Gifting grain is a common tax planning strategy for farm operations. Gifting grain, rather than selling the grain and gifting cash, can result in tax savings. If you gift grain to an individual who is not in the business of farming, you get to deduct all of the expenses for the production of the grain but don’t have to pick up the income. The recipient (donee), claims the income on their tax return on Schedule D as a short-term capital gain. They report the sales price of the grain with no tax basis on their return. Since the transaction is reported on Schedule D, there are no self-employment taxes associated with the sale of the grain. This can allow you to avoid self-employment tax and also shift income from a higher income tax bracket individual to a lower income tax bracket individual.
Before you gift your grain, there are few things you need to now. First, you must gift actual unsold grain. Meaning the “title” of the unsold grain must be transferred to the donee and the donee must independently sell the grain. If you gift already-sold grain that is sitting at the elevator, this can be considered constructive receipt for the farmer, and a gift of cash to the donee, therefore making the commodity income taxable to the donor.
If you gift grain to non-charities, such as a family member, there are a few things to watch out for. If you gift to any one person in excess of $14,000 a year, then a federal gift tax return must be filed. You can gift in excess of the $14,000, but it uses a portion of your lifetime gift/estate tax exemption, which is why a gift tax return must be filed.
Grain gifted to non-charity donees must be given after the year end in which the donor incurred the expenses. If the grain is gifted the same year the expenses are incurred, then the basis in the expenses must shift to the donee. For example, you spent money on grain production in 2016 and you are a calendar year-end farmer. You must gift the grain that was produced in 2016 on or after January 1, 2017, in order to ensure you get to deduct the expenses and shift the income.
One thing to remember is that if you gift grain to someone who is under age 19 or is a college student under age 24, then kiddie tax rules could apply. This means that they will have to pay tax based on their parents’ tax rate, rather than their own.
Gifting to a charity doesn’t have the $14,000 annual gifting limitation. Also, when gifting to a charity, you are allowed to gift current-year crop. This can be a great strategy for individuals who can’t itemize but give money to charities every year, or for individuals who are limited on their charitable contributions due to their adjusted gross income being too high. If you are already gifting cash to your church or other charities, it can be very beneficial to consider gifting grain to those entities instead.