Charitable donations boost bottom line, image.

• Author: Prysock, Mark
• Position: 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...