Your ecommerce business sells a product for $50. You send one to an influencer, give one to a prospective customer, or use a few as promotional samples.
Can you deduct $50 for each one?
Generally, no. The starting point is what the product cost your business, not what you normally sell it for.
If the product cost $15, you gave away $15 of inventory. The other $35 was potential profit. You never earned it.
The Selling Price Is Not Your Expense
This is where the confusion usually starts.
The owner sees a $50 product leaving the business. But the books should carry that product at its inventory cost, which may include applicable freight, duties, and other costs of getting it ready for sale.
For this example, assume that total cost is $15.
Giving it away for a legitimate promotional purpose may allow the business to deduct that cost. It does not turn the expected selling price into an expense.
The same principle applies if you give away 100 units. At $15 each, the inventory cost is $1,500. Their combined retail price of $5,000 does not create a $5,000 deduction.
The Cost May Already Be in Your Numbers
Sometimes the owner asks for a deduction that has already flowed through the accounting.
Consider a simple inventory calculation:
| Inventory activity | Cost |
|---|---|
| Beginning inventory | $10,000 |
| Purchases | $40,000 |
| Less ending inventory | ($12,000) |
| Cost of goods sold before other adjustments | $38,000 |
If promotional products left inventory during the year, their cost may already be included in that $38,000.
The calculation captures merchandise that is no longer on hand. By itself, it does not explain whether those products were sold, given away, damaged, or stolen.
That is why a giveaway can disappear into cost of goods sold much like shrinkage. Nothing nefarious happened. The merchandise simply left without a sale.
Your accountant still needs to identify the reason and record it appropriately.
Moving the Cost Is Not Another Deduction
Suppose $1,500 of the amount above represents products distributed as advertising samples.
If those costs are properly classified as advertising, the accounting would move $1,500 out of cost of goods sold and into advertising expense.
Cost of goods sold decreases by $1,500. Advertising expense increases by $1,500. Total profit stays the same.
You do not leave the cost in both places.
IRS guidance specifically requires merchandise withdrawn for personal or family use to be removed from purchases, and merchandise withdrawn for another business use to be removed from purchases and charged to the appropriate expense.
The objective is to account for the cost once, in the right place.
Why Track Giveaways Separately?
Even when the total expense is unchanged, the classification tells you something useful.
If promotional products remain buried in cost of goods sold, your gross margin may look worse without showing how much you spent promoting the business.
Missing inventory and planned marketing also deserve different attention. One may require better controls. The other should be evaluated as a marketing decision.
Keep a record of the products, quantities, dates, recipients or campaign, and business purpose. If an influencer agreed to provide content in exchange, keep that agreement, too.
Those records help explain both where the inventory went and what the business expected to receive.
Not Everything Given Away Is Advertising
A sample distributed to promote sales, a gift to a particular customer, and merchandise taken home by the owner are different transactions.
Business gifts can be subject to a $25 deduction limit per recipient per year, with exceptions. Calling something “marketing” does not automatically remove that limit.
Products taken for personal or family use should not remain in deductible cost of goods sold. Charitable donations have their own rules as well.
Tell your accountant what actually happened. The reason the product left matters.
Start With the Cost, Then Check the Books
Before recording an additional expense for products given away, answer three questions:
- What did the products cost?
- Why were they given away?
- Has that cost already been deducted through the inventory accounting?
A $50 selling price does not establish a $50 deduction. And moving a cost from inventory into an expense does not mean the same cost can be deducted again somewhere else.