Enhanced Deduction for Donation of Food
The Protecting Americans from Tax Hikes Act of 2015 (Path Act), Pub. L. 114-113, which became law on December 18, 2015, provided for an enhanced deduction for the donation of food. Small and large farms that produce food may benefit from the enhanced deduction as a result of the change in Internal Revenue Code (IRC) section 170(e).
Under prior law, farmers that used the cash method of accounting, or otherwise did not keep an inventory of production, had a zero basis in their food inventory, and could not claim a charitable deduction for any donations of food items from their inventory of produced products. Under the new law, if the farmer does not account for inventory (which is nearly all farmers), the farmer may elect, for the sole purpose of computing the enhanced deduction, to treat the basis (cost) of any apparently wholesome food that is donated to an allowable organization as described under IRC section 501(c)(3) (such as a local food bank) as being equal to 25% of the donated food’s fair market value (FMV). These new rules are applicable for donations made in tax years beginning after December 31, 2015.
The rules can be confusing and farmers wanting to take advantage of the enhanced donation for food should consult with an income tax professional to ensure their eligibility of the charitable deduction.
Example: Cash Basis Farmer
Sally raises spring and summer vegetables. In August of 2017 Sally had more production than she could sell at her farmers’ market. Sally donates her excess production of mixed vegetables to a local food pantry that qualifies as an IRC section 501(c)(3) organization. Sally’s net income from her farming business is $20,000 for the year. If Sally had been successful in selling her produce at her farmers’ market, the inventory of donated mixed vegetables would have sold for $500. Sally is not required to maintain inventories for her farm business.
For the purpose of this charitable donation, Sally’s tax basis for the mixed vegetables is $125 (25% x $500 FMV). Therefore, assuming the mixed vegetables are wholesome food, under the rules Sally’s charitable contribution is calculated as the lesser of:
a. Her $125 basis plus ½ of the $375 ($500 – $125) profit Sally would have realized, which is $312.50 [$125 + (1/2 x $375}, or
b. Two times her $125 basis, which is $250.
Further, her deduction is limited to 15% of the net income from her farming business (15% x $20,000 = $3,000. Sally’s deduction is $250, which is less than 15% of her net farm income. Therefore, Sally can include the $250 as a charitable deduction on her Schedule A, (Form 1040), Itemized Deductions. Under prior law Sally’s charitable deduction would have been zero, limited by her tax basis in the raised mixed vegetables. Sally aggregates this deduction with other deductions she makes and her total itemized deductions is subject to an overall limit of 50% of her adjusted gross income (AGI) for contributions to public charities. Assuming Sally’s federal income tax bracket is 15% and her state income tax bracket is 5%, the income tax benefit of this deduction is $50 (20% x $250), assuming Sally is able to use itemized deductions. If Sally used the standard deduction, there is no income tax benefit for Sally.
Observation: If Sally donated the mixed vegetables to the annual City-Farmer Appreciation Day held in her hometown, she would not be entitled to the deduction. The recipient charity must use the donated food for the care of the ill, the needy, or infants.
By: Guido van der Hoeven
Extension Specialist / Senior Lecturer, Department of Agricultural and Resource Economics