The Farm CPA
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.
It's All or None on Deferred Sales Contracts
Jan 22, 2012
We had a reader ask the following question:
"You previously wrote about electing out of deferred farm sales where the farmer could elect to include the income for a March delivery contract into the previous year to increase his taxable income in the previous year. I deferred my payment on my 2011 grain until 1/3/12. Can I elect to show part of this income on my 2011 taxes. "
When a farmer sells their grain on a deferred sales contract into the next year, they can elect out of the installment method on the grain that is covered by that particular sales contract. The key point is that they have to elect out of all of the grain covered by the contract or none of it.
In the question, the bushels of grain covered by the contract for delivery on January 3, 2012, all of that grain would have to be reported as income in 2011 if he elects out of reporting it in 2012. He cannot elect to report part in 2011 and part in 2012.
That is why we suggest having multiple smaller deferred sales contracts so you can pick the best one to defer if you need to.
For example, let's assume the farmer above had sold 25,000 bushels of corn for $150,000 delivered on January 3, 2012. He can elect to report all of this income in either 2011 or 2012, but it has to be all in one year or the other. Now, let's assume he entered into 5 separate 5,000 contracts at $30,000 apiece. Under this example, he can elect out of 1, 2, 3, 4, or 5 of these contracts to bring in $30, 60, 90, 120 or $150,000 of income into 2011 if he so elects. By spreading the contracts this way, he has five times the flexibility than having one contract.