Whether contemplating their legacy or simply wanting to work for a socially responsible company, two common themes for recent job seekers seem to be a search for purpose and a desire to give back to the community.
Food, beverage, and agribusiness companies have the opportunity to make this type of social impact through two distinct methods:
- Donating their product to public charitable organizations
- Gifting their product to a donor-advised fund
Food, beverage, and agribusiness companies—including farmers—can donate fresh or processed, supermarket-ready inventory for the direct benefit of public charitable organizations and the needy.
Generally, a taxpaying farmer or processor is entitled to a tax deduction equal to the cost basis—defined as all costs that go into producing a donated item—of the donated inventory. However, subject to certain limitations, the taxpayer could be eligible for an enhanced tax deduction equal to the lessor of:
- The cost basis of the inventory plus half of the ordinary income that would’ve been recognized if the crops were sold in the ordinary course of business for fair market value
- Twice the cost basis of the donated property
A vegetable grower donates crops with a tax basis of $10 and a fair market value of $30 to a qualified public charitable organization. Under the general rules for charitable deductions, the grower would be entitled to a tax deduction of $10.
However, as long as the donation meets certain criteria, the grower could be eligible for an enhanced deduction of $20—which is equal to the cost basis plus half of the built-in gain of $20. If the fair market value were $40, the enhanced deduction would still be $20 because the deduction can’t exceed twice the cost basis of the inventory.
If a taxpayer isn’t required to account for inventories, such as a farmer on the cash-basis method of accounting, the taxpayer may elect to treat the basis of the donated food as 25% of the donation’s fair market value.
For a grower to claim the enhanced deduction for donating inventory, the donation must meet the following criteria:
- Made to a qualified public charity
- Used as part of the charity’s qualified tax-exempt function
- Used for the care of the ill, needy, or infants—with the charity furnishing the donor with a written statement confirming this fact
- Categorized as an apparently wholesome food that satisfies all federal, state, and local regulations for quality and labeling
The donor needs to maintain records of the cost basis of the donated inventory as well as the fair market value that existed as of the donation date to support this analysis and the deduction taken.
What the Charity Organization Provides
It’s important to note the charity organization must not receive compensation for the donated goods aside from a nominal fee to cover administrative costs, such as storage or transportation. The organization must also provide the donor with a written statement that includes the following:
- Description of the property
- Representations that goods were used for the care of the ill, needy or infants
- Confirmation the organization is a qualified public charity
- Assurance adequate records are maintained and available
The donation of supermarket-ready food is a great way for a grower or processor to make a positive impact in the community—while also receiving permanent tax savings.
Gifting to a Fund
While gifting to a donor-advised fund provides more flexibility in terms of the social causes it can support, an agribusiness, food, or beverage company will need to work with a foundation to set up a donor-advised fund or designate an agreed-upon fund at the foundation that will receive the net proceeds of the inventory.
The donor gifts inventory to a foundation, and the foundation assumes responsibility for the following:
- Final sale
After the foundation sells the crop, the net proceeds are deposited to the donor-advised fund or other agreed-upon fund. Grants can then be requested to support community benefit organizations of the donor’s choosing.
In this scenario, a donor can deduct the expenses related to inventory production without recognizing any revenue. Additionally, although there isn’t a charitable deduction for the donated inventory, no federal, state, or self-employment taxes would have to be paid upon sale of inventory items provided to the donor-advised fund.
There’s more business risk involved with gifting revenue because market prices may fluctuate between when a donor gives title to a foundation and inventory is able to be sold. Because of that, this may be a better option for donors with longer shelf-life inventory.
We’re Here to Help
To learn more about pursuing this opportunity—or for any other questions—please contact your Moss Adams professional.