Know the rules for tax deductions on charitable donations of inventory
Detailed records help obtain full benefit of donating excess food or goods
INSIGHT ARTICLE |
Many consumer product businesses including farmers, retailers, restaurants and food manufacturers can enjoy improved cash flow through an enhanced tax deduction for the charitable donation of inventory, including food inventory. The IRS allows an enhanced deduction for C corporations that donate inventory. Additionally, the IRS allows an enhanced deduction for all taxpayers that donate food inventory.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently extended and in some cases modified charitable deductions for the contribution of food inventory. If your business currently donates excess inventory, or is considering doing so, and wishes to receive a tax deduction for these contributions, it is important to understand how food and non-food donations are viewed for tax purposes.
In order to qualify for the charitable deduction when inventory is donated, the contribution must be made to a qualified public charity or a private operating foundation, and the donee's use of the property must be for the care of infants, the ill or needy.
If a corporation, other than an S corporation, makes a gift of inventory, property held for sale to customers in the ordinary course of business, or depreciable or real property used in the trade or business, it may deduct its basis for the property, plus one-half of the property's unrealized appreciation. The claimed deduction, however, may not exceed twice the basis of the property (section 170(e)(3)).
Non C corporations
For non C corporations, the deduction is limited to an amount equal to the lesser of the cost basis or the fair market value of the inventory. Non C corporations do not benefit from the additional deduction for an amount above the cost.
Donating food inventory
The PATH Act made the enhanced deduction for the donation of food inventory permanent for both corporate and noncorporate taxpayers, increased the charitable percentage limitation and clarified carryover and coordination rules. In all cases, donated food inventory must consist of items fit for human consumption and be contributed to a qualified charity or private operating foundation for use in the care of the ill, the needy or infants. In addition, consider the following update guidelines for food inventory donation:
Qualified business (C corporation) taxpayers are able to deduct cost to produce the food and half the difference between the cost and full fair market value of food donated. A C corporation’s deduction for food inventory contributions for tax years beginning after Dec. 31, 2015, is limited to 15 percent of the corporation’s taxable income. Excess contributions are carried forward in each of the five succeeding tax years.
Non C corporations
The enhanced benefit—cost to produce the food plus half the difference between the cost and full fair market value—–is now permanent for noncorporate taxpayers. Any donations made in 2015 by non C corporations (such as S corporations and partnerships) are also eligible for the enhanced tax deduction.
A noncorporate taxpayer’s total deduction for food inventory donations during the tax year is limited to a maximum of 10 percent of the taxpayer's net income from all trades and businesses from which the donations are made during the tax year; the maximum increases to 15 percent of such net income for tax years beginning after Dec. 31, 2015. Excess contributions are carried forward in each of the five succeeding tax years.
Tax basis of food inventory
If a taxpayer does not account for inventory under section 471 and is not required to capitalize indirect costs under section 263A, the taxpayer may elect to treat the basis of any apparently wholesome food as being equal to 25 percent of the fair market value of such food (section 170(e)(3)(C)(iv), as added by the PATH Act). The election applies only for purposes of computing the enhanced deduction for food inventory.
Fair value of food inventory
Special rules apply in determining the fair market value of any contributions of food inventory of apparently wholesome food that cannot or will not be sold solely (1) by reason of internal standards of the taxpayer, lack of market or similar circumstances, or (2) by reason of being produced by the taxpayer exclusively for the purposes of transferring the food to a section 501(c)(3) tax exempt organization (section 170(e)(3)(C)(v), as added by the PATH Act).
The fair market value of such contribution is determined by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold by the taxpayer at the time of the contributions. In the case of products not sold at the time of the contribution, sale price in the recent past may be used for in determining value.
Good works invite reward
When donating inventory, corporate taxpayers may deduct the sum of one-half of the unrealized appreciation (fair market value minus cost of goods sold = appreciation) plus the taxpayer’s cost, but not in excess of twice the cost of the contributed property.
As of 2016, any taxpayer that makes donations of food inventories may be eligible to claim the enhanced deduction for such donations. The charitable deduction for the contribution of food inventory now applies to C corporations and non C corporations permanently.
This change will greatly increase the ability for small and mid-size businesses to donate food and obtain an additional cash flow benefit through an enhanced tax deduction. Donors who are at the 10 percent cap on charitable contributions can now enjoy tax benefits for donated food up to 15 percent of their adjusted gross income. Additionally, donors have greater certainty in how they value the food donated on an on-going basis.
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