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Your contracting business may be sitting on an important tax deduction, and you probably don't even realize it. The deduction lies in your excess, overstock inventory—the stuff you have piled in your warehouse for the projects that never came to fruition, or the items that have been there that you can't envision using in the very near future. By donating nonmoving flooring items or other construction materials to charity, your company can earn a federal income tax deduction under Section 170 (e)(3) of the U.S. Internal Revenue Code.
The IRS Code says that regular (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 the cost. For example, if your business (a C corporation) sells hardwood flooring for $1 a square foot, and the retail price is $2, your deduction is $1.50. If you pay $1 and that item sells for $4, your deduction is $2 (the limit is twice the cost).
S corporations, partnerships, sole proprietorships and LLCs qualify for a straight-cost deduction. Even if your business realizes only a straight-cost deduction, it may be to your advantage to donate your stagnant products rather than clear it through a liquidator. Since liquidators look for the lowest price they can get, their offers may be substantially less than your cost—substantially less. When you are faced with the choice of liquidating this merchandise, dumping it and writing it off as a loss, or donating it and taking a straight-cost deduction, donating may be the preferable choice.
There are several organizations willing to take on donations, including Habitat for Humanity ReStore, the National Association for the Exchange of Industrial Resources (NAEIR) and The Storehouse (see the Hardwood Floors article "Storehouse of Dreams" on page 17 of the August/September 2006 issue). Local schools and nonprofits might also be interested.
Investigate donating inventory before negotiating with a liquidator, however, to be able to justify the product's fair-market value with the IRS.
Besides the tax deduction, there are many other great benefits of donating your excess inventory:
• Freeing 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 inventory that isn't earning its keep.
• Putting your marketing focus where it should be: on your top sellers. Nonmoving inventory can consume a disproportionate amount of money, time and effort to clear it. 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.
• Avoiding problems involved with liquidating those overstocks. Liquidators tend to pick and choose. They may not want to buy all of your nonmovers, leaving you with the problem of what to do with the leftovers. Donating can often clear all of your problem products at once.
• Helping deserving schools and nonprofit organizations. This good deed can translate into good will. You might ask the recipient group to call the local newspaper to publicize the donation.
Once you've decided that donating inventory might be a smart move for your business, how do you identify which merchandise to clear? Here are some types of products to consider:
• Slow-selling or nonmoving SKUs. It is unwise to hold on to stagnant inventory. Wholesaler/distributors and catalog businesses are well aware of the need to constantly review their offerings, weed out the slow-movers, and concentrate on popular, topselling items.
• Returns. If, due to some conflict, the flooring you ordered for a job was returned to you by the homeowner, and you don't want to pay the restocking fee for the distributor, you can donate that undamaged flooring.
• Cancelled orders. Again, donating avoids restocking costs. If the flooring was custom-made, it may be difficult to sell anyway.
• Discontinued styles and colors. If you don't have enough flooring of a discontinued style for a project, donating can save you space, since it may be difficult to match that specific product.
You should have your accountant or tax adviser instruct the recipient group as to what information they need to include in the documentation they furnish as proof of the donation. You will have to include the recipient's letter on your corporate tax forms as support for claiming the deduction. If you have a large quantity of product (a semi-trailer or more), you will have to instruct the recipient groups that under IRS regulations, donated merchandise may not be bartered, traded or sold. Charities or schools may not auction or sell donated merchandise.
Donating inventory is one of the few opportunities business owners have to not only benefit their business, but also their community. Your excess flooring will be going to a deserving family or organization, turning their house into a home.