According to the U.S. Department of Agriculture’s Household Food Security report, 47.4 million people in the United States lived in food insecure households in 2023.1 Yet, an estimated 66 million tons of wasted food was generated in the food retail, food service and residential sectors, based on the latest reports from the U.S. Environmental Protection Agency.2
Donating surplus food can be a meaningful way for restaurants and food retailers to support their communities, reduce food waste and even improve their public image. However, understanding the tax implications of such donations is essential to ensure benefits can be maximized for both the business and the community.
Tax Deduction Opportunities for Food Donations
Under Section Sec. 170(e)(3)(C) of the Internal Revenue Code (IRC), restaurants can receive a tax deduction for charitable donations of food inventory. For prepared foods, this deduction allows restaurants to claim the lower of the fair market value (FMV) of the food or twice the food’s cost (the cost of the ingredients without labor or overhead). This enhanced deduction aims to incentivize businesses to donate food they might otherwise discard.
For example, if a restaurant donates food that costs $100 to make and has a fair market value of $300, they can claim a deduction of up to $200 (cost basis of $100 × 2 = $200).
Eligibility Criteria
Businesses must meet certain requirements for enhanced tax deduction eligibility. Those that do not meet the requirements may still claim a general tax deduction for the donation of food inventory (at cost). For a donation to qualify for this deduction:
- The donation must be used for charitable purposes and the donation recipient must be a qualified 501(c)(3) organization.
- The 501(c)(3) organization must use the food solely for the care of those requiring medical care, the needy or infants (a minor child, as determined by local law). Examples include a food bank or a homeless shelter.
- The recipient organization must use the donated food in a manner consistent with the organization’s exempt purpose.
- The recipient organization may not use or transfer the donated food in exchange for money, other property or services. An exception does apply when a recipient organization charges another 501(c)(3) organization a small or nominal amount that would reimburse the recipient organization for the cost of administration, warehousing or other related costs associated with the donation.
- The business must receive a written statement from the donee representing that the use and disposition of the donated items will be in accordance with the three requirements above.
- If the donated property is subject to regulations under the Federal Food, Drug, and Cosmetic Act (FD&C Act), then such property must satisfy all applicable requirements of this Act on the date of transfer and for 180 days prior to the date of transfer.
In addition to the requirements above, the donated property must be deemed “apparently wholesome food.” To meet this requirement, the food must meet all labeling and quality standards imposed by federal, state and local regulations.
Limits on Deductions
There are caps on how much of a business’s taxable income can be offset by these deductions. Generally, a C corporation can deduct up to 10% of its taxable income. However, an enhanced deduction applies to the charitable contribution of “apparently wholesome food” inventory. The enhanced deduction is limited to a maximum of 15% of the C corporation’s taxable income.
In the case of any other taxpayer, such as sole proprietorships, partnerships and S corporations, the total deduction for food inventory donations is limited to a maximum of 15% of the taxpayer’s net income from all trades and businesses from which the donations are made during the tax year. Qualifying contributions in excess of 15% may be carried forward for the succeeding five years.
Additional State-Level Tax Benefits
Some states offer additional tax incentives for food donations, which vary widely. Additionally, some states require donations of food surpluses. A restaurant should check with a tax professional to see if their state provides extra deductions or credits for food donations, further boosting the financial benefit.
Potential Risks and Compliance
Restaurants should exercise caution to avoid potential risks, such as donating food that does not meet health safety standards, which could void the deduction and liability protection. In line with the Good Samaritan Food Donation Act, businesses should ensure the food is safe for consumption, following proper storage and transportation protocols. This act provides liability protection, encouraging more businesses to donate food safely.
Properly documenting the food’s basis cost and FMV, as well as consulting with a tax advisor can prevent issues with IRS compliance. The business must keep records showing the donation’s value, including receipts or acknowledgment letters from the recipient organization. These records are crucial in the event of an IRS audit.
In addition, a general tax deduction is available for those businesses that are not eligible for the enhanced tax deduction. A business may take a charitable contribution for the cost basis of food inventory (not prepared).
Conclusion
By understanding the tax implications of donating prepared food or food inventory, restaurants can take advantage of available deductions while supporting community organizations. With the right knowledge, documentation and compliance, food donations can become both a socially responsible and financially viable practice for restaurant owners.
Cherry Bekaert’s knowledge team of tax professionals specializing in the Real Estate, Construction and Hospitality industries are constantly staying up to date on the latest tax regulations to help restaurants and retailers optimize their revenues by leveraging often overlooked tax strategies.
References
1 Rabbitt, Matthew P., Madeline Reed-Jones, Laura J. Hales, and Michael P. Burke, "Household Food Security in the United States in 2023," National Agricultural Library, (2024): 1-46, https://doi.org/10.32747/2024.8583175.ers.
2 "Sustainable Management of Food Basics," U.S. Environmental Protection Agency, last modified October 10, 2024, https://www.epa.gov/sustainable-management-food/sustainable-management-food-basics.
