Should you put off 2022 crop input purchases in hopes that prices will fall? Your accountant may want you to reconsider.
“With herbicide and fertilizer prices going up, some farmers are going to be tempted to wait and see if they come down,” says Bob Krogmeier, a CPA with CliftonLarsonAllen. “Realistically, the first thing I look at for income control is prepay, because with prepay, the product doesn’t necessarily have to be delivered as long as you and your vendor lock in price and quantity.”
“Income control” is a phrase you never hear in farm country, until fall rolls around and you want to manage your tax bill. That’s when accountants start earning their fees.
Most farms are coming off a second straight year of higher-than-average income, so a good accountant will likely suggest being as aggressive as possible on 2022 prepaid inputs. And crop prices for 2022 still reflect profit even with higher expected costs if you’re willing to forward-contract some of next year’s expected production.
Avoid this mistake
If you’re looking for a tax advantage on prepaid inputs, don’t make the mistake of simply writing a big check to your ag retailer.
“I got a feeling a lot of people will wait to lock in purchase price, but if you just write a check for $200,000 but didn’t really purchase anything, that’s really treated like a deposit and you don’t get the tax deferral,” Krogmeier says. “You have to fix the price and quantity to get the tax benefit.”
It’s pretty common for farmers to prepay for future delivery, but these are not common times. With continued supply chain hiccups, you may want to pay and take those products whenever it is feasible.
What happens if you sign a deal with your retailer who then fails to get you the product next spring?
“If a supplier really doesn’t believe it can make the delivery, I don’t think they would sign the contract,” Krogmeier notes. “But if a vendor does a prepay contract and can’t get you the product, it’s up to you to get your money back.”
If you prepay for inputs before year-end and the retailer can’t deliver, the money you get back in 2022 due to non-delivery may require an amended tax return. Small refunds for undelivered prepaids can be considered 2022 income to keep your books balanced.
One thing to be aware of: Making prepay purchases makes you an unsecured creditor. Let’s say you buy inputs from a co-op in December and plan for a March delivery, but the co-op goes bankrupt in January. “You might not get that money back. It happens, but those situations are pretty rare,” he says.
More tax tricks
A few tax moves can help control income before year-end:
Put children on payroll. Instead of giving them an allowance, try hiring them as employees. Wages are tax-deductible.
Set up a Roth IRA for your kids. They can invest part of it. That’s one way to mitigate tax on the farm and teach your children about investing.
Start a SEP. With a simplified employee pension plan, invest up to 20% of your self-employed farm income. You can do this up until you file the tax return in April.
Defer income. Move big dollars from one calendar year to another. Sell $50,000 worth of corn this fall through a deferred grain contract.
Buy new “toys.” That capital equipment you buy this fall must be on your farm by year-end. If you order and pay for a grain cart in December, but it’s not on your farm by year-end, you don’t get the accelerated depreciation. With current supply chain issues, make sure to have a frank discussion with your dealer about time of delivery.
If you bought a grain bin in March, paid for it and the concrete pad was poured but the bin itself was not up by year-end, depreciation can’t be claimed if the equipment can’t be used.
For more tips, read Bob Krogmeier's blog, By the Books.