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Charitable donations boost bottom line, image. (Washington Insights).

As year-end approaches, many members may stand to benefit from a provision of the tax code that can enhance their profitability. When corporations donate available inventory to charities that serve the ill, the needy or minor children, Section 170(e)(3) of the Internal Revenue Code permits a deduction of up to twice the donor's basis in the property.

To be specific, the deduction for these qualified donations of property equals the lesser of two amounts: 1) the donor's tax basis in the property, increased by one-half the difference between fair market value and basis; and 2) twice the donor's basis.

For example, assume a retailer donates merchandise worth $40,000. Further assume that the retailer's basis in the property is $12,000. The charitable deduction would equal the lesser of: 1) $26,000 computed by adding basis ($12,000) plus $14,000, which is one-half the difference between FMV ($40,000) and basis ($12,000), or 2) $24,000 (twice basis). In this case, the retailer's charitable deduction is $24,000.

The types of property eligible for this special tax rule include:

1) stock-in-trade or other property includible in a donor's inventory;

2) property held for sale by the donor to customers in the ordinary course of its trade or business;

3) depreciable property used in the donor's trade or business; and

4) real property used in the donor's trade or business.

In many cases the contribution of products instead of money is a more effective way for companies to make a real difference in their communities, as well as to enhance their image as good corporate citizens. A recent survey by the Conference Board found that product philanthropy now makes up to 33 percent of corporate giving on an annual basis.

The tax benefits of product philanthropy are available to manufacturers, retailers and distributors alike. Frequently, they are more beneficial to the bottom line than writing off or destroying unwanted product.

In addition, product philanthropy is a profit-enhancing method of reducing inventory costs. Inventory costs associated with reverse logistics and returns management can be staggering. The Reverse Logistics Council reports that reverse logistics costs alone are estimated at $40 billion annually. Additionally, over the next few years, analysts predict the average cost per return will be $30 to $35.

Given the handsome tax advantages available through Section 170(e)(3), product philanthropy becomes a profitable alternative for handling inventory that is no longer marketable due to changes in product lines, product returns, end-of-season merchandise or discontinued items.

Product philanthropy can also help corporations efficiently handle re-set situations at the retail level. In a typical retail re-set transaction, one company buys out another company's shelf space, in the process obtaining its merchandise. Or a manufacturer introduces a new product to replace an older product line.

Companies are often challenged to dispose of that old/unwanted inventory without undermining their market position or violating environmental regulations. This happens a lot in the software industry Donating that product to qualified charities preserves their market standing, eliminates the redistribution costs and offers the company the opportunity to qualify for tax benefits.

FEI members who are considering the use of product philanthropy as part of an overall tax and cost savings program for their companies might consider partnering with Gifts In Kind International.

Gifts In Kind is the seventh largest charity in the U.S. and the world's leader in product philanthropy. Last year, it collected more than $675 million worth of product, including: clothing and personal care items; computers; software and office equipment; books; educational materials; sporting equipment; toys and recreational items; and all the materials needed to construct and outfit low-income housing or a shelter for the homeless, or to renovate a local community center. Nearly 50,000 charities around the world use Gifts In Kind to provide product that supports their various community programs.

To find out more about Gifts In Kind International, visit its Web site: www.giftsinkind.org, where you will find some of the biggest multi-national corporations listed as donors. When you are ready to make a donation, contact Barbara Florence, Vice President, Donor Development, at bflorence@giftsinkind.org, or call 703.836.2121 to begin the process.

Mark Prysock is the Director of Tax and Economic Policy for FEI.
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Author:Prysock, Mark
Publication:Financial Executive
Date:Nov 1, 2002
Words:713
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