Chris Eichmuller, CPA is a manager at Corrigan Krause.
As the holiday season rapidly approaches, food drives and charitable donations are common giving opportunities that many businesses participate in. Did you know your company may be entitled to an enhanced tax deduction if you donate food to a qualifying organization?
Charitable contributions of food need to follow specific regulations under Code (Sec. 170(e)(3)(C)) and go to a qualified organization for the care of the ill, the needy, or infants.
Under Sec. 170, the food must be apparently wholesome food, meaning 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.
Adjusted Tax Basis (ATB)
The ATB is the inventoriable carrying cost assigned to the donated food, generally meaning the direct costs plus any indirect costs required to be allocated to the food.
Fair Market Value (FMV)
The FMV is generally the price that the taxpayer would have received if the food was sold in the usual market.
Calculation of the enhanced deduction for charitable contributions of food is based on whichever is lower, the cost basis of the inventory or fair market value.
ATB of the food + one-half of the difference between FMV and the ATB.
- Market Value – $5.00
- Cost Basis – $3.00
- Gross Margin – $2.00
- 2x the cost basis – $6.00
- ½ gross margin plus cost basis – $4.00
In this example the deduction is $4.00. The total deduction may not exceed twice the ATB of the food.
The PATH Act
The Protecting Americans From Tax Hikes Act is a change in the law that makes it easier for taxpayers to claim charitable deductions for food products donated to charity. The act modifies Section 170 to allow all companies to earn an enhanced tax deduction for donating selected surplus property, including food.
Limitations apply on the enhanced deductions. Please reach out to Chis with further questions about your donations.