By donating that new, idle merchandise to charity, your business 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 twice cost.
Let’s say you’re an hvac contractor (and a C corporation) that buys a certain model of furnace for $1,500. Your price to the residential customer is $2,000. Your deduction is $1,750. 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 stagnant inventory rather than clear it through a liquidator. Since a liquidator looks for the lowest price it can get, its offer may be lower than your cost — substantially lower.
Investigate donating inventory before negotiating with a liquidator, however, to be able to justify the product’s fair market value with the IRS.
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 on to stagnant inventory that isn’t earning its keep.
If your business is a supplier trying to trim inventory levels enough to achieve just-in-time delivery, these nonmovers may be one of your biggest obstacles. Donating clears them out quickly.
Nonmoving inventory can consume a disproportionate amount of your business’ money, time, and effort to clear it. By donating those items to charity, your company can put advertising and promotional dollars where they’ll do the most good, on your star performers.
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.
This good deed can translate into good will. You might ask the recipient group to call the local newspaper to publicize the donation.
If you decide to go ahead with publicity, have a diplomatic answer prepared in case other groups call.
Here are some types of products to consider:
Wholesaler-distributors especially are aware of the need to constantly review their offerings, weed out the slow movers, and concentrate on top-selling items.
To earn this deduction, make sure that the nonprofit recipient is a 501 C(3), since only that IRS classification of nonprofit qualifies. Public or private (nonprofit) schools may also qualify to receive these goods.