In kind giving is the low hanging fruit of corporate philanthropy (check out my past blog on this point), an excellent way for business leaders to give back by leveraging their company’s strengths and assets. It can be an easy lift for companies, with the reward of a nice tax deduction accompanying the significant impact in one’s community or across the world (in the case of donating materials to assist with global disasters, for example). Not to mention increased employee engagement, recruitment, retention and the plain ol’ good karma of responsible corporate citizenship.
The IRS regulations when it comes to gifts in kind donations can be confusing. But they’re well worth leveraging. As noted by Brian Mittendorf, Professor of Accounting and MIS at The Ohio State University Fisher School of Business, “The IRS rules are such that a company is likely to see greater tax benefits from donating inventory than from donating cash.”
With that in mind, here are a few rules of the road:
To qualify for a tax deduction, donations must go to nonprofits that are listed as 501(c)(3) organizations and be a public charity or private operating foundation.
If your business is a sole proprietorship, S corporation or partnership, your tax incentive is limited to the item's (cost) basis. For example, if the item cost $30 to make and the fair market value [FMV] is $50, the tax deduction is $30.
If your business is a C corporation, you can get a larger tax deduction than the basis if you get a written letter from the charity stating that the donation meets several requirements, including:
The donation is being used to care for the financially needy, ill or infants and is used in a manner related to the donee’s exempt purpose.
A third party has not used the property unless that use is incidental to the primary use of caring for the ill, needy, or infants
Donated property has not been transferred by the donee in exchange for money, other property, or services.
The property has satisfied certain requirements of the Federal Food, Drug and Cosmetic Act (if applicable). Compliance is required not only for the time the contribution is made, but for the 180 day period preceding the contribution as well.
Such an “enhanced” deduction allows the donor to deduct the lesser of (i) the midpoint between cost and FMV and (ii) twice cost. In the previous example, where the item cost $30 to make and the FMV is $50, the provisions permit a deduction of $40.
If you’re wondering how to get started with in kind giving, and trying to make sense of what the tax man will allow, consider two options as a first step:
If you’ve got extra company products that are lying around occupying space, do everyone a favor and give to charity. “The most common in-kind donors,” Mittendorf observes, “ are companies whose inventory is likely to lose value if not put in use quickly (like grocers) or those for whom FMV greatly exceeds cost (like pharmaceutical companies). This doesn't mean, however, that others can't take advantage of the favorable tax treatment, too.”
Bear in mind that the IRS offers incentives for you to transform clutter into product donations, as long as the inventory doesn’t exceed the quantities needed for the normal course of business and the nonprofit can use the donations to fulfill its stated mission. Acceptable donations: those that are normally sold in the course of business. Unacceptable donations: those that will benefit you in some way through your personal interaction with the nonprofit.
Products that are out of season or otherwise outdated can be tax deductible as long as the items still retain value and can be used by the nonprofit. If the item is going to collect dust with the charity, then you’re out of luck when it comes to the IRS.
For more information on in kind giving, including details about how to determine the precise value of a deduction, and the process by which you can claim a deduction, an addendum released by the IRS on in kind contributions is a helpful guide. “Companies should keep an eye on annual changes to these tax rules,” says Mittendorf, “since in the past the enhanced deduction has been temporarily expanded to include donations of books and computer equipment and has also been temporarily extended to non C corporations.”
The more your familiarize yourself with the parameters of in kind gifts, the more comfortable you’ll be in taking advantage of a giving approach that benefits everyone involved.