Gifting Commodities Instead of Cash Often Reduces Taxes
Many farmers regularly and generously give to their churches or other charitable organizations. This article reviews the rules for gifting a raised commodity directly to the charity, instead of selling the grain or livestock and then donating the proceeds. This strategy can allow some farmers to recognize both income tax and self-employment tax savings.
How it Works
If a farmer sells grain and then gifts the proceeds to charity, the income recognized from the sale is ordinary income to the farmer, subject to self-employment tax. Farmers who do not itemize deductions will recognize no tax advantage from the cash gift. In other words, a farmer with $10,000 of sales proceeds may have less than $6,000 after taxes to donate to the charity. Those who do itemize deductions (which is only available if your deductions exceed $25,100 in 2021 for married filing joint taxpayers or $25,900 in 2022), can deduct the value of the charitable gift from taxable income. This means the gift will reduce the amount of income subject to income tax. The gift will not, however, reduce the amount of income subject to self-employment tax.
Cash-basis farmers who donate a raised commodity, however, will save on both fronts. Donating the commodity, instead of the sales proceeds, means that the farmer will not recognize any income for the commodity itself. This means the producer will pay no income tax or self-employment tax on the value of the gift. This is particularly beneficial to farmers who do not itemize deductions. Even those who do, however, can benefit from the reduced self-employment tax liability. IRS guidance provides that a farmer who makes a charitable donation of a raised commodity can continue to deduct the expenses associated with raising that commodity. Treas. Reg. Reg. § 1.170A-1(c)(4). This is true even if the donation is made in the same year the expenses were incurred.[i]
Who is Eligible?
To recognize tax savings from the gifting of a commodity to a charity, farmers should consider the following:
- The commodity must be inventory in the hands of the farmer (crop share landlords cannot benefit)
- The farmer must use the cash-method of accounting (not the accrual method)
- Corporations, partnerships, and sole proprietors can make contributions of commodities to charitable organizations (there is no contribution limit)
- Farmers should certify their production to the FSA before donating the commodity
What are the Technical Requirements?
The most important consideration when donating a commodity to a charity is that the farmer must actually transfer title of the commodity to the charity before the commodity is sold. If the farmer delivers the grain to an elevator, for example, the warehouse or storage receipt must be made out to the charity. The farmer should also send a letter to the charity stating that the grain belongs to the charity and that the charity is responsible to store or sell the grain as it chooses. The charity, not the farmer, must give the elevator the instructions to sell the grain. If an actual transfer does not occur, the IRS will deem the transaction to be a transfer of the proceeds of the sale, not a contribution of the commodity itself. This will defeat the tax benefit of the transfer.
Farmers wishing to donate commodities to charities should consult with their tax advisors to ensure they follow all required steps.
Other Charitable Gifting Considerations
For those farmers who itemize deductions, charitable contributions can result in tax savings through a charitable deduction. When inventory is gifted to a charity, however, the charitable deduction is generally limited to the lesser of the fair market value of the property or the adjusted basis. Because raised commodities have no basis, there is no opportunity for a charitable deduction. A special tax rule does provide a limited deduction to farmers who contribute raised inventory constituting wholesome food to a charitable organization for the care of the ill, the needy, or infants. Treas. Reg. 1.170A-4(b)(1).
Those farmers who do qualify for a charitable deduction must ensure that they receive a “contemporaneous written acknowledgement” from the charity before claiming the deduction for any single contribution of $250 in cash or more. The acknowledgement must state that no goods or services were provided by the organization in exchange for the contribution. Without such an acknowledgement, the IRS will disallow the deduction if the taxpayer is audited. It is a taxpayer’s responsibility to obtain the acknowledgment before the tax return is filed. A cancelled check or other evidence of payment is not sufficient. Farmers claiming a charitable deduction for a noncash gift exceeding $500 must file Form 8283.
[i] A different rule applies to non-charitable gifts of commodities. With these gifts, associated expenses may not be deducted if the gift is made in the year the expenses were incurred.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.