Yesterday's post generated more comments than normal. This post will try to answer all of the questions raised.
Q. My understanding is that I have to gift grain that was harvested in the prior year. Is that correct?
A. No. You need to give grain harvested in the prior year only if you give it to your kids. If you give grain to your kids of current year grain, you then have to reduce your expenses by the amount attributable to the grain. However, grain gifted to a charity can be this year or previous year's grain. 100% of the farm's expenses are allowed on your Schedule F.
Q. Does this work for pass-through entities or C corporations?
A. Yes. The same concepts apply. Additionally, it can even work better for C corporations. Those entities are subject to a 10% of taxable income limitation on deducting cash donations. There is no limit on grain donations.
For example, assume the farm corporation generates $50,000 of taxable income and wants to donate $20,000. If the farm donates cash, it drops its income to $45,000 (only $5,000 is allowed as a deduction). The remaining $15,000 is carried forward to future years. However, if they simply donate grain, it drops their income to $30,000 (since they did not sell the grain) and they essentially get the full $20,000 deduction immediately.
Q. Does this work for livestock?
A. It can work for livestock but it is "messier". You need to prepare a bill of sale to the charity and the make sure the charity is responsible for all costs of feeding and caring for the livestock including disposing of it.