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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

When is a Deposit Income?

Oct 20, 2010

I will be at the annual American Institute of Certified Public Accountants Ag Convention in Denver today till Friday.  I hope to come away some ideas for our farmers.

We had a reader ask the following question:

"Can you hold checks that have been sent to us for grain sold in 2010 until 2011?"

The technical answer to this is that these checks will be considered income for 2010 even if they are not deposited until 2011.  Even if a farmer is on the cash basis of accounting, any constructive receipt of funds is considered to be income in the year available to farmers.  Constructive Receipt is defined as any income, although not actually in the farmer's possession, which is:

  1. It is credited to the farmer's account,
  2. Set apart for the farmer,
  3. Made available so the farmer can draw upon it at any time, or
  4. The farmer can draw upon if it notice of intent to withdraw is given.

 

In this case, the farmer has constructive receipt of the income since they can deposit into the bank at any time.

In my state of Washington, we have several thousand farmers who have their fruit processed at the local packing house.  Each variety of fruit is received, packed and then sold.  After this process is complete, the packing house will then close out the "pool" and allocate the income and expense to each of the growers in the pool.  Once the process is completed and the posting of the net income is made to the grower's account, this net income becomes income to the farmer even though they have not received any cash.  This is due to the fact that the pool closing has been (1) credited to the farmer, (2) set apart on the grower's account statement, and (3) the farmer can draw upon the funds at any time with a notice to the packing warehouse.

A farmer can defer grain income into future years by entering into a contract, but I will leave that for a future post.

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