Donating Excess Inventory for Tax Deduction

Are you aware that your corporation may be able to earn a federal income-tax deduction under Section 170(e)(3) of the Internal Revenue Code? If your corporation has unsold merchandise or other excess inventory on hand you may be able to donate it to a qualified charity — generally, a 501(c)(3) nonprofit organization.

National Association for the Exchange of Industrial Resources (NAEIR) is able to accept new donated items that include cancelled orders, returns, seconds, packaging changes, discontinued items and slow sellers. NAEIR is a nonprofit organization that collects donated merchandise from corporations and redistributes it to qualified schools and nonprofits.

Some noted factors for charitable giving include:

• When you purchased the donated inventory item. If you donate an item you already had on hand at the start of the year, the charitable contribution deduction will be the item’s fair market value minus the amount that would have been “ordinary income” to you (that is, your profit) if you had sold the item at that fair market value. Your total charitable contribution deductions cannot exceed 10% of your taxable income for the year. If you donate a new item you purchased during the year, you can deduct the item’s cost. In this case, the deduction is not subject to the 10% limitation.
• Whether the charity will use the item for its tax-exempt purpose. If that is the case and the item will be used solely for the care of the ill, the needy or infants, and your company is not an S corporation, you may qualify for an enhanced charitable contribution deduction. You can deduct the item’s fair market value minus one-half of the amount that would have been ordinary income to you if you had sold the item at that fair market value. The deduction cannot exceed twice the item’s “basis” (normally, the basis is the item’s cost). “Fair market value” is the price at which you otherwise would have sold the item — usually, the wholesale price for a manufacturer and the retail price for a retailer.

Consult your tax adviser for specifics because the requirements for charitable contribution donations are fairly complex. You can also get general information from NAEIR’s Web site, www.naeir.org, and a free guide on the subject by calling them at 1-800-562-0955