We had an advisor send us the following question today:
"We have a farm client who is a cash basis tax payer. He is considering making a gift of grain to charity in 2014. In your opinion, would it be necessary for him to make that gift out of grain harvested in 2013 or could he use grain harvested in 2014, and still be allowed to deduct the cost of production on those bushels given in addition to taking the charitable tax deduction?"
When you make a gift of raised grain to an individual such as a child or grandchild, it is important that the gift is of grain harvested in the previous tax year. Otherwise, if the grain was harvested this year, you are required to reduce your current year expenses by the cost of raising that grain. This can be a pain to calculate and reduces the self-employment tax savings that come with a prior year tax gift.
Now, with the contribution of grain to a charity, we no longer care whether the crop was harvested this year or in previous years. The tax law allows you to completely deduct the costs associated with the grain on your schedule F. Most likely, the main reason for this is that any cost allocated to the grain would be allowed as a charitable deduction, therefore, the law does not require this calculation.
However, the last part of this question results in a double deduction which would not be allowed. Since there is no cost allocated to the grain that is gifted, there is no charitable deduction to report. Rather, since you are reducing your schedule F income by the amount of grain given, this essentially results in your charitable deduction. You are not allowed to deduct both on schedule F and on schedule A.
There is a double bonus to making these types of gifts if you are subject to the new net investment income tax. By making a charitable gift of grain, you reduce your adjusted gross income resulting in a 3.8% reduction in your tax liability and also reducing your self-employment tax by at least 2.9%.