Tax Free Inventory - Financial Guide for the Fashion Industry

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Inventory Manufacturing Tax Tips: An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. To figure taxable income, you must value your inventory at the beginning and end of each tax year. To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. The rules for valuing inventory cannot be the same for all kinds of businesses. The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Your inventory practices must be consistent from year to year.

This information below has been updated 12/18/13.  The regulations are subject to change.  Please contact the Internal Revenue Service for clarification regarding their policies etc.  If you find that this information becomes out dated, please let us know.

Inventory of apparel and accessories can be turned into a federal tax deduction if a business donates it to charity, according to the National Association for the Exchange of Industrial Resources (NAEIR).  This deduction is claimed under the section 170 (e) (3) of the U.S. Internal Revenue Code, can be as much as twice the original cost.  A free guide that details the donation process as well as a formula for calculating your company's potential tax savings is available by contacting NAEIR by phone at 800 562-0955 or their web site.

NAEIR was founded in January, 1977 by Norbert C. Smith, a former aircraft parts manufacturing executive. While working as a charitable gifts consultant to major corporations, he discovered that many companies have millions of dollars worth of new, excess inventory in their warehouses. A new tax regulation, adopted a year earlier, would provide corporations with a federal income tax deduction for donating those goods to qualified schools and nonprofit organizations. Mr. Smith founded NAEIR to secure those products and channel them to organizations that need them. Since NAEIR's founding, it has collected and redistributed over $2 billion worth of new, donated supplies and equipment. Under Internal Revenue Code Section 170(e)(3), materials received through NAEIR are to be used for the care of the ill, needy or minors, and may not be bartered, traded or sold. The products may be used to further the recipient organization's mission, and in its everyday operations. Donor companies have included such well-known firms as 3M, Snap-On, Avery Dennison, E.K. Success, Black & Decker, Russ Berrie, The Stanley Works, Delta Faucet, Department 56 and many of other manufacturers, wholesalers and distributors.

Below you will find additional information that may be of assistance:


If you donate any inventory item to a charitable organization, the amount of your deductible contribution generally is the Fair Market Value (FMV) of the item, minus any gain you would have realized if you had sold the item at its FMV on the date of the gift. For more information, see Publication 526.

Used Clothing

Used clothing and other personal items are usually worth far less than the price you paid for them. Valuation of items of clothing does not lend itself to fixed formulas or methods.

The price that buyers of used items actually pay in used clothing stores, such as consignment or thrift shops, is an indication of the value.

You cannot take a deduction for clothing donated after August 17, 2006, unless it is in good used condition or better. An item of clothing that is not in good used condition or better for which you take a deduction of more than $500 requires a qualified appraisal. See Deduction over $500 for certain clothing or household items, later.

For valuable furs or very expensive gowns, a Form 8283 may have to be sent with your tax return.

Jewelry and Gems

Jewelry and gems are of such a specialized nature that it is almost always necessary to get an appraisal by a specialized jewelry appraiser. The appraisal should describe, among other things, the style of the jewelry, the cut and setting of the gem, and whether it is now in fashion. If not in fashion, the possibility of having the property redesigned, recut, or reset should be reported in the appraisal. The stone's coloring, weight, cut, brilliance, and flaws should be reported and analyzed. Sentimental personal value has no effect on FMV. But if the jewelry was owned by a famous person, its value might increase.

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What Is Fair Market Value (FMV)?

To figure how much you may deduct for property that you contribute, you must first determine its fair market value on the date of the contribution.

Fair market value.   Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction.

Example 1:

If you give used clothing to the Salvation Army, the FMV would be the price that typical buyers actually pay for clothing of this age, condition, style, and use. Usually, such items are worth far less than what you paid for them.

Example 2:

If you donate land and restrict its use to agricultural purposes, you must value the land at its value for agricultural purposes, even though it would have a higher FMV if it were not restricted.


In making and supporting the valuation of property, all factors affecting value are relevant and must be considered. These include:

These factors are discussed later. Also, see Table 1 for a summary of questions to ask as you consider each factor.

Determining Fair Market Value

Determining the value of donated property would be a simple matter if you could rely only on fixed formulas, rules, or methods. Usually it is not that simple. Using such formulas, etc., seldom results in an acceptable determination of FMV. There is no single formula that always applies when determining the value of property.

This is not to say that a valuation is only guesswork. You must consider all the facts and circumstances connected with the property, such as its desirability, use, and scarcity.

For example, donated furniture should not be evaluated at some fixed rate such as 15% of the cost of new replacement furniture. When the furniture is contributed, it may be out of style or in poor condition, therefore having little or no market value. On the other hand, it may be an antique, the value of which could not be determined by using any formula.

For the most current information please visit the IRS website at

Please view our Legal Notice section.  We are not accountants and we make no claim that the information on this page is up to date or accurate.  Regarding tax issues it is important that you contact a professional accountant or service that can provide you with the correct and current rules.

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