By Gary C. Smith
When companies think of the holiday season, they usually think of turning over a lot of new merchandise. But with the help of a gifts-in-kind organization, the season can also be a great time to get rid of excess inventory, earning companies big tax breaks while playing Santa to needy charities.
Gifts-in-kind organizations take companies’ excess inventory and make it available to member nonprofits such as schools, churches and hospitals. They act as a go-between, connecting businesses with deserving charities. It’s a great way to get rid of products taking up space in your warehouse, without taking a huge financial hit.
By donating new, excess inventory to charity, businesses can earn a federal income tax deduction under Section 170 (e)(3) of the U.S. Internal Revenue Code.
The IRS Code states 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 a retailer of office products and you buy a desktop stapler for $2.00. Your price to the home office consumer is $4.50. Your deduction is $3.25. If the markup is considerably higher, deductions are limited to twice cost.
If you’re an S corporation, partnership, LLC or sole proprietorship, you qualify for a straight cost deduction—which could still be more than you make by going through a liquidator.
By using a gifts-in-kind organization, you can earn this deduction without hunting for a charity yourself—usually at no extra cost. That’s because gifts-in-kind organizations typically provide free services to donating companies. Often, there are no restrictions on how much a company donates. Donations may be as small as one box or as large as dozens of truckloads.
Nonprofit gifts-in-kind groups typically accept items such as clothing, tools, toys, games, computer software, CDs, personal care items, warm clothes, shoes, janitorial supplies and many others. Your customers might not want to purchase a discontinued model or color, but those nonprofits will gladly accept and use them.
You don’t need to worry that these wares will not be used as planned and instead sold for profit. Tax codes stipulate that a donated product cannot be resold, bartered or traded – and must be used according to the organization’s mission. By keeping your extra inventory out of the open market, you are also protecting your brand and eliminating the potential for product devaluation.
To get started, contact a gifts-in-kind organization (www.naeir.org) and ask how to become a member of its donor network. Typically, you’ll be asked to complete a form providing information about your business and its products.
Once your company is accepted as a member, you should be able to make donations at any time. 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’s 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 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.
Besides tax benefits, using a gifts-in-kind organization will help free up precious warehouse space and allow you to focus on your best-selling products rather than worry about those that are sitting idle. Plus, it can expand your scope, putting products into the hands of people who might not otherwise have access to them.
With the holidays just around the corner, it’s a great time to take advantage of gifts-in-kind organizations. Donating items may not only help charities cut their own operating costs, but it can also help them play Santa to the many children and adults they serve.