Posted on: 14 November 2016
Busy restaurants often have unsold food left over at the end of each day. Some of the food may be used the following day, but wholesome food is sometimes discarded. A practical solution for minimizing wasted food is available. Restaurants can receive a tax deduction in exchange for donating unsold food to a qualified charity.
Tax deductions for charitable donations are generally limited to the fair market value of donated items. For donated food, there is a different deduction limit, referred to an enhanced deduction. Until passage of tax legislation in 2015, the enhanced deduction was scheduled to revert back to the regular deduction limit for all businesses not organized as a C corporation.
Enhanced deduction made permanent
The enhanced deduction for food donations is now permanently available to all business entity types. Before the 2015 legislative change, the enhanced deduction was permanent for C corporations only. The enhanced deduction is now permanently available to S corporations, partnerships, LLCs, and sole proprietorships.
Calculation of enhanced deduction
Food items in your inventory carry with them a cost basis. If the items are not sold, the difference between the cost and the unrealized sales price is essentially forgone profit. The enhanced deduction for food donations is the lesser of the two following amounts.
- Cost basis plus half of the unrealized profit
- Twice the cost basis
Total annual limitation
The legislative change in 2015 also makes permanent the annual limitations on food donation deductions. For a regular C corporation, the deduction limit is 15 percent of taxable income as shown on the corporate tax return. For other entity types, the deduction limit is 15 percent of net income, which is the net operating result for the restaurant activity itself.
As with other charitable contributions, food donations must be made to a qualified charitable organization. You can confirm the status of your local food bank or soup kitchen through the IRS search tool for exempt organizations. Churches are automatically classified as qualified charitable organizations and are not required to register with the IRS.
Carryover of unused deductions
If your total deduction for food donations exceeds the annual limitation amount, the unused excess can be carried forward to the next five tax years.
Grocers and farmers may also deduct food donations. For farmers, the deductible value of food is calculated differently than for retail food sellers. Contact an accountant like Kenneth L Lahner CPA for more information about how food donations can reduce the income tax on your business.Share