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Congress provides incentives under the tax laws to encourage donation
of inventory to non-profit organizations. These laws provide an
incentive to businesses for donating slow-moving items prior to
marking down the price. By donating items that today are
collecting dust on a warehouse floor or a retail outlet shelf, donors
can save the cost of other expenses related to maintaining the
inventory, including the cost of warehousing, handling, and/or
disposing of the items.
Internal Revenue Code, Section 170e3 creates an enhanced deduction
for corporationsto take a deduction up to twice the cost of
producing an item (when the value is higher than the cost).
Before the enhanced deduction was put in place, companies could only
deduct an amount equal to their cost for an item donated to an IRS
501c3 public charity. However, the inventory or other property may
have a fair market value higher than its cost. Under 170e3, an
enhanced deduction allows the donor to take a deduction up to
twice the cost/basis of the item if the value is higher than the cost.
Donated property under 170e3 must be used for the ill, needy or infant
(using IRS definitions). Equipment used by a facility providing
service to the needy also qualifies. The same acknowledgement
requirements that apply for any donations still applies under 170e3
donations. Though materials that are donated under 170e3 cannot
be resold, organizations may charge a “user fee, handling fee, or
donation fee” to recoup their expenses.
How
does the enhanced deduction under 170e3 work?
See the sample computation below and work with your accountant or tax
advisor to see how you can benefit from donation of inventory.
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Sample Computation |
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Fair Market Value (Selling Price) =
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$1,000 |
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Basis (Cost to Company)= |
$ 200 |
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Gain = (Difference between FMV and Basis, or “mark
up“)= |
$ 800 |
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Step 1:
Determine the Gain |
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Fair Market Value $1000 - Basis $200=
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$ 800 |
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Step 2:
Reduce
the deduction to not more than 1/2 the gain |
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Gain $800 x 1/2 = |
$ 400 |
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Fair Market Value $1000 - 1/2 Gain $400 = |
$ 600 |
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Step 3:
The deduction cannot exceed twice the basis or cost |
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$600 - 2 x Basis (2 x $200 = $400) = |
$ 200 |
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Step 4:
Add the limitation in Step 1 to the limit
in Step 2 and subtract
from the fair market value to determine the deduction |
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$1000 - Gain ($400 + $200) = |
$ 400 |
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Deduction = Twice the Cost |
The IRS
allows a company to take up to half the gain (mark-up) on an item,
but not
more than twice what the company paid for it.
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