Donating or liquidating excess inventory

Should you donate or liquidate excess inventory?

Liquidate when you need cash and space now, or the lot is large, mixed or partly damaged. Donate when the goods are useful, safe and in good condition, a charity wants that exact quantity, and your accountant confirms the after-tax value. Many companies do both: they sell the bulk and donate a targeted slice that a charity can actually use.

Both are reuse exits, high on the waste hierarchy. The choice is about money, timing and fit, not right versus wrong. For the full set of exits for unsold goods, see our returns and unsold inventory guide.

How do donation and liquidation compare?

What is the tax side of donating inventory?

In the US, donated inventory can be deductible, and C corporations may qualify for an enhanced deduction for certain inventory donations under IRC § 170(e)(3). The goods must generally be used by the charity for the care of the ill, the needy or infants, and the charity must give a written statement about how it will use them. How the deduction is calculated, and which taxpayers qualify, are set by the Code and IRS regulations; have your CPA run it for your case before you count on it.

Three practical points, before any numbers:

• A deduction is worth your tax rate times the deductible amount, not the retail value of the goods.
• It only has value if you have taxable income to offset.
• Liquidation also has a tax effect: you record the sale and the loss against cost.

So the honest comparison is cash after tax from liquidation against tax saved from donation. Talk to your CPA. The IRS publishes the rules; your adviser applies them to you. Outside the US, rules differ by country; ask a local adviser.

What can a charity really handle?

Charities run on limited space, volunteers and budgets. Before offering goods, ask these questions:

1. Do you need this item? A food bank wants food and hygiene products, not phone cases.
2. How many units can you take? Get a number, not "as much as you have".
3. Can you receive a pallet or a truck? Do they have a dock, a forklift, a pallet jack?
4. Who pays for freight? Many cannot.
5. What condition do you accept? Most want new or like-new, complete and safe.
6. Will you resell any of it? Some charities run thrift stores; that may matter for your brand.
7. What receipt will you give? You need a written acknowledgment for your records.

Goods charities usually cannot accept: recalled products, expired food or medicine, damaged electrical goods, used mattresses or car seats in many places, incomplete toys, and anything that fails safety rules. For more on what charities take and where the rest goes, read where charities and recyclers fit.

Who receives donated inventory?

Different charities need different things. Matching the goods to the right type of organization is most of the work.

• Food banks and pantries. In-date shelf-stable food, and often hygiene products and baby supplies. They have their own food safety rules.
• Homeless and domestic violence shelters. Hygiene products, socks and underwear, bedding, towels, coats.
• Schools and youth programs. School supplies, backpacks, books, sports equipment, art materials.
• Disaster relief groups. Specific items at specific times: water, hygiene kits, bedding, cleaning supplies. They often refuse unsolicited goods outside an active response.
• Thrift-store charities. Clothing, shoes, housewares and furniture they can resell to fund programs.
• Product donation intermediaries. Organizations that take larger corporate donations and pass them on to many smaller charities. They can absorb more volume than a single local group.

What about brand protection when you donate?

Donated goods can end up in thrift shops, flea markets or online. If that matters, agree in writing that the goods are for program use, not resale, or remove labels before you hand them over. Some brands donate only unbranded or de-labeled goods for this reason.

A decision framework

Run the lot through these steps in order.

1. Screen out what neither route can take. Recalled, unsafe, counterfeit or expired regulated goods go to the recall process or compliant destruction.
2. Check your cash need. If the business needs cash or space this month, lean toward liquidation.
3. Match goods to charity needs. List the items that fit a specific charity's programs.
4. Confirm capacity. Get the charity's yes, quantity and receiving method in writing.
5. Get a written liquidation offer for the whole lot and for the lot without the donation slice.
6. Get your accountant's after-tax value for the donation slice.
7. Compare and split. Donate the slice where after-tax value plus goodwill beats the cash offer for that slice; liquidate the rest.
8. Keep records. Item lists, quantities, receipts, invoices and bills of lading for each route.

Worked example: a retailer clearing a store closing

Illustration only. Pallet counts are hypothetical, and the values are letters, not market figures.

A regional retailer closes a store and has 22 pallets of general merchandise left: housewares, small electricals, seasonal décor, and 4 pallets of new toothpaste, soap, shampoo and deodorant, all well in date.

• A local shelter network confirms in writing that it can receive and use 4 pallets of hygiene goods, collected by its own van.
• The retailer gets a written liquidation offer for the other 18 pallets. Call it L.
• The retailer's CPA estimates the after-tax value of donating the 4 hygiene pallets. Call it D, and compare it with what those 4 pallets would add to a liquidation offer, after tax.

The decision: donate the 4 hygiene pallets, which fit the charity's needs exactly, and liquidate the 18 mixed pallets, which no charity asked for and which a bulk buyer can collect in one pickup. Had the retailer offered all 22 pallets to the shelter, most would have been refused or passed on to landfill, and the cash would have been lost.

For more on the write-off side of this decision, read write off or sell excess inventory.

Mistakes to avoid

• Valuing a donation at retail price. The tax value is set by the rules, not by the price tag.
• Donating to avoid the work of selling. If the charity cannot use it, it becomes their disposal cost.
• No written acknowledgment. Without a receipt and item list, the deduction may not stand.
• Donating recalled or expired goods. It is unsafe and can be illegal.
• Forgetting brand exposure. Donated goods can end up in thrift stores; agree terms if that matters.
• Comparing a deduction with a gross liquidation price. Compare after-tax values on both sides.
• Waiting too long. Both charities and buyers want goods in date and in season.

Next step

If you want a firm figure to compare with a donation, Skyline Dealz can make an offer. Send details, a manifest and photos to get an offer for your inventory; we look at anything from a few pallets to full loads, and pickup is set on agreed terms. More on the process is on our sell excess inventory page. For goods neither route can take, see liquidation versus destruction.