& Policy Update Graphic owner: UKZN SAEES: school website
July 26, 2017 Volume 17, Issue 7
ENHANCED TAX CREDIT AVAILABLE FOR CHARITABLE FOOD DONATION
Edited by Will Snell & Phyllis Mattox
In talking with several vegetable and fruit producers this summer, one commonality is the decrease in customers and sales this growing season. This is resulting in more surplus produce for the producers. Many will donate their surplus products to food pantries or homeless shelters. In addition to the good deed, producers should also realize it is possible for them to get credit for their donations in the form of a tax credit.
FEATURED ARTICLES
Congress passed legislation for an enhanced deduction for tax-paying businesses that donate food to a food bank or other charitable organization. Sole proprietors, partnerships, corporations, and limited liability companies can all benefit. If your farm donates food to a charitable organization and expects to owe taxes in the next five years, you can potentially claim a deduction.
Enhanced Tax Credit Available for Charitable Food Donation - Lauren O. Turley Observations on Central European Agriculture and Ag Policy - Will Snell Georgia Peaches & California Cantaloupe May Play a Role in Kentucky Prices - Alex Butler - Martin Bechu - Tim Woods Preparing to Transfer Your Farm to the Next Generation - Jennifer Hunter
A tax credit is a direct reduction in the amount of taxes owed while a tax deduction is a reduction of the taxpayer’s taxable income. Taxpayers have always been able to file for a tax deduction for ordinary income property (property that could have provided additional income to the donor, such as food products) that was donated. However, the tax deduction was limited to the property’s basis or the amount the business paid for the product or the cost of producing it. Normally the basis is lower than what the producer could have received for the product if sold on the market. The charitable contributions are capped at different rates depending on what type of business made the donation. The recently passed enhanced deduction allows a donor to value the donation at the lesser of your tax basis of the donated food plus one-half of the appreciation or twice your tax basis. The appreciation is equal to the fair market value minus the tax basis. As long as the food is “apparently wholesome”, you do not have to factor in whether you had a buyer, or whether the food meets normal standards for size, shape, etc. Fruits, vegetables, and meat products are qualified donations. If a producer grew peaches at a cost of $200 and donated the peaches at a fair market value of $300 to a food bank, he would have a potential deduction. His deduction would be $200 (basis) plus $50 (one-half of the $100 appreciation) = $250. The “twice basis” limitation does not apply because the $250 is less than twice the basis ($200 x 2=$400). In a year with significant surplus, this deduction could be very beneficial to producers. To receive the tax credit, an eligible business must meet three requirements: 1) The donor must donate food to a qualified 501(c)(3) nonprofit organization that uses the food solely for the care of the ill, needy, or infants. 2) The recipient organization must use the donated food in a manner consistent with the purpose constituting that organization’s exempt 501(c)(3) status. 3) The recipient organization may not use or transfer the food in exchange for money, property, or other services. Businesses claiming the enhanced tax deduction for donating food must receive a written statement from the recipient organization including a description of the contributed property and the date of its receipt. In addition, a statement that the recipient is recognized as a 501(c)(3) organization and that the property will be used in compliance and that adequate records will be made and available to the Internal Revenue Service upon request. The deduction is limited to 15 percent of your farm’s net income. Your charitable contributions cannot offset more than 50 PAGE percent2of your adjusted gross income. If you do not owe taxes in the current year, the deduction can be claimed within five years of your donation. You can carry the deduction and any excess donations over the 15 percent or 50 percent limits, over each of the five years.
PAGE 2
The enhanced tax deduction provides incentives for food donation across the United States, encouraging producers of all types to donate surplus food rather than dispose of it. To receive the deduction, follow the required steps and reap the benefits. Kentucky also has additional tax incentives for food donation that your business may want to take advantage of as well. Kentucky has a nonrefundable credit; however, the credit amount is equal to only 10% of the value of the food donated to the nonprofit. It would be beneficial for all producers who are donating surplus to look into claiming these credits to decrease their tax liability. If you have any questions about these credits, contact your tax preparer or your Kentucky Farm Business Management specialist.
●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●
Observations on Central European Agriculture and Ag Policy Class XI of the Kentucky Agricultural Leadership Program recently returned from an agricultural study tour of Austria, Slovakia, Poland, and the Czech Republic. These countries are approaching nearly thirty years of transition from a centrally planned economy under communist control to a capitalistic market-based economy. Despite the current challenges facing U.S. agriculture, most of the farms we visited in Central Europe did not appear overly concerned over the status of the current farm economy. These farms were very diversified in producing and marketing specific commodity traits and value-added foods, beverages, textiles, and energy and make it very clear that they were benefitting/surviving from farm subsidies from the European Union (EU) and premiums they are receiving from organic/non GMO production. The EU consists of 28 nations with the United Kingdom currently proceeding to formally withdraw following the Brexit vote in June 2016. Historically much of the EU farm policy has centered on providing sufficient quantities of food for European consumers by offering direct subsidies to EU farmers. In recent years, there has been more of a focus on providing funding for farm infrastructure/rural development investments (similar to Kentucky’s Ag Development Board), focus on environmental issues, and protecting EU consumers (i.e. traceability and food safety). The EU’s “farm bill” policy is called the Common Agricultural Policy (CAP), which is a seven-year commitment from the EU to provide support for farmers, rural communities, and consumers. The last set of reforms occurred in 2013, with policy debate already formulating ahead of the CAP renewal in 2020. Similar to the U.S. farm policy debate, there exists much discussion over the majority of payments being distributed to larger operations, benefits accruing to absentee landowners, vs producers, geographical disparities among regions (i.e., Eastern vs Western European nations), and the proper balance of benefits to farmers versus addressing environmental issues. Agricultural support from the EU has declined over the years, but still comprises nearly 40% of the EU budget. The farmers we visited realized that future EU support for agriculture would likely decline, but would remain an important component of EU agriculture. CAP supporters claim that EU policy allows a large majority of farms to survive in markets were local/regional food security is valued. Opponents argue that CAP provides a disproportionate amount of taxpayer funds to agriculture, inflates food prices, and has adverse effects on farmers in developing nations with limited government funds to assist producers. Besides concerns over the future commitment of policymakers to support agriculture, the farmers we visited have many of the same concerns confronting U.S. farmers today including a declining supply of labor, increasing age of farmers, and misinformed consumers. These farms and agribusinesses are attempting to better understand a changing consumer base and adjusting production and management practices to meet growing niche markets. The farms and businesses we met with seemed to indicate they have moved beyond the GMO and climate change debate, with anticipation that animal welfare will become the next major battle. It also appears that EU agriculture is moving to become more aggressive in developing trade agreements and business opportunities outside the EU, especially following recent U.S. trade policy actions.
PAGE 3
Our visits to farms in this region indicated crop yields and livestock/dairy production were not as high as top managing U.S./Kentucky operations, but they were still impressive. Farm technology in many cases rivaled U.S. farms with most of these operations utilizing individual pieces of equipment over a much longer time horizon compared to most U.S. farms. Structurally, the majority of farms in these nations are small farms that have absentee landowners. Active small farms are producing primarily for a local market, but depending mainly on off-farm income. However, an increasing number of farms with larger operations (1000s of acres) are prevalent, some renting from 100s of small farms and consisting of board of directors for a company farm or organized as cooperative farms with 100s of members. Following the movement from a centrally-controlled economy to a free market economy, land was transferred to the original owners which often resulted in some reestablished farms consisting of multiple family owners possessing very small tracts of land (in many cases less than an acre). Over the years, these owners have held onto the land inducing significant transaction costs for active producers attempting to rent multiple tracts of land to benefit from the economies of scale and marketing opportunities evolving from larger operations. While the future of these land-holdings is uncertain, it appears that agriculture in these nations will be faced with significant land transfer issues among future generations as the number of active farmers continues to decline.
The blue trail on the map shows the approximate journey of the Kentucky Agricultural Leadership tour.
PAGE 4
GEORGIA PEACHES AND CALIFORNIA CANTALOUPE MAY PLAY A ROLE IN KENTUCKY PRICES How this year’s weather is effecting cantaloupe in Southern California and Arizona and peaches in South Carolina and Georgia has been the topic of the day for most horticultural news outlets, but what could this mean for prices in other states like Kentucky? Kentucky has a large portion of cantaloupe producers concentrated in its south central and western portions while also having anywhere from 500 to 600 acres of peaches. For these producers, this is a potential opportunity to capitalize on a market supply shortage.
Jan 2017
Feb 2017
Mar 2017
Apr 2017
May 2017
June 2017
Figure 1 represents the average monthly temperature throughout the nation in 2017 as reported by www.climate.org.
Over the past months, temperatures in California and Arizona have been above 120F which has impacted cantaloupe prices in Texas, as reported by Jim Offner of The Packer. Using the USDA terminal market reports for the St. Louis Market to form Table 1, it can be seen that in California and Arizona half-cartons of cantaloupe are continuing to increase in price.
Cantaloupe 2017 Average Price for Half-Carton St. Louis Terminal Market 30 25 20 15 10 5 0 Table 1: This table represents the average 2017 half-carton cantaloupe price at the St. Louis Market for California and Arizona fruit.
The warm Georgia and South Carolina weather early in the year has also effected the harvest season for a number of peach producers in those states. With peach trees requiring a certain number of chilling hours below 45F in order to reduce the abscisic acid concentration within the tissue of the tree, warmer temperatures throughout this year’s winter led to premature growth. Late spring frosts is further contributing to a disorienting harvest season where some farmers in the southern portion of the state are harvesting early and are noticing a substantial yield lose as reported by Bryant Wynes of The Packer.
PAGE 5
“Fortunately for Kentucky producers we rarely have issues with fulfilling our chilling hour requirements,” said Dr. John Strang of the Department of Horticulture at the University of Kentucky. “This is why they often grow long chilling varieties.” What does this mean for Kentucky cantaloupe and peach prices? With the weather taking a toll on some of the largest producing states in the nation, it can be expected that demand for these crops is going to continue to increase throughout the course of the harvest season. Cantaloupe producers with access to commercial markets will likely benefit from a price increase. When examining the Fairview Produce Auction in Christian County Kentucky and the Lincoln County Kentucky Produce Auction, shown in Table 2, prices for 2017 cantaloupe have been trending much higher than in previous years. Kentucky’s marginal peach yield loss from late frost still has producers poised to capitalize on an expected increase in prices due to a market shortage. Like cantaloupe, the Kentucky peaches have also shown an increase in 2017 prices at auction. Table 2 illustrates that this season has seen anywhere from a $0.30/lb. to a $0.70/lb. increase in price from the previous year. As the seasons come closer to their respective ends, it is possible that prices will continue to stay high due to unmet demand.
2015 Peaches (per lb.) Cantaloupe (per melon)
Kentucky Produce Auction Price Average Early June Mid-June 2016 2017 2015 2016 2017
2015
July 2016
2017
$0.54
$0.34
$1.04
$0.72
$0.57
$0.88
$0.78
$0.53
$0.88
$1.34
$0.76
$1.65
$1.27
$0.80
$1.27
$0.98
$0.92
$1.05
Table 2: This figure represents the Fairview and Lincoln County average produce auction prices for cantaloupe and peaches during early June, Mid-June, and July. The averages prices are compiled using June 1st through June 15th for early June, June 16th through June 30th for mid-June, and July 1st through July 17th for July. Cantaloupe prices are per melon & peach prices are per lb.
You can find The Packer articles here:
http://www.thepacker.com/news/cantaloupe-prices-skyrocket http://www.thepacker.com/shipping-profiles/georgia-produce/smaller-quality-georgia-peach-crop-expect
PAGE 6
Preparing to Transfer Your Farm to the Next Generation: Estimating Your Family Living Expenses There are many factors to consider when deciding to transfer your farm business to the next generation. Open communication between the generations is a key in successfully navigating the farm transition process. As part of the conversation, the topics of profitability and income generation should be addressed, for both the retiring and new generations. If the farm business does not have the ability to provide the income and asset needs of both generations, then the likelihood for success is greatly reduced. Producers will often continue with specific enterprises on the farm business when the enterprise can generate enough income to cover short-run expenses; however, to ensure the longevity of the farm business, it should be profitable in the long run. Several factors influence profitability, such as input costs and commodity prices, but you should also consider the anticipated standard of living for the operation’s farm families and current debt loads. Households often struggle to estimate their current living expenses, which makes planning for the future difficult. According to the 2016 Kentucky Farm Business Management (KFBM) Family Living Summary, family living expenses were $67,478. This number may be higher than you anticipated your current family living expenses; however, many families have trouble estimating their actual living expenses. Both the retiring and new generations need to calculate the amount of income they will need to generate from the family farm. This should be done separately, because the two generations will have a different set of needs. The retiring generation may need to consider long-term care planning, while the younger generation may be concerned about establishing college saving funds. Below are some points to ponder for both generations: Retiring Generation: The first step in determining your retirement income needs is to calculate your current living expenses. If you already track your family living expenses on a monthly budget, then you are ahead of the game. If not, start a spending diary. Write down all of your expenses for a one-month period. The big expenses are normally easy to identify such as mortgage payments, insurance, taxes, and utility bills; however, the everyday expenses such as eating out, trips to the store, and even things like snacks at the ballfield are much more difficult to track. It is important that you write down all expenses for one month because even the smallest expense adds up over time. Multiply your spending estimate by twelve. As you review your expenses, identify the expenses that may not occur monthly, such as your property tax bill or holiday spending. Estimate your occasional expenses; examples of other occasional expenses that you may incur include home improvements, medical expenses, federal and state income taxes, recreation/vacations, and automobile expenses such as license, registration, insurance, and repairs. Add together the total of monthly expenses and occasional expenses; this number should give you a realistic idea of your spending needs. Next, consider each item that you listed in your spending diary as an occasional expense. Do you anticipate any of these expenses increasing or decreasing when you enter into retirement? Many families are able to pay off their home mortgage prior to entering retirement, so this may be a reduced expense. However, many couples anticipate traveling more, so this expense category may actually increase. It is also important to recognize that your expenses may change during retirement. For example, as you age your medical bills may increase. Nonetheless, with a little planning you should be able to determine a realistic income that will maintain your desired standard of living. Most retiring couples will not need to rely on the farm as their only source of retirement income; total all of your estimated retirement income from other sources, which may include social security, and investments, or employer retirement from off-farm work. After you subtract the total amount of other income sources from your estimated retirement needs, you will have a realistic figure for the amount of income that you need to generate from the farm. Younger Generation: Similar to the retiring generation, the younger generation needs to develop a realistic estimate of its yearly family living expenses. Follow the same steps as the retiring generation for creating a spending diary and estimating occasional expenses. As you review your anticipated yearly expenses, determine if there are expenses that may adjust up or down over the next several years. Are you planning on having a child or another child? Will your day care costs increase? Or, maybe your children will be moving into public school and your day care expenses will decrease. Do you have a child that will be driving soon? You will not be able to anticipate all of your future living expenses; however, you can develop a realistic estimate. Determine your sources of other income. Do you or a spouse have off-farm employment? Do you have rental property or other investments that generate income? Subtract your total offfarm income from your estimated expenses; the remainder represents that amount of income you would need to generate from the farm operation. As a reminder, the younger generation should be certain to include savings and investment in retirement accounts in their expense estimates. Once you have determined the income needs for both generations, you will have a realistic projection of the amount of income needed to cover your current standard of living.
PAGE 7
College of Agriculture, Food and Environment Department of Agricultural Economics 315 Charles E. Barnhart Bldg. Lexington, KY 40546-0276 Phone: 859-257-7288 Fax: 859-257-7290
Economic & Policy Update View all issues online at http://www.uky.edu/Ag/AgEcon/extbluesheet.php
Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE & KENTUCKY COUNTIES COOPERATING.