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The Farm CPA

RSS By: Paul Neiffer, Top Producer

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.

How Do We Treat the Grain Gifted?

Jun 09, 2013

Following up on our post regarding gifts of commodities to children and grandchildren, we had a reader ask the following question:

"In your example of Eric gifting to his grandson, does the grandson have to report this gift as income in either case (gifting in the current crop year or the following year)?"

In general, the receipt of the gift by the child or grandchild is not reported as income until they sell the grain. The child will receive a basis of zero (assuming a gift of a prior year crop) or a basis equal to the amount of cost allocated to the grain gifted. In our Eric example, he allocated $4,000 of cost to the 1,000 bushels of corn, so his grandson would have this as his cost basis.

If his grandson holds the grain for at least a year from the time of harvest, this will qualify for long-term capital gains treatment, otherwise, it is short-term. In most cases, the "Kiddie" tax will apply and the (grand)child will have to use the tax bracket of their parents. This almost always applies for kids that are in college or younger and being supported by their parents.

Also, if the fair market value of the grain gifted is greater than $14,000, you will be required to file a gift tax return. You will not owe any gift tax, but a return is required (unless you have gifted more than $5.25 million during your lifetime, then gift tax will be owed).

Example #1 - Eric's grandson is gifted 1,000 bushels of corn (from the previous year). The value at the time of the gift is $7,000 and the his cost basis is zero (since this is the previous year's crop). The grandchild sells it a month later for $8,000 and will report a short-term capital gain of $8,000. His tax rate will most likely be based on his parent's marginal tax bracket. If the grandson had held the crop until at least a year had passed from the time of harvest, it would be taxed as long-term capital gains.

Example # 2 - Same facts as number 1, except this is a gift of the current crop. In this case, $4,000 of basis is allocated and the grandson will have a short-term capital gain of $4,000 instead of $8,000.

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