Tax topic: deferred grain sales
Deferred payments may allow grain farmers to more effectively manage each year’s taxable income.
“This is because deferred grain contracts qualify as installment sales, and with installment sales producers may ‘elect out’ of reporting income when received and instead report the income in the year the grain was sold,” said Kim Dillivan, South Dakota State University Extension Crops Business Management Field Specialist, of the tax law that allows grain farmers to accelerate the income from deferred contracts into the year of sale.
He further explained that a producer using cash accounting can choose to report as 2013 income revenue received in 2014 from a deferred contract initiated in 2013. For example, producers who sold grain using these types of contracts in 2013 will not receive payment until 2014.
“Typically, with cash accounting, the sale of grain is taxed in the year when payment is constructively received, which may be different than the year the grain was produced or sold,” he said. “Constructively received means the income was credited to the seller’s account or is made available to the seller without restriction.”
Specifics of deferred payment contracts: A deferred payment contract specifies the date and amount of payment and can be used with cash, basis or forward contract sales. Ownership of the grain passes from seller to buyer when delivery is made, regardless of when the money is exchanged. Because deferred payments are backed only by the financial strength of the buyer, some producers elect to purchase deferred payment bonds.
“These instruments add a level of protection by guaranteeing that contract payment will be made should the buyer default on payment,” Dillivan said.
Advantages of deferred grain contracts:
By moving income from the current tax year forward, Dillivan explained that a deferred payment contract can help decrease tax liability in that year, especially if income was unusually high. Deferred payment contracts can also be used to better match income with cash flow needs. However, he said if circumstances at tax reporting time should dictate, a producer can declare the income from a deferred contract in the tax year the grain was sold, rather than the successive year when payment was received.
Advantages of multiple deferred contracts: When planning to sell grain using a deferred contract, Dillivan said producers should consider dividing grain into several smaller contracts rather than combining the grain into one large contract.
“Selling grain with one contract limits flexibility in regard to income tax reporting and adjusting income to fit cash flow needs,” he said.
“This is because producers who enter into a deferred contract to receive payments in the next year, but then decide to accelerate the income back into the year the contract originated, must do so for all of the grain covered by that particular contract (i.e., splitting contracts is prohibited).”
However, he said with multiple contracts, the revenue from any number of these individual contracts can be reported in either year.
For example, a producer who sold 50,000 bushels of corn in a deferred payment contract in November, 2013, for payment in January, 2014, can report that income in either tax year.
“However, the producer cannot report some of this income in 2013 and some in 2014. Had the producer contracted the corn in 10,000 bushels increments, he or she could have elected not to report the income from any number of these contracts (including all or none) in the 2014 tax year and instead report it in 2013. This strategy allows more flexibility in regard to the reporting of income for tax purposes,” Dillivan said.
For specific questions concerning the reporting and tax consequences of deferred grain contracts, consult your personal tax preparer or attorney.
For further tax information, view IRS Publication 225, Farmer’s Tax Guide at irs.gov/pub/irs-pdf/p225.pdf and IRS Publication 946. — WLJ