Zakat on Small Business

Zakatable: Inventory held for sale (trade goods)

All merchandise, products, goods, and inventory you intend to sell to customers are zakatable trade goods. For a retail clothing store, every item on the racks and in storage is zakatable. For a grocery shop, all food products on shelves and in stockrooms are zakatable. For an online electronics store, all devices held for sale are zakatable. For a restaurant, food ingredients and supplies intended for preparing customer meals are zakatable. For Zakat on small business, inventory for sale is the primary zakatable asset regardless of business type.

This includes finished products ready for sale, work-in-progress inventory being manufactured, and raw materials that will become products for sale. A bakery's flour, sugar, and eggs are zakatable because they become products for sale. A furniture maker's wood and materials are zakatable as they become furniture for customers. For Zakat on small business with production, materials and work-in-progress are zakatable as future trade goods.

Zakatable: Business cash and bank accounts

Cash in business bank accounts, business savings, cash in registers, and any liquid business funds are zakatable. If your business account holds fifteen thousand pounds, this is zakatable business wealth. For Zakat on small business, all business cash is included in calculation regardless of whether it is in accounts, held as working capital, or awaiting use for expenses.

Zakatable: Accounts receivable from customers

Money owed to your business by customers for goods sold on credit or services rendered is zakatable. If customers owe you ten thousand pounds in outstanding invoices you expect to collect, this is zakatable receivable wealth. For Zakat on small business with customer credit, accounts receivable are included in zakatable assets as they represent collectible business wealth.

Non-zakatable: Business premises and buildings

The shop, warehouse, office, or factory building you use for business operations is not zakatable whether you own or rent it. If you own the building, it is a capital asset, not inventory. If you rent, you do not own it at all. For Zakat on small business, buildings and premises are completely excluded from calculation regardless of value.

Non-zakatable: Supplies for business use (not for sale)

Supplies you use in operating your business but do not sell are not zakatable. Cleaning supplies for your shop, paper for printing invoices, packaging materials, office supplies, these are operational expenses, not inventory for sale. For Zakat on small business, only items you sell to customers are zakatable, not items you consume in operations.

Use wholesale prices, not retail prices

The majority scholarly position recommends valuing inventory at wholesale prices (current market value to acquire similar inventory) rather than retail prices. Wholesale represents true market value while retail includes your markup and profit margin. If you stock shirts that retail for thirty pounds but you could buy similar shirts wholesale for fifteen pounds, use fifteen pounds per shirt for Zakat valuation. For Zakat on small business, wholesale valuation ensures you calculate on actual wealth value, not aspirational retail prices.

The reasoning: if you needed to liquidate inventory quickly, you would receive approximately wholesale value, not full retail. Retail is what you hope to get through normal sales with full markup. Wholesale is market reality. For Zakat on small business inventory, the conservative scholarly approach uses wholesale or the lower of cost versus current wholesale.

Lower of cost or wholesale approach

A conservative methodology recommended by many contemporary scholars is valuing inventory at the lower of: (1) what you originally paid (cost), or (2) current wholesale market value. If you purchased items for ten pounds each and current wholesale is twelve pounds, use ten pounds (lower). If you purchased for fifteen pounds and current wholesale is twelve pounds, use twelve pounds (lower). For Zakat on small business, this conservative approach ensures you never overvalue inventory for Zakat purposes.

Handling damaged or slow-moving inventory

Damaged goods, defective items, or slow-moving inventory that cannot sell at normal prices should be valued at realistic liquidation value. If you have damaged merchandise worth only fifty percent of wholesale, value it at that reduced amount. For Zakat on small business with problematic inventory, honest realistic valuation ensures accurate calculation without overstating zakatable wealth.

Service businesses with minimal inventory

Service-based businesses (consulting, accounting, repair services, healthcare practices) typically have minimal zakatable inventory. A dentist's office has some supplies but not merchandise for sale. An accounting firm has no inventory at all. For Zakat on small business providing services, focus on business cash and receivables as primary zakatable assets, with minimal or zero inventory value.

Step one: Choose your Zakat date

Select an annual date for calculating business Zakat. Many business owners choose their business anniversary date, fiscal year end, or Islamic calendar date. This becomes your consistent annual Zakat date. For Zakat on small business, consistency in timing simplifies compliance ensuring annual obligation fulfillment at the same time each year.

Step two: Value all inventory at wholesale

On your Zakat date, count all inventory (finished goods, work-in-progress, raw materials) and value at wholesale prices or lower of cost versus wholesale. If you have one hundred units at fifteen pounds wholesale each, inventory value is one thousand five hundred pounds. For Zakat on small business with substantial inventory, this is typically the largest zakatable component requiring careful valuation.

Step three: Add business cash and bank balances

Include all cash in business accounts, registers, and business savings. Check bank statements for your Zakat date. If your business account has twelve thousand pounds, add this to inventory value. For Zakat on small business, business cash is straightforward to calculate, use actual balances on Zakat date.

Step five: Subtract immediate debts (optional)

The majority position allows deducting immediate business debts due within the year from zakatable assets. If you owe suppliers six thousand pounds due this quarter, you may deduct this from zakatable business wealth before calculating Zakat. Long-term debts (equipment loans over several years) are typically not deducted. For Zakat on small business with debts, immediate payables may reduce zakatable amount under the majority position.

Step six: Calculate total zakatable business wealth

Sum inventory value, business cash, and receivables, then subtract immediate debts if applying debt deduction. Example: Inventory twenty-five thousand pounds, cash twelve thousand pounds, receivables eight thousand pounds, immediate debts six thousand pounds. Total zakatable: thirty-nine thousand pounds (25,000 + 12,000 + 8,000 - 6,000). For Zakat on small business, this total represents your business zakatable wealth.

Step seven: Compare to nisab and calculate 2.5% Zakat

Compare total zakatable business wealth to nisab threshold. If above nisab for one year, calculate 2.5% Zakat. Using thirty-nine thousand pounds example: multiply by 0.025 to get nine hundred and seventy-five pounds business Zakat. Combine with personal wealth Zakat for comprehensive annual payment. For Zakat on small business, the 2.5% rate applies identically to other zakatable wealth categories.

Step eight: Combine business and personal Zakat

Calculate business Zakat separately for clarity, then calculate personal wealth Zakat (personal savings, investments, personal gold), then sum both for total annual Zakat payment. For Zakat on small business owners, comprehensive calculation covering business and personal wealth ensures complete obligation fulfillment in one annual payment.

Retail shops and stores

Retail businesses (clothing stores, electronics shops, bookstores, convenience stores) have substantial inventory as their primary zakatable asset. Value all merchandise on shelves, in stockrooms, and in storage at wholesale prices. Add business cash and customer receivables. For Zakat on small business retail operations, inventory valuation is the key calculation component requiring accurate wholesale pricing for all stock.

Restaurants and food businesses

Restaurants, cafes, and food businesses have inventory in the form of food ingredients, supplies, and beverages held for preparing customer meals. Value all food stock at wholesale/purchase prices. Kitchen equipment is not zakatable (capital assets), only food ingredients intended for customer sales. For Zakat on small business food operations, calculate on food inventory value plus business cash, excluding all equipment and fixtures.

Online stores and e-commerce

Online businesses operate identically to physical stores for Zakat purposes. Whether inventory is in your garage, a warehouse, a fulfillment center, or dropshipped through suppliers, all products held for customer sale are zakatable. For Zakat on small business e-commerce, location of inventory is irrelevant; ownership of trade goods creates obligation regardless of where products are physically stored.

Service businesses with minimal inventory

Service businesses (consulting, accounting, legal, medical, repair services) typically have minimal zakatable inventory. A plumber has some pipe fittings and supplies but not substantial inventory. Focus on business cash and receivables as primary zakatable assets. For Zakat on small business service operations, business liquid assets typically constitute the zakatable amount with minimal inventory value.

Wholesale and distribution businesses

Wholesalers and distributors hold substantial inventory for resale to retailers or other businesses. All wholesale inventory is zakatable at current wholesale value (or cost if lower). These businesses often have large inventory values creating substantial Zakat obligations. For Zakat on small business wholesale operations, accurate inventory counts and wholesale valuation are essential for proper calculation.