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Facility Operations: Turn Dead Inventory into Dollars

Sept. 1, 2008
Save money, help others and get rid of slow-moving or dead stock—all at the same time.

By Emily Collins

Ever wonder what to do with obsolete or slowmoving SKUs? Don’t just throw away the items that are taking up valuable space and costing your operation money. The smartest solution may be to give them to charity.

By donating overstock merchandise, your business can qualify for a federal income tax deduction, under 170(e)(3) of the U.S. Internal Revenue Code. Although this deduction has been available for 32 years, there are few corporations taking advantage of it. C corporations may deduct the cost of the inventory donated, plus half the difference between cost and fair-market value. Deductions may be up to twice cost.

For example, your business (a C corporation) sells a product, for which it pays $1. Retail price is $2. Your deduction is $1.50. If you pay $1, and that item sells for $4, your deduction is $2 (limit of twice cost). S corporations, partnerships and sole proprietorships earn a straight cost deduction.

Even if a business gets only a straight cost deduction, it may still be beneficial to donate stagnant merchandise rather than clear it through a liquidator. Since a liquidator looks for the lowest price, its offer may be less than cost—substantially less.

When a company has to choose among liquidating obsolete inventory, dumping it and writing it off as a loss or donating it and taking a straight cost deduction, donating may be the preferable choice.

Benefits Stack Up
Besides the tax deduction, there are many other great benefits of donating excess inventory:

  • Free up needed warehouse space. Whether you own your warehouse or are renting space, storing product can be expensive. Insurance, utilities, labor and shrinkage all factor in. It doesn’t pay to hold stagnant inventory that isn’t earning its keep.
  • Put your marketing focus where it should be—on your top sellers. Non-moving inventory can consume a disproportionate amount of money, time and effort. By donating those items to charity, your business can put your advertising and promotional dollars where they’ll do the most good—on your star performers.
  • Avoid problems involved with liquidating overstocks. Liquidators tend to pick and choose. They may not want to buy all of your non-movers, leaving you with the problem of what to do with the leftovers.
  • Donating can often clear all of your problem products at once.Help deserving schools and nonprofit organizations. This good deed can translate into good will. You could ask the recipient group to call the local newspaper to publicize the donation.

A Myriad of Details
However, before a company can earn a tax deduction and benefit from the advantages of donating excess inventory, it must first take several steps. Companies must donate to a public or private school, and in the case of nonprofit organizations, ensure that the nonprofit is a 501 (c)(3), since only that IRS classification qualifies.

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An accountant or tax adviser should instruct the recipients as to what information they need to include in the documentation they furnish to the company as proof of the donation. Then, the company has to include the recipient’s letter on corporate tax forms as support for claiming the deduction.

If a company donates a small quantity of merchandise, it should select recipients carefully to avoid the appearance of favoritism. By the same token, if the business is donating a large quantity of product (a trailer or more), it will have to instruct recipients that, under IRS regulations, donated merchandise may not be bartered, traded or sold. Charities or schools may not auction or sell donated merchandise to raise cash.

Simplifying the Process
I know what you’re thinking: “Who has the time to do all this work?” Despite the many potential benefits of donating obsolete inventory, most material handling managers simply don’t have time to track down qualified recipient organizations, do the necessary research and prepare the documentation.

Thankfully, a nonprofit organization called the National Association for the Exchange of Industrial Resources (NAEIR) will do the heavy lifting for you. NAEIR accepts donations of excess or non-moving inventory, provides the proper tax documentation and then redistributes the goods to more than 13,000 qualified schools, churches and nonprofit organizations throughout the U.S.

The organization ships items to elementary and high schools, YMCAs/YWCAs, community centers, rescue missions, shelters for abused women and children, hospitals, nursing homes, churches of all denominations and many other social-service agencies. Since NAEIR’s founding in 1977, more than 7,500 corporations have contributed more than $2 billion worth of excess inventory.

The following items are all good candidates for donation: slow-selling or non-moving SKUs; undamaged returns; cancelled orders; misprints, seconds, blurs or overstocks; unsuccessful product introductions; discontinued models, styles or colors; packaging changes.

When a company uses NAEIR’s service, the donation process becomes simple. To begin, a company sends in a written proposal or list of products to donate, including short descriptions, quantities and value. A NAEIR committee reviews and approves proposals within 72 hours. Then, NAEIR notifies the donor and then sends shipping instructions and labels.

Although the donor company is responsible for the shipping cost, that is also a tax-deductible expense. And, NAEIR’s traffic department can provide reduced rates for shipping.

For a free donation information kit or to inquire about making a donation, call 800-562-0955 or email [email protected].

Emily Collins is the communications associate for the nonprofit National Association for the Exchange of Industrial Resources (NAEIR). NAEIR accepts product donations from businesses and redistributes those goods to 13,000 qualified charities and schools throughout the U.S. NAEIR does not charge donor companies for its service.