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More Firms Donating Products to Charities : Companies Benefit by Taking Tax Deductions on Inventories They Would Otherwise Dump

August 21, 1987|NANCY L. ROSS | The Washington Post

WASHINGTON — Four years ago an employee of United Way of America received a surprising telephone inquiry from a company wanting to get rid of millions of dollars of merchandise.

"What would you do if you had $12 million in office equipment?" asked the voice at the other end of the phone. A startled Stephen J. Paulachak responded that he would do his best to give it away.

Today, as executive vice president of Gifts in Kind Inc. of Alexandria, Va., Paulachak and his associates annually give away donated goods valued at tens of millions of dollars.

GIK is just one of a growing number of nonprofit organizations that act as intermediaries between charities and manufacturers looking for tax deductions for surplus products.

Last year one-fifth of corporate America's charitable contributions took the form of non-cash donations, such as real property, volunteer services by personnel and products from inventory, according to the Conference Board, a trade organization that conducts an annual survey of charitable contributions by major corporations. In 1982, non-cash gifts were only 11% of the total.

Cash contributions made by the 400 or more major corporations surveyed annually by the business organization increased from $1.1 billion in 1982 to $1.3 billion in 1985, the last year for which data are available. In the same period, the value of product donations rose from $96.1 million to $190.3 million.

The reasons for growth of product donations are both economic and societal. A 1986 monograph by Alex J. Plinio, vice president of the Prudential Insurance Co. of America, credits the recession of the early 1980s for stimulating inventory gifts when cash was hard to find.

Tax Incentives

Recent reductions in federal aid to nonprofit organizations have encouraged charities to become more aggressive in seeking corporate donations, and business executives have become more aware of the good-will value of integrating their products and volunteer personnel with the cash contributions, he added.

Undoubtedly changes in the tax code offer the most important incentive. In 1976 Congress decided to give corporate donors an increased deduction for donations of property to charity. In 1981, computer and data processing equipment manufacturers got a break for giving their products to colleges and universities for research purposes.

Finally, the Tax Reform Act of 1986 aided the trend, according to S. Theodore Reiner, director of client tax communications in the Washington office of the accounting firm Ernst & Whinney.

"New tax law changes designed to limit deduction of certain expenses by incorporating them into inventory cost may have unintentionally created incentives for business to donate inventory to charity," he told clients.

Tax experts estimate that inventory costs will rise by 10% to 15% because items like taxes, employee benefits, insurance, scrap and spoilage costs will henceforth be paired with inventory expenses rather than being deductible immediately.

One Alternative

That means that if a business does not succeed in selling its widgets before the end of the tax year, it cannot take the deduction for these expenses against that year's income.

Hence the inducement to move the widgets out of inventory quickly. Abandonment is one alternative, but giving them to charity can be more advantageous if the charity benefits the ill, the needy or infants (up to 21 years of age).

Under the 1976 rule, the corporate donor can get a tax deduction of up to twice the actual cost of his products or the cost plus one half of the price at which the product is sold, whichever is smaller.

For example, if each widget costs the manufacturer $10 and sells for $40, the manufacturer may deduct a maximum of $20. If the $10 widget sells for $20, the manufacturer may deduct a maximum of $15.

The new law increasing the inventory costs also increases the value of "twice the cost," according to Reiner. Hence, an item with a cost basis of $3,000 would permit an actual deduction of not $6,000, but $6,725, he said.

Say the market value or selling price of the property is $10,000. Under the old rules, the inventory cost is $3,000; under the new rules, it is 15% more, or $3,450. Under the old rules, the appreciation, or markup, is $7,000. Therefore the deduction is limited to twice the cost or $6,000.

Under the new rules, the cost is now $3,450 and the markup is $6,550. Since twice the cost would be $6,900, the company must take the lesser deduction equal to the cost plus half the appreciation: $3,450 plus $3,275 or $6,725. But this still is more than the $6,000 deduction permitted under the old rules.

Surplus medical supplies have long been donated to charity, as have unsold books. In recent years, hundreds of millions of dollars worth of food and computers have been given away to charities.

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