Ask the Taxman: How Do You Claim Charitable Gifts of Animals? — DTN


    I saw your commentary about making gifts of inventory to charity. We have a dairy operation, and some of our dairy friends instruct the sales yard to send the proceeds of one or more of their culled cows directly to a charity. Is this treated the same as gifts of inventory? And is this OK for any number of animals?


    Charitable gifts of productive animals, such as dairy cows that produce capital gain on sale, generally receive the same tax treatment as gifts of inventory or resale animals. In other words, the taxpayer who makes the donation avoids the income that would occur from sale, but there is no charitable deduction (gifts of appreciated tangible personal property receive a charitable deduction equal to tax basis, which is zero).

    Secondly, the only limit on gifts is essentially your generosity. Cash contributions for which you claim charitable deduction have an annual percentage-of-income limit, but this does not apply where no deduction is taken in the tax return.

    The manner in which you described the action of your friends would not pass muster with the IRS as a charitable gift of unsold property. As I explained in the previous questions on charitable gifts a few months ago, the donation must be accomplished as a two-step process:

    1. The farmer moves title or ownership of the commodity or animals to the charity; and
    2. The charity independently accomplishes the sale.

    The transaction you describe above, where basically the dairy producer sells the animal and directs the purchaser to send a check to the charity, is simply an assignment of income. The producer would be taxed on the sale, but then could claim a charitable deduction for those proceeds sent to the charity (assuming there is any benefit for itemizing charitable deductions). In fact, selling the animals at a capital gain tax cost (generally a 15% or 20% rate) and then giving the proceeds to charity (to gain an ordinary deduction at perhaps a 25% or higher rate) is a better answer than attempting to structure a gift of unsold breeding or dairy animals.

    The most efficient commodity or livestock gifts to charity are those that produce ordinary income and self-employed Social Security tax. Avoiding that income can be a significant savings. But again, the execution in two separate steps is critical. For that reason, it is better to do these gifts in grain where title can be easily transferred. Separating a gift of animals from a later sale by the charity is difficult to execute.


    I am a 63-year-old farmer with passive and active farm income. I sell my crops the year after production. I am planning on retiring at 66 and drawing Social Security benefits. Please explain how passive versus active farming will be taxed and how it will affect my Social Security at my retirement.


    When you indicate “passive and active farm income,” I assume you mean passive rental income versus your own actively conducted farming operations. Presently, you should only be paying the self-employed Social Security tax on your active farming; the rental income, whether cash rent or crop share, should not be subject to self-employment Social Security tax if it is passive as you described.

    If you were to begin drawing Social Security benefits today (between age 62 early eligibility and age 66 full retirement age), there would be a limit on how much active self-employed or salaried earned income you can receive without causing payback of those Social Security benefits. But instead, you indicate that you will not draw Social Security benefits until age 66. At that point, the Social Security benefits are payable to you regardless of whether you have actively earned farm income or have converted all to rental status. So the bottom line is that by waiting until age 66 for benefits, you have complete flexibility as to whether all income is in passive rental status or whether you continue to actively farm some of your ground.

    The collection of the deferred farming income will be subject to the self-employment tax and, if you do continue farming, perhaps with a custom farming arrangement that doesn’t require significant time on your behalf, you will continue to be paying into the Social Security system on that portion of your net income.

    When you do begin collecting Social Security benefits at age 66, there is a separate income tax issue that can arise. Social Security benefits can be subject to income tax in your Form 1040 if your total income exceeds roughly $34,000 joint or $25,000 single. There is a complicated formula that causes reporting of your Social Security benefits on page 1 of your 1040 as income. The formula keeps escalating the portion of benefits that is taxable until 85% of the total you collect is reported as income. That formula does not care whether the income is active or passive; rather, it focuses on the total adjusted gross income in your 1040.


    I am planning to retire this year and it is raising some complex questions. I am a 50% partner in a farming partnership with my brother. How can I sell my interest and avoid paying a large portion in taxes? And how do we come up with a fair value for a 50% share?


    Selling an interest in a farming business is a difficult tax matter, due to all of the ordinary income associated with cash method deferrals. You do not indicate whether your operation includes grain and/or livestock, and whether the partnership might also include farm machinery and possibly land. A good first step would be to get tax advice on the character of each asset group within the partnership. For example, your share of the unsold grain represents ordinary income property. The same applies with depreciable equipment. But there may be capital gain treatment if there is raised breeding stock, and of course capital gain if there is any land inside the partnership and you are selling your share of that property.

    Another step to consider is whether you and your brother may prefer to distribute assets out to the partners, and each go your own way in terms of completing the disposition. For example, the unsold grain might be distributed to each of you 50-50, and then you each market that grain based on timing that fits your particular 1040 tax situation.

    In terms of valuation, we generally find that our clients are capable of getting to those amounts without the need of a formal appraisal. Certainly the grain and livestock can be valued based on your knowledge of current prices. With respect to machinery, you may need to use a machinery broker or equipment dealer to assist in valuation. If there is land, it likely would make sense to secure a good appraisal.

    If you do sell your share of the partnership to your brother, the tax rules look inside the partnership to determine the various asset components you are selling. And that further determines what portion of the payments can be taxed over time. There are some portions of the sale that result in immediate income recognition, such as the depreciation recapture on your share of the equipment. But other portions of the sale, such as values allocable to land or to raised breeding animals, can be spread out on the installment method.

    This is a case where good planning is critical. Ideally, you might have begun this process a bit earlier than just a year ahead. But even so, careful tax analysis and good planning can go a long way toward minimizing the tax costs. In addition, there are also some deductions, such as funding a retirement plan that might make sense in the next few years if you have high earned income from your share of the grain and any resale animals. And finally, farm income averaging may soften up the federal income tax rate.

    DTN Tax Columnist Andy Biebl is a CPA and principal with the accounting firm of CliftonLarsonAllen LLP in New Ulm and Minneapolis, Minn., and a national authority on agricultural taxation. He’ll address more detailed tax strategies for retirement at an Ag Summit workshop in Chicago Dec. 7 To pose questions for upcoming columns, email

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