Meal donations by restauranteur

[Greta]

To fight hunger, restauranteur (a sole proprietor) is selling meals and donating proceeds to a hunger fighting charitable organization. The ingredients are already being deducted. But how to treat the actual larger donation, and how to treat the sales tax collected. Does it get counted as a personal donation and only $300 in her case deductible?

[IRonMaN · Accepted solution]

Sounds like you have two distinct transactions - sale of meals and a donation.  Unless you are leaving something out of your details, the restaurant sells a meal, collects sales tax on that meal, and remits the collected sales tax.  He or she then turns around and makes a donation that is going to move to schedule A instead of schedule C.

[rbynaker]

I suspect you'll find plenty of folks who will deduct this as "advertising" but I'm with IRMN given this particular fact pattern.

Maybe have them change the business model?  I'm thinking something like "bring us your donation receipt to abc charity and we'll give you a xx% discount on food at our restaurant."  Then the funds aren't running through their hands, no sales tax charged on the donation part, the charity still gets paid, and deductions might be spread to folks who don't normally make contributions and can take advantage of the charity deduction for non-itemizers this year.

[Greta]

I too thought of it as an advertising deduction (it was, in fact). Then the only one to take a bite of the gross income is our local city hall which bases their license fee as a % of gross not net. It's a new restaurant, so your ideas are most welcome.

[BobKamman]

This is just someone's opinion found on the Internet, and it doesn't give a source for the "IRS guidance."  However, you might want to track it down,

"Under certain conditions, a business may deduct a charitable contribution as an advertising/marketing expense. For the expense to be classified as “advertising,” the business must be able to substantiate that it received a direct benefit for its donation. The cost can then be classified as an “ordinary and necessary business expense." 

According to IRS guidance, costs that can be considered advertising expenses include:

• Messages containing qualitative or comparative language, price information, or other indications of savings or value
• An endorsement
• Inducements to purchase, sell, or use the products or services"

https://blog.fabeancounters.com/bean-blog/deducting-charitable-contributions-a-guide-for-small-busin....

[qbteachmt]

What you described is translated as, "My client runs a business, but decided to give the money to charity." That is personal donation.

They cannot give the sales tax funds; that isn't theirs to use, keep or give.

And, unfortunately, your client didn't Give Food, so the special pandemic provisions don't apply.

"For the expense to be classified as “advertising,” the business must be able to substantiate that it received a direct benefit for its donation. The cost can then be classified as an “ordinary and necessary business expense." "

This is why I tell my clients to print and display a banner, or make sure they get listed in the event program, or on the uniforms. Then, take pictures for proof. Advertising is not the same as "generating good feelings." You need hard evidence.

Also, keep in mind that it is a typical mistake to write off the Retail Price as Advertising or charity.

"It's a new restaurant, so your ideas are most welcome."

Your client needs a different model. Such as, gives away the food to the population that charity targets. What your person likely intended is to support the charity, either with food or money. The way to do this is to Partner with them, and using their FEIN  and 501(c)(3) status, they would not have run into this dilemma. This becomes a true fundraiser, not personal giving, if you set it up properly.

Example of something that would change: The charity's purpose relates to food, they likely don't need to charge Sales Taxes, for instance, if this is "their" event that your client is sponsoring and supplying, because this is not Unrelated.

[Greta]

Thanks for the full-fledged review. It will help me beyond 2020. For my current clients the question is moot because they have huge losses in their small restaurant business anyway, so advertising or donation deductions are unneeded. Perhaps in the future, if they survive.

[BobKamman]

@Greta "For my current clients the question is moot because they have huge losses in their small restaurant business anyway,"

No net operating loss, though?

[qbteachmt]

"so advertising or donation deductions are unneeded"

The local United Way can send their executive or liaison, or that charity might have a person, to review the options. For instance, the concept of "donation" for any business except a C Corp is not really a good method at all, since those businesses don't have Charity Giving for tax returns. The concept of Advertising won't fly if there clearly is no intent to profit from the activity's impact/result. And the concept of including this as part of selling means there would be "consideration received" for the donor = the value of the food, so their giving is not a deductible donation for them, much less this restaurant owner.

All of their intent is great. All of their concepts are typically missing the mark. A professional in the Not For Profit network in the community can review this with them.

[Greta]

OK, I will look for a Not For Profit professional in our rural town of pop. 5000, hopefully one who works for free. The bulk of local large donations go to one of our 53 churches.

[qbteachmt]

"in our rural town of pop. 5000"

As I noted, there likely is a NFP network. It doesn't have to be someone local, given today's life issues. For instance, my mother became president on a "women's league" and the State of FL provides this guidance (I think it was through their Ag Dept, which was sort of strange). I helped her know the issues and what to ask about, and then FL helped her learn what they needed to know and do.

"The bulk of local large donations go to one of our 53 churches."

I guarantee you that one or more of these churches have a professional that is up to speed on this, then. Their networks are world-wide and even a newly planted church is well supported for these issues.

Can you imagine calling a church to ask them to help you learn about supporting them, and them answering, "Sorry, we can't help with that?" Of course, they would help with that.

[Greta]

Thanks for all the great info! I will pass it on to the client to pursue the correct ways of making donations, depending on the amount of time she has to pursue these avenues.