The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Commodity Gift Update
Jun 04, 2013
We got a couple of comments/questions regarding our previous post on commodity gifts.
"For a cash basis farm taxpayer, I was under the impression that care must be taken to assure that crop is gifted after the year in which the crop was grown. Otherwise, costs to create the crop need to be backed out of farm expenses and treated as basis for the contribution. I could be wrong on that point so could you address that issue?"
The reader's question and comment is correct for the gifts of commodities to non-charities. In that case, a farmer wants to make sure that they are gifting prior year crops instead of current year crops.
Eric gives 1,000 bushels of corn to his grandson worth $7,000. The gift is made right after harvest and is of the current year crop. When he prepares his tax return for the current year, he will be required to reduce his expenses by the percentage based upon the number of bushels gifted divided by total bushels grown. For example, if his total costs were $400,000 and he harvested 100,000 bushels of corn, he would need to back out $4,000 ($400,000 times 1% (1,000 / 100,000)) of expenses when filing his return since this was the "cost" of the bushels donated to his grandson. However, if he elected to wait until after year-end to make his gift, then he would not be required to back out any of the expenses.
Charitable gifts of commodities do not have this rule. You are allowed to fully deduct your expenses on schedule F, etc. A simple way of looking at it is that if you were required to reduce your expenses on Schedule F, you would then be allowed to deduct the costs of the commodity as a donation on your schedule A. The IRS has been beat up a lot lately, but this is a favoable decision by that IRS since the other way can be a pain to calculate and you would then lose the benefit of a reduction in self-employment income, etc.
Therefore, when making commodity gifts to non-charities, make sure to gift the commodity after the year it is harvested. This can be tougher with the contribution of livestock.
Another reader asks if the gifts of commodities to charities works for partnerships and corporations. The quick answer is yes. Since there is no deduction involved, the amount given will not show up on schedule K-1 as a charity donation, however, the primary benefit is the reduction in income subject to self-employment tax for partnerships and the possible reduction in AGI for higher income farmers that might be subject to the 3.8% net investment income tax.
A nice feature of these types of gifts for C corporations is that you no longer have to worry about the 10% of gross income limitations. If you make a cash contribution in a C corporation, the deduction for the current year is limited to 10% of your overall net income before the gift. However, you can have an unlimited commodity gift since there is technically no deduction to be limited. Also, if the corporation owner does not itemize their deductions, this is way of getting that deduction to flow through the corporation since the amount of grain donated will reduce the taxable income of the corporation.
If you have a choice between a commodity gift or cash gift to a charity, do the commodity gift every time. It will save you taxes.