This morning, I had to dig out a long-sleeve shirt, which signals that fall is coming. I have always enjoyed fall, not just because of the much-needed reprieve from hot temperatures, but also for the many wonderful events it brings — fall colors, trick-or-treating for the kids and Thanksgiving gatherings with family.
But fall also brings the culmination of the year’s efforts in the form of harvesting crops and weaning time. It’s so enjoyable to see the hard work and challenges come to fruition.
As you begin to anticipate the financial rewards soon to come, I challenge you to stop for a moment to evaluate if you are maximizing the use of those funds. Is there a way to make our money go further? Could you donate some of that grain or calves before their sale in a way that helps both you and local charities?
Trouble with cash donations
Let’s consider the following example for a cash donation:
Assume you are about to sell $10,000 worth of something such as grain or calves. If you sell those assets, at the end of the year you must pay taxes on the sale. If you are in the 12% federal tax bracket, you write a check for $1,200. If you are in the 22% bracket, it’s $2,200. In my home state of Missouri, the state income tax rate is 5.4%, so that’s another $540.
If your farming operation is profitable, you get to pay 15.3% into self-employment tax for Social Security and Medicare. (It does not cost exactly 15.3% because you get to deduct a portion, but for simplicity, let’s use that figure.) So, for the 12% bracket taxpayer, it’s a total bill of $3,270. Add another $1,000 if you are in the 22% bracket.
Many individuals desire to give back to charitable organizations such as their local church. If a person takes the $10,000 cash received from the sale and donates it to their favorite charity, and if you have enough other deductions to itemize totaling greater than the standard deduction, the donation may save you some money at tax time. If you have enough deductions, you may save the federal and state taxes, but you are still required to pay the self-employment tax regardless.
However, in 2017, the Tax Cuts and Jobs Act doubled the standard deduction. Therefore, many taxpayers no longer have a benefit to itemizing simply because the standard deduction everyone receives is so much higher.
In 2021, the standard deduction for a married couple filing jointly is $25,100, so unless your itemized deductions are greater than that, you will not receive any financial benefit from the donation as tax savings. The taxpayer still pays $3,270 (or $4,270 in the 22% tax bracket) in taxes at the end of the year, even after the $10,000 donation.
Consider asset contributions
But what if rather than donating the $10,000 as cash, you donated the asset to a local charity before its sale?
You could deliver the grain to the elevator with a storage or warehouse receipt made out to the charity. Then send a letter to the charity stating that the grain belongs to the charity, and they can sell it as they see fit. The farmer must relinquish dominion and control over to the charity, and the commodity cannot have any prior sale or pricing contract.
Now, since the farmer does not sell anything, no income taxes are owed. The charity is a nonprofit, so it does not owe tax either. The farmer just saved $3,270 in taxes. The $10,000 donation only cost you $6,730 because you did not have to pay the $3,270 in taxes at the end of the year.
In essence, the charity receives $10,000, but only $6,730 comes from you — the remaining $3,270 comes from Uncle Sam (and your state department of revenue).
You must work closely with your income tax professional because there are specific steps required by the IRS to ensure the intended tax benefits. Title to the asset must be transferred prior to sale. The charity must decide when to sell it, not you.
You cannot just deliver grain to the elevator or calves to the sale barn and say make the check out to the charity. However, with some prior planning and needed paperwork ahead of time, your donation can create tremendous income tax savings and allow you to give even more to your local charity.
Tucker is a University of Missouri Extension ag business specialist and succession planner. He can be reached at firstname.lastname@example.org or 417-326-4916.