Charities in agricultural areas are reporting increased interest by operating farmers in gifts of crops. There are basically two ways farmers can execute a gift of crops to charity:
A charity that is given a warehouse receipt for crops can wait until the market value of the crops is high and then cash in the receipt. Neither the harvesting of crops nor the contribution of crops to charity by an operating farmer causes the farmer to realize any income. This is true whether the crops themselves are delivered or a warehouse receipt for the crops is contributed. However, since the crops are ordinary income property, the operating farmer’s contribution is reduced under IRC §170(e)(1)(A) to his cost basis in the crops – probably close to zero.
What is the tax advantage to the farmer in a gift of crops? Why not simply sell the crops and donate the cash proceeds? The sale/contribution plan creates a charitable deduction that seemingly should offset federal and perhaps state income taxes, assuming the farmer itemizes deductions. But income from the sale will boost the farmer’s self-employment tax, which can’t be offset with a contribution deduction. Recognizing income from the crops may also trigger collateral tax damage, such as pushing the farmer into a higher tax bracket, exposure to AMT, etc. Here is an example of a direct gift to charity of grain worth $10,000 compared to sale-gift-of-proceeds:
If farmer cashes out the warehouse receipt, he must report income of about $10,000. Furthermore, he would owe $1,530 in self-employment tax leaving only $8,470 for a charitable gift. Federal and possibly state income taxes would be due on 50% of his self-employment tax.
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