Excess Food Inventory? Turn Your Leftovers Into Tax Savings

With Thanksgiving behind us and the holiday season ahead of us, many nationwide face the same issue: Too many leftovers!

True, as far as problems go, it’s a particularly tasty one, but for many businesses, it can be worse than it sounds.

From restaurants to supermarkets to manufacturers, excess unsold food inventory can pile up quickly, wasting resources and costing money for storage, shipping, and disposal.

Fortunately, there’s an appetizing solution: Convert your leftover food inventory into tax savings and help lessen hunger during the holidays.

The Enhanced Deduction for Donated Foods (EDDF) empowers you to do that by providing an extra tax incentive when businesses donate wholesome food to people in need.

Read on to discover how the Enhanced Deduction for Donated Foods can combine goodwill and tax savings to make charitable food contributions better for everyone. We’ll explore:

  • What the EDDF entails
  • How donating leftovers under this provision can directly lower tax bills
  • What kinds of businesses can benefit from the EDDF
  • Steps to start reaping deductions from donations

What is the enhanced food deduction?

Charitable contributions can come with plenty of financial and emotional benefits for businesses and individuals.

However, if your business makes charitable food contributions, you could be eligible for a more significant write-off than the standard deduction.

Typically, a business can deduct the lesser of the Fair Market Value (FMV) of the inventory on the date of contribution — or the original cost basis. Under the EDDF, on the other hand, a business could be eligible for a deduction above the cost basis, depending on certain conditions.

Essentially, the IRS rewards qualified food donors by:

  • Allowing deduction of inventory costs PLUS half the foregone profit if items were sold at fair market value – a significant boost over the standard deduction of just basis cost
  • Expanding maximum annual deductibility for food donations from the standard 15% cap to 25% of taxable income, further increasing potential savings

How does the enhanced donation tax deduction work?

Let’s walk through a hypothetical example…

  • ABC Grocery Store donates 1,000 pounds of potatoes with a fair market value of $1 per pound to a local food bank, totaling $1,000 worth of potatoes
  • ABC Grocery’s cost basis in the potatoes was $300 for the 1,000 lbs. If sold at the fair market value of $1 per pound, ABC would have generated $1,000 in revenue and $700 in profit.
  • Under normal deduction rules, ABC could only write off its $300 basis cost for the donation.

With the EDDF, ABC can deduct the larger of:

  • 1. Cost Basis x 2 = $300 x 2 = $600

OR

  • 2. Cost Basis + (Expected profit / 2) = $300 + ($700 / 2) = $650

So ABC can deduct $600 under the EDDF, compared to just the $300 cost basis otherwise. And remember, companies can deduct up to 25% of their total taxable income under the EDDF versus just 15% usually.

The opportunities to convert leftover food into tax savings quickly add up!

What businesses qualify for the EDDF?

To qualify for EDDF, businesses must meet the following conditions:

  • The donated food must be “apparently wholesome.” This means it should be fit for human consumption and meet all federal, state, and local quality and labeling standards.
  • The food should be used exclusively for the needy, the ill, or infants.
  • The contribution should align with the organization’s exempt purpose.
  • The donated food must not be exchanged for money or any other consideration.
  • The organization should provide a written statement affirming that it will comply with the above requirements.
  • The food must comply with the Federal Food, Drug, and Cosmetic Act, and the organization cannot be a private non-operating foundation.

The good news is that the EDDF tax incentive applies broadly to most types of business entities, including:

  • C Corporations
  • S Corporations
  • Partnerships
  • Limited Liability Companies (LLCs)
  • Sole Proprietorships

This means almost any company can reduce taxes by donating excess wholesome food inventory matching the above guidelines.

Moreover, if a business cannot utilize its entire EDDF in a particular year, the unused portion can be carried forward for up to five years. (However, if a business consistently donates more than the allowed limit, these carryforwards may never be used. Hence, it’s crucial to plan the EDDF strategically every year.)

More good news for C corps: The general limitation of 10 percent of taxable income on C corporation contributions does not apply to the EDDF. (Again, there is a catch — the 10 percent limit that applies to other contributions is reduced by the amount of the applicable food inventory contributions.)

Of course, maintaining detailed records that validate your eligible donations is imperative to substantiate your deductions.

How do you write off donated food on your taxes?

Turning excess food inventory into enhanced tax savings for your business using the EDDF involves straightforward steps:

1. Identify and Quantify Excess Inventory

Regularly review inventories across perishable and shelf-stable items to pinpoint predictable streams of excess food left unsold or unusable. Quantify typical weekly/monthly volumes to identify reliable donation pools.

2. Locate Eligible Charities with Recovery Capabilities

Research non-profit hunger relief charities like food banks and soup kitchens operating in communities where your businesses have locations. Determine if they have the capacity, transportation, and storage to consistently accept bulk donations of your specific food types.

3. Formalize Arrangements

Reach out to mutually interested groups to coordinate formal donation plans. Seek commitments documenting their exclusive usage of items for charitable hunger purposes and acknowledge your responsibility for properly handling items.

4. Track Donations Meticulously

Rigorously record every donated item, corresponding fair market value, original cost basis, and expected profit margin of items sold. Be sure to maintain files containing documented acknowledgments and usage commitments from the charities.

5. Claim Enhanced Deductions

Provide complete documentation to your tax accountant so enhanced donation deductions of up to 25% of taxable income can be rightfully claimed.

What potential pitfalls should businesses anticipate?

When a business donates food, it reduces the inventory, reducing the cost of goods sold (COGS).

However, the EDDF allows businesses to claim a deduction that is potentially larger than the actual cost of the donated food.

In a partnership setup, this approach can cause issues. For instance, if a business donates food worth a certain amount, that amount is taken off its inventory cost and claimed as a charitable contribution.

When that inventory is reclassified as a charitable contribution on the partner’s tax return, it can increase taxable self-employment income, thereby potentially increasing the tax liability. (For S Corporations, reducing the cost of goods sold doesn’t have an impact unless the shareholder can’t use it on their personal return.)

More generally, when considering tax strategy, any business should conduct a thorough cost-benefit analysis and examination of its unique circumstances. Depending on your industry, the nature of your services, and the actual cost of your inventory, you may find that the EDDF is simply not cost-effective for your business.

Likewise, as discussed above, unused EDDF or an increase in self-employment income could make this deduction more trouble than it’s worth for your business.

At the same time, the EDDF is an obvious win for many businesses with excess food inventory.

To learn precisely how the EDDF could impact your bottom line and start reaping the rewards while spreading goodwill, consult with tax professionals…like us!

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Jeff Coyle, CPA

Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.

He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.

His business experience includes:

Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.

Jeff also has a long history of helping individuals manage their taxes and plan their finances including:

Income tax planning and strategy.
Filing quarterly and annual taxes.
Audit support.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.

Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.

Jody H. Chesnov, CPA

Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004.  After a career of public accounting and general management, Jody knows the value of good financials.  Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.

He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles.  His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.

He has a particular expertise in early-stage growth companies.  His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.

Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller.  He has experience across industries, which gives him a deep understanding of business.

Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.

In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.  

He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.

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