How to Dispose of Unwanted Inventory… and Do Good

Gary C. Smith
October 16, 2018
THE TALK... | Operations

Many manufacturers, distributors and window and door retailers face an ongoing challenge: disposing of surplus inventory. Many practice discounting, liquidating and auctioning unwanted merchandise, but this labor-intensive work can yield little profit. 

Another idea is to donate products to charity, also known as product philanthropy or gifts-in-kind donations. This practice has financial advantages, too, thanks to a little-known tax break in IRC Section 170(e) (3). 

This piece of tax code states that, when C Corps donate their inventory to qualified nonprofits, they can receive a tax deduction equal to up to twice the cost of the donated products. 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 a very simple math example, if a product costs $10 to make and can sell for $30, the difference is $20. Half of $20 is $10. So, $10 (product cost) + $10 (half the difference) = $20 deduction. Because, in this example, the $20 does not exceed twice the product cost, it does not exceed the maximum allowable deduction. It’s that simple and advantageous.  

Donating Unwanted Stock

Companies do not have to hunt for worthy not-for-profits to accept excess merchandise; a gifts-in-kind organization can do all the work. Gifts-in-kind organizations are 501(c)(3) nonprofits that exist to collect corporate product donations and then distribute them to qualified nonprofits.

A gifts-in-kind organization should accept 100 percent of overstocks, at any time throughout the year. It’s particularly helpful when consolidating a warehouse, transitioning between selling seasons or dealing with a run of returns. 

How the Donation Process Works

The first step is to contact a reputable gifts-in-kind organization and ask how to become a member of its donor network. Typically, the organization will ask the donator to complete a simple form about the company and its products. 

Once a company is accepted, the next step is to make a list of the inventory of eligible donations and submit it for approval. Once approved, the company can ship goods to the designated location. The gifts-in-kind organization assumes responsibility for sorting and cataloging the merchandise, as well as making it available to member charities. 

When the merchandise is received, the gifts-in-kind organization will send tax documentation to the donating company. After the products are donated, the organization can identify what specific charities received the goods.

More Benefits to Gifts-in-Kind-Donations

The tax benefits aren’t the only advantages to making gifts-in-kind donations. Donating can also help: 

  • Protect brand identity: Discounting inventory can devalue products and a brand name. Making corporate donations can elevate a brand.
  • Enhance employee engagement: Employees like working for companies with heart. Sharing the names of the charities that benefited from gifts-in-kind donations can raise morale.  
  • Keep inventory current: There’s no reason to hang onto obsolete stock when it’s simple to move.
  • Keep the warehouse uncluttered: Storage space is valuable. Most gifts-in-kind organizations will accept both large and small volume donations at any time, allowing for better management of warehouse space. 

Most important, donating goods offers a helping hand to people in need and the charities that serve them. Unwanted products can enjoy new life in the hands of those that will put them to good use.

Gary C. Smith is President and CEO of the National Association for the Exchange of Industrial Resources, the largest gifts-in-kind organization in the U.S. Galesburg, Illinois-based NAEIR has received donations of excess inventory from more than 8,000 U.S. corporations and redistributed more than $3 billion in products to non-profits and schools. Smith may be reached at 800/562-0955.