It is common for businesses to receive tax deductions for cash donations, but did you know that the agriculture community can donate fresh foods for a similar benefit? California farmers and agriculture businesses have the opportunity to donate fresh fruits and vegetables in return for some pretty hefty tax breaks.
How much is the deduction?
In order to calculate the federal deduction and the California credit, your accountant will need to know the cost basis of the donated fruit as well as the fair market value (FMV) of that fruit as of the date it was contributed.
Normally, the federal deduction for inventory contributions is limited to the FMV on the date of the charitable contribution or the cost basis of the inventory, whichever is lower. However, there is an enhanced deduction allowed for the contribution of food inventory to a qualified organization that allows for an “above-basis” deduction. This deduction equals the lesser of: (1) the basis of the contributed inventory plus one-half of the ordinary income that would have been recognized if the inventory had been sold for FMV on the contribution date, or (2) twice the basis of the property. As is often the case, there are special rules for certain taxpayers. If you are not using full absorption to account for your inventories, consult with your accountant as special rules will apply.
For farm partnerships, the result of the above calculation would be passed through to the individual partners within the partnership. The deduction is then limited to 15% of their net income from all businesses that made food contributions. This means that their deduction would be limited to 15% of their net income from the farm entity that made the donation. If individual farmers who are also partners in farm partnerships made charitable contributions to qualified organizations, then the net income of both activities would be added together in determining the 15% limitation. Any unused deduction can be carried over and used in the five succeeding tax years.
California law
Under California tax law, a qualified taxpayer who donates fresh fruits or fresh vegetables to a food bank located in California is allowed a tax credit equal to 15% of the cost that would otherwise be included in inventory costs. This is applicable for tax years beginning January 1, 2017 through January 1, 2022. In the case of farm partnerships, the credit would be passed through and used by the individual partners. Any unused credits may be carried forward for seven years.
Here’s an example of a charitable contributions deduction
Partnership A owns a farm that grows fruit. The partnership donates unsold fruit to the local food bank. A determines that the basis of the contributed property is $180,000. A also determines that one-half of the ordinary income that would have been recognized if the inventory had been sold for FMV on the contribution date is $40,000. The deduction would consist of the lesser of: (1) the basis of the property contributed plus one-half the profit = $180,000+$40,000 = $220,000, or (2) twice the basis of $180,000 = $360,000. In this case, the lesser figure of $220,000 would be the enhanced deduction for the food inventory contributed. That deduction would be passed along to the partners of the partnership. The charitable contributions deduction on the partner’s tax returns would be limited to 15% of the income from the partnership that made the food donation.
Please note that if the donated inventory was not included in the opening inventory, but rather was produced during the current year, the donated inventory would be considered to have zero basis. This means that the enhanced deduction for food inventory would only be $40,000 in the example above, as the $180,000 cost of that fruit would instead be included as part of the cost of goods sold deduction in the current year.
If you have questions about charitable food donations or want to learn more about how to claim the charitable contributions deduction, contact us!
