With the new year comes an old problem: how to dispose of excess inventory without feeling like you’re just throwing dollars out the door.

Discounting, liquidating or auctioning unsold merchandise eats up valuable time without much profit to show for it. But there’s one solution that’s both easy and good for the bottom line: donating merchandise.

Through product philanthropy or gifts-in-kind donations, companies can make room for new products in their warehouses, spread goodwill in their communities, and receive a tax break, all in one simple step.

Breaking Down the Benefits

The tax break comes thanks to a piece of tax code that many people haven’t heard of: Internal Revenue Code Section 170(e)(3). It provides C Corporations with a tax deduction equal to up to twice the cost of donated products, when they donate those products to qualified nonprofits.

Under the tax code, 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 in store for $30, the difference is $20. Half of $20 is $10. So, $10 (Product Cost) + $10 (Half the Difference) = $20 Deduction. Twenty dollars does not exceed twice the product cost, so it does not exceed the maximum allowable deduction.

Beside the tax savings, donating unused merchandise offers other benefits as well. For one, donating merchandise elevates your brand in the eyes of both consumers and your employees. Plus, it keeps the merchandise from being devalued. That’s good both for your brand and your relationship with retailers. No retailer wants merchandise in the store being undercut by a supplier discounting it elsewhere.

Donations also give you a way to keep warehouses uncluttered, or quickly free up space when you need it, by donating unsold merchandise whenever you choose to throughout the year.

Finally, the donations spread goodwill throughout the community and increase employee morale by demonstrating your company’s generosity to those in need. 

Leaning on Gifts-in-Kind Organizations

While companies can task staff to search out reputable charities and arrange for donations, they can also turn to gifts-in-kind organizations – nonprofits that act as a go-between for companies that have products to donate to schools and nonprofits in need. A good gifts-in-kind organization will make the process easier and often more cost-effective than going it alone.

Gifts-in-kind organizations are 501c3 nonprofits, whose sole purpose is to collect corporate product donations and then distribute them to qualified nonprofits. Gifts-in-kind organizations should accept donations of any size year-round, from a few boxes to a few truckloads at a time.

To get the process started, first contact a reputable gifts-in-kind organization and find out how to join its donor network. Usually this involves filling out some paperwork with details about your company and the types of products you want to donate. Be wary of companies that charge a fee to their donors. Reputable gifts-in-kind organizations will ask only that donors take care of the cost of shipping items to their designated warehouse.

Once a gifts-in-kind organization accepts your company into its network, you’re ready to make a list of inventory you would like to donate. Next, you’ll submit that list to the gifts-in-kind organization for approval. Once you have its approval, you’ll ship the items to the designated location. The organization will handle sorting and cataloging of the merchandise, then make it available to member charities. In turn, you’ll receive tax documentation for your donation and learn what charities received your goods. 

Who Benefits?

A variety of nonprofits, schools and churches make use of gifts-in-kind organizations. (If you prefer your donations go to particular kinds of groups, you can often indicate that to the gifts-in-kind organization.) Products run the gamut from toiletries to office equipment. Some of the more popular items include printers, office supplies, art supplies, toys and tools.

Charities that receive the items can either use them in their offices or donate them to their communities. The only restriction is that participating organizations must agree to act in accordance with IRC section 170(e)(3), which states that merchandise must be used for the care of the ill, needy or minors. It cannot be bartered, traded or sold.

Charities can request as many items as they want. One group reported receiving more than $1m in donated products in a year. For most groups the savings are more modest, but still a huge help for charities operating on shoestring budgets.

Getting Your Feet Wet

Remember that with gifts-in-kind organizations, no donation is too small. So if you’re not convinced that donating items is the right path for your organization, you can always start small. Begin with just one “trial donation” to see how the process works. If you’re not happy, try another small donation with a different gifts-in-kind organization to see if it meets your needs better. With the potential tax benefits and the goodwill you’ll spread, donating unused inventory is certainly worth a try. 

Gary Smith is president and CEO of the National Association for the Exchange of Industrial Resources, a U.S. gifts-in-kind organization.