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KSM Blog | Katz, Sapper & Miller CPA

Are You Taking Advantage of the Special Rules for Food Donations?

Posted 3:36 AM by

If you are looking for ways to improve the net cash generated by your restaurant, take a closer look at the special rules for calculating the deduction for donated food. You are entitled to an enhanced tax deduction if you donate food to an organization qualifying under Section 501 and meet the following conditions:

  1. You made a contribution, from your trade or business, of apparently wholesome food, which 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 infants, the ill or the needy.
  3. The use of the food is related to the organization’s exempt purpose or function.
  4. The organization does not transfer the food for money, other property or services.
  5. You receive a written statement from the organization stating it will comply with requirements (2), (3) and (4) listed above.
  6. The organization is not a private non-operating foundation.
  7. The food satisfies any applicable requirements of the Federal Food, Drug, and Cosmetic Act as well as regulations on the date of transfer and the previous 180 days.

Below is an example of how the enhanced deduction is calculated:

Food items’ market value

$10.00

(Food items’ cost basis)

    3.50

Gross margin

$  6.50

The enhanced deduction is the lesser of: 1) 2x the cost basis; or 2) 1/2 of the gross margin plus the cost basis:

2x the cost basis = $7.00

1/2 gross margin plus cost basis = $6.75

In this example, the restaurant is entitled to deduct $6.75 for the donated item, which is $3.25 of additional deduction for a qualified donation (over the cost basis deduction) if the food is just thrown away. For a profitable restaurant, this approach could be a great way to reduce your tax liability.

Note, however, the charitable contribution for food is limited to 10 percent of net income from the entity making the contributions.

About the Author
Jim White is a member of Katz, Sapper & Miller’s Restaurant Services Group. Jim guides restaurant owner-operators through tax compliance issues and helps them plan strategies to minimize tax liabilities and maximize savings. Connect with him on LinkedIn.

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Comments (4)
Jack wrote
Thank you for this informative piece. One additional question on this topic - what if a restaurant donates a free meal to a family in need, and found this family through a 501(c)(3) food pantry? Does the enhanced tax deduction apply (assuming, of course, that the cost of such meal could be computed)? Thank you and regards.
Posted Oct 17 2013 4:47 PM
Jim White wrote
In order to take advantage of the enhanced deduction the donation needs to be made to the 501 (C) organization. Please note the following 7 requirements for the enhanced deduction:

1. You made a contribution, from your trade or business, of apparently wholesome food, which 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 infants, the ill or the needy.
3. The use of the food is related to the organization’s exempt purpose or function.
4. The organization does not transfer the food for money, other property or services.
5. You receive a written statement from the organization stating it will comply with requirements (2), (3) and (4) listed above.
6. The organization is not a private non-operating foundation.
7. The food satisfies any applicable requirements of the Federal Food, Drug, and Cosmetic Act as well as regulations on the date of transfer and the previous 180 days.

Thank you for your question.
Posted Oct 18 2013 1:36 PM
Howard wrote
Jim - Great article... You said in #1 that the food needs to meet labeling standards. Do you have a link to what those might be? is this the same for Raw food/vegetables vs cooked food? Thank you,Howard
Posted Jul 13 2017 11:01 PM
Jim White wrote
In order to comply with food labeling standards, make sure you are familiar with the Food and Drug Administration’s (FDA) Food Labeling Guide. This guide outlines food labeling requirements, including both cooked and uncooked food. The complete guide can be found: https://www.fda.gov/Food/GuidanceRegulation/GuidanceDocumentsRegulatoryInformation/LabelingNutrition/ucm2006828.htmAdditionally, you will also need to determine if there are any specific state or local requirements that extend beyond the FDA’s requirements. Thank you for your question.
Posted Jul 20 2017 1:27 PM
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