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Maintain Flexibility with Deferred Payment Contracts

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October 8th, 2012

One of the best tools in our farm tax toolbox is the ability to use deferred payment contracts to achieve our desired level of taxable farm income.  These contracts call for the sale of grain in 2012, with payment being received in 2013.  Normally, the sale of the grain is taxed when cash is received, however, the tax laws allow farmers to elect out of the installment method on any of the contracts and accelerate this income into 2012.

With the uncertainty of the current income tax situation (will the Bush Tax Cuts be extended, will Section 179 be increased retroactively, will bonus depreciation be retained for 2013, etc.) these contracts provide maximum flexibility to the farmer for 2012/13.  To maximize this flexibility, we stronger recommend that the farmer have at least two or three contracts that are smaller than normal to allow for picking and choosing the correct contract.  The election is on a contract by contract basis, you cannot pick and choose a dollar amount.

As an example, assume Farmer Jones has entered into three deferred payment contracts all at $7.50 per bushel:

  • Contract #1 5,000 bushels,
  • Contract #2 7,500 bushels,
  • Contract #3 10,000 bushels.

When preparing his tax return, he finds out that instead of having taxable farm income of $100,000 (his desired amount), he has a loss of $25,000.  To generate an additional income, he can elect out of the installment on contract #2 and #3 and increase his income by $131,250 to get him back to roughly his desired income.  Or he could pick #1 and #3 if he wanted to report a little less income.

If you consistently use deferred payment contracts, make sure to pick the right size for a couple of them each year.

Paul Neiffer, CPA

Paul Neiffer

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 partner with CliftonLarsonAllen in Yakima, 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. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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