By Yusef Rhymer, CPA
02.12.19 | Berdon Industry Insights
For businesses that over produced or over purchased food, or have food inventory nearing the end of its shelf life, there can be a silver lining. The Protecting Americans from Tax Hikes (PATH) Act gave a permanent tax benefit to food wholesalers and retailers—providing businesses with food inventory the opportunity to plan physical donation processes and set up long-term relationships with charitable food bank organizations to maximize their tax benefits.
In general, a business must use the adjusted basis, usually the purchase price, for a charitable deduction of inventory. Under the PATH Act, an enhanced tax deduction for food inventory is permanently available for businesses, resulting in the deduction equaling the lesser of the average of the adjusted basis and fair market value (FMV) or double the adjusted basis.
If inventory was purchased for $10,000 and the FMV was $15,000, then the charitable tax deduction would be $12,500, based on the average. If the purchase price was $5,000 and the FMV was $20,000, then the tax deduction would be $10,000, based on double the purchase price.
In many cases, wholesale food distribution or cultivation companies have a fair market inventory value that exceeds their cost by more than double. In these circumstances, most eligible donations for food companies fall below the retail level and will garner a deduction of double the cost.
If a company with an average of $5 million in inventory discards 5% of the inventory over the course of the year, it could potentially receive an additional deduction of $250,000 for properly donating the food. At today’s personal tax rates for pass-through business owners, the tax savings could exceed $100,000. For C corporations, the potential tax savings could be in excess of $65,000.
The active owners of a pass-through entity or the corporate entity itself may not receive an immediate tax benefit because there are limits on charitable deductions at the personal and corporate levels. For C corporations, this deduction is limited to 15% of the taxable income before charity, for each tax year. If the limitations affect these charitable deductions, then the excess amounts can be carried forward for up to five years on the entity’s return. Shareholders, partners, or members of pass-through entities face charitable deduction limitations on their personal returns also. These specific charitable deductions are limited to 15% of the aggregate taxable business income flowing from the businesses with food donations. This limitation is in addition to the normal 60% of adjusted gross income (AGI) limitation for charity. A five-year carryforward on limited charitable contributions is also allowed for individuals.
Documentation and Verification
A company must be able to prove it donated the inventory to a 501(c)(3) charitable organization. As proof of 501(c)(3) status, the company can check the tax exempt organization search page on the IRS’ website or request a tax exempt certificate from the organization. For substantiation of the tax deduction, you can use a receipt of the donation from the organization, as long as the receipt lists the organization as a 501(c)(3). With that accomplished, the company must be able to document the FMV of each donation and the reasonable method used to determine the FMV.
The opportunities for substantial tax savings are there for those who can follow the rules. If you have questions, contact Yusef Rhymer at 212.331.7673 | firstname.lastname@example.org.
Berdon LLP New York Accountants and Advisors