Food for Thought: Farmers’ Market Donations Count as Charitable Deductions
Every year, farmers’ markets become more and more popular. Why wouldn’t they? People want locally grown fresh produce and, once they have tasted how good it is, they want more.
But what do growers do when they can’t sell the leftovers? Farmers should have an alternative plan in place before the goods spoil, so why not donate the produce to a local food shelf and earn a tax deduction?
Turning unsold food into charitable donations
Normally when you donate something that is considered ordinary income property or, in other words, something that is in your ordinary course of business, the deduction is limited to the tax basis (i.e., cost). The problem for farmers’ market producers is that usually the cost of their produce is considered zero since they are often a cash-basis farmer, having deducted all of the growing costs.
Since 2016, cash-method farmers have been allowed to claim a charitable donation of 50 percent of the fair market value of their donated food inventory. Fair market value is determined by the price the farmer would have charged a customer at the time the other goods were sold. The charitable deduction is limited to 15 percent of the business income from the activity. Any disallowed deduction is not lost, but rather carried forward for up to five years.
As always, documentation is key. The farmer should obtain a written statement from the charity stating that its use and disposition of the food will be in accordance with its exempt purpose and solely for the care of the ill, needy, or infants, and that the inventory was not transferred by the charity in exchange for money, other property, or services.
A market example
John Doe is a local cash-basis farmer who grows fruits and vegetables on his farm. John regularly harvests his produce and sells it at the weekly farmers’ market in town.
After one of the farmers’ markets, John has 50 bags of onions leftover and decides to donate the unsold onions to his local food shelf. He would have normally sold a bag of onions for $5, so he treats the basis of the bags of onions as being equal to 25 percent of fair market value, or $62.50 ($5 x 50 x 25 percent). John’s charitable donation is $125, since his donation is limited to twice the deemed tax basis.
How we can help
This tax strategy is a win-win situation. Farmers receive a charitable donation for the hard work of growing the produce, while those in need get the nutritious produce they may not otherwise have access to. As farmers know, an agribusiness operation is a complicated collection of moving parts that, with some help, can be a productive and well-oiled machine. CliftonLarsonAllen (CLA) agribusiness professionals offer a wide range of tax and accounting services to help your business run smoothly.