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Cliff Holste is Supply Chain Digest's Material Handling Editor. With more than 30 years experience in designing and implementing material handling and order picking systems in distribution, Holste has worked with dozens of large and smaller companies to improve distribution performance.

Logistics News

By Cliff Holste

September 25, 2013



Using Excess Inventory To Lower Taxes And Benefit Non-Profit Organizations – A Smart Double Play!

How to Cut Taxes Using Excess Inventory


The staff at SC Digest felt that the following information was a good follow-up to our recent article titled Short Product Life Cycles Increase Inventory Levels & Decrease Efficiency”

Holste Says:

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If a business has a small quantity of merchandise to donate, select the recipient(s) carefully to avoid the appearance of favoritism..
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Previous Columns by Cliff Holste

Logistics News : Three Key Factors for Implementing a Profitable Returns Capability

Logistics News : Shippers Looking To Automate Should Simulate Recommended Solutions Prior To Committing

Logistics News : When Looking To Improve Operations, Shipper Can Tap Into a Variety Of Expert Resources

Logistics News : Shippers Take Advantage of Donating Excess Inventory to Non-Profit Organizations

Logistics News : Will DC Automation Drive Some Shippers to 3PL Service Providers?

More

Excess, nonmoving inventory is a common business problem that, fortunately, contains its own solution.

By donating that new, idle merchandise to charity, a 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 a retailer of office products buys a desktop stapler for $2.00. The price to the home office consumer is $4.50. The deduction is $3.25. If the markup is considerably higher, deductions are limited to twice cost.

If the company is an S corporation, partnership, LLC or sole proprietorship, it qualifies for a straight cost deduction.

Even if the business realizes only the straight cost deduction, it may be to its advantage to donate its stagnant inventory rather than clear it through a liquidator. Since liquidators look for the lowest price they can get, their offer may be less than cost – substantially less.

Investigate donating inventory before negotiating with a liquidator, however, to be able to justify the product’s fair market value with the IRS. Using a gifts-in-kind organization makes the process simple.

Besides the tax deduction, the company can realize other benefits by donating excess inventory:


 

  • Free up needed warehouse space. Whether a business owns a warehouse or rent space, storing product can be expensive. Insurance, utilities, labor, and damage all factor in. It doesn’t pay to hold stagnant inventory that isn’t earning its keep.
  • Get down to Just-in-Time inventory. If a business is a supplier trying to trim inventory levels enough to achieve Just-in-Time delivery, these non-movers may be one of the biggest obstacles. Donating clears them out quickly.
  • Put marketing focus where it should be - on top sellers. Non-moving inventory can consume a disproportionate amount of a business’s money, time and effort to clear it. By donating those items to charity, the company can put advertising and promotional dollars where they’ll do the most good, on its star performers.
  • Avoid problems involved with liquidating those overstocks. Liquidators tend to pick and choose. They may not want to buy all of the non-movers, leaving the problem of what to do with the leftovers
  • Help deserving nonprofits, schools and church organizations. This good deed can translate into good will. The recipient group might call the local newspaper to publicize the donation. While a photo of a company presenting a donation might bring in additional business, keep in mind that it also may produce requests from other groups for donations, too. If a company decides to go ahead with publicity, have a diplomatic answer prepared in case other groups call.

After an accountant or tax adviser and has recommended that donating inventory would be the right move for a business, how does one identify which merchandise to clear? Here are some types of products to consider:

 

 
  • Unneeded supplies. As new products are introduced into an industry, the company may be caught with quantities of equipment or supplies that simply aren’t up to date. They may not work as well as more current products for a particular sector of the economy, or are no longer part of what’s being offered in the mainstream market; be that the office products industry or the school supplies sector. But they might still be useful to nonprofits, schools or churches with limited funds.
  • Slow-selling or non-moving SKUs.  Just as it is dangerous to fall in love with a stock or mutual funds and be reluctant to unload them when not performing, it is equally unwise to fall in love with stagnant inventory. Businesses need to be continually 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, a business will do better on the bottom line.
  • Discontinued models, styles, colors. As an example, the manufacturer with more efficient, high-tech versions may supersede older models of certain product lines. Inventory of those earlier generations of items can be donated instead of scrapped.


To earn this deduction, make sure that the nonprofit recipient is a 501( c )(3), since only that IRS classification of nonprofits qualifies. Public or private (nonprofit) schools may also qualify to receive these goods.

 

Have an accountant or tax adviser instruct the recipient group as to what information it needs to include in the documentation it furnishes you as proof of the donation.

 

Include the recipient’s letter on the corporate tax forms as support for claiming the deduction.

 

If a business has a small quantity of merchandise to donate, select the recipient(s) carefully to avoid the appearance of favoritism. By the same token, if it has a large quantity of product (a semi-trailer or more), instruct the recipient groups that under IRS regulations, donated merchandise may not be bartered, traded or sold. Charities, schools or churches may not auction or sell donated merchandise to raise cash.

 

Bottom line:  a business can do something good for someone and for itself.


Final Thoughts

The above was submitted to SC Digest by Gary C. Smith, president of NAEIR, the National Association for the Exchange of Industrial Resources, based in Galesburg, Illinois (www.naeir.org). NAEIR accepts product donations from businesses and redistributes those goods to approximately 12,000 qualified nonprofits, schools and church organizations throughout the United States. NAEIR does not charge donor companies for its service. For further information, contact NAEIR at (800)-562-0955.

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