July 25, 2002 | Read Time: 11 minutes
Tax incentives spur boom in donations of products
Donations of computers, medical supplies, and other products from companies have become the fastest-growing
component of giving by major corporations in the United States, now accounting for at least 30 percent of all corporate gifts, by some estimates.
This rise has been fueled in part by changes in the tax code over the past quarter-century that have made such gifts increasingly attractive to many businesses. Now, Congress is weighing whether to extend additional tax breaks to companies for certain gifts of food, books, and other items.
A new Chronicle survey has found that product donations by 28 corporations that provided figures for 2000 and 2001 grew by a median of 10.1 percent between the two years, meaning half the businesses had a bigger increase and half had a smaller increase or showed a decline. The overall value of donations from those corporations rose from $1.4-billion in 2000 to $1.7-billion in 2001.
Some of the largest increases in product giving in the survey were registered by pharmaceutical and food corporations. That finding echoes the results of a report released earlier this year (The Chronicle, January 24) by the Conference Board, a nonprofit research group financed by businesses.
Many charities have hailed the boom in noncash gifts as a way to get much-needed supplies for their work. They praise efforts by several large pharmaceutical companies, in particular, to manufacture some drugs specifically to give away.
But as Congress considers a proposal to add new incentives to encourage product donations, some observers are questioning the wisdom of such tax policies, saying that they could depress cash donations from companies. Among other criticisms: that the tax incentives could be hard to monitor and permit companies to reduce their tax bills by unloading worthless or unusable items on nonprofit groups.
“If anything, the tax code should probably favor cash over in-kind gifts,” says Martin A. Sullivan, an economist for the Tax Analysts news service and a former staff member of the Congressional Joint Committee on Taxation, but “the tax law does just the opposite.” He adds: “Economics and common sense tell us that $100 in cash is worth more than $100 in kind.”
Value Debated
Crucial to the debate is how companies should calculate their tax deductions: based on the cost of producing the products, the fair market value of the items, or a figure in between.
In general, federal law allows companies to deduct the production costs of the goods they donate, an amount that is usually well below the goods’ fair-market value.
But certain corporate in-kind donations qualify for a larger deduction. In 1976, lawmakers voted to allow big companies, called Chapter C corporations, to take deductions equal to the production cost of inventory gifts plus one half of the excess of fair-market value over the production cost (not to exceed two times the production cost). To qualify for the enhanced deduction, gifts have to be used by charities “solely for the care of the ill, the needy, or infants.”
In 1981, Congress extended the enhanced deduction to include gifts of “scientific property used for research” to educational organizations; in 1997, it permitted corporations that make computer technology or equipment to get an expanded deduction for gifts to elementary or secondary schools.
Backed by White House
Proposals now pending in Congress, most of which are supported by the Bush administration, would give larger tax breaks to companies for gifts of food, books, and selected other items. Some observers say one reason the added incentives are important is because companies otherwise may find it cheaper to discard the goods rather than go through the trouble and expense of donating them.
While many charities and corporations are pleased with the proposals — found in several bills, including versions of the Charity Aid, Recovery, and Empowerment Act (CARE) — some analysts have raised concerns that the proposals go too far.
A key part of the proposals would allow any business to qualify for an expanded tax deduction for gifts of food inventory, which could include a truckload of peaches from farmers as well as burritos from a fast-food takeout spot. Under the legislation being considered, companies could claim deductions generally worth the fair-market value of the donated items, as long as the figure did not exceed twice the production cost.
America’s Second Harvest, a network of food banks, says that the proposed changes for food would provide vital help to hunger-relief groups just as they are facing high demand for services due to the stumbling economy. It estimates that by essentially increasing the deduction for food donations to their fair market value, companies would provide an estimated $1-billion in new food donations over the next 10 years.
Supporters of the tax change include Kraft Foods — part of Philip Morris Companies, one of the largest overall donors of cash and products to America’s Second Harvest. Amina Dickerson, director of corporate contributions at Kraft, says her company wants the bill to pass “because it’s going to mean more companies will give.” She adds, “There will be a bigger incentive for the smaller donor to contribute, and that’s going to mean more valuable food products available to those who need it.”
Others, however, question whether the estimated $1.9-billion cost to the Treasury for the food proposal over 10 years is too high compared with the benefits that charities and society would receive in exchange.
A report prepared last year by the Congressional Research Service, which advises members and committees of Congress, says that some opponents of the provision to give expanded deductions for food to all kinds of businesses “fear that other worthy causes will request similar tax treatment” in future years.
Critics “also have argued that it may be preferable for the government to pay directly for food programs rather than creating ‘hidden back door’ expenditures through the tax system,” the Congressional Research Service says. “It is argued that direct control would assure funding was allocated under democratic procedures and be available equally to all, based on need.”
In addition to food, the pending legislation would give some companies enlarged tax breaks for gifts of book inventories, and for “assembled” donations of scientific property and computer technology and equipment. With books, a proposal pending in Congress would permit companies to use the published market price when calculating the tax deduction they would be eligible for on books published within seven years.
But that provision, too, has drawn some criticism. “Anybody who has spent an iota of time at a used-book counter knows that it is ludicrous to assert that a seven-year-old book has the same ‘fair market value’ as when it was new,” says Mr. Sullivan of Tax Analysts. Expanding the deduction allowed on donated books alone is estimated to cost the government $379-million over 10 years.
Even some supporters of federal incentives to prompt companies to donate products caution that providing too many federal incentives for in-kind gifts could tempt corporations to cut back or eliminate their cash giving.
One observer, Curt Weeden, president of the Contributions Academy, in Mount Pleasant, S.C., a training organization for corporate-giving officials, says companies that take advantage of current or future tax-law deductions for product gifts should feel the need to “buy a ticket to get into the theater” by making cash gifts to help charities pay their bills, in addition to giving away inventory.
“Companies really have to look at themselves and say, ‘We have a moral obligation — even if most of our giving is represented in the form of product — to put some cash on the table,’” says Mr. Weeden, a former vice president for corporate giving at Johnson & Johnson. For manufacturing companies, Mr. Weeden believes that obligation should translate to cash gifts of 1.5 percent of the average of a company’s prior three years of pretax profits and product gifts worth 2 percent of profits.
Another concern is whether the tax breaks unfairly favor manufacturing companies over other businesses. Among the businesses generally excluded from the chance to get expanded tax breaks are enterprises such as banks, insurance companies, real-estate companies, and law firms — because they don’t produce goods that qualify for those deductions.
Even as new tax breaks for in-kind gifts are being considered by Congress, no one disputes that such donations have grown rapidly in the past decade.
The Conference Board, in New York, reported that product donations at 207 major corporations in 2000 accounted for 33 percent of their total contributions. “Since about 1992, the emergence of product giving as a growing component of overall giving has been pronounced, no question,” says David J. Vidal, director of research in the organization’s global citizenship department.
Many charity recipients of noncash gifts have certainly seen big gains.
The value of products donated by corporations through Gifts in Kind International, for example, has increased at an annual rate of 34 percent for the past decade, says its president, Susan Corrigan, to around $700-million this year.
One reason: Gifts in Kind has also made it easier for retail chains like Bed Bath & Beyond, Office Depot, Staples, and Williams-Sonoma to donate unsold inventory from their outlets, rather than after the goods have been packed up and returned to their central distribution centers. “Their reverse-logistic costs have been eliminated,” Ms. Corrigan says.
Role of Tax Breaks
While many companies report big increases in the value of their product giving, most corporate leaders insist that tax incentives play a relatively small role in their decisions to give. They say they are responding primarily to requests from charities that would otherwise need to purchase the items they produce.
“Tax deductibility has never served as a factor in determining whether we move forward or not” with a donation, says Brenda D. Colatrella, who oversees Merck & Company’s product donations. “Where we are eligible to take credit, we take it. Where it’s not available, we will move ahead anyway” with the donation. “For us, the primary driver is: Do we have a drug, a product line, an area of expertise that could be valuable?”
About two-thirds of Merck’s $283-million in donated products last year was for Mectizan, a drug that treats onchocerciasis (river blindness) but has no commercial market in the United States. Merck pledged in 1987 to produce the drug and distribute it free for as long as necessary to treat the disease, which is prevalent in parts of Africa and Latin America.
Another incentive for giving products is that they hold strong public-relations appeal for companies since the companies can show their products being used for a good cause and can tout a high fair market value for the gifts that, in some cases, far exceeds the cash the company had to spend on producing the items.
Control Over Gifts
Giving products also appeals to company leaders because such items are not easily absorbed into overhead expenses, some say. “If I give you a dollar, it could be diverted,” notes Conrad Person, director of product donations at Johnson & Johnson. “But if I give you diaper-rash cream, it’s a pretty good bet that it will end up being rubbed on babies’ bottoms.”
Besides such ointment, Johnson & Johnson gives away medicines, sutures, and other medical supplies — valued at about $151-million last year. About half is donated overseas.
Johnson & Johnson is one of a handful of major pharmaceutical companies that now manufacture drugs specifically in response to requests by their principal beneficiary charities.
Merck, for example, has told MAP International, which distributes drugs to projects in developing countries, that the company will donate products worth a specific dollar amount this year. Shopping from the list of all eligible drugs Merck produces, the charity has submitted a list of the types and quantities it expects to be most useful in its programs. Merck has adjusted its production runs accordingly, and is shipping the requested drugs to MAP every three months.
Such “produce to give” programs make it easier for charities to plan their medical-aid programs, while also shielding companies from the criticism that they are merely dumping excess inventory that might or might not be medically appropriate.
“It’s a lot easier for everybody to know you’re going to have to make an amount of amoxicillin that takes account of the fact you’ve promised that amount to MAP International,” says Jim Russo, director of Partnership for Quality Medical Donations, a group of 16 pharmaceutical companies and charities that promotes more effective drug donations. “Then MAP has it in its warehouse.”
While pharmaceutical donations this year will total around $500-million, says Mr. Russo, he would like that figure to be much higher. Previous criticism of drug companies for donating obsolete or inappropriate material has kept some corporations sitting on their hands, he says.
“Corporations like to avoid problems if they can, and the easiest way to avoid being identified with poor donations is not to give donations,” Mr. Russo says.
And in some cases, he adds, there is simply less to give away. “Twenty years ago, it was common for companies to have substantial excess inventories,” Mr. Russo says. “But because they have now got so good at predicting demand, the amount of excess inventory available for donation is thinner and thinner.”
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