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Whether your travel goods company is experiencing a boom or bust – or something in between – donating excess inventory is one step all businesses can benefit from.
How does giving products away help your bottom line? It’s all because of a little-known tax code – Internal Revenue Code Section 170(e)(3), which offers a generous tax benefit to C Corps. The tax benefit can make donating much more attractive than the alternatives, such as discounting, liquidating or auctioning merchandise.
Under 170(e)(3), when a C Corp donates its unwanted inventory to qualified nonprofits, it can receive a federal income tax deduction equal to up to twice the cost of the donated products.
According to 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.
For 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 is does not exceed the maximum allowable deduction.
What about labor costs involved in donating? If you’re going it alone, vetting charitable organizations, and sorting and distributing products can be a huge investment in both time and money, taking your workforce away from their regular responsibilities. That’s where a gifts-in-kind organization can prove invaluable.
Gifts-in-kind organizations are 501(c)(3) organizations that connect businesses that have products to donate to charitable organizations in need. Companies tell a gifts-in-kind organization what product and how much they want to donate. Once they get the OK, they ship that product to the organization’s warehouse. It’s that simple. The gifts-in-kind organization takes care of the rest.
Once a gifts-in-kind organization receives a donation, they sort it, catalog it and make it available to their member schools, churches and nonprofits. They’ll also send tax documentation to the business and may even let them know who benefited from their donation.
What are the limits? Businesses can donate as much or as little as they want – from a few boxes to a few truckloads. They can also donate as often as they want. Some businesses choose to donate on a quarterly or annual basis, others choose to donate whenever they have excess stock.
On the other end, churches, schools and nonprofits scroll through their online inventory or catalogs and request as many items as they want as often as they want throughout the year.
That can result in huge savings for groups trying to survive on a shoestring budget – from teachers trying to supplement classroom supplies to nonprofits looking to provide gifts to needy children.
Charitable groups receiving donated product must abide by the guidelines outlined in IRC section 170(e)(3), which states that the merchandise must go to care for the ill, needy or minors. They also may not barter, trade or sell the donated items.
What can I donate? Gifts-in-kind organizations will take just about anything. Office supplies, maintenance items and janitorial products are always popular. So, too, are clothing, toys, sporting goods, small appliances and personal care items. Anything an organization or those they serve could use is greatly appreciated.
Because of the latitude businesses have in the scope and size of their donation, working with a gifts-in-kind organization makes as much sense for a small business as it does for a large corporation.
Everyone likes to talk about win-wins. What could be more of a win-win than getting a tax break for donating products to those who truly need them?