Excessive buildup of inventory, which ties up cash, can be a real risk in an economic downturn. Here's a solution: donate your excess inventory to qualified charities, under Section 170(e)(3) of the Internal Revenue Code.

That's what Marshall Rauch, CEO of Rauch Industries Inc., a $38-million manufacturer of Christmas decorations in Gastonia, N.C., has been doing for years. "At the end of each season, when we've got leftover merchandise that hasn't sold and isn't in demand from closeout buyers, we donate it to charities that can use it," explains Rauch. As a result, Rauch has been able to claim thousands of dollars in tax deductions and cut his company's warehousing costs.

The IRS offers philanthropically minded companies a sweet financial incentive: tax deductions adding up to more than the original production cost of the items donated. "You get to deduct the cost of the product donated, plus half the difference between your original cost and the product's fair-market selling price," says Rauch. Deduction limits are pegged at a maximum of twice the product's cost.

To qualify for the deduction, your company's gift must go to a charitable, religious, or educational organization that has been granted 501(c)(3) tax-exempt status by the IRS. A middleman organization, such as the National Association for the Exchange of Industrial Resources (NAEIR), can help you locate interested recipients.

"I submit samples and marketing catalogs, and NAEIR determines whether its charities can use our items," says Rauch. "If they can, the association sends us shipping documents and redistributes our goods to interested charities."

For further information call (309) 343-0704 or write NAEIR, Dept. YB-12, 560 McClure St., Galesburg, IL 61401.

-- Jill Andresky Fraser

* * *