BY CURTIS SAWYER, CPA
No one wants to see hard grown crops go to waste, but surplus crops happen. Fortunately, a recent tax law change has created an opportunity for farmers to support their communities by donating surplus crops to hunger relief organizations in exchange for a charitable donations tax deduction.
What is the potential benefit for my farm?
Cash basis growers can now deduct 50% of the fair market value of donated food to qualified organizations.
How does the charitable donations tax deduction work with my surplus crops?
A special rule permits an enhanced charitable contribution deduction for food donations to qualified organizations. The deduction is the lesser of:
- twice your tax basis of the donated food, or
- your tax basis plus one-half of the appreciation (the difference between fair market value and tax basis).
Cash basis growers have not previously been able to benefit from the food donation tax deduction since their basis is zero (because they do not record inventory costs), but Congress recently passed legislation permitting cash basis taxpayers to elect to deem the tax basis as 25% of the fair market value of the donated food.
What food qualifies for the charitable donations deduction?
The food must be “apparently wholesome”, which is defined by the Bill Emerson Good Samaritan Food Donation Act as “food that meets all quality and labeling standards imposed by Federal, State, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus or other conditions.” The description is intentionally broad to ensure food that might be a little unattractive or nearing the end of its life will not go to waste.
What organizations qualify to receive my food donations?
The recipient must be a qualified tax-exempt organization, and the food must be used for the care of the ill, the needy, or infants. Your local food bank most likely qualifies, and there are also many hunger relief organizations willing to accept donated crops.
Is there a limit to the food donation tax deduction?
The deduction cannot exceed 15% of your net income for the year. If you cannot use it all in one year, it can be carried forward for future use.
How do I claim my charitable donations tax deduction for donated crops?
To claim the deduction, the receiving organization will need to provide you a written statement confirming the donated food will be used exclusively for the care of the ill, the needy, or infants. This statement will need to be in hand by the tax return filing date.
Additionally, the following information should be maintained for each donation:
- Description of the food
- Name and address of organization receiving the donation
- Date of donation
- Fair market value of the food on the date of the donation, and
- How the fair market value was determined (comparable sales, etc.)
For example, say Aldrich Farms is a cash basis farm growing vegetables. As harvest comes to a close, Aldrich Farms has an abundance of green beans. The green beans have a fair market value of $100,000 and no tax basis because all costs to grow the beans have been expensed along the way. The bumper crop has buyers at capacity, and Aldrich Farms is short on storage so instead of paying to store, sell, transport or dispose of the excess, Aldrich Farms reaches out to the local food bank to see if they have a need for the green beans. The local food bank happily accepts the donation and provides Aldrich Farms with the necessary documentation to support the deduction. Come tax time, Aldrich Farms takes a deduction for $50,000 (50% of the fair market value), which assuming a 40% tax rate, results in a tax savings of $20,000.
If you have excess crops and are looking to take the next steps in earning a food donation tax deduction, please reach out to our Aldrich Agribusiness team. We are here to talk through all of your donation considerations and can even help you find a hunger relief organization.