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Donating Inventory

        Donating Inventory          

Whenever we are assisting clients with year-end inventories, the question often comes up about what to do with slow-moving or excess items.  It usually comes as a surprise to many business owners that they can actually reap a nice tax deduction by donating their excess inventory to charity. 

The IRS allows C-corporations a tax deduction for the lesser of: a) twice the basis (generally cost) of the merchandise, or b) its cost basis plus half the difference between the cost basis and its fair market value.

Where do you find the charity to take your items?   There are several possibilities.

Examples of the types of products you might want to donate include cancelled orders, returns, seconds, packaging changes, discontinued items and slow sellers, according to the National Association for the Exchange of Industrial Resources (NAEIR). NAEIR is a nonprofit organization that collects donated merchandise from corporations and redistributes it to qualified schools and nonprofits.

As an example, if you donate inventory which cost you $20,000 to acquire or manufacture and generally has a market value of $40,000, your tax deduction would be $30,000.  (This is computed under (b) above by taking the cost basis ($20,000) and adding half the difference ($10,000) between the inventory's cost and its FMV of $40,000).  The applicable code section for this deduction is IRC Sec. 170(e)(3). 

Now, let's take the same example, but assume that the FMV of your excess inventory is $70,000 instead of $40,000.  In this case, your tax deduction would be $40,000.  Under (a) as outlined above, your deduction would be twice the cost ($20,000 x 2) since that amount is less than the cost basis plus half the difference between the cost basis and its fair market value ($20,000 + $25,000). 

Where do you find the charity to take your items?   There are several possibilities and there are some restrictions as to the types of charities that qualify so please call our office before making any donation.

Some organizations specialize in taking excess inventory and finding charities to accept it.  The best solution, however may be to think of the possible non-profit groups that might make use of your inventory and spend an afternoon on the phone.  As you can see from the example above, the results could be well worth the effort.

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