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.
More benefitsBesides the tax deduction, your company can realize the following 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 on to stagnant inventory that isn’t earning its keep.
- Get down to just-in-time inventory.
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.
- Put your marketing focus where it should be, on your top sellers.
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.
- Avoid problems involved with liquidating 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.
If you decide to go ahead with publicity, have a diplomatic answer prepared in case other groups call.
Deciding itemsAfter you’ve consulted with your accountant or tax adviser and s/he has 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:
- Unneeded supplies — As hvacr systems become more sophisticated, you may be caught with quantities of equipment or supplies that don’t work in the latest generations. But they might be useful for repairs or installation in nonprofit organizations that are not as concerned about energy efficiency as a homeowner is.
- Slow-selling or nonmoving SKUs (stock keeping units) — 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 you’ll keep the liquidator from competing against you at cut-rate prices.
- Discontinued models, styles, colors — As an example, older models of furnaces, heat pumps, or air conditioners may be superseded by the manufacturer with more efficient, high-tech versions. Your inventory of those earlier units can be donated instead of being scrapped.
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.