03-03-2026
Businesses that donate inventory rarely see it as “just being generous.” As Daniels School accounting scholar Tyler Atanasov puts it, “there are economic reasons behind why companies engage in charitable activity,” making inventory donations a very synergistic space where tax, operations and social impact intersect.
Sellers of consumer goods routinely rank at the top of corporate philanthropy lists, with the preponderance of their donations being unsold inventory. For instance, take Panera Bread’s practice of donating unsold food at the end of each day. Committed to fresh baked goods and menus, the company inevitably has leftovers, which restaurants direct to charity instead of the trash. Clothing, books and medical supplies follow similar patterns as seasons change or trends shift.
Under Internal Revenue Code section 170(e)(3), companies that donate inventory for the care of “the ill, the needy, or infants” can potentially claim an enhanced deduction that exceeds their cost basis, rather than just deducting what they paid. While the tax code describes the details regarding what and how much can be deducted, at a high level it’s about inventory donated to qualified 501(c)(3) organizations serving vulnerable populations.
In “Inventory planning and tax incentives for charitable giving,” Anil Arya, Atanasov, Brian Mittendorf, and Dae‑Hee Yoon build a formal model of a firm facing uncertain demand over two selling periods and the option to donate unsold goods. They show that enhanced tax deductions do more than increase charitable giving: by softening the downside of overstocking, the deduction encourages firms to carry more inventory in the first place.
That extra inventory has two key effects. First, it reduces stockouts, which means fewer disappointed customers and higher “consumer surplus” — in Atanasov’s words, “there’s going to be fewer consumers who are disappointed” when they show up and find shelves stocked rather than the retailer being sold out. Second, it accelerates learning about demand: when stockouts are less frequent, firms observe actual sales quantities instead of truncated signals like “demand was at least as big as what we stocked.” Over time, this learning improves inventory decisions and helps align what firms produce with what customers want.
The model also looks beyond firm profit to a social planner’s perspective. The authors show that the “socially optimal” tax deduction for inventory donations ends up looking like “cost plus something,” and “what we find is socially optimal lines up with what we see in practice,” which Atanasov finds reassuring.
For CFOs and supply chain leaders, the takeaway is that the tax value of donations should be part of inventory and product-launch decisions. If a firm can take advantage of this enhanced deduction and find a charity to work with, it may make sense to stock more than it otherwise would, especially when demand is uncertain or when testing a new product. Charities, in turn, can use this research as evidence to highlight the benefits of inventory donations — both the direct tax benefit and the subtle operational consequences.
But the story is not unambiguously positive. Enhanced deductions lead firms to produce more, not just give more. Atanasov notes that while the government aims to encourage donations, it may be “thinking about it in a static way,” assuming inventory is fixed, whereas in reality “it affects initial inventory levels which causes firms to produce more.” Additional production can mean a higher environmental footprint and, in some sectors, donated goods “flooding other countries” and disrupting local labor markets.
In other words, tax-favored inventory donations are a powerful lever that create real synergy between tax planning, inventory strategy and corporate philanthropy — but they also invite leaders to think holistically about ESG trade-offs, not just the immediate deduction.
