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How to turn excess inventory into a tax deduction.

If a corporation donates excess inventory to certain qualified charities, it can take a federal tax deduction of as much as twice the cost of the goods.

The rules, spelled out in tax code section 170(e)(3), permit corporations to deduct the cost of donated inventory, plus half the difference between cost and fair market value, with a maximum deduction of twice the basis of the property.

For example, assume a corporation donates a pen in which it has a basis of $1 and which it sells for $2. The deduction is $1.50: cost ($1) + half the difference between cost and fair market value ($.50) = $1.50.

The deduction for S corporations, partnerships and sole proprietorships is limited to their cost basis.

Recipient organizations must use the donated property for the care of the ill, needy and infants (minors) and may not barter, sell or trade donated merchandise. Hundreds of corporations donate inventory to charity and have found, especially during a recession, that the practice has benefits beyond the tax deduction.

BENEFITS

A charitable contribution provides benefits that other types of excess inventory disposal do not. For example, liquidation--ofetn used because a company usually needs cash more than it needs a deduction--realizes less than product cost. However, since a deduction under section 170(e)(3) is above cost, it could, depending on the product's markup, generate substantial tax savings.

A business that may have to unload a slow-moving product would be wise to refrain from lowering the selling price before making a thorough review of the potential for donating. If the selling price is reduced, it may be difficult later to prove a higher fair market value.

Also, a corporation sustaining a loss during its current fiscal year often assumes it won't benefit from the deduction. But the loss situation may be temporary, and the contributions can be carried forward.

DONOR DOUBTS

To be sure, donations to charity raise questions:

* How are the donations to be divided among recipients?

* How are they shipped or distributed?

* How does the donor determine if a potential recipient is qualified under the law?

* Does a corporation that donates more product than the recipient can use increase the potential that some product may be wasted or not used in accordance with IRS regulations?

* Will a corporation donating inventory locally hurt its market by giving products to prospective customers?

* Will a corporation that does not have enough product to satisfy everyone cause ill will among the organizations that are turned down?

* Must a donor corporation that has too much inventory for local non-profits to use expand distribution to other cities?

* Will these local recipients provide the donor with the proper tax documentation, and will they do it without time-consuming prompting?

These are all valid concerns, and often they become obstacles to donations. One way to avoid most of these obstacles is to donate inventory to a not-for-profit organization that acts like a "charity middleman." One such organization is NAEIR, which specializes in collecting inventory donations--at no cost--and redistributing them to a network of 7,000 qualified school and not-for-profit organizations across the country. NAEIR provides donors with proper tax documentation within 14 days after receiving a donation.

Here's how NAEIR operates:

A prospective donor sends a listing of the merchandise it wants to donate, including a brief description of each item, its quantity, unit cost or wholesale value and its extended value. NAEIR's donation review committee decides if the proposed material is useful to network members. If the donation is accepted, a NAEIR representative phones the donor immediately and provides shipping instructions.

NAEIR makes donated merchandise available to its members, which pay $625 annual dues plus shipping and handling, and receive an average of $7,000 of new merchandise each year. Recipients include nonprofit hospitals and nursing homes; drug and alcohol rehabilitation centers; shelters for the homeless and abused women and children; church organizations;] Young Men's Christian Associations; Boys and Girls Clubs; social service agencies; and schools.

Another such organization is Educational Assistance, Ltd. In EAL's case, a college or university "buys" the inventory donated to EAL, using tuition credits for payment. EAL then awards scholarships to needy students in the donor's name.

Management accountants should consider advising their companies that such convenient donation services exist.

For more details about NAEIR, write to it at 560 McClure Street, Galesburg, Illinois 61401, or call (309) 343-0704.

For more information about EAL, write to it at P.O. Box 3021, Glen Ellyn, Illinoise 60138, or call (708) 690-0010.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Zavada, Jack
Publication:Journal of Accountancy
Date:Feb 1, 1992
Words:752
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