Taxlink by Andy Biebl

There is a perception that writing a check to your church or other charity produces a full tax deduction. But that's becoming increasingly problematical. For upper income filers (over $250,000 of adjusted gross income on the 1040), itemized deductions, including charitable contributions, are subject to phase-out. And for others, especially those without large residential mortgage interest deductions, the itemized deductions are often of modest benefit due to the standard deduction alternative of over $12,000. Bottom line: A $10,000 charitable contribution may be effectively reduced to a smaller deduction as it works its way through your 1040.

Here are some strategies to consider that help your favorite charity and your tax return.

GIFTS OF INVENTORY

Farmers using the cash method of accounting for tax purposes have a unique opportunity. Their raised grain has a zero tax basis (i.e., all costs of producing that grain were deducted as disbursed). As a result, a gift of unsold inventory, followed by the charity's sale, effectively shifts the income from the farmer-producer to the tax-exempt charity. This is highly efficient from a tax standpoint, as it not only eliminates 100% of the value from the donor's tax return (with no dilution from itemized phase-outs or standard deduction offsets), but also avoids the self-employed Social Security tax on that amount of income.

DOING IT RIGHT

This is not about strolling into the elevator, selling $10,000 of grain, and instructing the elevator to send a check to your church. That would be an assignment of income in the tax law, causing the sale to be taxable in your return. Rather, the key is that the asset (i.e., unsold grain) is donated to the charity. That's the first step; the second step in the process is for the charity to independently sell the grain, not the donor. A solid approach is to get the desired quantity of grain into commercial storage, and then change the title on those bushels to that of the charity. After the title is transferred to the charity, the charity decides when to execute the sale.

The farmer doesn't claim an income tax deduction due to the zero tax cost in the inventory. The tax benefit is the elimination of the income, effectively taking the deduction off the top of the tax return. This strategy also works for those who farm within an entity, such as a partnership or corporation that raises grain and makes the gift, but isn't available to a crop-share landlord.

Raised grain is the ideal asset to convey, because of the simplicity of changing title to the charity. Livestock can be impractical, as it's hard to separate the change in ownership from a later sale event (i.e., who cares for the animals during that interim?). It's better to use grain and avoid these hassles.

CAPITAL ASSET GIFTS

Another opportunity arises for those with appreciated stocks and mutual funds. Capital assets held over 12 months that are donated to charity are deductible at current market value rather than cost. Again, the key is to transfer the unsold security to the charity and let the charity execute the sale.

Editor's Note: Andy Biebl is a CPA and principal with the firm of CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., and a national authority on ag taxation. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future columns, e-mail AskAndy@dtn.com.

(MZT/AG/CZ)

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