Charitable Gifts of Commodities Have More Value Under Tax Reform

Farmers who currently do not itemize their deductions can still get a tax benefit from grain or other farm commodities donated to their favorite charity.  The farmer will not get a deduction for this donation, however, they also do not recognize the income from the gift.  For Schedule F farmers, this is even more valuable since it will not be subject to self-employment (SE) tax.

Let’s look at an example:

Assume Farmer Alex farm as a Schedule F farmer and earns $110,000 from his farm operation.  He files a joint return with his spouse and does not itemize.  He is currently in a 25% tax bracket and is subject to the full 15.3% SE tax rate.  He has two options.  He can give $10,000 in cash to his church or he can simply reduce his Schedule F income by $10,000 and donate this amount of grain to his church.  Option #1 gains him nothing since the cash donation is less than their standard deduction (there may be some state income tax savings).  Option # 2 saves him about $3,830 ($2,300 of income tax and $1,530 of SE tax (income tax is increased by the reduction of the SE tax deduction)).

Now under tax reform, the standard deduction is almost double the current standard deduction.  This would allow Farmer Alex to increase his donation from about $10,000 to close to $20,000 or more and enjoy an increase in the tax savings compared to current law.  This is due to him being able to reduce his Schedule F income by up to $20,000 and still getting to deduct the standard deduction.

Now, the only negative with this approach is that no exemption deduction is allowed for Alex and his spouse under tax reform.

We will keep you posted.

 

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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