Charitable Deduction for Restaurant Business

[advantagepoints]

What advise do you have for restaurant businesses that want to give/donate meals to communities and organizations in needs? Which steps should they take and how can the expenses be deducted as charitable deductions?

[IRonMaN]

Do you mean deducting them as charitable donations in addition to the deductions they are already taking for food and labor costs or instead of taking their deduction for food and labor costs?

[abctax55]

In case Jeff's subtle point is missed...there ISN'T an additional deduction over/above the amounts already included in expenses as payroll, purchases, supplies, etc.  

IF you want to track the amounts for management purposes and so that your COGS percentages are still in line with normal operations, you can move the amounts from their normal categories to charitable.  I don't know many entities that do so.

[advantagepoints]

Here's some interesting info that I've found....

"Federal law protects businesses that donate apparently wholesome food from liability to encourage businesses to donate food before it becomes waste. Further, tax law establishes special rules for food donations, which can give businesses a larger write-off than otherwise available for inventory donations. Under the special rules for donated food, businesses can deduct what they paid for the food plus up to half of the markup they could have charged. For example, if the ingredients cost $10 and the final dish would sell for $30, the donation would provide $10 in write-offs from the cost and another $10 in write-offs from half the markup of $20."

[advantagepoints]

Not "in addition to" but "instead of"

[qbteachmt]

"how can the expenses be deducted as charitable deductions?"

There is no Instead Of, unless this entity is a C Corp and files 1120? Because only a C Corp can even list donation on the tax return.

You don't want this as charity, otherwise. That would be passed through to the 1040, which has limitations on charity deductions.

That's why you are being told to treat it as part of regular operations and COGS. You just happened to "sell" it at $0.

[advantagepoints]

Thank you so much for your thorough inputs! Much appreciated.

[advantagepoints]

Thank you so much for your inputs.  Much appreciated!

[advantagepoints]

https://www.thetaxadviser.com/newsletters/2016/jul/charitable-donations-of-food-inventory.html

[qbteachmt]

With the inclusion of that fascinating article, are you still wondering if/how it applies to your question?

You mentioned "give/donate meals to communities and organizations in needs" which would be different than, for instance, a Restaurant giving their walk-in food to the local Food Bank rather than see it go wasted.

Do you still have a specific question?

[advantagepoints]

Thank you so much for your follow-up question. Yes. I am still curious about how to treat the markup portion the meals would have cost if sold to customers.  According to the article, the charitable deduction under this provision is 50% of FMV but it gave no guidance as to how to do so.

[qbteachmt]

This does not exist: "how to treat the markup portion the meals would have cost if sold to customers."

You don't get to write off the potential profit. There would be nothing to stop me from stating, "That would have been a $1,000 steak!"

"According to the article"

Which doesn't seem to apply to your facts and circumstances so far. It describes my example: giving to a Charity and the Charity then uses it for Charitable purposes. Not your client as a restaurant "giving it For Charitable purposes" by handing out free meals.

"the charitable deduction under this provision is 50% of FMV but it gave no guidance as to how to do so."

Example: a farmer provides foodstuffs to that same Food Bank, which is a qualified Charity. The Food Bank uses it for charitable purposes.

Can you find your restaurant in any of this?

[advantagepoints · Accepted solution]

Thank you all.  I've found additional details here.  Much appreciate all your help.

https://www.irs.gov/publications/p526

[qbteachmt]

@advantagepoints 

Since this is a peer user community, would you like to describe what you found that is your intended action, so that others reading your topic will learn what you decided? Thanks.

[advantagepoints]

Thank you so much for your request. At the moment, I am continuing to do additional research for the guidance regarding the following information previously shared.

"While generally only C corporations may claim a deduction for charitable contributions of nonfood inventory items, any form of entity is entitled to the charitable deduction for contributing food (Sec. 170(e)(3)(C)(i)(I))"

and...

"Federal law protects businesses that donate apparently wholesome food from liability to encourage businesses to donate food before it becomes waste. Further, tax law establishes special rules for food donations, which can give businesses a larger write-off than otherwise available for inventory donations. Under the special rules for donated food, businesses can deduct what they paid for the food plus up to half of the markup they could have charged. For example, if the ingredients cost $10 and the final dish would sell for $30, the donation would provide $10 in write-offs from the cost and another $10 in write-offs from half the markup of $20."

I will bring up the issue with the E.A. group that I meet up monthly. Will return to provide updates.