Donating excess inventory may get you a tax deduction

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

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.

James J. Carroll, an attorney with Day, Berry & Howard LLP in Hartford, says the amount of the tax deduction you can take depends on many factors, among which are: 

• 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 1-800-289-4551. 

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