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 twice cost.
Let’s say you’re a paint manufacturer (and a C corporation) who makes latex house paint that costs you $5 a gallon. Your selling price is $10 per gallon. Your deduction is $7.50 per gallon. If the markup is considerably higher, deductions are limited to twice cost.
If you are an S corporation, partnership or sole proprietorship, you qualify for a straight cost deduction. Even if your business realizes only a straight cost deduction, it may be to your advantage to donate your stagnant inventory rather than clear 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.
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, your company can realize other benefits by donating excess inventory.
- Free up needed warehouse space. Whether you own your warehouse or are renting space, storing product can be expensive. Insurance, utilities, labor and damage all factor in. It doesn’t pay to hold stagnant inventory that isn’t earning its keep, especially if the clock is ticking on its shelf life.
- Get down to just-in-time inventory. If your business is a supplier trying to trim its inventory levels enough to achieve just-in-time delivery, these nonmovers may be one of your biggest obstacles. Donating clears them out quickly.
- Put your marketing focus where it should be: on your top sellers. Nonmoving inventory can consume a disproportionate amount of your business’s money, time and effort to clear it. By donating those items to charity, your company 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 nonmovers, 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 donation. While a “grip and grin” photo of you presenting the donation might bring in additional business, keep in mind that it also may produce requests from other groups for donations, too. If you decide to go ahead with publicity, have a diplomatic answer prepared in case other groups call.
After you‘ve consulted with your accountant or tax adviser and jointly decided that donating inventory would be the right move for your business, how do you identify which merchandise to clear? Here are some types of products to consider:
- Slow-selling or nonmoving stock keeping units (SKUs). Just as it is dangerous to fall in love with a stock or mutual fund and be reluctant to unload it when it is not performing, it is equally unwise to fall in love with stagnant inventory. Wholesaler/distributors especially are aware of the need to constantly review their offerings, weed out the slow-movers, and concentrate on top-selling items.
- Unsuccessful product introductions. Some new products simply do not move. By donating them, instead of selling them to a liquidator, your business will do better on the bottom line and will keep them from competing against you at cut-rate prices.
- Discontinued formulations or colors. If you phase out a line of paint, you can donate leftover inventory to keep it off the market. The same holds true for discontinued colors.
To earn this deduction, make sure that the nonprofit recipient is a 501 (c)(3), since only that IRS classification of nonprofits qualifies. Public or private (nonprofit) schools may also qualify to receive these goods. Be prepared to furnish the recipient groups with material safety data sheets (MSDS) for the donated product.
Have your accountant or tax adviser instruct the recipient group as to what information it needs to include in the documentation it furnishes you as proof of the donation. You will 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, 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), 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.
For more information on donating excess inventory, contact NAEIR’s Corporate Relations, NAEIR, Suite 111, 315 S. 48th St., Tempe, AZ 85281; phone 800/289.4551; e-mail firstname.lastname@example.org; or visit www.naeir.org.