Specialty Food & Beverage Closeouts
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Pssst. Hey food manufacturers… here’s a trillion dollars.

Pssst. Hey food manufacturers… here’s a trillion dollars.
One Trillion Dollars from PATH Act for food manufacturers

Although we recently described how the PATH Act was creating a windfall for food manufacturers, it warrants a little more scrutiny to see just how big of a deal this is.

As a recap, the PATH Act is a huge blob of tax code that covers everything from state and local sales tax deductibility to enhanced child tax credits to loosening up 529 education plan rules. But Bullpen is a company that helps food manufactures and distributors maximize the value of their excess inventory, so we’ll just focus on the ‘enhanced deductions’ stuff defined in IRC Section 170 and expanded/clarified by the PATH Act.

In many respects Congress has shifted some of the responsibility for feeding the country’s 50 million food-insecure to the food industry. In exchange, food companies will get high-value tax deductions that no other industry gets. From a taxpayer’s perspective, it’s kind of a wash… unless you happen to believe that private industry will somehow get more food to the needy faster and cheaper than the US government. ūüėČ

Before all this IRC 170/PATH Act stuff, food companies could deduct just their cost basis for charitable donations of food. So whether the inventory just came off the production line or it was down to its last few days of code date, it didn’t really matter. With the introduction of IRC Section 170(e)(3), larger companies (C Corps) were allowed to take an enhanced deduction for donation of ‘wholesome’ food (basically no freezer-burned Nutraloaf) to 501(c)(3) type charities such as food banks and Feeding America.

But there were a lot of limitations. Here are a few:

  • S Corps, LLCs and those that used cash accounting¬†didn’t get the same treatment as C Corps
  • Companies were limited to a maximum deduction of 10% of their pretax profits
  • The IRS was pretty restrictive in what they wanted to allow companies to deduct (see Lucky Case)

The PATH Act changes this by:

  • Allowing non C Corp entities and those that use cash method of accounting to participate
  • Increase the deduction limit to 15% of profits and enable everyone to carry deductions¬†forward 5 years if necessary
  • Clarified and opened up the definition of fair market value such that companies could recognize higher value in many cases and could even do things such as run their production line a bit longer to produce product solely for donation.

Strategic Philanthropy

As we discussed in this blog post on key times in a product’s life, companies who recognize (maybe it’s more like¬†predict) excess inventory situations early on and act on that information now have the opportunity to get up to twice the tax deduction¬†available to a company who kicks the inventory can down the road. For food companies, philanthropy is now a strategic financial concern. A clever company can effectively double the tax benefit for the same level of inventory donation.¬†Imagine a company that used to donate at their cost basis and now donates at twice their cost basis to the full 15% of profits allowable by the PATH Act.

So the total write-offs for the $650B food & beverage producers are 15% of their average 11.4% pre-tax profit or a total of $11.115B of write offs for the entire industry. At a combined corporate tax rate of 40% that’s $4.5B in after tax benefit for the industry.¬†Although the current price earnings ratio for food processors is in the stratosphere¬†in the mid 40s (same as biotech!), let’s use a much more conservative number – the Shiller PE for the S&P 500 which is roughly 24 today.

So 24 * $4.5B = $108B in increased market cap per year. Since governments are fond of looking at 10 year financial horizons, let’s do that here and we get $1.08T in increased market capitalization for food processors¬†due to charitable donations over the next decade.

That’s how we get to one¬†trillion dollars.


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