How To Manage Problem Inventory

Gary C. Smith

How To Manage Problem Inventory

Every business has problem inventory; items sitting in a storeroom or warehouse with little or no chance of ever being sold. But a growing number of businesses are taking advantage of an IRS regulation that lets them turn that merchandise into a federal income tax deduction by donating it to charity.

This deduction is allowed under Section 170 (e) (3) of the U.S. Internal Revenue Code. 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 cost. S corporations, partnerships and sole proprietorships earn a straight cost deduction.

What types of inventory can be donated? As you take a good hard look at your inventory, pay particular attention to these types of items:

Slow-selling or nonmoving SKUs (stock keeping units). Just as it’s dangerous to fall in love with a stock or mutual fund and be reluctant to unload it when it’s not performing, it’s equally unwise to fall in love with stagnant inventory.

Wholesaler/distributors and catalog businesses are well aware of the need to constantly review their offerings, weeding out the slow-movers, while concentrating on top-sellers.

Unsuccessful product introductions. Despite extensive studies and market research, some new products simply don’t move. By donating these products, instead of selling them to a liquidator or allowing them to collect dust, your business will exhibit a healthier bottom line while keeping these same items out of the consumer market.

Returns. If returns are not damaged, they can be good candidates for donation. By donating, you’ll avoid the costs and labor involved in returning those items to stock.

Cancelled orders. Again, donating avoids restock costs. If the product was custom made, it may be difficult to sell anyway.

Packaging changes. If package graphics or counts, e.g. - a 6 pen pack replaces a 4 pen pack, are updated, you may want to keep products in old packaging out of the market as you introduce the new. Donating is also a good way to clear products with packaging that promotes rebates or contests that have expired.

Discontinued models, styles, colors. As an example, software publishers may donate the previous version of a program that has been updated, to keep the earlier version from competing with the update or to keep it out of the hands of liquidators. Trendy items that are no longer selling are also candidates for donation.

Misprints or seconds. Businesses that make or sell promotional items frequently have misprints on products that are still serviceable. Seconds, especially in clothing, can be donated as well.

Donating your products to local nonprofits or schools (public and private schools also qualify, as long as they are nonprofit) can generate much good will for your business within the community. To earn the deduction, you should make sure that the nonprofit organization is a 501(c) (3), since only the IRS classification of nonprofits qualifies as recipients.

Also have your accountant or tax adviser instruct the recipient group as to what information they need to include in the documentation they furnish you as proof of the donation. You will include the recipient’s letter on your corporate tax forms as support for claiming the deduction.

If your business has a small quantity of merchandise to donate, select the recipient(s) carefully to avoid the appearance of favoritism. By the same token, if you have a large quantity of product (a semi-trailer or more), 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 to raise cash. 

An alternative to donating locally, gifts in kind organizations accept product donations from businesses and redistribute those goods to qualified member non profits, charities, schools and churches throughout the United States.  

About the Author

Gary C. Smith is the president of the National Association for the Exchange of Industrial Resources (NAEIR), a Galesburg, Illinois gifts-in-kind organization. For more information, contact NAEIR at (800)-562-0955 or, or visit