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.
What is the potential benefit for my business?
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.
Really? How is this possible?
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)
What food qualifies?
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.
What organizations qualify to receive the donations?
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.
Is there a limit to the deduction?
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.
How does it work?
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.
What are next steps for your excess inventory?
Meet the Author
Carrie Sowders, CPA
Aldrich CPAs + Advisors LLP
Carrie leads our Manufacturing group at Aldrich and specializes in serving large and middle market companies, primarily in the consumer and industrial products sectors. Carrie has exclusively practiced in tax since beginning her career in 1998. Prior to joining Aldrich in 2009, Carrie spent a decade with Deloitte and oversaw the tax function of a…
- Certified Public Accountant
- Manufacturing tax
- Consumer business
- Multinational corporate issues
- Tax accounting and methods
- International tax