Your business may be sitting on an important tax deduction—and you may not even realize it.
The deduction lies in your excess, overstock inventory. By donating that nonmoving merchandise to charity, your company can earn a federal income tax deduction under Section 170 (e)(3) of the U.S. Internal Revenue Code. 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.
For example: your business (a C corporation) sells a product for which it pays $1. Retail price is $2. Your deduction: $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 stagnant merchandise rather than clear it through a liquidator. Since a liquidator looks for the lowest price possible, that offer may be substantially less than your cost; donating may be your preferred 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 significant benefits from donating your excess inventory:
Freeing up needed warehouse space.
Whether you own your warehouse or are renting space, storing product can be expensive. Insurance, utilities, labor, and shrinkage all factor in. It doesn’t pay to hold stagnant inventory that isn’t earning its keep.
Putting your marketing focus where it should be: on your top sellers.
Nonmoving inventory can consume a disproportionate amount of money, time and effort. By donating those items to charity, you can put your promotional dollars where they’ll do the most good.
Avoiding problems involved with liquidating those overstocks.
Liquidators tend to pick and choose, leaving you with the problem of what to do with the leftovers.
Helping deserving schools and nonprofit organizations.
This good deed can also translate into good will. You might ask the recipient group to call the local newspaper to publicize the donation, for example.
Identifying what to give
Once you decide 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 (stockkeeping units).
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.
Some new products simply do not go. Donating them can help the bottom line and keep them out of the consumer market.
By donating undamaged returns, you avoid the costs and labor involved in returning those items to stock
If the product was custom made, it may be difficult to sell anyway.
If package graphics or special promotions are updated, you may want to keep products in old packaging out of the market as you introduce the new line.
Discontinued models, styles and colors.
For example, software publishers may donate an earlier version of a program. Trendy items that are no longer selling are also good 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.
What to do
Donate excess inventory to get tax deductible receipt and tax write off
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 qualifies.
Ask your accountant or tax adviser to instruct the recipient about what information should be included in the documentation they furnish to 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.
If your business has only a small quantity of merchandise to donate, you may 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 semitrailer or more), instruct the recipients 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.
To avoid having to deal with all of these issues, using a gifts-in-kind organization, such as the National Association for the Exchange of Industrial Resources (NAEIR), may be your best solution.
More than 7,000 large corporations have donated $2 billion in inventory to NAEIR since its founding in 1977. NAEIR accepts donations of new, overstock merchandise, and then provides the proper tax documentation. The donated goods are redistributed to more than 13,000 qualified schools 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. NAEIR has 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. NAEIR’s 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 services.
Author Emily Collins
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