Gift of Farm Commodities
We had a reader ask the following question as a follow up to our post of gifts:
“Please touch on one more aspect of gifting. Gifting grain and the tax owed by the recipient. Thanks, I enjoy your emails.”
Cash method farmers have had many situations where the gifts of farm commodities to family members could be advantageous:
- Moving income to minor children in a lower tax bracket,
- Helping with college costs for children of the taxpayer,
- Supporting parents of the farmers.
With the expansion of the kiddie tax in 2008 to dependents up to age 23 attending college, this reduced the advantage of making gifts of farm commodities to relatives, but not completely. The farmer still removes this income from their schedule F and if self-employed, neither the farmer or child will pay self-employment taxes on the gift.
One thing to remember is to gift farm commodities that were raised in the prior year since there will be no reduction in operating costs related to the commodity gifted (if gifted in the year of production, you have to reduce your operating costs by amount attributable to the gift).
If the family member is not a dependent under age 24 (if going to college), the income tax effect to them is very straight forward. The basis in the commodity carries over, most likely zero (unless gifted in the year of production). The grain is considered a capital asset in the hands of the donee and if sold in less than a year, it is subject to ordinary income tax rates. If held more than a year, it is subject to favorable capital gains rates. In the case of parents that the farmer is supporting, they may only have social security income and could easily earn another $10-20,000 of gifted farm commodity income and pay no tax, or if held for more than a year, they could easily double or triple that amount in certain situations for 2011 and 2012.
For dependent children, it is likely that the kiddie tax will apply and the child will pay income taxes on the sale of the grain based upon the farmer’s tax rate. Therefore, there is minimal income tax savings, but there can be substantial self employment tax savings.
One last reminder is that you must make sure to document the gift properly and the person receiving the commodity must have actual control and ownership before selling the commodity and you should review this with your tax advisor to make sure it is done properly.
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 principal with CliftonLarsonAllen in Walla Walla, 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. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Please comment on the tax ramifications of gifting farm commodities to a charitable foundation.