Accounting for your money: donation deductions
Can I receive a contribution deduction for donating food?
I often get asked, “Why can’t I deduct the retail price of pies donated to charity organizations?” The answer is, sometimes you can—and I’ll outline how.
You’ve probably found that you have a quantity of surplus food on hand that is not saleable for various reasons, such as misprints, improper weights, overruns, new products withdrawn from test markets, damaged shipping containers, incorrect dating, etc. Rather than destroy these products and take a complete loss, you can ship them to a local charitable organization. You then receive a contribution deduction on your tax return. The amount of the deduction taken is equal to the basis of the property, plus half of the property’s appreciated value.
The Internal Revenue Code (IRC) specifies three qualifications for a contribution:
1. The property is to be donated to an organization that qualifies under section 501(c)(3) and to be used solely for the care of the ill, the needy or infants.
2. The property is not to be transferred by the donee in exchange for money, property or services.
3. The taxpayer receives from the donee a written statement that represents that its use and disposition of the property will be in accordance with the two provisions above.
The following types of contribution do not qualify:
1. You decide to donate pizzas after soccer games and receive recognition as a sponsor (you’re receiving value for the donation).
2. You donate weekly pizzas to a business luncheon in return for receiving a free conference room rental to be used in the future.
Congress believed that it was desirable to provide a greater tax incentive for contributions of certain types of ordinary income property that the donee charity uses in the performance of its exempt purposes. However, Congress also believed that the deduction allowed should not be such that the donor (i.e., you) would be in a better after-tax situation by donating the property rather than selling it. Therefore, the charitable deduction is limited to half of the regular income that would be recognized on a sale of the property for its fair market value, but the deduction may not exceed twice the taxpayer’s adjusted basis for the property.
Given this law, you can recoup some of your losses and increase customer service at your restaurant. You never want to cook an order twice as a result of an order that included pepperoni vs. sausage or onions vs. green peppers, but this probably happens more than you’d like to admit. Any miscommunication between the order taker, cook and customer can result in a pie that needs to be cooked again, and the original is thrown away.
But, by creating a relationship with a qualified charity that’s willing to visit your restaurant once per day at its own expense and provide a daily receipt for all pies or product picked up, you now have a way to recover some of your costs.
Devise a way in your current POS or daily sales tracking method to account for all pies and product that are contributed daily to the charity. Along with this tracking, you need a method of capturing the cost of sales attributed to this contributed product in your accounting.
Select a charity in proximity so you ensure the product is picked up daily. Make sure you create a method that keeps the product fresh, perhaps by using resealable plastic bags. In the case that pies or product are subject to regulation under the Federal Food, Drug, and Cosmetic Act, as amended, such product must fully satisfy the applicable requirements of this act and regulations promulgated thereunder on the date of transfer, and for 180 days prior thereto.
Finally, create a written procedure that all employees can follow to make sure the product is handled, stored and accounted for properly, and then made available for the charity’s daily pickup. This new process should allow the wait staff to correct any incorrect product orders sooner rather than later and increase customer satisfaction. IRC section 170(e)(3)(B) was designed not for operators to be financially better off by donating the product, but to allow for a method that recovers some of the costs incurred in preparing incorrect customer product, which is usable to other willing parties identified as ill, needy or infants. However, nationally, restaurants operate at between 2% to 6% net income margins, so any methods that recover costs should be considered important for the operator’s bottom line.