Deductions for donating farm property
Farmers, ran ch ers and horse owners can get significant tax deductions by making noncash charitable contributions of farm property to qualified donees—such as agricultural schools or government programs. This serves two purposes: one, there is a tax deduction available; and two, by culling unneeded animals or equipment, or even land, this shows the IRS that you are mindful of costs and that you are doing what you can to operate in a businesslike manner—so as to move closer towards making a profit.
The kinds of things that one might donate include livestock, horses, equipment, tractors, motor vehicles, or farmland. Artwork is also something that people donate, sometimes with substantial tax deductions if the art has appreciated in value since the time of acquisition.
Certain kinds of information are needed to support the charitable contribution deduction, or written records and substantiation.
First, the charity must be a “qualified” one. Most charities, whether they are schools, scientific institutes, have that status, as does any government agency. Donating property to an individual does not ordinarily qualify unless the individual operates a private foundation.
To determine how much you may deduct, you must support the fair market value of the property as of the date of contribution.
Fair market value means the price the property would sell for on the open market. It is the price that a willing buyer and seller would agree upon, knowing all relevant facts. If you donate land to be used for agricultural purposes, according to the IRS “you must value the land at its value for agricultural purposes, even though it would have a higher FMV if it were not restricted.”
In donating farmland to a charity, the transfer could provide that you or a third party will have the right to all income and full use of the property for life, and the life interest subject to actuarial tables would be taken into account in computing the charitable deduction.
The property must be appraised by a qualified appraiser in accordance with generally accepted appraisal standards. That usually means that the appraiser has earned an appraisal designation from a recognized professional appraiser organization or that he has met certain minimum education and experience requirements, and that the individual regularly prepares appraisals for a fee. The standards are set forth in the instructions to IRS Form 8283.
The appraisal must be made not earlier than 60 days before you donate the property. The appraiser must sign off on Form 8283. Someone from whom you acquired the property does not ordinarily qualify as an appraiser for this purpose, unless you donated the property within two months of the date you acquired it and the property’s appraised value does not exceed its acquisition price. One appraisal is acceptable for a group of animals or a group of similar items contributed in the same tax year. If the appraised value of donated property seems to be too high, the IRS may contact you to get more information, or refer the valuation problem to an IRS appraiser or valuation specialist. An appraiser who prepares an incorrect appraisal is subject to being fined by the IRS under section 6695A.
For reporting a noncash charitable donation, you must file Form 8283 if the amount of the deduction is more than $500. The most common method of valuation looks to sales prices of property similar to the donated property. Factors considered in this type of appraisal are the degree of similarity between the donated property and the property sold; the time of the sale—whether it was close to the valuation date; the circumstances of the sale—whether it involved a willing buyer and seller in an arm’s length transaction; and the market conditions of the comparable sale— whether unusually inflated or deflated.
Sometimes, unusual market conditions make it difficult to establish the fair market value of certain kinds of property. It might be difficult to rely on sales of comparable property in a restricted or depressed market.
The charitable organization that receives the property must sign a “donee acknowledgment” on Form 8283. The person signs to acknowledge the gift, and must be someone specifically authorized to sign on behalf of the organization.
The form is then returned to you to file with your income tax returns. In some cases, it is not possible to get the donee’s signature on the form. In that case, the deduction will still be allowed if you attach an explanation why it was impossible to get the donee to sign the form.
— John Alan Cohan [John Alan Cohan is a lawyer who has served the farming, livestock and horse industries since l98l. He serves clients in all 50 states, and can be reached by telephone at 3l0/278-0203 or via e-mail at firstname.lastname@example.org, or visit his Web site at www.JohnAlanCohan.com.]