Cows and Pigs and Chickens, Oh MY!: Gifts of Farm Assets
If you live or work in an agricultural area, it may come as no surprise that farmers donate things like harvested crops, livestock, and farm machinery to charity. It makes sense if you think about it. It’s what farmers have and they’re valuable assets that charities can sell.
Each of these three asset types requires specialized care when donated to charity, but once you know what to do, it’s pretty simple. When handled properly, these kinds of gifts can work out great for both the farmer and the charity.
Harvested crops, livestock, and machinery offer BIG opportunity for charities. The assets are valuable and easy to liquidate. They are typically much larger gifts than a farmer could make in cash. Most of the time, they are a much more tax-efficient gift for the farmer than cash. If your donor base includes farmers, you’ll want to get your “farm asset” gift program up and running sooner than later. Once you’ve used the resources in this chapter to get your infrastructure in place, start letting farmers know that they can donate crops, livestock, and machinery AND that you’re happy to accept them.
The most common types of crops you’ll probably run into are corn, wheat, and soybeans. After the crops have been harvested, farmers will transport them to the local grain elevator to sell. In the case of a charitable gift of crops – the farmer will deliver to the elevator in the name of a favorite charity. The charity contacts the elevator, requests them to be sold and the proceeds sent to the charity. It’s that simple.
If the farmer sells the crops herself, the proceeds are subject to ordinary income tax and self-employment taxes. There is often little to no basis in the crops; therefore, the entire sales price is subject to taxes. Needless to say, crops are highly taxable assets, which is one reason farmers will choose them as the best asset to donate.
They deliver the crops to the elevator in the name of the charity. The charity sells the crops, and the farmer does not recognize the income on the sale. The charitable deduction for ordinary income property is the lesser of cost basis or fair market value. The crops have little to no basis, so the farmer is not likely to receive any income tax charitable deduction for the gift. The gift does help them to avoid tax on income they may not need AND make a sizeable charitable gift. It’s much more efficient than selling, recognizing the income, making a gift of cash, and taking a charitable deduction for the cash gift. In most cases, the charitable deduction for the cash gift won’t off-set all of the income and subsequent tax the way a gift of crops does.
Gifts of crops tend to come seasonally – when it comes time to harvest. Depending on the growing zone, that’s usually in the late summer or early fall.
Farm animals, such as beef cattle and hogs, are the most common livestock gifts you’ll probably see. They are liquidated in much the same way as crops. Farmers transport them to a sale barn where they are sold by auction. In the case of charitable contribution, the farmer will deliver the livestock in the name of the charity. The charity works with the sale barn to auction the livestock and send proceeds to the charity. It’s a pretty straightforward process.
When a farmer sells livestock, the proceeds are subject to ordinary income tax and self-employment taxes. Just like crops, livestock are highly taxed assets. You can see why a farmer might choose this as a good asset to give.
Some types of livestock are considered capital gain property and thus, subject to lower capital gains tax rates. That only applies to animals used for “draft”, “dairy breeding”, or “sports”. So, unless your donor has animals that fall into these categories, their livestock is probably going to be considered ordinary income property.
The charitable deduction for ordinary income property is the lesser of cost basis or fair market value. Livestock tends to have little to no basis; therefore, the farmer is likely to receive no charitable income tax deduction for the gift. The gift does help them to avoid income and self-employment tax when sold, so it can be a very tax-efficient asset to donate. It’s much more efficient than selling, recognizing the taxes, and then making a cash gift to charity. The charitable deduction for the cash gift probably won’t off-set all the income associated with the sale anyway. The gift of the livestock will.
Big machines, like tractors and harvesters, cost a fortune. The newer models are extremely technologically advanced and can even be programmed to drive themselves. When farmers are ready to upgrade to a newer model, they will most often sell the older machine at a machine auction. Machine auctions tend to happen in Spring and Fall when the machines are not needed for farm activity. Farm machinery is considered an ordinary income asset and subject to ordinary income tax rates, which are the highest rates a taxpayer will pay.
While the farmer uses the machinery, she is likely to depreciate the value on her taxes. Depreciation provides a tax deduction for the decrease in the machine’s value over time. Depreciation also reduces the farmer’s “basis” in the asset. (Remember, basis is the amount you have invested in an asset.) When you sell, your taxable income is based on the difference between the sales price and your basis. If your basis has been reduced by depreciation, most or all of the sale price is going to be taxable and at those higher ordinary income rates. Machinery is not likely to be subject to self-employment taxes, but the sales prices are often very high and therefore come with a hefty income tax bill.
Farmers can donate their farm machinery to charity. They simply transfer the title to a favorite charity. The charity will often work with a machinery auctioneer to liquidate the machinery for them. That way, they are likely to get the highest sales price possible and the auctioneer takes care of just about everything to do with the sales process. Nice and easy for the charity.
Because the charity is selling the machinery, the farmer doesn’t recognize the income tax on the sale. The charitable deduction for ordinary income property is the lesser of cost basis or fair market value. If the farmer’s basis in the machine is low or zero, the resulting charitable deduction will thus be low or zero as well. The gift does allow the farmer to avoid the extra income on the sale, which is almost always more tax-efficient than selling, recognizing the income, and then making a cash gift to charity. The cash gift probably won’t off-set all the income from the sale the way an outright gift of machinery does.
Machine auctions can be really fun. Many farmers attend as a social activity – even if they aren’t bidding or selling. There might be food vendors and other activities happening. You might want to attend for the fun of it and to get a little publicity for your organization. It certainly can’t hurt to spread the word to those you meet that someone donated a piece of machinery and you’ll be selling it to further your mission. It just might inspire another farmer to do the same thing.