Donated Produce and Tax Deductions

Charitable Donations of Produce and the Tax Implications
By Kristin Krokowski (reprinted with permission)

Over the years there has been a lot of confusion about charitable donations of farm and garden
produce and how that relates to tax deductions. After all there is always some good cause to
donate your excess produce to – the local food pantry, church or fundraiser. But how does that affect your taxes?

Philip Harris of the University of Wisconsin Department of Agriculture and Applied Economics
and Cheryl Whittmann, accountant at WegnerCPA’s compiled the following information to
help taxpayers understand what the law is and how it applies to your situation.
Whether a charitable donation can be claimed as a deduction depends on if the producer treats
the raising of products as a business or as a hobby. Since most taxpayers who are in the
business of producing farm products use the cash method of accounting, they deduct the cost
of production on their Schedule F (Form 1040) as a business expense when filing taxes. Once
the costs of seed, fertilizer, pesticides and other inputs are deducted, the grower has no income
tax basis or “tax cost” invested in the product. Since charitable contribution deductions in the
past have been limited to the tax basis of the products, and there was no tax cost, the deduction
was zero.

In January of 2016, a change in the tax code expanded the ability of farm businesses to
receive an enhanced deduction that is greater than the tax basis in the property (which is zero
since the farm business wrote off their expenses as outlined above). This is a special rule for
contributions of food inventory to a 501c3 charity that uses it for the care of the ill, the
needy or infants. Under Code Sec. 170(e)(3)(C), the “above basis” deduction is equal to the lower of the basis plus one-half the ordinary income that would have been recognized if the property were sold at fair market value or twice the basis of the property. To make it easy for people who don’t have to account for inventories, they can elect to treat the basis of any “apparently wholesome food” as being equal to 25% of the fair market value of the food.

So what does that mean? It means that if farm businesses who deduct their farm inputs on a
Schedule F when filing their taxes make a charitable donation to a 501c3 charity that cares
for the ill, needy or infants, they can now receive a tax deduction for it.

This is not a simple deduction. Farm businesses should seek tax advice from a professional before taking this deduction but here is a very simplified example. XYZ farm donates produce to the local food pantry with a fair market value of $100. The farm (with documentation
from the food pantry which received the donation) can deduct $25 as a charitable contribution on their taxes.
Please refer farmers and 501c3’s to the IRS website for
complete information.

Kristin Krokowski
Commercial Horticulture Educator
UW Cooperative Extension Waukesha County
515 W Moreland Blvd AC G22
Waukesha WI 53188