Wednesday, October 12, 2016
Interestingly (at least to me), at many of my tax seminars this year, practitioners have expressed interest in the new tax provision governing the donation of food items to charity. On the articles page of my website (www.washburnlaw.edu/waltr), I posted an article on this issue on July 6, 2016, authored by Chris Hesse. Chris is a Principal in the National Tax Office of CliftonLarsonAllen, LLP in Minneapolis. Today’s post is a quick summary of that article and also involves some of the questions about the provision that have come up at tax seminars over the summer and fall.
Normally, a farmer wouldn’t be able to claim a deduction for food products that are donated to charity. That’s because the farmer doesn’t have any tax basis in the food items. The costs of raising the products have already been deducted, leaving no basis. But, there is a provision that is in the Code now that provides for a tax basis in food items resulting in a charitable deduction possibility. Under this provision (it’s contained in I.R.C. §170), it doesn’t matter what business form the farmer conducts the farming business in, and the food must be “wholesome.” Its value is tied to the price at which the items would sell for.
Under the new rule, for farmers on the cash method, the charitable deduction is one-half of the fair market value of the contributed food item. That’s the starting point. Under the late-2015 legislation, the deemed tax basis is 25 percent of the food’s fair market value. This is the rule starting in 2016. Before 2016, a farmer with zero basis inventory couldn’t get any charitable deduction for a contribution of those items.
The food items must be donated to a certain type of charity for the donor to be able to claim a charitable deduction. This point has generated numerous questions and practitioner interest at the seminars. The charity must be one that uses the food to further its charitable purpose or function in caring for the ill, needy or infants. So, what kind of charity is that? Certainly a food bank would qualify. But what other types of charities would qualify? How about a soup kitchen? Would a homeless shelter be a qualified charity? The answer basically comes down to whether the use of the food by the charity is essential to the charity’s exempt purpose.
Among other requirements, the donor can’t receive any goods or services in exchange for the donation. Also, the typical charitable contribution rules must be followed. Thus, because in-kind property is being donated to charity rather than cash, the charitable organization must provide a written statement that shows that the use and disposition of the donated items will be in accordance with the charity’s exempt purpose, and denotes that the other requirements are also satisfied.
So how big of a deduction can be claimed by a donating farmer? The limit is 15 percent of the taxpayer’s aggregate net income for the year from the trade or business from which the contributions were made. When computing that amount, don’t take into account the charitable deduction itself. So, for a farmer, that donates food from the farm business, the 15 percent limit would be applied to the farmer’s Schedule F income by itself. It wouldn’t include non-farm business income that is reported on other Schedules. One issue where clarification is needed is whether a farmer’s sale of a Schedule F depreciable asset that is reported on Form 4797 triggers gain (or loss) that is part of the Schedule F business income for purposes of the 15 percent limitation. For C corporate donors, the limit is 15 percent of taxable income determined without regard to charitable contributions. Different rules apply to other types of corporate charitable contributions.
While not explicitly clear in the statute, it does appear that the deduction provision applies to any type of taxpayer. So, if that’s right, there are numerous types of taxpayers that could potentially qualify for the deduction upon the donation of wholesome food products to the right type of charity. For instance, a taxpayer that owns fresh food that is packed for shipping could get the deduction. The same is true for a grower of fresh produce that sells the produce at a farmers’ market, but has food items left over. Also, many taxpayers involved in the production process of fresh fruit or vegetables can potentially use the provision. For a grocery store that has leftover food products (that meet the “wholesome” requirement), they are likely to be on the accrual method and will have to determine the reduction from fair market value to derive the amount of the charitable deduction that they can claim.
Take a look at this new provision. You may have some clients that can benefit from it that couldn’t have in the past.