BGBC Partners, LLP Tax Update: Charitable Contributions of Food Inventory
As we come to the end of another year, many business owners are thinking of additional ways to reduce taxes. Owners are also considering how to give back to their communities. Charitable contributions present an opportunity to combine both goals.
Two ways business owners can contribute are through actual cash donations, which are always beneficial and appreciated by charities, and by the donation of noncash property. One particular type of noncash donation is food inventory, and since this donation is important to grocers, it is the subject of this week’s Tax Update.
As you know, when we are dealing with the Internal Revenue Code, it is important to follow the published rules and regulations or risk an unfortunate surprise during an IRS audit. The donation of food inventory is one of those areas which are loaded with IRS requirements.
The Tax Code allows an “enhanced” charitable deduction only if the food is “Apparently Wholesome” which simply means that the food is: (a) intended for human consumption and (b) meets all quality and labeling standards imposed by Federal, State, and local laws and regulations. It is called “enhanced” because the regular deduction is limited to cost basis.
In addition to the “Apparently Wholesome” requirement, the grocery store is required to obtain a written statement from the charitable organization receiving the donation which confirms the following:
1.) The food is to be used only for the care of the ill, the needy, or infants;
2.) The use of the food is related to the organization’s exempt purpose or function; and
3.) The organization does not transfer the food for money, other property, or services
Furthermore, the organization receiving the contributions cannot be a private non-operating foundation.
The Protecting Americans From Tax Hikes (PATH) Act of 2015 affected this deduction in a couple of major ways.
The enhanced deduction is equal to the lesser of the cost basis of the food plus half of the product’s appreciation, or two times the cost basis. As noted, the regular deduction (i.e., non-enhanced deduction) is limited to the cost basis of the food inventory. Beginning in 2016, the PATH Act modified the above deduction by increasing the limitation from 10% to 15% of adjusted gross income for stores which are not C corporations, and 15% of taxable income for C corporations.
The PATH Act of 2015 also made the enhanced deduction permanent (i.e., instead of at the mercy of the infamous “extenders” legislative process).
Be sure to consult with your tax advisor to ensure that you are obtaining the required documentation from the charity.
Benefitting the community while obtaining a tax deduction is a winning combination!
