Charitable Gifts of Grain
If a farmer is charitably minded, he or she should consider making a donation of grain to their favorite church or charity. The tax advantages of donating commodities far outweigh those for a contribution of cash. It could mean hundreds or thousands of dollars in tax savings.
A cash donation is made from the sale proceeds of the grain. Therefore, the sale is reported on Schedule F and is included in both taxable income and self-employment income. It is also taxable for state income tax purposes. To receive a tax deduction, the donor must itemize their personal deductions on Schedule A. As you may be aware, the standard deduction for 2018 has increased significantly. You may not be able to itemize your charitable deductions due to this higher standard deduction. Thus, you may have no tax benefit of the cash donation.
Even if the farmer can itemize, he or she does not get any relief from self-employment tax or state income tax. That is 21 cents of every dollar going to tax that the farmer may be able to avoid (self-employment tax (15.3%), state (3.23%) and county income tax (2.6% in Tipton County).
Gifts of Grain, instead of cash donations. Be Careful, the IRS is particular with steps to follow. Don’t worry, the steps are easy to follow.
- Present a letter to the charity telling them you are making a contribution of a commodity. The letter should describe the commodity and the quantity being contributed.
- The letter should ask the charity where and when they want the commodity delivered. In “IRS speak” the charity must have dominion and control of the commodity.
- Keep a copy of the letter.
- Make sure to get a receipt from the charity for the amount of the donation.
- Do not report the donation on Schedule A. The farmer is not entitled to any additional The tax benefit comes from deducting the production expenses and not reporting the sale on Schedule F.
The following example illustrates the tax advantage of a charitable gift of grain:
Freddie and Frieda Farmer normally make a $10,000 annual contribution to their church. In 2018, they give the church 2,000 bushels of corn when the market price is $5.00 per bushel (Corn worth $10,000). Assuming the Farmers have not exceeded the maximum self-employment tax limit, they will save 15.3%, or $1,530 of self-employment tax. They will save 12% (depending on their tax bracket), or $1,200 of federal income tax and 3.23%, or $323 of Indiana State income tax and 2.6%, or $260 of Tipton County Tax.
The total tax savings from the gift of the corn is $3,313.
If they are able to itemize, the savings from a $10,000 cash gift would only be $1,200.
A difference of $2,113 in tax savings of gifting grain rather than gifting cash.
If they are unable to itemize, nothing.
That is thousands of dollars in tax savings by following a few simple steps. Gift grain and not cash.
What Freddie and Fredia should not do…
Do not take the commodity to market and ask the elevator to make the check or partial check payable to the charity. The IRS could take a position that the farmer had constructively received the money and then gave the money as a donation.
If you have questions, please don’t hesitate to give our office a call and talk with one of our CPA’s. 765-675-7021