Excess or non-moving inventory is a very common business dilemma that also contains its solution.
When you donate idle merchandise to charities like Giving Center, your business can gain a federal income tax deduction under Section 170 ( e )(3) of the U.S. Internal Revenue Code.
The IRS Code states regular C corporations are able to deduct the cost of the inventory donated to charity, including half of the difference between cost and fair market value. Deductions can potentially be up to twice-cost.
For example, if you are a retailer of office products and you buy a desktop stapler for $2.00, your price to the consumer is $4.50. Your charitable deduction would be $3.25. If the markup is usually considerably higher, deductions are limited to twice cost.
If you are an S corporation, partnership, LLC, or sole proprietorship, you are allowed a straight cost deduction.
If your business can only a straight cost deduction, it may be advantageous to donate any stagnant inventory rather than liquidation. Liquidators will look for the lowest price they can get so their offer can be substantially less than your cost.
It is important to investigate donating inventory before negotiating with a liquidator. This will allow you to justify the product’s fair market value with the IRS.
Besides tax deduction, your company can gain other benefits by donating excess inventory:
- Free up much-needed warehouse space. No matter if you own a warehouse or are renting space, storing products can end up being expensive. In the end, it does not pay to hold on to stagnant inventory that is not earning its keep.
- Get down to the Just-in-Time inventory. If your business is a supplier and you are trying to reduce inventory levels enough to attain Just-in-Time delivery, non-moving inventory may be one a huge obstacle. Donating excess clears them out quickly.
- Put your marketing focus on your top sellers. Non-moving inventory can eat up a disproportionate amount of your business’s time, money, and effort to clear it. In donating stagnant products to charity, your company can put your dollars into advertising and promotional purposes where they will do the most good.
- Avoid problems with liquidating overstocks. Liquidators usually pick and choose and may not want to buy all of your non-moving inventory. This can leave you with the problem of what to do with the leftovers. Donating can often clear out your problem products all at once.
- Help deserving nonprofits. Good deeds often translate into good will. You may ask your chosen charity to call the local newspaper to publicize your charitable donation. While a photo op of you giving away the donation may bring additional business, remember that it can also garner requests from other groups for donations as well. If you decide you would like to go with the publicity route, have a diplomatic answer prepared in case other groups call.
After you have consulted with your tax adviser and they recommended that donating non-moving inventory would be the right move for your business, how do you know which merchandise to clear? Here are some basic types of products to consider for donation:
- Unneeded supplies. As new products are continuously introduced into the industry, you may be tied up with unwanted quantities of equipment or supplies that aren’t up to date. They may also not work as well as current products for a specific sector of the economy or are no longer part of what is being offered on the mainstream market; whether that be the office products industry or the school supplies sector. But they can still be useful to nonprofits and other like organizations with limited funds.
- Slow-selling and non-moving SKUs. It is dangerous to fall for a stock or mutual fund and become reluctant to unload it when it’s not performing, it’s also equally unwise to fall in love with a stagnant inventory. Businesses should be continually aware of the need to constantly review their offerings, discard the slow-movers, and focus on the top-selling items.
- Unsuccessful product intros. Sometimes new products just do not move. By donating these products instead of selling them to a liquidator, your business will do better when it comes to the bottom line.
- Discontinued models, styles, colors. Manufacturers with a more efficient, high-tech version may replace older models of certain product lines. Non-moving inventory of this type can be donated instead of scrapped.
You should make sure that the nonprofit of your choice is a 501( c )(3), like Giving Center, since only that IRS classification of nonprofits qualifies for a charitable tax deduction. Public and private (nonprofit) schools may also qualify to receive these goods.
