As the coronavirus (COVID-19) outbreak continues to spread, restaurants are being restricted to carryout and delivery service, while many others are closing their businesses entirely during this period. As a result, much of restaurants’ food inventory may spoil and end up getting trashed. Restaurant owners should strongly consider donating their food inventory to a charitable organization, as this will not only help many people in a time of need, but will result in a special and advantageous treatment by the Internal Revenue Service (IRS).
According to Internal Revenue Code (IRC) Section 170(e)(3), a taxpayer is eligible for a charitable deduction for donating “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 of 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 was 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 is 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 ($3,000 x two).
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 any contributions exceed the imposed limitation, the owner is allowed to carry over the excess contributions for up to five succeeding tax years.
Restaurant owners that have food inventory that may spoil due to their restaurant being closed or restricted to carryout and delivery service can obtain not only great tax benefits, but great publicity for the restaurant. Before pursuing these tax deductions, restaurant owners should discuss this matter with a tax advisor to ensure that all of the criteria to claim the deduction are met. This includes 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 topics for restaurants, hotels, or food distributors. Please contact Aaron Boker or one of our hospitality tax advisors at 301.231.6200 for more information.