Deferred grain contracts are helpful tax planning tools. Simply, grain is sold at the local elevator, but payment is deferred to a future date.
Most times, that payment date would be the first of the ensuing calendar year, says Paul Neiffer, principal with CLA and author of “The Farm CPA” blog.
“Under current tax rules this is a favorable treatment because even though we’ve sold it and locked in the price, we’re not going to collect the income until 2022, and that is when we’re going to pick up the income on the tax return,” he says.
Unfortunately, Neiffer says, farmers often skip a vital step: detailing the sale in writing.
“You need to make sure the deferred payment contract is set up — in writing — before you sell any grain,” he says. “Because most farmers have never been audited, they can be a little bit lackadaisical about it.”
Listen in as Neiffer discusses the issue with AgriTalk’s Chip Flory:
Why does skipping the written contract leave you vulnerable?
“The tax code includes an issue called constructive receipt,” Neiffer says. “If you don’t do the deferred grain contract properly and you get audited by the IRS, they can determine you have to pay taxes on all that money you got in January 2022 in 2021. We’ve seen some audits in this area of $30 million to $60 million of contracts. It can get very costly for some of those farmers.”
With expensive farm equipment and suppliers being hesitant to lock in prices for inputs, deferred payment contracts might be the best tax planning tool to round out 2021, Neiffer says.
“Farmers still have this week to get it done, but they need to make sure it’s done correctly,” he says. “The other nice thing about this tool is if you determine you actually could have used that income in 2021 instead of 2022, you can move that income back to 2021.”
Read more: How Not To Do a Deferred Payment Contract
Want to learn more tax tips? Read all of Neiffer’s blogs and magazine columns.
