Product Donations: Better for Your Bottom Line, Better for Your Brand

Excess inventory is a costly problem. It can eat into profits, devalue your brand, increase waste, and take up prime warehouse space. Companies that dispose of their excess product pay hefty tipping fees to put their inventory in landfills. Others choose to liquidate their inventory, receiving pennies on the dollar while risking devaluation of their brand. Thankfully, there’s a better solution: Donating your product to a reputable nonprofit.

At first glance, donating product to a nonprofit sounds like charity, but there’s more to it than that. Due to IRS Tax Code §170(e)(3), the write off for product donations is often better for your bottom line than either liquidating or disposing of excess inventory.

Organizations like World Vision are providing a business solution to companies with surplus goods, while at the same time meeting humanitarian needs in developing countries, disaster zones, and impoverished parts of the U.S.

Unpacking IRS Tax Code §170(e)(3)

IRS Tax Code §170(e)(3) is designed to make donating product an attractive option for corporations. It allows a tax deduction for qualified donations that is the lesser of:

1. The tax basis (usually the purchase price of the inventory, or cost basis) plus one-half of the difference between fair market value and tax basis: Deduction = ½ (FMV-TB) + TB
2. Two times the tax basis (cost basis): Deduction = 2TB

For example, if a company purchased 1,000 pairs of children’s shoes for $10 each, and the fair market value is $20, then the formulas would be:

1. Deduction = ½ ($20,000-$10,000) + $10,000 = $25,000
2. Two times the tax basis (cost basis): Deduction = 2($10,000) = $20,000

So in this example, the tax deduction would be $20,000. Assuming a federal corporate tax of 21%, and an average state tax rate of 6.2%, the net benefit to the bottom line of the organization would be $3,884.70.

When we compare this with the impact that disposal has on the bottom line, it is clear that donating product is always the better solution, because the deduction for disposal is simply the cost basis. Accounting for tipping fees (with the national average being around $54.17), the net benefit of disposing of these products would only be $2,589.80. This also does not take into consideration environmental factors—most companies have sustainability metrics they measure against, and disposing of first-quality items in a landfill would count against their targets.

But what about liquidation? The answer depends on two factors: the price offered by the liquidator and the value of your brand. If you can get a high enough price, then liquidation may be the best option for your bottom line in the short run. But if you are a premium brand, offering your products at a steep discount in your home markets may dilute your brand such that any benefit to your bottom line is negated through cannibalization.

You can compare these options for yourself using this calculator.

How Product Donation Works

While the specific process may vary from organization to organization, typically, the donation process shouldn’t differ much from any vendor relationship you have. Most nonprofits that accept product donations have corporate engagement reps and dedicated supply chain teams that will work with you to coordinate the logistics of your donations.

When a product donation is offered, these teams will align your designation (domestic or international) with the needs in their project areas, working carefully to match supply with demand to avoid disrupting local markets.

Companies that are using product donation solutions for the first time often express surprise at the sophistication and efficiency that large NGOs have. At World Vision, we can accept donations ranging from a single pallet, to two dozen truckloads of mixed goods originating from multiple locations. You should expect that your nonprofit partner has safeguards in place to ensure that your donation is not resold on the black market and does not end up in a landfill.

Beyond the Bottom Line

We’ve talked about the impact to your bottom line, but donating your products to a nonprofit can make an impact in other areas as well. When your nonprofit partner distributes the donated product, it has the potential to radically transform the lives of vulnerable children and families.

When multiple tornadoes struck western Kentucky in 2020, it carved a 227-mile path of destruction leaving 80 dead and thousands without homes. Within days, World Vision delivered pre-positioned donated building supplies, equipping eight local partners across the region with resources to rebuild. One year later, 94 homes had been rebuilt and over 19,000 people had received assistance.

In Zambia, girls like Mary have to walk more than 9 miles one way to get to school each day, a dangerous and difficult journey that starts at 4am. As a result, few have opportunities to finish their education, increasing their prospect of early marriage and a life trapped in the cycle of poverty. Donated bicycles are transforming the lives of children like Mary, who can now make the journey to school much faster, reducing absenteeism and increasing their chances of a better future full of hope and opportunity.

These are just two examples of a vast array of products that are donated and repurposed to make lives better at home and abroad.

Marketing and Sustainability

At World Vision, we’ve found that when products are donated, it creates powerful and compelling stories like those just mentioned. These stories have the power to engage your employees—one donor reported that when warehouse staff saw that product was being donated instead of destroyed, it made them more excited about their work, and their attention to detail increased. But they can also be used to create brand loyalty among your customers, whether you are a B2C or a B2B company.

Reverse logistics often exists within somewhat of a silo in an organization, separate from marketing and sustainability teams. A strategic product donation program also opens the door for greater collaboration across business units. For example, one of our partners has donated product for more than a decade, but only recently began to measure how their donations impacted their sustainability strategy. Today, product donations are a key feature in their annual sustainability report and they are able to show tens of millions of dollars in waste reduction as their inventory has been averted from landfills and used to rebuild housing after natural disasters. This has opened a new realm of possibilities across their entire organization.

Tips on Selecting a Donation Partner

For product donations to be an effective solution for your company, care must be taken when selecting a partner. You should evaluate your nonprofit partners the same way that you would a vendor. Questions to ask include:

1. Consider what the nonprofit does with your donation: Do they sell the products to the public, charge recipients, or receive a handling fee? Or do they ensure that the product is distributed to people in need free of charge?
2. What steps do they take to ensure brand protection?
3. Can they handle the volume that you are offering?
4. Can they offer meaningful reporting—photos and stories of your product being put to good use?
5. Does their geographic footprint align with your business needs? For example, some companies require that their product is only distributed in certain countries outside the United States, while others prefer it to be distributed domestically.

Conclusion

In conclusion, the decision to donate excess inventory under IRS Tax Code §170(e)(3) emerges as a strategic and financially advantageous choice for businesses. When compared to alternatives like disposal and liquidation, it offers a substantial net benefit to the bottom line. Beyond the fiscal gains, the impact of product donations extends far beyond profit margins. Collaborating with reputable nonprofits, such as World Vision, opens avenues for transformative change in communities both locally and globally.

Stories of positive impact not only resonate with employees but also become powerful tools for building brand loyalty and engaging customers. The ripple effects of product donations extend into sustainability initiatives, fostering collaboration across business units and showcasing tangible benefits in annual reports. While careful consideration in selecting a donation partner is crucial, ultimately, engaging in a product donation solution can become a catalyst for a stronger bottom line and a testament to a company's commitment to social responsibility and sustainability.