Enhanced Charitable Deductions for Contributions of Food Inventory

Excess inventory is a common byproduct of food production and processing. When storing food doesn’t make sense due to cost or shelf life concerns, donating food inventory to a hunger relief organization just might, thanks to an enhanced tax deduction.

A deduction is available for the tax basis of the inventory donated to qualified organizations and up to 50% of the difference between your tax basis and the fair market value.

A special rule permits an enhanced charitable contribution deduction for food donations to qualified organizations. The deduction is the lesser of either:

• Twice your tax basis of the donated food
• Your tax basis plus one-half of the appreciation (the difference between fair market value and tax basis)

The food must be “apparently wholesome,” which is defined by  Bill Emerson Good Samaritan Food Donation Act as “food that 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.” This description is intentionally broad to ensure food that might be a little unattractive or nearing the end of its life will not go to waste.

The recipient must be a qualified tax-exempt organization, and the food must be used for the care of the ill, the needy, or infants. Your local food bank most likely qualifies. There are also many hunger relief organizations willing to accept donated food.

The deduction cannot exceed 15% of your net income for the year, but if you are unable to use it all in one year, it may be carried forward for future use.

To claim the deduction, the receiving organization will need to provide you with a written statement confirming the donated food will be used exclusively for the care of the ill, the needy, or infants. This statement will need to be in hand by the tax return filing date.

Additionally, the following information should be maintained for each donation:

• Description of the food
• Name and address of organization receiving the donation
• Date of donation
• Fair market value of the food on the date of the donation, and
• How the fair market value was determined (comparable sales, etc.)

For example, Aldrich Foods processes produce and has found itself with an abundance of beans. The beans have a fair market value of $100,000 and tax basis of $85,000. The bumper bean crop has buyers at capacity, and Aldrich Foods is short on storage so instead of paying to store, sell, transport or dispose of the excess beans, Aldrich Foods reaches out to the local food bank to see if they have a need for the beans. The local food bank happily accepts the donation and provides Aldrich Foods with the necessary documentation to support the deduction. Come tax time, Aldrich Foods takes a deduction for $92,500 (tax basis of $85,000 + 50% of the fair market value $7,500), which assuming a 40% tax rate, results in a tax benefit of $3,000.

If you have inventory that might qualify for the enhanced deduction, please reach out to your Aldrich Manufacturing team or contact us here. We are here to talk through all of your donation considerations and can even help you find a hunger relief organization.