For years of very low income, this choice allows the farmer to optimize the taxable income indicated in the tax return. We`ve had conversations with farmers this year that they are reluctant to sell their crops, even on a deferred payment basis to the local elevator, believing that the harvest will be even more valuable later. For every good deferred payment situation we see among farmers, there always seems to be about five bad ones. From a reader of the blog, we got the following: Deferred contracts can be returned to the tax year in which they were registered, although the money was not received until the following tax year. This can only be done on a contractual basis. Therefore, it would be desirable to divide a sale into several contracts instead of having a single large contract. If a particular contract is returned in the taxation year in which it was entered into, the grain will not be taxed in the following year in which the money was received. If cash inflows are not required for operational purposes, grain carry-forwarding could be the preferred selling approach. Accelerated depreciation and deferred grain production contracts could allow a farmer to maximize tax brackets, especially when higher tax rates threaten. The rules are pretty strict when it comes to entering into contracts with deferred payments, and if you don`t follow them, you`ll lose an audit. John Farmer has 10,000 bushels of corn to sell, but doesn`t need more money to run the farm until the end of 2021. John decides to sell the corn in December 2021 due to favorable prices and contract the grain in two 5,000-bushel contracts with payment in January 2022. After completing John`s tax return in February, it is recommended that John pay a little more income tax to maximize the bracket he is in.
The amount required to achieve this is one of 5,000 bushel contracts and will be taxed on the 2021 tax return. The other 5,000-bushel contract will be taxed in 2022. That is probably a problem. When the sale takes place, the purchase contract must be immediately linked to the deferral contract. The elevator, which allows the farmer to do his tax planning at the end of the year and then tell the elevator how much to put in the deferred payment contract, really means that all sales in the sales year should be taxable and none of the sales are eligible for deferral, even those that were included in the deferred payment agreement. In the case of deferred grain contracts, the grain is sold at the local elevator, but payment is deferred to a later date. In most cases, this payment date would be the first of the following calendar year. Most farmers do not understand that these contracts can offer tax flexibility.
Can you tell me when you had the blog about the steps needed to get a deferred contract for farmers? With rising prices of all raw materials, coupled with good production and USDA payments, many farmers could make higher profits in 2021 compared to previous years. One tool a farmer could use when faced with higher profits is the deferral of grain contracts. “Some of my clients tell me that they have deferred payment contracts in place before the sale, but when they sell it, they don`t decide to take a check or include it in the deferred payment contract until a certain date in December that the elevator is putting in place. You are doing tax planning before that date. Then, no later than the date set by the lift, they shall inform the lift which sales are to be made in cash and which sales are to be placed on the deferred payment contract. Is that a problem or do they agree because they had established the deferred contract before the sale and they were just waiting to decide when to make that decision? Bill and Mary operate as S Corporation. They have $2 million in grain on hand and without selling grain, they will probably report a $1 million operating loss for the year. They choose to sell themselves $1.250 million worth of grain under five deferred payment contracts of $250,000 each, requesting a payment in January 2020. They sell the grain in person in March 2020 for $1.3 million and pay the company $1.25 million at that time. In preparing the 2019 S Company Return, they choose to bring four of the contracts back into income to bring taxable income down to zero. In their personal statement for 2020, they report a profit of $50,000 from the sale of grain and S Corporation reports the remaining $250,000 in grain sales.
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