Nothing encapsulates the spirit of summer more than the fair, whether it’s a 167-year-old tradition like the Indiana State Fair, attended by nearly one million people annually, or a more local event populated by neighbors (and animals) from across the county. These fairs capture the spirit of simple camaraderie and recreation in a way few other events can, drawing people in with rides, concerts, and almost comedically indulgent comfort foods (everything from the traditional corn on the cob to the creative deep-fried butter and the seemingly impossible fried Coke). Yet, at their heart, fairs are rooted in agriculture, showcasing farm-related exhibitions, demonstrations, and competitions.

Farmers and ranchers across the country not only make fairs possible, but they form the backbone of America, providing food for the nation and the rest of the world. While some efforts involved in fair participation may result in compensation, farmers and ranchers donate most of their work out of a deep sense of community and pride.

Despite already giving so much, many farmers and ranchers feel a deep desire to give back even more to their communities. This philanthropic spirit is a testament to their commitment to sustaining and nurturing the land and people around them. Farmers and ranchers looking to continue their legacy of generosity have gift options almost as varied as fair food offerings, from the traditional to the creative and unique.

Farmers and ranchers often find that their legacy is intertwined with their land—land that may have been in the family for generations. When these farmers and ranchers also aspire to further their family’s legacy by making a difference for others, they have numerous gift options to choose from, including assets and strategies unique to their work and way of life. When a charitable gift can also secure much-needed retirement income or tax savings for the farmer or rancher, that gift can be a decisive win for all involved.

Donating crops or livestock

Each year, ranchers and farmers sell crops and livestock, so it makes sense to consider using these valuable assets to meet charitable goals. Corn, wheat, and soybeans are the most commonly donated crops, and beef cattle and hogs are the most common types of livestock donated.

The tax benefit

A farmer or rancher could sell the crops or livestock as part of their regular trade or business, then donate all or a portion of the sale proceeds to charity. However, the sale proceeds are taxed as ordinary income and subject to self-employment tax.

With the current high standard deduction—$14,600 for single filers and $29,200 for joint filers in 2024—many people no longer itemize.^[1] Farmers and ranchers who do not itemize deductions, though, will receive no tax advantage for their cash gift. Those who do itemize can deduct the value of the charitable gift from taxable income, subject to limitations.^[2] Although the gift will reduce the amount of taxable income, it will not reduce the amount of income subject to self-employment taxes on net earnings.^[3]

Donating crops or livestock directly to a charitable organization is typically more beneficial for a farmer or rancher as they will not recognize any income and will, therefore, pay no income tax or self-employment tax on the value of the gift. This potential tax savings is an even more significant benefit to those who do not itemize deductions.

Generally, the charitable deduction is limited to the lesser of the cost basis or fair market value (FMV). Unfortunately, crops and livestock tend to have little or no basis, meaning the charitable income tax deduction is usually minimal. One exception is for livestock that are considered capital gain property (e.g., animals used for dairy breeding or sports).^[4]

To maximize the tax benefit for a gift of crops or livestock:

• An eligible farmer or rancher (including sole proprietors, corporations, and partnerships) must be the producer and owner of the crops or livestock.
• The farmer or rancher must use the cash method of accounting.^[5]

A farmer who makes a charitable donation of a raised commodity can also deduct the expenses associated with raising that commodity.^[6] To accomplish the gift, it is critical that the farmer transfer ownership to the charity before the sale by providing a notarized letter of transfer to the charity. They should also confirm that the elevator, processor, or auction house documents that the commodity belongs to the charity by issuing a receipt made out to the charity.

Gift substantiation

If a gift qualifies for a charitable deduction, the farmer or rancher must carefully substantiate the donation according to tax laws and regulations like any other donor. A few critical baseline rules include the following:

• For any single contribution of $250 or more, the donor must obtain a contemporaneous written acknowledgment from the charity stating that the charity provided no goods or services in exchange for the contribution.
• For a single contribution exceeding $500, donors must file Form 8283.
• For a single contribution of more than $5,000, donors must obtain an independent qualified appraisal in addition to the charity’s detailed, written gift substantiation.

How it works

Crop donation example. Jon notifies his favorite charity that he plans to donate grain to them. He delivers the grain to the elevator or processor in the charity’s name and gets written confirmation of the donation. This step ensures that the charity is aware of and accepts the gift. (If the transfer fails to occur before the sale of the grain, the IRS will deem that the sale proceeds are the donation, not the commodity itself. This would diminish Jon’s tax benefits.) Once the transfer is complete, the charity is responsible for selling and storing the grain. In this case, the elevator sells the grain and sends the sale proceeds to the charity.

Livestock donation example. Dean transfers livestock ownership to his favorite charity via a deed of gift. The charity then works with Dean to deliver the livestock to a sale barn in the charity’s name. Following the auction, the charity receives the proceeds.

NOTE: In both examples, another option is to donate the crops or livestock to a donor-advised fund, then recommend a grant to the charity at a future date. We will discuss donor-advised funds in more detail later in this issue.

Donating farm machinery and equipment

Equipment for industrial farming and ranching (such as tractors or combines) is expensive. When farmers and ranchers upgrade to newer models, they often sell their older machines at auction, where even used machinery can fetch high prices. However, because this machinery is considered an ordinary income asset, it can result in a high tax bill. By making a properly structured charitable gift of used machinery, farmers and ranchers can enjoy significant tax savings.

Regular use of machinery will depreciate its value over time (unless a § 179 deduction is taken).^[7] When the farmer sells the asset, the taxable income is the difference between the sale price and the cost basis. However, if the machinery is fully depreciated, most (if not all) of the sale proceeds will be taxable at the higher ordinary income rates.

To avoid this outcome, a farmer or rancher can transfer the equipment title to a charity. The charity can then obtain the highest possible sale price at auction and immediately put the full amount of the sale proceeds to work supporting their cause. The farmer or rancher recognizes no income tax on the donation (or the subsequent sale), and the gift qualifies for a charitable income tax deduction equal to the lesser of cost basis or fair market value. If the basis in the machine is low or zero, the charitable deduction will also be low or zero.

Like crops or livestock, donating equipment or machinery is almost always more tax-efficient than selling it, recognizing the income, and making a cash gift to charity. The cash gift from the sale proceeds is unlikely to offset the income from the sale to the same extent an outright gift of equipment will.

Donating surplus crops to hunger relief organizations

Farmers may be able to take advantage of federal government enactments that encourage the donation of surplus crops to qualified nonprofit organizations serving individuals in need. Donating “apparently wholesome food”^[8] is a tax-advantaged charitable act that can increase the intake of fresh foods in the diets of families in need.

Enhanced tax deductions

The Internal Revenue Code provides enhanced tax deductions for charitable food contributions to hunger relief efforts.^[9] In 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act, which extended these enhanced deductions permanently to any taxpayer meeting specific criteria.^[10]

These enhanced deductions allow a charitable tax deduction for food donations even if the taxpayer has no basis in the donated food. As noted above, farmers who use the cash method of accounting typically have a tax basis of zero in their crops. However, they can now elect to deem the tax basis as 25% of the FMV of the donated food.^[11] The value of this deduction is the lesser of either:

• Two times the tax basis of the donated food
• The tax basis of the donated food (generally, the farmer’s cost) plus one-half of the food’s expected profit margin (FMV minus the tax basis)^[12]

To qualify for this tax deduction, the farmer can only donate food to tax-exempt organizations that provide direct food aid to infants or individuals who are needy or ill.^[13] The organization receiving the donation cannot sell or exchange the food. These organizations could include homeless shelters, food banks, food pantries, or national hunger relief nonprofits.

The farmer claiming the enhanced tax deduction must receive a written statement including:

• A description of the contributed property and date of its receipt
• A statement that the organization will use the property in compliance with the requirements of the Code
• A statement that the recipient organization is a tax-exempt organization under IRC § 501(c)(3)
• A statement that the IRS can obtain records relating to the donation upon request^[14]

Donating mineral rights

Farmers and ranchers may hold mineral rights—the right to own what exists below the surface of their land (oil, gas, coal, gold, copper, etc.) and extract, modify, and sell it. Mineral interests can be separated from the land and could include the following:

• Working interests/operating interests: a percentage of ownership in an oil or natural gas lease granting the owner the right to explore, drill, and produce gas and oil from a tract of property
• Royalty interests: an expense-free interest that gives the owner of the interest the right to a share of the extracted oil or natural gas under the lease
• Overriding royalty interests: the fraction of the gross production of natural gas, oil, or other minerals subject to the donor’s lease or ownership interest exceeding that provided in the oil and gas lease
• Non-participating royalty interest: an expense-free interest in the gross production of gas, oil, and other minerals created from a mineral estate (fewer rights than a royalty interest owner)

This unique asset class carries some risk for the charity, which must thoughtfully consider applicable environmental and regulatory issues. Some organizations may not accept working or operating mineral interest gifts, for example, due to the potential liability and tax consequences. Therefore, the first step for an interested farmer or rancher is to confirm that the charity accepts mineral rights and to understand any limitations to acceptance.

The donation process itself is complex. If the initial discussion with the charity shows a path forward for the gift, the farmer or rancher would still need to obtain an appraisal from someone who specializes in mineral rights, then draft a deed of gift to legally transfer the rights to the charity and file it with the county clerk’s office.

This uncommon donation may be more complex than many other gifts, but it can also make a truly powerful impact. The farmer or rancher can protect natural resources, preserve habitats, and further a charity’s meaningful mission. The gift also qualifies for an income tax deduction for the fair market value of the mineral rights, and the farmer or rancher can bypass any capital gains tax that might have been due on the mineral rights.

Giving with a donor-advised fund

A donor-advised fund (DAF) may be a good option for a farmer or rancher, as it may be able to accept unique or complex assets (including real estate) that a charity may have difficulty accepting. A DAF is a type of restricted fund managed by a charitable organization. The farmer or rancher makes an irrevocable gift to the DAF now, qualifies for an immediate income tax deduction, and retains the flexibility to recommend grants from the DAF to charity later, when the time is right. Notably, these recommendations must be free of material restrictions for the gift to qualify for a tax deduction.

The ability to recommend grants at a future date makes this giving option particularly attractive to many donors. This more hands-on approach to charitable giving might appeal to farmers and ranchers, who are accustomed to the rhythms of time elapsing between planting and harvesting.

Each donor-advised fund may have its own particular requirements, including those related to the timing or minimum amount of grants.

Charitable gifts of land

Even with the decline in the number of U.S. farms, a tremendous amount of land remains devoted to farming.^[16] But what happens when children don’t want to take over the family farm or ranch?  

• Hold onto the land. While a farm or ranch likely has infinitely more sentimental value attached to it than most other types of property, maintaining the acreage can be costly. It involves property taxes, insurance, maintenance, and other upkeep costs, plus the costs of running the farming or ranching operation.
• Sell the land. Selling the farm or ranch can result in a lower-than-expected sale price, which is particularly disappointing when coupled with the loss of an asset and home that has likely been passed down for generations.
• Donate the land. For some farmers and ranchers, using the land to achieve charitable objectives is a more meaningful path forward that creates a new legacy for the family. In reaching this decision, it is helpful if the farmer or rancher can clearly articulate the rationale for donating the land.

It may be an excellent time to begin a discussion regarding land donation if a farm or ranch owner:

• Learns that the beneficiaries who would otherwise receive the land are not interested in continuing the farm or ranch operation
• Wants peace of mind knowing that they will provide direction for the future use of the land or the proceeds from the sale of the land
• Has become overwhelmed by the responsibilities of managing the farm or ranch
• Is no longer interested in working the land (or is no longer able to work it)
• Has a clear title and has paid off the mortgage
• Seeks income or estate tax savings that would result from a properly structured charitable gift of land
• Needs to create a consistent lifetime income for themselves or one or more family members

Despite a strong inclination to hold onto the land for sentimental reasons, practical realities often prompt an exploration of the alternatives, including those that follow.

An outright gift of real estate

A farmer or rancher who owns significant assets besides the land may want to consider an outright lifetime gift. For property owned longer than one year, the gift qualifies for a federal income tax charitable deduction equal to the property’s full FMV and bypasses the capital gains tax that would have been due on the property.

A bargain sale

A “bargain sale” occurs when a taxpayer sells a property to a charitable organization for less than the property’s fair market value.^[17] The difference between the property’s fair market value and the sale price realized is considered a gift to the charity. If the taxpayer had the charitable intent at the time of the sale, this becomes a charitable contribution.

A bargain sale allows the taxpayer to capture the total amount of the property’s fair market value at the time of sale while limiting the taxable gain recognized for the sale. The charitable contribution will first offset the taxpayer’s ordinary income. When structured properly and supported by documentation, a bargain sale can satisfy a farmer or rancher’s desire to donate the land while still receiving the cash needed for retirement—all while significantly reducing the transaction’s tax impact.

A testamentary gift of real ESestateTATE

Making a gift of a farm or ranch through a will or trust allows the donor to remain on the land during life and support a meaningful charitable cause at death. A certain peace of mind comes with a testamentary gift since the donor can change or even remove the gift at any point if planning goals or circumstances change. Often, a farm or ranch gift is only possible at death—many farmers and ranchers don’t have enough assets outside the farm or ranch to make this a realistic gift option otherwise. And for such a significant gift, the administrative burden is relatively simple—generally no more than adding a few sentences to the will or trust with a codicil or in a revised document.  

A charitable remainder trust

A charitable remainder trust (CRT) is an irrevocable trust in which a donor transfers assets (typically an appreciated property like stock or land) to a trust. The donor or beneficiaries designated by the donor receive income from the trust for either the individuals’ lives or up to 20 years. Then, the trust terminates, and the qualified charity receives the assets.

CRTs are a popular charitable vehicle, and for good reason. Donating an appreciated asset provides the promised income stream and allows the donor to avoid the capital gains tax on the property’s increased value. CRT terms require the trustee to distribute a specified annual annuity payment of at least 5% of the trust’s initial value (and not more than 50%). The value of the charitable remainder eventually passed on to the charity must be at least 10% of the property’s FMV.

CRTs might be particularly appealing to farmers and ranchers. The waxing and waning cycles of agricultural revenues are infamously inconsistent, and the prospect of a guaranteed income stream using existing assets could be a perfect fit. Alternatively, the ability to provide for a loved one as the donor progresses toward retirement is another attractive aspect of a CRT.

Example: Linda owns a farm worth $500,000. She has two adult children, but neither child is interested in farming. As Linda considers her retirement plans, the family discusses what to do with the family farm. Given the appreciation of the farm’s value over decades, she does not like the idea of facing a hefty capital gains tax bill upon a sale. Instead, Linda decides to transfer the farm to a CRT and designate her children as the beneficiaries. The charity has a professional trustee overseeing the property, and her children benefit from up to 20 years of guaranteed income based on the value of the farm, even after she passes. After 20 years, the charity receives the farm, and the trust dissolves.

A CRT allows a donor to contribute any appreciated, unencumbered real estate owned by the donor for more than one year in exchange for an income stream for a term of up to 20 years. If the property includes a personal residence, it must be vacant when contributed to the CRT. If the donor wants to remain on the property during life, a remainder interest with a retained life estate is an excellent option.

A remainder interest with a retained life estate

There is a unique gift arrangement where an individual’s residence or farm may be donated as part of a deferred gift. This allows the donor to take an immediate tax deduction based on the appreciated value of the property while maintaining their life at the property. The real estate is transferred to the charitable organization after the donor’s or designated beneficiary’s death. Until then, the charity has no right to use or control the property or any of its income.

Like a CRT, a remainder interest with a retained life estate might work best when a donor has no heirs for the farm property or does not intend to continue the family business. The ideal candidate for a retained life estate donor includes those who would like to make a significant donation to a charitable cause but lack the liquidity to make such a gift—such as farmers and ranchers whose land is their most valuable asset.

Example: Robert owns a farm worth $750,000, which has appreciated significantly during the 45 years he has owned the property. He has no children, and none of his extended family are interested in farming. Robert is in good health and intends to keep working for as long as possible. The last few years have been particularly bountiful. Thus, Robert could benefit from a charitable income tax deduction. He decides to pursue a remainder interest with the retained life estate. This allows Robert to remain on the farm for the duration of his life, maintaining his current lifestyle with the bonus of an immediate substantial federal charitable income tax deduction based on the farm’s FMV. When he passes, the charity with which he made the arrangement receives the property. This shields his estate from any capital gains or estate tax associated with the property’s transfer and eliminates the administrative work associated with selling the real estate.

If the farmer or rancher’s income is relatively modest, they may be unable to take full advantage of the charitable income tax deduction. For donors in this position, making a major gift to a cause they care about must be the primary consideration for making the gift, with any tax advantages being of secondary importance.

Celebrating agricultural products, assets, and options

Those who love going to the fair every summer are used to waiting through the long winter with anticipation and excitement building as fair season approaches. Luckily, farmers and ranchers looking to continue their legacy of generosity through charitable contributions don’t need to wait. They can explore the veritable midway of charitable giving options today or at any time that works for them. With the guidance of advisors and other planning professionals, farmers and ranchers can make a gift as unique and meaningful as their situation and way of life, sustaining charitable causes while accomplishing necessary tax and planning goals.

Endnotes

1. “IRS provides tax inflation adjustments for tax year 2024,” IRS, November 9, 2023. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024. [↵]
2. IRC § 170, et seq. [↵]
3. IRC § 1402(a) (defining net earnings from self-employment).[↵]
4. IRC § 1231(b)(3), Treas. Reg. § 1.1231-2. [↵]
5. Treas. Reg. § 1.61-4(a) (defining farmers’ gross income using the cash method of accounting). [↵]
6. Treas. Reg. § 1.170A-1(c)(4). [↵]
7. IRC § 179 (Election to expense certain depreciable business assets). [↵]
8. 42 USC § 1791(b)(2). [↵]
9. IRC § 170(e)(3)(C). [↵]
10. IRC § 170(e)(3)(C)(i)(I) (eligible taxpayers include all C-corporations, S-corporations, LLCs, partnerships, and sole proprietorships). [↵]
11. IRC § 170(e)(3)(C)(iv). [↵]
12. IRC § 170(e)(3)(B); Treas. Reg. § 1.170A-4A(b). [↵]
13. IRC § 170(e)(3)(A); Treas. Reg. § 1.170A-4A(b)(2). [↵]
14. Treas. Reg. § 1.170A-4A(b)(4)(i). [↵]
15. 42 U.S.C. § 1791. [↵]
16. “Farming and Farm Income,” USDA Economic Research Service, February 29, 2024. https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/farming-and-farm-income/. [↵]
17. IRC §§ 1011, and Treas. Reg. § 1.1011-2. [↵]
18. IRC § 170(b)(2)(B). [↵]