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Every bakery ends the day with product it won't sell tomorrow. Most owners throw it out, mark it down, or hand it to a food bank without tracking it. The tax code treats those three choices differently. Donating without records usually leaves a deduction unclaimed. Claiming a large deduction without records or a cost adjustment is how a small giveaway turns into an audit adjustment.

The rule: food donations get an enhanced deduction

Under §170(e)(3)(C), any business can take an enhanced deduction for donating apparently wholesome food from inventory to a qualified charity, not just a C corporation. A normal inventory donation is deductible at cost. The enhanced rule lets you deduct the lesser of two amounts:

1. your cost plus half the markup, or
2. twice your cost.

Fair market value is the price you charge for the same item at the time of the donation. Your own freshness standard doesn't reduce it. A loaf you sell for $8 at 9 a.m. is still valued at $8 when it goes to the food bank at 7 p.m.

What it's worth

Example: Over a year, you donate bread and pastries that would have sold for $20,000. Ingredients, packaging, and direct labor on those items cost $6,000.

• Cost plus half the markup comes to $6,000 + $7,000 = $13,000.
• Twice cost comes to $12,000.
• Your deduction is $12,000.

The catch is that the $6,000 cost comes out of cost of goods sold (Reg. §1.170A-4A(c)(3)). You can't deduct it twice. Compared with throwing the product away, you gain $6,000 of extra deduction, not $12,000.

If you don't track inventory

Some bakeries don't account for inventory under §471 and aren't required to capitalize costs under §263A. A business generally qualifies if its average gross receipts are $31 million or less for 2025 tax years, or $32 million or less for 2026. Those bakeries can elect to treat their cost as 25% of fair market value. On $20,000 of retail value, that's a $5,000 deemed cost and a $10,000 deduction. If you use the simplified small-business method for inventory under §471(c), confirm with your preparer whether the election applies to you.

Who can actually use it

• C corporations. The deduction goes on the corporate return, capped at 15% of taxable income. Anything over the cap carries forward five years.
• Sole proprietors, S corporations, and partnerships. The donation doesn't reduce business income. It passes through to you as a charitable contribution, capped at 15% of your net income from the businesses that donated. You only benefit if you itemize, and starting in 2026, itemized charitable deductions count only above 0.5% of your AGI.

That creates a trap. Say you own an S corp and take the standard deduction, but the books still take the donated cost out of cost of goods sold. You lose that business deduction and get nothing back for it. If you don't itemize, ask your preparer before year-end whether to keep the cost in cost of goods sold and skip the charitable claim.

The paperwork that makes it hold up

The conditions are written into the statute. A food bank pickup with no records doesn't meet them.

1. Donate to a qualifying charity. It has to be a 501(c)(3) that serves the ill, the needy, or infants. Check its status in the IRS Tax Exempt Organization Search before the first pickup. Giving bread directly to people doesn't qualify.
2. Get the written statement. The charity has to state in writing that it will use the food for those purposes and won't trade it for money, property, or services. Get it at the start, not in April.
3. Donate only food that meets the food-safety rules. It has to comply with the Federal Food, Drug, and Cosmetic Act on the day you hand it over and for the 180 days before.
4. Keep a daily log. Record the date, item, quantity, that day's selling price, and the pickup signature. That log is your support for fair market value.
5. Track cost per item. A recipe-cost sheet, updated whenever flour or butter prices move, supports the lesser-of calculation and the cost-of-goods-sold reduction.
6. File Form 8283 when noncash donations top $500 for the year. An S corp or partnership files it with its own return. If it's missing, the deduction is denied to the owners.

Don't deduct waste twice

If you count inventory, product you throw out is already deducted, because it never makes it into ending inventory. If you expense ingredients when you buy them, it's deducted then. A separate spoilage or waste line on your P&L is for pricing and production planning. Don't put it on the return as an extra deduction.

What to do

1. This week: pick your food bank, confirm its status, and get the written statement.
2. Starting tomorrow: keep a one-page donation log at the back door. It costs nothing, and the deduction depends on it.
3. This month: cost out your top 15 items so you can reconcile the cost of donated product with cost of goods sold.
4. Before December 31: check with your preparer whether the business is a C corp or whether you itemize. If neither applies, decide whether a separate claim is worth making at all.
5. At filing: take the cost of donated items out of cost of goods sold, file Form 8283 if it's required, and keep the log and the charity statement with the return.

If your bakery donates product nobody tracks, or claims a deduction nobody can support, book a 30-minute Tax Leak Review, and I'll show you which way the money is leaking.

Tristan D. Taylor, EA

​tristandtaylor.com​