THE FOLLOWING IS FOR ILLUSTRATION PURPOSES ONLY. BULLPEN IS NOT A TAX ADVISOR. YOU ARE ADVISED TO CONSULT WITH YOUR TAX ADVISOR BEFORE APPLYING ANY DEDUCTIONS.
Under Section 170(e)(3) of the Internal Revenue Code and extended by the PATH Act, companies may be eligible for an enhanced tax deduction for donation of wholesome food to qualified charities such as food banks with a 501(c)(3) status.Generally, for product with good code date, you may be eligible to deduct your cost basis plus one-half your normal profit up to a maximum of twice your cost basis (limited to 15% of taxable income).
An illustration of enhanced deduction for charitable donation:
WeeblyCo produces the popular Choco Kale Blasters (CKBs). Due to an extra zero in a production planning model, WeeblyCo finds itself with 14,000 extra cases and prefers not to sell it through its normal retail channels. Instead, WeeblyCo donates the food to a local food bank. Assume that the cost basis for CKBs is $6/case and the market value (wholesale pricing) is $18/case. In this case, WeeblyCo may be able to take a tax deduction of $6 + ($18-$6)/2=$12/case x 14,000 cases=$168,000.
While this may be less than WeeblyCo would have received if they sold it for Fair Market Value (FMV), it could have a better outcome than if the product needed to be liquidated into a deep discount retail alternative. And WeeblyCo does a ton of good in the process by donating to a food bank.
One of the key activities in evaluating the deduction potential is determining FMV. For products with good code dates, this is typically the standard wholesale pricing. But as code dates get short, FMV can drop dramatically. Many situations are in a middle-ground that requires some analysis – both of your own internal standards and industry practice. The PATH Act provides a lot more flexibility in this regard.But FMV can go from full wholesale pricing to a small fraction in a matter of a week as it crosses over a code date threshold that separates standard retail from deep discount retail. Therefore, we urge you to contact us sooner rather than later and we can give you an informal assessment of your situation.