Product Philanthropy Allows Retailers and Manufacturers to Deduct Taxes

warehouse with retail goods

Product Philanthropy Allows Retailers and Manufacturers to Deduct Taxes

Here are some reasons why in-kind donations may be one way to increase these clients’ bottom lines if product philanthropy hasn’t been on your radar as a year-end strategy.

For retailers and manufacturers, the fourth quarter theme is uncertainty. To beat inflation and avoid running out of inventory like they did last year, many retailers stocked up early before the holiday season. As consumers struggle with rising prices, holiday sales are still predicted to rise this year, but not at the same frenzied rate as they did last year.

This will almost certainly result in heavy discounting; in fact, holiday sales are now beginning well before Black Friday. Furthermore, discounting will have a significant impact on profitability.

The opposite is the case for manufacturers. They are having trouble managing their inventory as supply chain delays and shortages persist, and they are worried that by the time they do have inventory, the window for getting it to market will have passed.

To make matters worse, online and in-store returns are giving businesses more trouble. Customers like generous return policies, but retailers don’t always enjoy having to inspect and repackage returned inventory, even though it leads to goodwill and repeat business. According to a CNN report from earlier this year, retailers are considering the unthinkable: refunding customers while allowing them to keep their unwanted items.

As a CPA, you might be hearing these complaints from clients who are struggling with crowded shelves and warehouses and unsure of what to do. Should you dismiss it? Give it to a consolidator for sale? Put it in the garbage? None of these options are particularly appealing.

Here are some reasons why in-kind donations may be one way to increase these clients’ bottom lines if product philanthropy hasn’t been on your radar as a year-end strategy.

The in-kind remedy

The excess and returned inventory on those pallets and shelves won’t disappear by themselves. They’ll consume priceless storage space and perhaps hurt profitability.

The good news is that there is a clever, simple way to transform that burden into a sizeable asset while doing good for the neighborhood. It’s referred to as product philanthropy. It’s also among the IRS tax code’s best-kept secrets for C Corporations.

Families are having a hard time making ends meet due to the current economic climate, and nonprofit organizations are being asked to do more with less. For instance, many schools now provide students with school supplies. Clothing and supplies for cleaning are always needed at homeless shelters. The demands are limitless.

IRS regulations permit Regular C Corporations to deduct above-cost in-kind donations from federal income taxes in order to encourage American companies to give back to their communities. Companies donate not only to free up warehouse space and avoid dealing with liquidators but also to ensure that their merchandise is distributed to a closed market and that their philanthropic goals are met.

Companies can donate in-kind goods with the help of a gifts-in-kind organization. Companies save time by not having to dedicate valuable staff time to finding deserving charities and coordinating logistics when they donate their stock to a gifts-in-kind organization. Corporate product donations are gathered by nonprofits known as gifts-in-kind organizations, which then give the donations to approved nonprofits. Whether it’s a truckload or a few cartons, they accept everything that is overstocked and make sure it goes to 501(3)c nonprofits that are approved.

A trustworthy in-kind donation organization will not only provide you with a detailed accounting of how your donation was used but will also make sure that a client’s product doesn’t end up on the open market where its brand risks being compromised. Or perhaps in a landfill.

All of this, plus a tax break

An in-kind contribution could be a welcome boost to the financial situation in these difficult times. According to Section 170(e)(3) of the Internal Revenue Code, Regular C corporations may deduct up to twice the cost of donated goods when they donate inventory to qualified nonprofits.

For instance, if a product retails for $30 and costs $10, the price difference is $20. Half of $20 equals $10. Thus, a deduction of $20 is made by adding the $10 product cost and the $10 half-difference. $20 is an allowable deduction as long as it doesn’t go over twice the price of the item. It’s as simple as that.

It’s truly a win-win situation. The best part is that a business can feel good about knowing that it made a nonprofit or school better able to serve its patrons and students. Additionally, the favorable PR brought about by such generosity enhances a company’s reputation.

In 2023, looking ahead

Supply and demand matching is akin to balancing on the head of a pin. If you only lean one way, your client will be unable to meet customer demand. If they tilt the balance the other way, they will have more inventory than they can possibly use.

According to a recent Supply Chain Brain article, “Global supply chains are unlikely to experience relief from congestion, disruption, labor shortages, and skyrocketing costs anytime soon.”

As a result, merchandisers will keep avoiding “just-in-time” stocking techniques in order to build inventory buffers. However, unexpected global events, seasonality shifts, consumer preference changes, more frequent, severe weather events, inflation, and a plethora of other uncontrollable factors can completely invalidate inventory forecasts.

There is no one-size-fits-all solution to your clients’ inventory problems. However, giving in-kind can assist them in reducing inventory, giving back to their community, and obtaining a sizeable tax break. And what CPA wouldn’t want that for his or her clients?

The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.

If you are a licensed tax professional and are interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our marketplace has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here.

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[…] Here are some reasons why in-kind donations may be one way to increase these clients’ bottom lines if product philanthropy hasn’t been on your radar as a year-end strategy. For retailers and manufacturers, the fourth quarter theme is uncertainty  […]

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