The changes are the result of the PATH Act, which Congress passed last December to modify Section 170 of the Internal Revenue Code. The law makes two big changes: making the enhanced tax deduction permanent and allowing all companies to claim the enhanced deduction, as long as they donate their food to 501(c)(3) charitable organizations.
Before the changes, only some larger companies were allowed to take the enhanced deduction. Now, smaller businesses can take advantage of it, too, says Jim Larson, program development director for the Food Donation Connection, which manages donations for foodservice companies.
“C corporations have been able to take these deductions since 1976, but non-C corporations – including small businesses like S corporations -- have been able to do it only intermittently since 2005. Now, everyone wins,” Larson says.
Adds Tony Pupillo, director of foodservice and convenience stores for Feeding America, a nationwide network of food banks: “Making these incentives available to non-C corporations is a major improvement. No longer will an LLC or restaurant franchisee have to worry whether or not they are eligible for a tax deduction on food donation.
Any type of business structure can receive the benefit as long as the donations go to 501(c)(3) organizations.”
In addition to making the enhanced tax deduction permanent for everyone, other changes include:
- An increase in the annual cap on food deduction donations from no more than 10-percent of a business’ total taxable income to 15 percent of its net income, starting in 2016.
- Allowing businesses to carry forward the tax deduction for up to five years if they can’t use it in the current year.
- Codifying an important tax ruling that allows businesses to define the fair market value price of donated food as the retail price at the time of contribution. This gives donors greater certainty in how they value the food they donate.
- Making the cost basis for food donations 25 percent of the fair market value for businesses using the cash method of accounting. This allows donors using cash-basis accounting to estimate the cost of producing the food and take the enhanced tax deduction based on that amount.
Pupillo says the changes give donors a stronger economic incentive to donate excess food inventory, and can help cut hauling costs and tipping fees by reducing waste. “Now companies will be able to account for the product, report it as a donation and be incentivized for it.”
Larson also believes the changes will result in more donations. “The financial offset should inspire businesses to take the necessary steps to safely donate, rather than dump, wholesome food,” he said. “The tax savings will result in more money they can invest in their businesses, spend on consumable goods or use to start new businesses.”
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