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Deferred Payment Contracts (Again)

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April 16th, 2013

We seem to get several questions during tax season regarding how deferred payment contracts work for tax purposes.  I thought we would do another post on the mechanics and show some examples.

With a deferred payment contract, the farmer has sold their grain, but elected to defer receipt of the payment until a future date, usually the next year.  Since the farmer is using the cash method of accounting, the income is usually reported when they receive the cash.  However, this transaction is technically an installment sale and one of the elections a farmer can make is to “elect” out of the installment method and report the sale when the transaction occurs, not when the cash is received.

This is a very simply election.  Simply report the sale on your return and you are done.  No statement is attached and no other indication to the IRS is required.  The key thing is to remember not to report the income when you collect the cash the next year.

This election is on a “contract by contract” basis.  It is an all or none election for each contract.

For example, lets assume we have a farmer that has sold 30,000 bushels of corn in 2012 using three deferred payment contracts with collection to occur in 2013.  Contract # 1 is for $50,000. Contract # 2 is for $60,000 and Contract # # is for $70,000.  Under is normal method of accounting, he would report these three contracts in 2013 for $180,000.  However, he has six alternatives available for the 2012 tax year.  He can elect to report either Contract #1, 2 or 3.  He can report 1 and 2, 1 and 3 or 2 and 3.  This allows him to report in 2012 the following amounts of income:

  • $50,000
  • $60,000
  • $70,000
  • $110,000
  • $120,000
  • $130,000

These are the only 6 options available to him.  He cannot report half of contract # 1, 2, or 3, but is limited to reporting one 0f these six options.  That is why we suggest having multiple deferred payment contracts and having a couple of small ones to allow the greatest flexibility.

On a personal note, we made it through another tax season.  I think today is my first day off in over 2 months and I am going to go hit the little white ball (or at least try) and wear shorts for the first time all year.

 Paul Neiffer

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. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

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