Inventory donations generate enhanced deductions
The end of the year is a time that many corporations look to reduce their excess inventory. And there is a Tax Code section that can make donating the inventory much more attractive than the alternatives, such as discounting, liquidating or auctioning merchandise.
Under Code Section 170(e)(3), if a C corporation donates its unwanted inventory to qualified nonprofits, it can receive a federal income tax deduction up to twice the cost of the donated products. Deductions are equal to the cost of the donated inventory, plus half the difference between the cost and fair market-selling price, not to exceed twice the cost.
“Much of the inventory would typically go to the liquidation market,” said Gary Smith, president of the National Association for the Exchange of Industrial Resources. “But a lot of times the company finds that the product ends up competing against itself. For example, every couple of years a company might change the color of binders. The excess of older binders gets sold to a liquidator, and ends up at a bargain store. For people who don’t care that their binder isn’t lime green but just want the cheapest ones available, they’ll buy the black binders at Dollar General.”
If a product costs $10 and the company sells it in a store for $30, the difference is $20, Smith explained, so $10 (product cost) + $10 (half the difference between the product cost and the fair market price) = $20 (deduction).
“And $20 does not exceed twice the product cost, so it does not exceed the maximum allowable deduction,” he explained.
The NAEIR, founded in 1977, is the oldest in-kind giving organization. It gives away more than $100 million in supplies each year to schools, churches and nonprofits.
“If a client is going it alone, vetting charitable organizations, and sorting and distributing products can be a huge investment in both time and money, taking their workforce away from their regular responsibilities,” said Smith. “That’s where a gifts-in-kind organization can prove invaluable.”
“Gifts-in-kind organizations are 501(c)(3) organizations that connect businesses that have products to donate to charitable organizations in need,” said Smith. “Companies tell the gifts-in-kind organization what product and how much they want to donate. Once they get the approval, they ship the product to the organization’s warehouse, and the gifts-in-kind organization takes care of the rest.”
When the organization receives a donation, it sorts it, catalogs it and makes it available to its members' schools, churches and nonprofits, Smith indicated. “They also send tax documentation to the business and may let them know who benefited from their donation.”
The fair market value of donated items is determined by the donors, Smith said. “They have to establish that on their own. And although S corporations are not eligible for the enhanced deduction, many donate to us. They know that the best they can get is just their cost, but sometimes they just want to be charitable.”
On the receiving end, churches, schools and nonprofits scroll through NAEIR’s online inventory or catalogs and request as many items as they want as often as they want throughout the year.
“Charitable groups receiving donated product must abide by the guidelines outlined in the Tax Code, which states that the merchandise must go to care for the ill, needy or minors,” Smith said. “They also may not barter, trade or sell the donated items.”
Gifts-in-kind organizations such as NAEIR will take just about anything, according to Smith. “Office supplies, maintenance items and janitorial products are always popular. So, too, are clothing, toys, sporting goods, small appliances and personal care items — anything an organization or those they serve could use is appreciated.”