As we approach year-end, many farmers will be prepaying 2023 farm inputs before the end of 2022. These prepayments lock in lower prices (hopefully) and quantities to be used in 2023. The deduction is allowed even though the inputs have not yet been delivered to the farmer.
However, in order for the deduction to be allowed, the farmer needs to follow certain rules as follows:
- Be on the cash method of accounting (about all farmers are on the cash method);
- The invoice needs to reflect a specific farm input, the quantity and the price per unit (simply have a dollar amount listed is not sufficient);
- The payment is for farm inputs reasonably expected to be used in the following year; and
- The total amount amount of prepaid farm expenses can’t be greater than 50% of all other farm costs including depreciation.
The more than 50% can be exceeded if your farm operation changes (such as increase in acres), or you meet the 50% test for the last three years.
We typically see issues with the invoice showing a deposit or insufficient detail on what is being purchased. We also see some issues with farmers exceeding the one year of farm input needs requirement.
You may also prepay up to one year of crop rentals or other rents. If you pay the rent on December 31 and mail it to the landlord, they can pick up the income in 2023 even though you deducted it in 2022.
Finally, make sure you have sufficient funds in your checking account to cover the prepaids. If you are relying on the deferred crop payments you are depositing January 2, 2023 to cover those payments, you may be at risk if you are audited by the IRS.
Most farmers take advantage of prepaying farm inputs at year-end. Make sure you do them correctly.
More on taxes:
4 Year-End Tax Tips for Farmers from Paul Neiffer
Paul Neiffer: Let’s Talk Depreciation for Farmers
