There are substantial tax advantages in making a gift of crops that do not exist with the traditional type of charitable donation made with using a check or cash, says Marc Lovell of the University of Illinois Tax School and Department of Agricultural and Consumer Economics.
For example, a farm couple gives a total of $5,000 to their local church in the form of weekly checks. In order to obtain any tax benefit from the $5,000 donation, however, they must itemize their deductions for the year, instead of claiming the standard deduction.
For 2014, the standard deduction is $12,400 for a couple filing jointly. The couple will need a substantial amount of other itemized deductions in order to make it worthwhile to itemize their deductions rather than claim the standard deduction, Lovell says.
Generally, if they don't itemize, there will not be any tax benefit from the usual cash-or-check $5,000 charitable donation. If they instead give the church a gift of crops with a value of $5,000, the following advantages may exist:
• The value of the donated crops is not included on Schedule F
• The expenses associated with the production of the donated crops are deductible on Schedule F
• There are no federal or state income taxes paid on the value of the donated crops
• There is no self-employment tax paid on the value of the donated crops
• Yield records are not affected by the donation
With a crop donation, tax savings from the donated crops will still exist whether the couple chooses to itemize deductions for the year or claim the standard deduction. If it isn't worth itemizing deductions in 2014, they can claim the standard deduction of $12,400 and still obtain all of the tax advantages of the donated crops, Lovell says.
In addition, with self-employment taxes now at 15.3%, the overall tax savings from donated crops can be substantially higher than the tax savings that results from the ordinary cash-or-check type of donation, which generally does not provide a self-employment tax savings, he says.
Dominion and control
An important aspect of donating crops under the Tax Code, Lovell says, is for the farmer to ensure that full "dominion and control" over the crops donated is relinquished.
In order to satisfy this tax requirement, after the donation of the crops the farmer cannot retain any legal right to recall the crops or even direct what happens with them.
Care must generally be taken by the farmer not to instruct or direct the charity on the subsequent sale or other aspects regarding the donated crops, since this might provide evidence that the farmer's dominion and control over the crops was not, in fact, fully relinquished, Lovell says.
It is important to properly document the farmer's full relinquishment of dominion and control over the donated crops in order for the farmer to be able to establish that the crop donation meets the requirements of a gift under the Tax Code.
Immediately after the donation, the charity should take responsibility for and storage costs and sale expenses, and should assume any risk of loss in connection with the donated crops. Many charitable organizations have experience with crop donations and are quite familiar with how administer such donation in the charity's best interests after it has been made by the farmer, Lovell says.
Farmers should contact their tax advisor for specific instruction on use of this tax strategy," Lovell says.
For more details, read the original entry, " Donating Crops Can Mean Substantial 2014 Tax Savings for Farmers" on FarmDoc Daily.