Give To Get
Donating surplus inventory has tax advantages.
By Gary C. Smith
One of the biggest tax secrets is hiding in plain sight in warehouses across the country. It’s excess inventory.
A perennial problem for anyone who sells goods of any kind, surplus or obsolete inventory can provide a great tax benefit to C Corps who take advantage of a little-known piece of tax code: Internal Revenue Code Section 170(e)(3). This code is probably one of the best kept secrets of corporate tax law, but it provides the key to one of the best ways to dispose of unprofitable inventory — donating it. Besides boosting your bottom line, donating surplus inventory boosts your company’s image by helping people in need.
Giving Is Receiving
Under 170(e)(3), when a C Corp donates its excess inventory to qualified nonprofits, it can receive a federal tax deduction equal to up to twice the cost of the donated products.
In other words, according to the tax code, deductions are equal to the cost of the inventory donated, plus half the difference between the cost and fair market-selling price, not to exceed twice the cost.
For example, if your product cost $10 and you sell it in store for $30, the difference is $20. Half of $20 is $10. A $10 product cost plus $10 – half the difference between cost and fair market selling price – would net a $20 deduction.
Since $20 does not exceed twice the product cost, it does not exceed the maximum allowable deduction. So instead of selling that surplus merchandise for pennies on the dollar, you can donate it and recoup twice your cost.
Making Donations a Snap
The next question is how to get that surplus merchandise off your shelves and into the hands of people who can really use it. That’s where gifts-in-kind organizations come in.
Gifts-in-kind organizations are 501(c)(3) nonprofits that exist to collect corporate product donations and then distribute them to qualified nonprofits. The organizations act as the go-between for member companies and charities in need. You cover the costs of shipping your products to a gifts-in-kind organization, and they take care of the rest. The organization screens nonprofits to make sure they’re qualified, handles the logistics of getting stock from point A to point B, and provides all the tax documentation.
Besides the obvious advantage in earnings, making gifts-in-kind donations also save time. Discounting, liquidating and auctioning old merchandise are all labor-intensive practices. Donating can be, too, if you’re choosing charities on your own. But when you join a gifts-in-kind organization, the process of getting rid of surplus inventory is simple and fast.
Donating items also helps protect the integrity of your brand and gives you more control over where your products end up. That’s because the tax code stipulates that a donated product cannot be resold, bartered or traded – and it must be used according to the organization’s mission.
Once you establish a relationship with a gifts-in-kind organization, you should be able to donate merchandise at any time, whether transitioning between seasons, updating inventory or consolidating your warehouse. And size doesn’t matter. Most groups will accept anything from a simple box full of products to truckloads.
Giving Makes a Difference
It’s clear that Section 170(e)(3) will benefit your corporation. But the added bonus is that it allows you to help others in the process. Those items taking up space in your warehouse could be just what a charity needs to help others.
Most anything your company produces can fill a need through a charity. The most commonly requested items include office supplies, maintenance items and janitorial products. And there’s always a need for clothing, toys, sporting goods and small appliances. Some items help keep charities’ offices working, while others directly benefit the communities they serve.
When using a gifts-in-kind organization, you should know exactly who your products are benefitting. Most gifts-in-kind organizations will tell companies what charities received its donations. You can then share that information with your employees, building morale by demonstrating that they are part of a caring, giving company.
Excess inventory doesn’t have to be a problem. Donate it and see the benefits not only on your next corporate tax return but in the lives of people who are truly in need.Gary C. Smith is the president of National Association for the Exchange of Industrial Resource (NAEIR), the largest gifts-in-kind organization in the U.S. Since its founding in 1977, the Galesburg, Illinois-based NAEIR has received donations of excess inventory from more than 8,000 U.S. corporations and redistributed more than $3 billion in products to non-profits and schools. Contact NAEIR at 800.562.0955.