Donations for deductions – donating excess inventory
Marsha Bertrand
If you have obsolete, excess, or slow-moving inventory that you,d like to dispose of, it may be worth more than you think. Not only can you get rid of that inventory and free up warehouse space, but you also can get a hefty tax deduction–often, more than your production costs–and at the same time help a not-for-profit organization.
Under section 170(e)(3) of the U.S. Internal Revenue Code, you can donate inventory to a qualified not-for-profit organization and receive a tax deduction. In order to qualify, the materials you donate must be used to help the ill, the needy, or minors, and the donor may not barter, trade, or sell the goods.
Although it may be too late to complete a donation and claim a deduction for 1995, it’s not too early to begin planning for the 1996 tax year.
The most challenging part of the process is to find a not-for-profit group that can use the type and the amount of items you want to donate.
That’s where organizations called exchanges enter the picture. They accept materials from companies and distribute the goods to various not-for-profit groups. Such exchanges include Gifts In Kind America, in Alexandria, Va., which accepts most items other than food, and Second Harvest, in Chicago, which accepts food as well as health-care and beauty products. Gifts in Kind can be reached at (703) 836-2121; Second Harvest’s toll-free number is 1-800-771-2303.
In addition to finding an outlet for your goods, exchanges supply you with the proper tax documentation, handle distribution, and ensure that the recipient qualifies under the tax code. Moreover, Second Harvest will handle any recall of donated food if it becomes necessary. Those services are all performed without charge to the donor.
“Practically any product produced can be used by the nonprofit sector because it includes charities that serve children, the homeless, and the elderly,” says Susan Corrigan, president and CEO of Gifts In Kind America. For instance, when Coburn Corp., in Lakewood, N.J., had $200,000 worth of novelty stickers and decals that wouldn’t sell, the company gave them away to schools. Coburn reduced its inventory, cleared out warehouse space, and received a tax deduction.
The tax deduction that a company receives for donated goods usually is equal to the cost of producing those goods plus half the difference between that cost and the fair market value. For example, if you manufacture felt-tip pens at a cost of $1 per pen and sell those pens for $2, your deduction would be $1.50 each.
For C corporations, the deduction is limited to twice the production cost. And the deduction for S corporations, partnerships, and sole proprietorships is limited to straight cost, without consideration of market value.
When Triangle Pacific Corp., a Dallas manufacturer of flooring and kitchen cabinets, wanted to dispose of some old flooring, it called Gifts In Kind. The organization located the David School, in David, Ky., whose students are adults who have dropped out of high school. The school had been trying to complete construction of a new building for three years but couldn’t afford the materials. Triangle Pacific was able to dispose of 13,000 square feet of flooring at no cost and at the same time help the school expand. The school received $100,000 worth of flooring for $2,500 in shipping costs.
“It’s certainly helpful if the donors donate the transportation, but if not, we arrange for transportation right out of their warehouse,” says Christine Vladimiroff, president and CEO of Second Harvest. She says about half of the business donors also supply transportation of the goods.
Companies donate goods for a variety of reasons. Second Harvest often gets canned goods because their labels are upside down or have printing errors or because the manufacturer is changing the packaging. “It’s perfectly safe, nutritious food, but it can’t be sold in a grocery store,” says Vladimiroff. “We once got raisin bran because the machine put too many raisins in the boxes. With that many raisins, the product didn’t match the nutrition information on the label.”
The benefits to the donating company aren’t only financial. “Besides the tax deduction and the reduction in inventory-carrying costs, companies realize tremendous public-relations benefits,” says Corrigan. “When we talk to companies, their intent relates to their whole philanthropic program, not just `What can I do with excess inventory?, The companies really do care.”
And so, everyone wins. “We exist to feed hungry people, but we’re also the link to the corporate business world,” says Vladimiroff “We think it’s a unique partnership in which all of us benefit.”
COPYRIGHT 1996 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group
