After you park the combine, it’s time to shift your thinking to year-end tax planning. That’s especially true this year with all of the CARES Act changes.
Strategy 1: Deferred Payment Contracts
One of the key tools we use almost every year is deferred payment contracts. A grower may sell their crop now and then elect to have the payment made right after the first of the year.
Most years we will pick up the income when the farmer receives the cash; however, this is considered an installment contract and under those rules, we can elect to pick up the income in the year of sale. This gives us great flexibility in picking our correct taxable income for the current year.
But one reader asked me lately “Can I pick the number of bushels to report as income?” The answer is no. This is on a contract-by-contract basis. Therefore, we like to have some small, medium and larger contracts. This allows us to pick the best one(s).
For example:
Erica sells her corn on various deferred payment contracts. Two are for 5,000 bu., two are for 10,000 bu. and two are for 25,000 bu. When preparing the tax return, we determine her taxable income is negative $100,000 and she would like it to be positive $50,000. We elect to pick up one of each of the small, medium and large contracts that will bring her income up to about $50,000.
Be sure to record those contracts in your books as a receivable so you do not double count this income in 2021. That is very easy for farmers to miss. We usually make a note in our books as a backup.
Strategy 2: Prepay Farm Inputs
Another key option is to prepay for farm inputs. Most farmers already understand this, but we are seeing more IRS audit activity on these payments since many of the payments are deposits, not qualified prepayments. To qualify, it should:
- Have a stated farm input (seed, gas, diesel, fertilizer, chemicals, etc.).
- Have a stated quantity.
- Have a stated price per unit.
- Not allow for a substitution.
- Should not exceed 50% of farm expenses (in most situations).
Many of the invoices we review are really deposits and would not stand up to an IRS audit. Also, you are not allowed to prepay more than 50% of total farm expenses in any one year. You can always prepay next year’s rent without limit.
These are two of the best tools in your tax planning kit, but you need to make sure to follow the rules.
Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA.
