EMILY
COLLINS
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Your
business may be sitting on an important tax deduction and
you probably don’t even realize it. The deduction
lies in your excess, overstock inventory. By donating your
nonmoving maintenance supplies to charity, your company
can earn a federal income tax deduction under Section 170
(e)(3) of the U.S. Internal Revenue Code.
The IRS Code says that regular (C) corporations may deduct
the cost of the inventory donated, plus half the difference
between cost and fair market value. Deductions may be up
to twice cost.
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For example, your business (a C corporation) sells a product for
which it pays $1. Retail price is $2. Your deduction is $1.50. If
you pay $1 and that item sells for $4, your deduction is $2 (limit
of twice cost). S corporations, partnerships and sole proprietorships
qualify for a straight cost deduction.
Even if your business realizes only a straight cost deduction,
it may be to your advantage to donate your stagnant merchandise
rather than clear it through a liquidator. Since a liquidator looks
for the lowest price they can get, their offer may be less than
your cost—substantially less. When you are faced with the
choice of liquidating this merchandise, dumping it and writing it
off as a loss, or donating it and taking a straight cost deduction,
donating may be the preferable choice.
Investigate donating inventory before negotiating with a liquidator,
however, to be able to justify the product’s fair market value
with the IRS.
Besides the tax deduction, there are many other great benefits
of donating your excess inventory:
You can free up needed warehouse space. Whether you own your warehouse
or are renting space, storing excess janitorial inventory can be
expensive. Insurance, utilities, labor, and shrinkage all factor
in. It doesn’t pay to hold on to stagnant inventory that isn’t
earning its keep.
Put your marketing focus where it should be: on your top sellers.
Nonmoving inventory can consume a disproportionate amount of money,
time and effort to clear it. By donating those items to charity,
your business can put your advertising and promotional dollars where
they’ll do the most good, on your high performing product
lines.
Avoid problems involved with liquidating those overstocks. Liquidators
tend to pick and choose. They may not want to buy all of your nonmovers,
leaving you with the problem of what to do with the leftovers. Donating
can often clear all of your problem products at once.
Good Deeds Translate into Good Will
You would be helping deserving schools and nonprofit organizations.
This good deed can translate into good will. Many schools include
maintenance departments that have budget restrictions. Donating
that overstock inventory will free up budget dollars that schools
could use elsewhere. You might ask the recipient group to call the
local newspaper to publicize the donation.
Once you‘ve decided that donating inventory might be a smart
move for your business, how do you identify which merchandise to
clear? Here are some types of products to consider:
Slow-selling or nonmoving SKUs (stock keeping units). Just as it
is dangerous to keep a stock or mutual fund and be reluctant to
unload it when it is not performing, it is equally unwise to hold
on to stagnant inventory. Wholesaler/distributors and catalog businesses
are well aware of the need to constantly review their offerings,
weed out the slow-movers, and concentrate on popular, top-selling
items.
Unsuccessful product introductions. Despite extensive studies and
market research, some new products simply do not go. By donating
them, instead of selling them to a liquidator, your business may
do better on the bottom line and donation will keep them out of
the consumer market.
Weed Out Stagnant Inventory
Returns. If returns are not damaged, they can be a good candidate
for donation. By donating, you will avoid the costs and labor involved
in returning those items to stock.
Cancelled orders. Again, donating avoids restock costs. If the
product was custom made, it may be difficult to sell anyway.
Packaging changes. If package graphics are updated, you may want
to keep products in old packaging out of the market as you introduce
the new. Donating is also a good way to clear products with packaging
that promotes rebates or contests that have expired.
Discontinued models, styles, colors. As an example, software publishers
may donate the previous version of a program that has been updated,
to keep the earlier version from competing with the update or to
keep it out of the hands of liquidators. Trendy items that are no
longer selling are also candidates for donation.
Misprints or seconds. Businesses that make or sell promotional
items frequently have misprints on products that are still serviceable.
Seconds, especially in clothing, can be donated as well.
To earn this deduction, companies must donate to a public or private
school, and in the case of nonprofit organizations, make sure that
the nonprofit is a 501 (c)(3), since only that IRS classification
of nonprofits qualifies as recipients.
You should have your accountant or tax adviser instruct the recipient
group as to what information they need to include in the documentation
they furnish you as proof of the donation. You will have to include
the recipient’s letter on your corporate tax forms as support
for claiming the deduction.
Documentation, Process and Rules
 If
your business has a small quantity of merchandise to donate, you
will need to select the recipient(s) carefully to avoid the appearance
of favoritism. By the same token, if you have a large quantity of
product (a semi-trailer or more), you will have to instruct the
recipient groups that under IRS regulations, donated merchandise
may not be bartered, traded or sold. Charities or schools may not
auction or sell donated merchandise to raise cash. That includes
bazaars, fundraisers, rummage sales, or auction web sites, such
as e-bay.
To avoid having to deal with all of these issues, using a gifts-in
–kind organization may be the best solution. Over 7,000 companies
have donated $2 billion in inventory to the National Association
for the Exchange of Industrial Resources since its founding in 1977.
They accept donations of new, overstock merchandise, and then provides
the proper tax documentation. The donated goods are redistributed
to over 9,500 qualified schools, churches and nonprofit organizations
nationwide.
The donation process is simple. To begin, a company sends in a
written proposal or list of product they want to donate, including
a short description, quantities and a value. There’s a committee
that reviews and approves proposals within 72 hours.
NAEIR notifies the donor and then sends shipping instructions and
labels. Although the donor company is responsible for the shipping
cost, that is also a tax-deductible expense of the donation process.
Their Traffic Department can provide reduced rates for shipping.
Your donation will be redistributed to groups such as elementary
and high schools, YMCAs/YWCAs, community centers, rescue missions,
shelters for abused women and children, hospitals, nursing homes,
churches of all denominations, and many other social service agencies.
There is no cost to corporations for NAEIR’s service. For
a free Donation Information Kit, please contact NAEIR’s Corporate
Relations Department at 1-800-562-0955 or e-mail donor@naeir.org.
Emily Collins is the Communications Associate for the not-for-profit
National Association for the Exchange of Industrial Resources. NAEIR
accepts product donations from businesses and redistributes those
goods to 9,500 qualified charities and schools throughout the United
States.
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