Examples of Tax Write off information
Internal Revenue Code 170(e)(3) provides enhanced tax deductions to businesses to encourage donations of fit and wholesome food to qualified nonprofit organizations serving the poor and needy. Qualified business taxpayers can deduct the cost to produce the food and half the difference between the cost and full fair market value of the donated food.
If you contribute inventory (property you sell in the course of your business), the amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis.
The basis of contributed inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your charitable contribution deduction from your opening inventory. It isn't part of the cost of goods sold.
If the cost of donated inventory isn't included in your opening inventory, the inventory's basis is zero and you can't claim a charitable contribution deduction.
Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.
Special rules apply to certain donations of food inventory to a qualified organization.
These rules apply if all the following conditions are met.
1. You made a contribution of apparently wholesome food from your trade or busi- ness. Apparently wholesome food is food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
2. The food is to be used only for the care of the ill, the needy, or infants.
3. The use of the food is related to the organization's exempt purpose or function.
4. The organization doesn't transfer the food for money, other property, or services.
5. You receive a written statement from the organization stating it will comply with re- quirements (2), (3), and (4).
6. The organization isn't a private nonoperating foundation.
7. The food satisfies any applicable requirements of the Federal Food, Drug, and Cosmetic Act and regulations on the date of transfer and for the previous 180 days.
Donations of Food Inventory
See separate Worksheet instructions. (Keep for your records)
1. Enter fair market value of the donated food . . . . . . . . . . . . . . . . .2. Enter basis of the donated food.......................3. Subtract line 2 from line 1.
If the result is zero or less, stop here. Don't complete the rest of this worksheet. Your charitable contribution deduction for food is the amount on line 1 . . . . . . . . . . . . . . .
4. Enter one-half of line 3 . . . . . . . . . .5. Subtract line 4 from line 1 . . . . . . . .6. Multiply line 2 by 2.0 . . . . . . . . . . . .
7. Subtract line 6 from line 5. If the result is less than zero, enter -0- . . . . . . . .8. Add lines 4 and 7 . . . . . . . . . . . . . .
9. Compare line 3 and line 8. Enter the smaller amount . . . . . . . . . ......10. Subtract line 9 from line 1 . . ......
11. Enter 10% of your total net income for the year from all trades or businesses from which food inventory was donated . . . . ......
12. Compare line 10 and line 11. Enter the smaller amount. This is your charitable contribution deduction
for the food . . . . . . . . . . . . . . . . . .
Worksheet instructions. Enter on line 11 of the worksheet 10% of your net income for the year from all sole proprietorships, S corporations, or partnerships (or other entity that isn't a C corporation) from which contributions of food inventory were made. Figure net income before any deduction for a charitable contribution of food inventory.
If you made more than one contribution of food inventory, complete a separate worksheet for each contribution. Complete lines 11 and 12 on only one worksheet. On that worksheet, complete line 11. Then compare line 11 and the total of the line 10 amounts on all worksheets and enter the smaller of those amounts on line 12.
More information. See Inventory, earlier, for information about determining the basis of donated inventory and the effect on cost of goods sold. For additional details, see section 170(e) (3) of the Internal Revenue Code
The following information is presented for general information only. Consult with your Attorney or Tax Consultant to determine its application to your specific organization and situation.
Tax Cuts and Jobs Act (H.R. 1), passed by Congress on Dec 20, 2017, does not change the ability for a company to take the enhanced deduction for the donation of surplus food. Based on this Act, the following information is still accurate.
U.S. Congress enacted Section 170 of the Internal Revenue Code in 1976 to encourage donations by allowing C corporations to earn an enhanced tax deduction for donating selected surplus property, including food. In 2015, Congress passed the PATH Act as Division Q of the Consolidated Appropriations Act, 2016, which modified Section 170 of the Internal Revenue Code to allow all companies to earn an enhanced tax deduction for donating selected surplus property, including food.
This encourages food donations by:
1.Making the enhanced tax deduction permanently available for Non-C corporations – retroactive for contributions made after December 31, 2014.
2.Increasing the charitable contributions cap from 10% to 15% of net income for Non-C corporations or taxable income for C corporations - applicable to taxable years beginning after December 31, 2015. The additional 5% is specifically for food donations.
3.Allowing Non-C corporations a tax deduction carry forward of 5 years, mirroring the treatment of C corporations - applicable to taxable years beginning after December 31, 2015.
4.Defining the Fair Market Value for donated food by taking into account the price for which the item is sold at the time of the contribution without regard to lack of market, internal standards - applicable to taxable years beginning after December 31, 2015.
5.Providing basis for food donations from businesses using the cash method of accounting (typically identified as “farmers and ranchers”) as 25% of the fair market value - applicable to taxable years beginning after December 31, 2015.
See an explanation of how this enhanced tax deduction applies to donation of wholesome food.
Prior to December of 2007, S corporations with limited shareholder basis faced a dilemma regarding their ability to take the enhanced tax deduction for donating food inventory. FDC submitted a technical correction to the House Committee on Ways and Means in 2007 which was integrated into The Tax Technical Corrections Act of 2007 (HR 4839 and Public Law 110-172). This made a technical correction to the provision relating to contributions of appreciated property by an S corporation.
The technical correction provides that the present-law basis limitation on the deduction of S corporation items does not apply to a contribution of appreciated property to the extent the shareholder’s pro rata share of the contribution exceeds the shareholder’s pro rata share of the adjusted basis of the property. This means that S corporation shareholders can take the enhanced deduction regardless of their basis in the corporation.
Congress Passes PATH Act -Enhanced Food Donation Tax Deduction Available to All Companies
(December 23, 2015)
On December 18, 2015, President Obama signed HR 2029 -The Consolidated Appropriations Act, 2016. Contained in this bill was a provision that made the enhanced deduction for food donations permanently available to non C-corporations – retroactive for contributions made after December 31, 2014. Previously, only C-corporations could realize the enhanced tax benefit from donating their surplus food. In addition, the bill:
Increased the charitable contributions cap from 10% to 15% of net income for Non-C corporations or taxable income for C-corporations -applicable to taxable years beginning after December 31, 2015.
Allowed non C-corporations a tax deduction carry forward of 5 years, mirroring the treatment of C corporations -applicable to taxable years beginning after December 31, 2015.
Defined the Fair Market Value of Donated Food by taking into account the price for which the item is sold at the time of the contribution without regard to lack of market, internal standards -applicable to taxable years beginning after December 31, 2015.
Provided basis for food donations from businesses using the cash method of accounting (typically identified as “farmers and ranchers”) as 25% of the fair market value -applicable to taxable years beginning after December 31, 2015.