The typical ways of dealing with excess inventory—discounting products, liquidating inventory and just holding onto unsold stock in a warehouse—all come with their own sets of problems. Discounting eats into a company’s profits and devalues its brand. Liquidating returns just pennies on the dollar. Holding onto excess inventory wastes valuable warehouse space. By comparison, product philanthropy—donating unwanted stock to charity—requires minimal labor while generating a hefty tax deduction. And for those companies that use a gifts-in-kind organization, a go-between for corporate donors and charities, the donation process requires little more than transporting their donation to the organization’s warehouse.
A gifts-in-kind organization is a nonprofit that collects donated products from corporations and disperses them to pre-screened, qualified nonprofits that want them. Donated items might range from paper goods for a nonprofit’s headquarters to art supplies for a school.
Once a company becomes a recognized donor, they can contact their gifts-in-kind organization whenever they want to dispose of inventory. That might be when a company is consolidating its warehouse or trying to expedite post-holiday returns.
So what’s the bottom line on how much of a tax break a company can earn through a donation to a gifts-in-kind organization? If that company is a C Corp, it can receive a federal tax deduction equal to up to twice the cost of the donated products, according to IRC Section 170(e)(3).
Here’s the formula:
Deductions are equal to the cost of the inventory donated, plus half the difference between the cost and fair market-selling price, not to exceed twice the cost.
For example, if your product cost $10 and you sell it for $30, the difference is $20. Half of $20 is $10. So:
$10 (Product Cost) + $10 (Half the Difference) = $20 Deduction. ($20 does not exceed twice the product cost, so it is does not exceed the maximum allowable deduction.)
Most companies will find that this is a much better return—with less hassle—than liquidating their products or putting them up for auction.
In addition to the tax benefit, product donation saves companies money by reducing the time and labor needed to move excess inventory. It also promotes a company’s brand in two ways. First, by donating products to those in need, it positions the company as one with heart, raising its image with both consumers and its own employees. Second, donating preserves the company’s brand. Donations promote good will, thereby elevating a company’s image. By contrast, putting discounted inventory into the marketplace devalues a company’s brand and can sometimes sour relationships with retailers trying to move those same products.
To make the transition from discounting to donating, companies should research gifts-in-kind organizations to find the one that best fits their needs. There are multiple such organizations operating in the U.S. Companies should look for ones that can tell them exactly what types of charities they serve, will accept the types of merchandise they want to donate, accept both large and small donations, offer a fast, streamlined donation process and provide detailed records of both what the company donated and who received it. Most gifts-in-kind organizations do not charge fees to corporate donors, so this should be a given when choosing an organization to work with.
Once a company selects a gifts-in-kind organization, it will typically complete some basic paperwork. Then, when the company is ready to make a donation, it will contact the organization to let them know what inventory it wants to donate. Once the donation is approved, all the company has to do is ship the donation to the gifts-in-kind organization. The organization will take care of sorting it, cataloging it and making it available to member charities.
Once it has recorded a donation, the gifts-in-kind organization will send the company proper tax documentation. If requested, the organization may also send additional documentation identifying which charities ultimately received the donation.
Toys, school supplies, small electronics and even makeup are among the many items gifts-in-kind organizations may accept. Basically, companies can donate most anything other than food items and some exceptions based on storage requirements.
With a donation to a gifts-in-kind organization, those products taking up space on warehouse shelves can be put to use by people who truly need them. The end result for companies is high marks in both philanthropy and profitability.
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