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Cliff Holste

Supply Chain Digest
Material Handling Editor

Logistics News - Sorting It Out

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.

January 17, 2018

Sorting It Out: How to Turn Nonmoving Inventory from Liability to Asset


Putting the Charitable Giving Tax Code to Work – A Smart Business Decision

 

While it is true that the Trump Administration has already changed hundreds of business regulations, the ones affecting charitable giving have yet to be touched and probably won’t be. This is good news! Why? Because this time of year many shippers find that their nonmoving merchandise has become a major liability chocking up the warehouse while providing little or no storage space for new incoming merchandise. By donating that nonmoving merchandise to charity a shipper 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 merchandise donated, plus half the difference between cost and fair market value. Deductions may be up 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 shipper realizes only the straight cost deduction, it may be to its advantage to donate its nonmoving merchandise 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.

 

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

Holste Says...

A shipper stuck with nonmoving merchandise has several options one of which is to donate it to a nonprofit organization. It makes room for new merchandise, reduces taxes, and benefits the community.

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  • 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 your accountant or tax adviser has recommended that donating inventory would be the right move, 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 products or supplies that simply aren’t up to date. They may not sell 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. But they might still be useful to nonprofits, schools or churches with limited funds.
  • Slow-selling or non-moving SKUs.  Just as its 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 merchandise. 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.

Note: 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 shipper 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.

 

If you need some help with this, you can contact 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.

 

Final Thoughts

 

A shipper stuck with nonmoving merchandise has several options one of which is to donate it to a nonprofit organization. It makes room for new merchandise, reduces taxes, and benefits the community.

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