How do I pay zakat on business stock?

What counts as business stock

Urud al-tijarah (trade goods) are defined as everything prepared for buying and selling in order to make a profit. The scholars state this broadly: al-Tuwijri lists money, land, food, animals, machinery, cars, minerals, clothing, buildings and shares among the things that become trade goods when held for sale. What decides it is not the kind of object but the intention behind holding it.

Shaykh Ibn Baz made the same distinction in a ruling about a shop. The shop itself is not zakatable — it is the container, not the merchandise:

"The goods in it that are for sale are what are called trade goods, and they are zakatable. As for the house or shop prepared for sale — it is not itself for sale, so there is no zakat in it."— Shaykh Ibn Baz, on the zakat of trade goods

So the question to ask of each item is simple: did I acquire this to sell it at a profit, or to keep and use it?

The conditions that make it due

Three conditions must all be met before zakat becomes obligatory on your stock.

On the year: the hawl of trade goods is the hawl of the money you bought them with. Ibn Qudamah explains in al-Mughni that when you buy an item for trade with a nisab's worth of money, you build the year of the goods on the year of that money, because zakat attaches to their value — and their value is the money itself. This is why you do not restart the clock every time you buy new stock: new goods and old goods share one year, the year of the capital.

How to work it out

1. Fix your zakat date. Choose the day your wealth first reached the nisab, and use it every year.
2. Value your stock at market price on that day. Al-Tuwijri's instruction is to value what you own at the going market rate and to be careful in estimating, because it is an act of worship and you are trusted with it. What counts is the value at the end of the year, not what you paid.
3. Add your cash and the debts owed to you. Include money on hand, in the bank, and debts receivable from someone who acknowledges them and is able to pay.
4. Subtract the debts you owe. IslamWeb (fatwa 70405) sets out this order: value the goods, add the debts owed to you, deduct what you owe, and if what remains still reaches the nisab, zakat is due.
5. Pay 2.5% of the remainder. Al-Tuwijri notes it is better to pay in cash, since the nisab is measured by value.

A debt owed to you by someone who is stalling or is insolvent is treated differently: it is zakatable for one year only, after you actually receive it.

Stock that does not sell

If goods sit unsold for years, the majority of jurists still require zakat on them every year, valued afresh each time. The Malikis take a different view: they distinguish the trader who sells at the current price, who pays every year, from the one holding stock back waiting for prices to rise, who pays nothing until he sells — and then pays for the whole period at once. Shaykh Salih al-Fawzan, asked about land bought for trade and held for years before being sold in instalments, ruled that zakat is owed for every year it was held for sale, valued at what it was worth when each year ended, and that the instalments are then zakatable as you receive them.

What is not zakatable

• Equipment and tools: machinery, vehicles, refrigeration units, office equipment and warehouses used in the business carry no zakat, because they were not acquired for sale.
• Rented property: buildings held for rent are not trade goods; zakat falls on the rent once it reaches the nisab and a year passes.
• Goods inherited: if you inherit stock, it does not become trade goods merely by inheritance. If you later sell it intending trade, the year begins from that point.

Key takeaways

• Zakat is due on the market value of goods held for resale, not on what you paid for them, at 2.5% once a lunar year passes.
• Intention at purchase, the nisab, and the passing of the year are the three conditions — all must be present.
• The year runs from the money you bought the stock with, so new purchases join the existing year rather than starting a new one.
• Value the stock, add cash and good debts, subtract what you owe, and pay on what remains if it still reaches the nisab.
• Fixtures, vehicles and equipment used in the business are exempt; only what is held for sale is counted.

Further reading

• Ibn Qudamah, al-Mughni — on the year of trade goods and the partner's share
• Al-Tuwijri, Mawsu'at al-Fiqh al-Islami — the chapter on zakat of trade goods
• Shaykh Ibn Baz, Majmu' Fatawa wa Maqalat — on land held for sale and rent

And Allah knows best.