Key Year-End Tax Planning Tools
Harvest is rapidly coming to an end for many producers and that means key year-end tax planning is needed. Especially this year with all of the CARES Act changes.
One of the key tools we use almost every year is deferred payment contracts. A grower may sell his 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.
However, as one reader asked me today “Can I pick the number of bushels to pick up 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).
As an example:
Erica sells her corn on various deferred payment contracts. 2 are for 5,000 bushels, 2 are for 10,000 bushels and 2 are for 25,000 bushels. 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.
You need to make sure to record that contracts in your books so that you do not double count this income in 2021.
Another key option is to prepay 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, and
- 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.
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 certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Paul, can you please specify the IRS code that has information regarding differentiating between qualified prepayments and deposits? Publication 225 addresses it a little – but only in the context of livestock feed. Thank you!