Most restaurateurs know that inventory contributed to charity can be deducted based on the cost of the inventory. What many restaurants may not know is that new legislation allows a taxpayer to claim higher deductions closer to the actual value of the inventory. This results in increased deductions for restaurants, grocery stores, and any other food resellers.
In general, when inventory is contributed to charity, the deduction is based on the cost of the inventory. If the donated inventory’s cost is $10,000, the deduction is limited to $10,000 even though the fair market value of the inventory may be higher.
The Katrina Relief Act
The new provision for food donation, effective 8/28/2005 to 12/31/2007 (enacted through the Katrina Relief Act) allows an “above-cost” increase in deductions for inventory donated to charitable organizations for the use of aiding the ill, the needy, or infants. The deduction is equal to the lesser of either:
- cost plus half of the difference between the cost and value, or
- twice the cost
If a taxpayer purchased inventory for $10,000 and its value is $16,000, the taxpayer can claim a $13,000 deduction if donated [the lesser between $13,000 (cost plus half of the difference between value and cost), and $20,000 (twice the basis).]
(Value-Cost) / 2
|Cost x 2||$10,000 x 2||= $20,000|
There is no dollar limit on how much inventory can be donated under these rules, yet the regular overall deduction limit for corporations still applies; total charitable deduction for the year generally cannot exceed 10% of corporate taxable income. Contributions in excess of the 10% limit are carried forward and may be used during the next five years and are subjected to the 10% taxable income limitation each year.
Any restaurant, food reseller, or business can take advantage of this “above-cost” deduction for charitable food donations as long the donation is “apparently wholesome food” as defined by the Bill Emerson Good Samaritan Food Donation Act. Thus, any taxpayer engaged in foodservice, whether in the form of a C-Corporation, S-Corporation, Partnership, Sole Proprietorship, or other entity, is eligible to claim a higher deduction for donations of food inventory. Additionally, C-Corporations can benefit from donating other types of inventory such as clothing, equipment, and more.
“Apparently wholesome food” is food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations. Donating businesses, if subjected to FDA regulations, must also be in compliance on the date of the donation and for 180 days prior. Organizations accepting donations must provide a written statement representing the use and distribution of the donation, within a reasonable amount of time.
Circular 230 Disclaimer: This article represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. Any tax information contained in the body of this article was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Author: SoSum Lee, Senior Tax Advisor