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 that non-moving
merchandise 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
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.
if your business realizes only a straight cost deduction, it may be to your
advantage to donate your stagnant merchandise rather than clearing 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
donating inventory before
negotiating with a liquidator, however, to be able to justify the product’s
fair market value with the IRS.
the tax deduction, there are many other great benefits of donating your excess
Free 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
Put your marketing focus where it should be: on your
top sellers. Non-moving 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 star performers.
Avoid problems involved with liquidating those overstocks.
Liquidators tend to pick and choose. They
may not want to buy all of your non-movers, leaving you with the problem of
what to do with the leftovers. Donating can often clear all of your problem
products at once.
Help deserving schools and nonprofit organizations. This good deed can translate into good will. You
might ask the recipient group to call the local newspaper to publicize the
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
Unsuccessful product introductions. Despite extensive studies and market
research, some new products simply do not go. By donating 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.
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
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.
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.
To avoid having to deal with all of these
issues, using a gifts-in-kind organization, such as NAEIR, may be the best
Over 7,000 large corporations have donated $2
billion in inventory to the National Association for the Exchange of Industrial
Resources 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
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
service. For a free Donation Information Kit, please contact NAEIR’s Corporate
Relations Department at 1-800-562-0955 or email [email protected].
Collins is the Communications Associate
for the not-for-profit National Association for the Exchange of Industrial
Resources, or NAEIR. NAEIR accepts product donations from businesses and
redistributes those goods to 13,000 qualified charities and schools throughout
the United States.
NAEIR does not charge donor companies for its service. For further information,
contact NAEIR at 1-800-562-0955 or email