How to leverage enhanced food deduction: A win-win for businesses

This article was written in partnership with Brent Lessey, CPA, MST – Tax Partner of Anchin. The Target Accelerators team provides the resource below as information and not as advice. For further financial guidance, please reach out to your financial advisor. 

In an era where corporate social responsibility is no longer a mere buzzword but a crucial aspect of business strategy, the Charitable Contribution Enhanced Food Deduction has emerged as a beacon for companies seeking to make a positive impact on society. This innovative tax incentive not only enables businesses to trim down their tax liabilities, but also holds the potential to transform the way they address food waste and contribute to charitable causes. The Charitable Contribution Enhanced Food Deduction allows qualifying businesses to deduct eligible food donations from their taxable income. In this article, we’ll delve into the mechanics of this enhanced tax deduction and how it can be harnessed to support organizations.

At its core, the deduction offers a straightforward yet impactful solution to the twin challenges of food waste and charitable giving. Rather than allowing edible products to go to waste, businesses can opt to donate them to qualified §501(c)(3) charitable organizations. In return, they not only receive a tax deduction covering the cost of the donated items but also 50% of the gross profit margin on the donated product. This initiative encourages companies to be more responsible with their excess food and empowers them to actively contribute to the well-being of the community.

A Case Study

Consider the case of a chocolate manufacturing company. For every bar of chocolate produced, it costs them $5. Typically, they sell these bars for $10, making a $5 profit on each. However, unforeseen circumstances can lead to a surplus of chocolates nearing their expiration date. Here, the company faces a crucial decision:

A) Allow the products to spoil, resulting in a $5 loss per item that can be written off on their tax return.

B) Take advantage of the Charitable Contribution Enhanced Food Deduction. Under this option, the company can donate the products to a charity thereby receiving a deduction of $5 for the cost and also 50% of the gross profit margin, or $2.50 per item in this case, thereby offsetting a significant portion of their tax liability.

In order for this deduction to apply, the charitable donation must be to a qualified charitable organization that meets certain criteria. One such example is “Feeding America.” Specific criteria include donating food inventory to tax-exempt charitable organizations and ensuring that the donated food serves the needs of the ill, needy or infants. The recipient organizations must refrain from exchanging the donated food for monetary gain or other forms of compensation. To maintain transparency and accountability, it is important that donors receive written assurances from the recipients regarding the proper utilization of the food in accordance with charitable purposes and regulatory standards.

In a world where the intersection of business and social responsibility is becoming increasingly important, the Charitable Contribution Enhanced Food Deduction stands as a win-win opportunity for both businesses and society. It empowers companies to reduce food waste, support charitable causes and receive valuable tax benefits. By choosing to donate surplus food to organizations, businesses can align themselves with a noble cause, feed the hungry and strengthen their ties with the communities they serve, all while receiving a larger write-off than if they had simply discarded the food.

If you would like to take advantage of the Charitable Contribution Enhanced Food Deduction, consider working with an experienced accountant or advisor to ensure that your charitable contribution meets the necessary criteria.  In discussing this with your accountant or advisor, here are a few key questions to consider:

• Is my product eligible for this enhanced deduction according to IRS guidelines?
• How might my business benefit from donating our product(s) to a charitable cause?
• Do I have enough documentation to substantiate my calculations for the bonus deduction?

By addressing these key questions and working closely with knowledgeable professionals, entrepreneurs can maximize the impact of their charitable contributions while optimizing their tax benefits.

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About the author

Brent Lessey, CPA MST is a Tax Partner in Anchin's Consumer Products Practice. His practice focuses on creating custom tax planning with the end goal in mind and empowering MWBE and other growing companies to succeed. Brent is also a featured Target Accelerators program speaker, sharing his tax expertise with new founders across both Target Forward Founders and Target Takeoff programs.