Blogging Beyond the Numbers
- Food must be given to a food pantry or similar nonprofit organization for feeding the ill, the needy, or infants.
- The deduction is the cost of the food plus the lesser of:
- One-half of the gross margin using the normal retail price, or
- The cost of the food.
- This makes the maximum deduction equal to twice the cost of the food.
- In a food co-op 2a will almost always apply.
- A receipt must be obtained to document the food donation.
- Applies to donations in tax years beginning after December 31, 2015.
New Tax Law
In late 2015 Congress adopted an enhanced deduction for food given to 501(c)(3) public charities that allows more than the cost of donated food to be deducted. Prior to this new law the deduction for food given to charity was the same as for any other food loss, which is the cost of the food.
This new rule is permanent and applies to taxable years beginning after December 31, 2015. For internal record keeping a Coop will need to begin identifying qualifying donations beginning with the first day of its tax year beginning after December 31, 2015. For a calendar year tax filer this would be January 1, 2016. For a June year-end tax filer this would be July 1, 2016. In both cases a 52-53 week year organization might be up to a week on either side of these dates.
Donations to Food Pantries and Similar Organizations
To qualify for the enhanced deductions the food donations must be used by the recipient 501(c)(3) nonprofit organization solely for the care of the ill, the needy, or infants. This includes only food donations to a food pantry, community center, or other charity using the food to feed qualifying people. The enhanced deduction does not apply to donations to a 501(c)(3) for use at a fundraising dinner or a similar event.
As documentation for the donation a written receipt must be received from the 501(c)(3) indicating that the donated food was used within the tax exempt purpose of the organization and solely for the care of the ill, the needy, or infants. In addition the written receipt must indicate that the food was not “transferred by the donee in exchange for money, other property, or services”. If you are working with a food pantry they should be familiar with these rules.
Additionally, the Co-op should maintain accurate records of the categories and quantities of the food donated so that its income tax return can be prepared properly. The calculations below will need to be performed for all qualifying donated food.
The food must be apparently wholesome food within the definition of the law. This definition allows the enhanced deduction for past date or otherwise unsalable food that is still edible. See Technical References, item b at the end of this memo for an expanded definition. The retail price is used to calculate the enhanced deduction. Typically this is the standard selling price of the product. If an item is past date the normal retail price can be used if it is donated just after the expiration. For damaged food, such as bruised produce, a reduced retail price should be used in the calculation. If the reduced retail price is equal to or below the cost no enhanced deduction allowed.
Calculating the Deduction
The formula for the deduction is that the amount is the lesser of twice the cost or the cost plus one-half of the gross margin. For a grocery this will almost always be the cost plus one-half of the gross margin.
- Yogurt given to a food pantry.
- Cost = $3.00
- Retail price = $4.00
- Gross margin = $1.00
- Deduction = $3.00 plus $0.50 (lesser of cost or one-half of gross margin) = $3.50
- Deli sandwich given to a food pantry.
- Cost = $3.00 including labor and
- Retail price = $7.00
- Margin = $4.00
- Deduction = $3.00 plus $2.00 (lesser of cost or one-half of gross margin) = $5.00
- Vitamins given to a food pantry.
- Cost = $10
- Retail price = $35
- Margin = $25
- Deduction = $10 plus $10 (lesser of cost or one-half of gross margin) = $20.00
The amount of the enhanced deduction should be calculated but it is not recorded in the accounting records. This will be an entry only for the tax return, possibly reducing the federal tax due. It may or may not be a deduction for state income tax returns, depending on the state’s conformity with the federal tax code.
Limitation and Carryover
The deduction for food donations is allowed to be up to 15% of taxable income, after patronage dividends, compared to 10% of taxable income for non-food donations. The maximum deduction for both combined is 15% of taxable income. Unused donation deductions carryover for 5 years before expiring. Unused food and non-food donations will carryover separately.
a) Internal Revenue Code Section 170. Specifically 170(e)(3)(C).
b) For purposes of the above rules, “apparently wholesome food” has the meaning given that term by section 22(b)(2) of the Bill Emerson Good Samaritan Food Donation Act (42 U.S.C. 1791(b)(2)), as in effect on Sept. 23, 2005. That is, “apparently wholesome food” is food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.