Turn This Year’s Excess Inventory into Next Year’s Tax Deduction

by Gary C. Smith

Excess Inventory and TaxesIf you are like many retailers, one of your greatest ongoing challenges is disposing of excess inventory. That unwanted stock takes up valuable shelf space that belongs to more profitable merchandise.  From time to time, when you have reached your limit, you discount or liquidate those overstocks. It is not an ideal solution, but what other option do you have?  

Turns out, you have a much better option: product philanthropy. There is a generous tax benefit aimed at C Corporations that donate goods to charity. Unfortunately, many retailers have never even heard of this particular section of the tax code. According to IRC Section 170(e) (3), when C Corps donate their inventory to qualified nonprofits, they can receive a federal tax deduction equal to up to twice the cost of the donated products.

The easiest way to do it is via something else you may never have heard of: a gifts-in-kind organization. Gifts-in-kind organizations are nonprofits that collect corporate product donations and then give them to qualified nonprofits. The gifts-in-kind organization facilitates the deal, while your company and the receiving charity reap the benefits of the exchange.

Chances are, you are thinking that a double tax deduction sounds too good to be true, but it is the real thing. It works like this: 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.

Excess Inventory and TaxesFor 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

$20 does not exceed twice the product cost, so it does not exceed the maximum allowable deduction. It is that simple.

More Benefits For Stores

Tax benefits are only one of many advantages of donating unwanted merchandise to a gifts-in-kind organization. You will also:

• Save time and headaches – Discounting your stock is painful. Liquidating it or listing it on auction sites is laborious and time-consuming. But with gifts-in-kind organizations, once your donation is approved, you just ship it out. 

• Protect your brand – Discounting inventory lessens the value your products as well as your store name. That does not happen when you donate it. If anything, the good will you generate elevates your brand, while giving your employees something to be proud of.

• Make someone else’s life better – Product philanthropy enables you to give your products to someone who really needs them and will appreciate them. Gifts-in-kind organizations distribute the products to qualified charities, who in turn distribute them to people in need. You can do some real good. 

How To Get Started

The first thing to do is to contact a gifts-in-kind organization and ask how to become a member of its donor network. Typically, you will be asked to complete a form providing information about your store and its products. Once your company is accepted as a member, you should be able to make donations at any time. Many retailers find their arrangement is especially beneficial when shifting between seasons or after Christmas.

You start the process by making a list of the inventory you wish to donate. Submit it to your gifts-in-kind organization for approval. Once it is approved, simply ship it to a designated location. The organization’s workers will sort it, catalog it, and make it available to member charities. Once it is received, the gifts-in-kind organization will send you proper tax documentation for your records. And after the products are donated, you’ll be told exactly what charities received your goods, which you and your staff will find very gratifying.  

The bottom line is: start donating now, and by next April, you will see the difference in your corporate tax return. And best of all, you’ll have made a difference for those in need. 

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