Gifts of Commodities to Qualified Charitable Organizations

November 8, 2018 | Article

Considered the most significant tax code overhaul in over three decades, the Tax Cuts and Jobs Act was passed by Congress on Dec. 20, 2017 and signed into law by President Trump on Dec. 22, 2017. It includes provisions affecting both individuals and businesses, and while it simplifies taxes for some taxpayers, it has created new complexity for others.

Standard Deduction Increases
It has been estimated that nearly 90 percent of individual taxpayers will now utilize the increased deduction capabilities of the standard deduction. Not including additional standard deduction amounts for the blind or elderly, the Tax Cuts and Jobs Act increased the standard deduction for a couple electing to file “married filing joint” from $12,700 in 2017 to $24,000 in 2018. Additionally, the standard deduction for a single taxpayer increased from $6,350 in 2017 to $12,000 in 2018. The increase in the standard deduction amounts alone will likely generate enough tax savings to switch many individual taxpayers from claiming itemized deductions, and the law’s limitation (or complete elimination) of certain itemized deductions enhances that likelihood.

Impact on Charitable Contributions
The most commonly used itemized deductions include:

  • State and local taxes.
  • Home mortgage interest.
  • Charitable contributions.

With the standard deduction almost double the amount of prior years, the decrease in taxpayers claiming itemized deductions is expected to have an impact on charitable giving, primarily because the incentive to make a charitable contribution and receive a tax deduction will be gone for many taxpayers. However, in many cases, it may not matter. Individuals should give because they are passionate about the causes that charitable organizations support, not just because they will save money on income taxes. But, in those cases where the deduction does matter, better planning for those who wish to donate will make it much easier to realize a tax benefit.

Gifting Commodities
For example, let’s look at how these new changes have affected the agricultural community when gifting commodities. Cash basis producers can still make contributions of raised commodities directly to a charitable organization. The fair market value of the gifted commodity is excluded from taxable income of the donor, resulting in the potential for significant federal, state and self-employment tax savings. This is true even though no charitable deduction is allowed, as the tax basis of the commodity contributed is zero.

How does this strategy work to provide the maximum tax benefit? To achieve the desired results, it is very important that the following rules are followed:

  1. The donor must be a cash-basis farmer who is actively engaged in a farming activity.
    • Commodities gifted by an accrual basis farmer will not qualify.
    • Grain gifted by a crop-share landlord does not qualify due to the assignment of income principal.
  2. The donor must be sure that commodities gifted are not:
    • Collateral for a CCC loan.
    • Under a loan deficiency payment contract.
  3. The donor must ensure the commodity, not cash, is being given to the charitable organization.
    • Clear title to the commodity must pass to the charitable organization.
    • The title requirement can be evidenced by an assembly sheet or warehouse receipt in the name of the charity. When the donor delivers grain to the elevator, the producer must use the charity’s name on the assembly sheet.
    • The assembly sheet or warehouse receipt should be delivered to the charitable organization with a letter indicating the commodity has been donated. It also needs to indicate that the charity is now the owner of the commodity and has total control, including the ability to sell it at any time.
  4. The charitable organization must direct the sale of the commodity, as the donor is no longer the owner. Therefore, if the charity wants to cash out a commodity donation, the charity must call the elevator, not the donor, to request the commodity to be sold.
  5. If the commodity is delivered by a producer to a cooperative, the reporting of the commodity sale will be handled differently. Under normal circumstances, the sale of commodity by the producer will generate unit retains as reported on the 1099-PATR. Because the commodity is not being sold in the producer’s name, the bushels sold, and dollars collected should not be included on the producer’s 1099-PATR. However, it is important for the producer to keep a copy of the assembly sheet for the commodity donated to the charity, so the producer can prove their yields for FSA and crop insurance purposes. Also, it is important to review the 1099-PATR at the end of the year in which a donation is made to be sure the commodity sale was not included in the taxable total.

Remember, if the above rules are not followed, the IRS may treat the commodity donation first as a grain sale by the farmer, and then a subsequent cash contribution to the charitable organization, which is not the best result for the farmer.

The example above is just one of many that need to be considered when planning gifts to charitable organizations. To maximize your benefits and reduce the risk of unintended consequences, consult with your tax professional to discuss this or other strategies for charitable giving in the new era of taxation under the Tax Cuts and Jobs Act.

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