Tis the Season For Prepayments

• December 19, 2018
• Paul Neiffer

Special thanks to Vanessa Bechtel of our Champaign, Illinois office for this post.

As the end of year draws near, many producers find themselves shopping for farm inputs as well as holiday presents.  Year-end prepayments are a common way to increase expenses and manage taxable income.  As a reminder, the IRS allows a cash method farmer to deduct prepaid farm supplies up to 50% of your other deductible farm expenses. 

Due to the routine nature of this practice among farmers, it is key to keep the limitation and rules in mind.  The supplies must be actually purchased, not just a deposit made to the vendor.  There must also be a business purpose (i.e. lock in rates, availability) and not just tax avoidance.  Also, the deduction is not allowed if it materially distorts income (for which there is no bright line test).  If a farmer prepays in excess of the 50% limit, the IRS says then that the most that can be deducted on the tax return for the year the expenses are paid would be the 50% level.  Any in excess would be deductible in the year following the year it was paid. 

For example, if Farmer Jordan has total deductible farm expenses of $200,000 for a year (before any prepaids), then $110,000 of prepaid supplies is acquired at year end, Jordan would be able to deduct $300,000 on the 2018 Schedule F, carrying $10,000 over to 2019.

As with most areas of tax, it is important to know the details as well as exceptions.  Should you have questions, work with a CLA tax advisor to determine how to manage your taxable income in accordance with tax laws.

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