In light of current grain prices, it’s easy to feel less than charitable. However, if you properly structure your sales, you might be able to achieve a premium for a portion of your stored grain. Let’s explore a few opportunities available to cash basis farmers and materially-participating landlords, who might be feeling a little discouraged because they didn’t contract more grain this past summer.
Charitable contributions: To receive an actual tax benefit for your charitable cash contributions, you need to itemize your deductions. For 2014, the standard deduction for a couple filing jointly is $12,400. If you are over 65 years of age, add $1,200 for each person. Unless your itemized deductions exceed $12,400, you will simply use the standard deduction and technically lose the tax benefit.
As a cash basis farmer, let’s assume your goal is to contribute $6,000 to your church or favorite charity. While an actual cash contribution will work, it will not produce the same tax benefit as transferring grain to the charity. With the transfer of your grain, you have the potential to receive a premium of more than 35%. In order for your charitable contribution to produce a tax benefit, you need to transfer the title or ownership of grain to the charity. This will allow you to effectively remove the sales proceeds from farm income, while eliminating federal, social security, medicare and state income taxes. It’s important to remember: The title has to transfer to the charity prior to a “sale,” and the option to sell the grain has to be at the discretion and direction of the charity.
College savings for a family member: Take the opportunity to transfer grain or livestock to set up an educational savings account for your children or grandchildren. They can then sell the commodity, at their discretion, reporting the transaction as a capital gain. Be aware congress placed anti-abuse provisions on unearned income of children in the form of a “Kiddie tax,” meaning they could pay tax on the capital gain at the tax rate of their parents.
The transfer of grain or livestock requires an additional step regarding the timing of the transfer. If the transfer of grain or livestock occurs during the year of production, you will need to reduce your cost of production, which becomes the carryover basis to your child upon subsequent sale. A transfer following the year of production does not require an adjustment and, depending on your particular circumstance, could have a potential premium of 14% to 35%.
Saving taxes on current employees: Save on social security and medicare taxes for your farm employees by payment of commodities. If you pay your spouse or children over 18 years of age, social security credit earnings should be a determining factor. Since this will impact the employee’s social security credits, both parties should consider the merits of this arrangement.
Trading your grain for vehicles to avoid sales tax: In Missouri, for example, a farmer can trade commodities to a local automobile dealership to purchase a new or used vehicle for “farm use” and omit sales tax. This might be cumbersome if your grain dealer is unfamiliar with the process; however, avoiding the current sales tax on the purchase of a vehicle could result in a 6.1% premium. Remember to include the value of the trade as farm income on your schedule F, and the expense will be the depreciation deduction on that particular vehicle.
The important point to remember in all of the above transactions is the title of the commodity must change hands prior to any sale. After the change in title, all subsequent decisions are at the discretion of the transferee. The success of implementing each of the above strategies requires adherence to the applicable documentation standards.
These strategies might not be applicable in some situations, so consult your tax adviser prior to entering into any commodity exchange transactions.
This column is not a substitute for tax advice.