The enhanced deduction: a C corporation that donates inventory for the care of the ill, the needy or infants can deduct its cost plus half the markup, up to twice its cost. Example: goods worth 1,000 dollars that cost 200 dollars earn a 400 dollar deduction.

When a manufacturer has a warehouse full of last season’s winter coats, it has a few choices. It can sell them to a liquidator for pennies, send them to a landfill, or give them to a charity that will put them on the backs of people who need them this winter.

The tax code gives that third choice a real advantage, and many of the companies that could use it have never heard of it. A pallet of coats that would fetch a few dollars from a liquidator can be worth far more as a donation, both to the company and to the families who receive it.

What the rule says

Under section 170(e)(3) of the Internal Revenue Code, a C corporation that gives inventory to a 501(c)(3) charity can deduct more than what the goods cost, as long as the charity uses the property "solely for the care of the ill, the needy, or infants." S corporations aren’t eligible.

The deduction equals the company’s cost plus half of the difference between that cost and the goods’ fair market value, capped at twice the cost. Treasury’s regulations work through the numbers: for goods with a fair market value of $1,000 that cost the company $200, the deduction is $400. If the same goods cost $600, the deduction is $800. Under the ordinary rule for inventory, the company would generally deduct no more than its cost.

What the charity promises

The enhanced deduction depends on paperwork from the charity. The donor needs a written statement that describes the property and the date it arrived, and that represents the charity will use it as the law requires. The statement must also represent that "adequate books and records will be maintained, and made available to the Internal Revenue Service upon request."

The statement has a deadline as well. The charity must provide it no later than the date, including extensions, by which the company has to file its tax return for that year. Charities that send it along with the thank-you letter never have to chase it.

There is one more condition worth knowing: the charity can’t sell the goods. The law requires that the property "is not transferred by the donee in exchange for money, other property, or services."

Why warehouse teams should know it

For a development director or warehouse manager, this rule is a door-opener. Winter coats, blankets, hygiene kits, diapers, medical supplies and school supplies can all meet the test when they go to the people who need them. A corporate donor’s tax team will want to know that the charity can back up the statement it signs.

That’s where good records do their quiet work. GracePoint records each donated item at intake, with a photo, a category and an estimated value, and logs every handoff until it reaches a household, with recipients’ personal information kept out of the record. When the statement says the books are kept, a warehouse can show them.

Tax treatment depends on each company’s situation, so donors should confirm the details with their own tax advisor.

Which company in your area has a storeroom full of exactly what your neighbors need this winter?

Sources: 26 U.S.C. 170(e)(3); 26 CFR 1.170A-4A.