Restaurants that donate food inventory to charitable organizations could have the opportunity to claim tax deductions for charitable contributions, which are given special and advantageous treatment by the Internal Revenue Service (IRC).
According to IRC Section 170(e)(3), a taxpayer is eligible for a charitable deduction for donated “apparently wholesome food,” if the food given to the charitable organization is for the care of the ill, needy, or infants. “Apparently wholesome food” is defined as food that meets all the quality and labeling standards imposed by federal, state, and local laws and regulations.
The charitable contribution for donated food inventory is the lesser of:
- The cost of the donated food, plus half of the appreciation (gain if the donated food were sold at fair market value); or
- Twice the cost of the donated food.
Taxpayers that take a deduction for food contribution must reduce their cost of goods sold by the original purchase price of the food that’s being donated.
A restaurant donates 1,000 pounds of chicken to a nonprofit organization. Assume the chicken costs the restaurant $3 per pound ($3,000 total) and the chicken has an appraised market value of $10 per pound ($10,000 total).
- Calculation #1: The restaurant reduces their cost of goods sold deduction by the total cost of the chicken, which is $3,000. Under this computation, the tentative tax deduction for the donated inventory equal to the basis of the donated food, plus half of the appreciation, is $6,500 ($3,000 for the cost, plus $3,500 for half one of the appreciation).
- Calculation #2: The restaurant reduces their cost of goods sold deduction by $3,000. The tentative tax deduction for the donated inventory would equal twice the cost of the donated food, which would be $6,000 in this example ($3,000 x 2).
The tax deduction the restaurant would claim is the lesser of the two computations, which would be $6,000 from calculation#2.
While the value of the charitable contribution can prove to be advantageous, there are special limitations that taxpayers have to be aware of. For a taxpayer other than a C corporation, the tax deduction is limited to 15% of each owner’s aggregate net income for the year from the trade or businesses from which the contributions were made. If there are any contributions that exceed the imposed limitation, the owner is allowed to carry over the excess contributions up to five succeeding tax years.
Restaurant owners with food inventory that may spoil and end up getting trashed should consider donating this inventory to charitable organizations, as it can provide not only great tax benefits, but excellent publicity for the restaurant. 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, which include overcoming the income limitation hurdles to claim the deductions on their individual income tax returns.
Our tax specialists are available for consultation on this and other business management matters for restaurants, hotels, and food distributors. Please contact our hospitality tax advisors or Aaron Boker at 301.231.6200 for more information.