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The advantage of giving gifts of grain or livestock instead of cash can be both a savings in income taxes and/or self-employment tax. In 2003 the standard deduction for a married couple filing jointly was $7,950. This is the amount that you have to exceed on your Schedule A with your itemized deductions before it pays to itemize. Itemized deductions include such things as medical insurance, medical bills, state income tax, property taxes, interest paid for personal residence, and charitable contributions. Your medical insurance and medical bills have to be reduced by 7.5% of your adjusted gross income leaving only the difference to be used as an itemized deduction. With 100% deductibility of self-employed health insurance on the front of the 1040 in 2003, this will made it even more difficult for medical expenses to be used as itemized deductions. The majorities of farmers don’t itemize, but use the standard deduction; therefore, the charitable contributions are lost as a tax deduction. What would happen if the charitable contribution were in the form of a gift of grain or livestock rather than a cash contribution? Example: Gifting 1,000 bushels of corn to a charity would in essence create the “tax deduction”. You don’t report the 1,000 bushels of corn as an itemized deduction and you don’t report it as income on the Schedule F. You deliver the corn to the elevator and do a transfer of title to the charity. Then the corn is sold and a check made out to the charity. It is important you don’t just sell the corn and have a check made out to the charity; it must be transferred to the charity prior to the sell. What if the 1,000 bushels of corn was sold first and then cash paid to the charity? Taxes would now need to be paid. Assume the corn is worth $2.40 per bushel, and the reported income on the Schedule F would then be $2,400. The income taxes and self-employment tax on $2,400 is approximately $840. If the farmer gives the corn as a gift, it results in a tax savings of $840. Even if you are someone who does itemize and you decided to sell the grain and make a cash charitable contribution of $2,400, you would still be better off by gifting and thereby saving in the self-employment tax, which would be about $360. Corporations can also benefit by gifting to charities. Corporations are limited to 10% of their taxable income for cash contributions. If gifting is utilized, there is no income to report and no charitable contribution to report. You may use current years’ production or a previous years’ production for gifting to a charity. You need not reduce your expenses by that amount that was required to raise what was sold. If you are to gift to a non-charity, such as your children, then you want to gift a commodity that was raised the previous year to avoid reducing your Schedule F expenses by the cost of raising it. Gifting has a place and is probably underutilized as a tax savings device. Be sure that your charity is willing to accept the responsibility of receiving commodities or livestock as gifts. When they issue year-end statements accounting for your contributions, the statement should distinguish between cash and non-cash or not list the commodities or livestock at all. For more information on gifts of commodities or livestock, contact your local tax advisor or CPA. |
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