Two common themes have emerged for food and beverage-related businesses as they navigate the COVID-19 pandemic—the reduction of food waste and loss and the strong desire to give to those in need.
If you’re contemplating a restaurant closure due to a shelter-in-place order, or a producer with a surplus of inventory, you can make a food donation and potentially receive an enhanced tax deduction at a time when your business faces significant losses.
Producers and restaurants can donate fresh or processed food inventory for the direct benefit of public charitable organizations and the needy.
A tax-paying restaurant, farmer, or processor is often entitled to a tax deduction equal to the cost basis of the donated inventory. Cost basis is defined as all costs that go into producing a donated item. However, subject to certain limitations, the taxpayer could be eligible for an enhanced tax deduction.
Imagine a vegetable grower donates crops with a tax basis of $10 and a fair market value of $30 to a qualified public charitable organization.
In this scenario, there are two deductions to consider.
General—or Non-Enhanced—Tax Deduction
Under the general rules for charitable deductions, the grower would be entitled to a tax deduction of $10. Businesses that donate inventory may claim a tax deduction in the amount of the property’s basis, which is usually its cost to the business and often lower than the fair market value.
C-corporations generally can’t deduct more than 10% of their taxable income for the year. For 2020, under the Coronavirus Aid, Relief and Economic Security (CARES) Act, this limit has been increased to 25% for contributions of food inventory.
For businesses other than C-corporations—including S-corporations, sole proprietorships, and some LLCs— the individual owner’s deduction is limited to 30% of income from the business that generated the deduction.
Enhanced Tax Deduction
However, if the donation meets certain criteria, the grower could be eligible for an enhanced deduction of $20—which is equal to the cost basis plus half of the built-in gain of $20. If the fair market value were $40, the enhanced deduction would still be $20 because the deduction can’t exceed twice the cost basis of the inventory.
The enhanced tax deduction provides an extra incentive for donation by allowing the donating business to deduct the lesser of:
- Twice the basis value of the donated food
- Basis value of the donated food plus one-half of the food’s expected profit margin if the food were sold at its fair market value
Under the enhanced deduction, all businesses may deduct up to 15% of their taxable income for food donations. This limit has been increased to 25% under the CARES Act for 2020.
If a taxpayer isn’t required to account for inventories—such as a farmer on the cash-basis method of accounting—they could elect to treat the basis of the donated food as 25% of the donation’s fair market value.
Contributions to employees don’t create an enhanced tax deduction.
For a producer, grower, or restaurant to claim the enhanced deduction for donating inventory, the donation must meet the following criteria:
- The donation is made to a qualified public charity.
- It was used as part of the charity’s qualified tax-exempt function to care for the ill, needy, or infants.
- The charity furnishes the donor with a written statement confirming use of donation.
- The donation is categorized as a wholesome food that satisfies all federal, state, and local regulations for quality and labeling.
- The charity organization mustn’t receive compensation for the donated goods aside from a nominal fee to cover administrative costs, such as storage or transportation.
Both the donor and the charity organization need to keep careful records of donations given and received.
The donor needs to maintain records of the following to support analysis of the deduction:
- Cost basis of the donated inventory
- Fair market value that existed as of the donation date
The organization must also provide the donor with a written statement that includes the following:
- Description of the property
- Representations that goods were used for the care of the ill, needy, or infants
- Confirmation the organization is a qualified public charity
- Assurance that adequate records are maintained and available
We’re Here to Help
The donation of food is a great way for a grower or processor to make a positive impact in the community—while also receiving permanent tax savings.
For restaurants, excess inventory donations can affect the local community and help produce company-wide goodwill.
To learn more about pursuing this opportunity—or for any other questions—please contact your Moss Adams professional.
For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: