Charitable Contributions of Food Inventory: Proposals for Change

Publication Date: April 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

Major legislation involving changes to tax incentives for charitable giving has been introduced in the first session of the 109th Congress. Both S. 6, the Family and Community Protection Act of 2005, and S. 94, the Good Samaritan Hunger Relief Tax Incentive Act, were introduced to encourage gifts of food by businesses for charitable purposes. These bills propose to expand current law, which provides an enhanced deduction only to C corporations, to include all business entities. The value of the existing deduction is the corporation's basis in the donated product plus one half of the amount of appreciation, as long as that amount is less than twice the corporation's basis in the product. A temporary expansion of the tax deduction for charitable contributions of food inventory was made by the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73). The law extended the deduction to individuals making donations during the period August 28, 2005, through December 31, 2005. S. 2020, the Tax Relief Act of 2005, includes a provision that proposes to extend the temporary law through January 2008.

A review of charitable giving by the 50 companies that were the largest corporate donors revealed that five food concerns in that group showed substantial in-kind giving in 1999. Other companies that showed substantial in-kind gifts were those in the pharmaceutical/health care or computer/information technology industries. These firms, like food companies, are provided an enhanced deduction for in-kind gifts. It appears that in the case of large firms, the enhanced deduction has stimulated contributions.

Although proposed legislation would have the effect of reducing equity differences between C corporations and other business concerns, it would not entirely eliminate them. If the intent is to resolve the equity issues, transforming the deduction to a credit might be more effective. Unlike deductions, whose value is based on the tax rate of the taxpayer, tax credits provide dollar-for-dollar value and do not fluctuate with the taxpayer's marginal tax bracket.

In the past, there have been problems valuing products with shelf lives, such as fruits and bread. The Family and Community Protection Act of 2005 (S. 6) proposes a definition for "apparently wholesome food" and supports the findings of a major court decision on the issue. In that case, the court found that value of the product was set by sales of the individual merchant and not by normal industry practice. This liberal interpretation made it easier for donors to obtain the maximum deduction permitted under law.

This report will be updated to reflect major legislative developments.