Businesses in the food & beverage industry, such as producers, farmers, or restaurants, may find themselves with a surplus of food due to shelter-in-place orders or other coronavirus-related closures.
In your efforts to reduce food waste, consider a donation to a local nonprofit. Your food donation would not only result in a positive contribution to your community, but may also result in a significant tax benefit for your business.
What tax benefit is available for my food donation?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act increased the amount a taxpayer engaged in a trade or business may deduct for the charitable donation of food inventory. Under section 170(e)(3)(C) of the Internal Revenue Code (IRC), the amount taxpayers (both individuals and corporations) could deduct for the charitable contribution of food inventory was 15% of the taxpayer’s taxable income for the applicable taxable year.
However, the CARES Act has increased this limit and now a taxpayer may deduct up to 25% of their taxable income for taxable years ending after December 31, 2019. The food donation must occur in calendar year 2020.
What can I donate?
Producers and restaurants can donate fresh or processed food inventory for the direct benefit of public charitable organizations (like a local food bank, hospital, church, or more) and the needy.
What are the requirements to utilize this tax incentive?
In order to claim the enhanced tax deduction, the food donation must satisfy the following criteria:
- The taxpayer must make the donation to a qualified tax-exempt organization (as defined by 501(c)(3) of the IRC).
- The recipient must use the donation as part of their qualified tax-exempt function to care for the ill, needy, or infants.
- The not-for-profit organization must furnish the donor with a written statement confirming the use of the donation.
- The donation must qualify as a wholesome food that satisfies all federal, state, and local regulations for quality and labeling.
- The food may not be transferred by the recipient organization in exchange for money, other property, or services; however, the recipient may charge another organization a nominal amount for “administrative, warehousing, or other similar costs.”
It is important to donate to a “qualified tax-exempt organization” in order to receive the tax deduction. Please refer to the Internal Revenue Service (IRS) list of qualified organizations.
How can I calculate the enhanced tax deduction?
The enhanced deduction under the CARES Act provides additional tax incentives, as the taxpayer can deduct the lesser of:
- Twice the basis value of the donated food; or
- 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.
The deduction cannot exceed 25% of the corporation’s income.
If you do not have 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.
Also of note: you may generally deduct the transportation and labor costs, including using your car to travel to and from the location of the charitable services or packing and unloading the food donations. You may add these costs to the donation amount, and it is subject to limitation.
What kind of documentation do I need?
Both the donor and the receiving tax-exempt organization need to keep records of donations given and received.
The donor must maintain records to support the deduction calculation, including:
- Cost basis of the donated inventory, and
- Fair market value as of the donation date.
The organization receiving your donation must provide you a written statement that includes the following information:
- 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; and
- Assurance that adequate records are maintained and available.
How can Squar Milner help?
As we continue to monitor and assess the implications of the ongoing health crisis, we are here to help your business update your tax strategies to adapt to the new business and tax environment.
Our team of tax professionals and food & beverage specialists can advise you on how to effectively utilize the increased food donation deduction and other coronavirus relief tax measures. To learn more about the CARES Act, how to respond to the economic impact of the pandemic, and more, please refer to out Squar Milner COVID-19 Resource Center.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.