With the Coronavirus Aid, Relief, and Economic Security (CARES) Act being signed into law on March 27, 2020, Congress added a host of new measures to lessen the impact of the Coronavirus on U.S. citizens. Along with the new measures, Congress temporarily modified existing parts of the Internal Revenue Code (IRC) Section 170 (e) (3) to increase the annual enhanced deductibility of food contributions made by businesses in 2020 from 15% to 25% of 2020’s net income.
This tax savings tool is often overlooked by restaurants and should be taken into consideration if your restaurant has a large amount of useable food waste or donated a large amount of food inventory to charitable organizations during the pandemic. For example, if you purchase whole chickens for use in your restaurant and only use part of the chicken in your recipes, consider not throwing away the leftovers. Instead, donate the food to a local charitable organization such as a food bank and you could receive a charitable deduction amounting to the lesser of:
- Twice what you paid for the donated food, or:
- The cost of the donated food or plus half of the expected profit margin if sold at market value.
- Taxpayers that take a deduction for the food contribution must reduce their cost of goods sold by the original purchase price of the food that’s being donated.
Continuing with the prior example, let’s say that you purchased the chickens for $10 and you use all but the leg quarters in your various recipes. If you assign a value of $4 to the leg quarters and say that had you cooked and served them, they would have sold for $8. In this case, double your basis would be $8 and your basis plus half of the expected profit margin would be $6. Since you can only take the lesser of these two amounts, your deduction would be $6 per set of leg quarters.
In order to take the deduction, the Internal Revenue Service states that the following conditions must be met:
- Make a contribution of wholesome food from a trade or business to a qualified organization
- The food is given only to the ill, the needy, or infants
- The use of food given to the qualifying organization is related to the organization’s purpose or function
- The organization cannot transfer the food to another organization
- Receive a written statement from the organization stating that it will comply with the other requirements above
- The organization isn’t a private nonoperating foundation
- The food meets all requirements of the Federal Food, Drug and Cosmetic Act and regulations on the date of transfer and for the previous 180 days
The biggest limitation on this deduction historically was that you could only receive a charitable deduction for an amount up to 15% of your business’ net income. If you are unable to claim all of the charitable deductions allowed in the year of the donation due to the net income threshold, you can carry the charitable deductions forward for 5 years. Some restaurants donate so much food that they are unable to use up all of their contributions during the 5 year carryover period. This act gives a current year boost in allowable charitable deductions and helps those that donate large amounts of food to reduce the number of deductions that expire after 5 years.
Before pursuing these tax deductions, it is recommended that restaurant owners discuss this topic with a tax advisor to ensure that all of the criteria to claim the deduction are met and determine if it makes sense to pursue the deduction given the income limitation hurdles.
Our tax specialists are available for consultation on this and other business management topics for restaurants, hotels, food distributors, or retailers.
Please contact Aaron Boker or one of our hospitality tax advisors at 301.231.6200 for more information.