Setup Your Deferred Payment Contracts Now
Over the next few weeks we will post some year-end tax tips and today’s post deals with using deferred payment contracts. Since most Midwest farmers are in the midst of harvest right now, this is the time to think about setting up your deferred payment contracts for year-end tax planning. These contracts call for delivery of the grain to the elevator with payment being deferred until 2014. Normally, the farmer would report the income from the sale of this grain when he collects the cash in 2014.
However, the tax laws consider these contracts to be an installment sale and the farmer (when preparing his tax return) can elect to accelerate this income into 2013 if this would optimize his tax situation. Cash basis farmers are one of the few types of taxpayers that are allowed to make this type of election.
The election is on a contract by contract basis so it is important to have at least a couple contracts in the $20-30,000 range to allow for the correct amount of adjustments to income. If you have only one contract for $150,000, that may not give you the best flexibility. Another consideration to make sure you note in your records that you have reported in the income early. We normally record a receivable on the books and then reverse it out at the beginning of the year. You tax advisor will usually keep track of it too, however, it is better to record it properly on your books.
Paul Neiffer, CPA
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.
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