Enhanced Business Charitable Deduction for Donations of Food

Tom Deyak, CPA ​•

Many businesses, especially those in the food industry, are not aware of the enhanced charitable deduction for wholesome food inventory to qualified charitable organizations. 
 
What is the deduction?

• The deduction for wholesome food inventory equals the lesser of:
  • The basis of the contributed food inventory plus one half of the ordinary income that would have been recognized if the property were sold for fair market value  on the contribution date or
  • Twice the basis of the property

 
What are the rules to determine the amount of the deduction?

• Fair market value
  • The price at which food items of the same or similar type would have sold for in the normal course of the taxpayer’s business on the contribution date.  If no sales were made on that date recent past sales would suffice.
• Basis
  • The basis of contributed inventory is determined using the taxpayer’s method of accounting for tax purposes.

 
What qualifies as an eligible charitable organization?

• The organization must be a 501(c)(3) public charity except from tax under IRS Sec. 501(a)
• The organization must use the donated inventory in connection with the function for which it was granted their tax-exempt status and must be used solely for the care of the ill, the needy, or infants.
• No goods or services may be received in exchange for the donation
• A written statement must be received from the organization representing that its use and disposition of the inventory will be in accordance with these provisions.

 
What constitutes wholesome food?

• Food that it is intended for human consumption
• Meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.

 
Who can take the deduction?

• Any trade or business. The business is not required to be a C corporation and can include sole proprietorships, S Corporations, and partnerships.

 
The following is an example of how the enhanced deduction can benefit a taxpayer:
 
ABC Company has food inventory with a basis of $1,500 that donates to a local food pantry for their use in feeding the needy.  The food has a fair market value of $3,500 on the date of contribution.   The ordinary income would have been $2,000 if ABC Company sold the inventory on the date of contribution.  The enhanced charitable deduction would be $2,500 in this example.  This is the lower of the basis of the property ($1,500) plus one half of the ordinary income if sold ($1,000) or $3,000 (twice the basis of the property).
 
The deduction does have limitations. In the case of taxpayers other than a C corporation the deduction is limited to 15% of the taxpayer’s aggregate net income from the trade or business during the tax year the contribution is made.  For those taxpayers that are a C Corporation the deduction is limited to 15% of taxable income and in addition the 10% limitation for other charitable deductions is reduce by the contributions subject to the 15% rule.   Other limitations may apply and it is important to consult with your tax advisor to clarify if your business would be eligible for the deduction.
 
This enhanced deduction is a great opportunity for businesses to support their local nonprofits while also receiving an additional tax benefit.  Please contact our office for more information and to see if your business could benefit.