More Firms Donating Products to Charities : Companies Benefit by Taking Tax Deductions on Inventories They Would Otherwise Dump
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.
But now the list of giveaway items reads like a shopping list: This year, Gifts in Kind has found users for, among other items: a million ball point pens, a million Beatles records, 36 cash registers, 500 stuffed bears, 9,000 cases of Oil of Olay, 44,080 drinking glasses, 117 boxes of Clearasil, plus assorted hosiery, bow ties and ice scrapers.
Steve Paulachak was the chief financial officer for United Way of America when he got the call in 1983 from Minnesota Mining & Manufacturing Co. asking how it could donate $12 million in office equipment. Soon thereafter Electrolux Corp. called with an offer of vacuum cleaners.
Nonprofit Brokerage
“It didn’t take long for the light bulb to go on,” Paulachak said.
He helped found Gifts in Kind, a nonprofit brokerage that is separate from United Way but whose seven full- and part-time employees are paid by United Way. As chief operating officer, Paulachak earns $51,000 a year.
(He is also paid a like amount as a vice president of United Way. He manages a discount buying program for its agencies, manages its benefits plan and acts as a consultant on finances to local United Way agencies.)
Since the fall of 1983, GIK has arranged for the distribution of more than $88 million in products to more than 40,000 charitable organizations. With half of that business done last year, GIK is expanding rapidly.
Current donors include American Express Co., Apple Computer Corp., Avon Products Inc., Digital Equipment Corp., Gillette Co., J. C. Penney Co. and Levi Strauss & Co. In addition, it has a long list of well-known companies that have expressed interest in in-kind giving. These include an art dealer, a soft drink bottler, a telecommunications firm, a high-fashion store and several other retailers.
For example, Best Products Co., the discount retailer with headquarters in Richmond, Va., used GIK to dispose of excess clothing several years ago. The donation coincided with a major flood.
When the company found itself in financial difficulties, it cut back corporate cash donations to charity and relied more on merchandise, said Susan Butler, who oversees corporate gifts.
Over the past four years, Electrolux has given away 72,000 new and reconditioned vacuum cleaners worth $24 million, making it GIK’s largest donor.
Black & Decker Manufacturing Co. in Baltimore is another firm that is now looking at ways to dispose of its old inventory.
Other companies choose to make charitable donations of products rather than reduce the price excessively and damage their markets.
Most of GIK’s recipients belong to one of three categories: ill, needy or infants. The company hopes to expand its activities soon to other nonprofit groups in education and the arts.
Office equipment and furniture are the items most in demand, yet GIK will accept anything so long as it is useful and can be placed with a recipient. It does not deal in foods, drugs, liquor or frivolous items.
Administrative Fees
Paulachak said female inmates love to get new clothing, but he draws the line at intimate apparel. He also refused an airplane.
Besides a $200,000 start-up grant from the Lilly Endowment and some United Way funds, GIK supports its activities through corporate cash donations and by charging administrative fees.
Recipient agencies may pay $5 for a vacuum cleaner or up to $20 for a computer. Fees cover training and technical assistance. Donors pay shipping costs.
Brother’s Brother Foundation in Pittsburgh does not charge corporations or recipients fees, depending instead on cash donations and government grants. It specializes in corporate gifts of medical supplies, books and some agricultural equipment for shipment to English-speaking Africa and Jamaica.
Last year it coordinated shipments worth $34.5 million, compared to $19.5 million in 1985, said President Luke Hingson.
Second Harvest, a national food-bank network in Chicago, was funded as a government project until 1984. Since then it has been supported by the food industry.
Hingson said he had received a dozen phone calls recently from persons who wanted to become corporate-gifts brokers.
