Prepaid Farm Expenses Reminder
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 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.
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.
But IRS Publication 225 page 24 states advance payments of rents & leasing are not allowed. They may only be deducted in the year which they apply … … …
Does the 50% rule also apply to sec 179 as well?