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Year-End Timing Decisions on Grain Marketing

The IRS says a check in hand is revenue.

A lot of thought goes into deciding what time of year to sell crops. Most of that decision should be based on maximizing commodity prices. However, a bit of it has to do with your tax situation. This is especially true in November and December. 

When it’s late in the year, there are a lot of options. Sell today and take the check today. Sell today and take the check January 1. Sell on December 31 and take the check then. Sell in January and take the check at that time.

Most farmers are on the cash basis for income tax purposes. This means they pay tax on revenue when it is collected in cash, rather than when it is earned. They take tax deductions when cash is paid, rather than when the expense is incurred. As a result, there is room for some strategizing. 

The classic strategy is to assess your net income going into December and decide if this year is likely to be better than next. If this year is looking great, you set about paying every bill you can find, consider buying equipment, and hold off crop proceeds until January. Delaying that revenue will involve storage fees if you are trying to delay the price until January, but most elevators will lock the price today and delay the check until January 1 for free. After all, you’re giving them a short-term, interest-free loan.

One strategy that some farmers and other business owners try is to just sit on December checks and deposit them in January. Warning: Technically, according to IRS rules, a check in hand is revenue, whether you deposit it or not. There are bank records that show images of all the checks you deposit.  If you get audited, the IRS can request and receive details of what you deposited from your bank.  If you deposit 14 December crop checks on January 2, it’s a little suspicious. Also, the elevators have records of all of their check issuance dates if someone wants to trace it that far.

Besides the revenue timing decision, there is the expense timing decision.  Should you go buy a tractor, a truck, or a grain wagon before December 31? If you do, you will need to pay for it (or sign a promissory note) before year-end if you are to benefit from the tax deduction. In 2016, you’ll be able to take 50% bonus depreciation on any new equipment. Alternatively, you may be able to take a Section 179 deduction, which allows you to immediately expense-off 100% of equipment purchases up to $500,000 – new or used.

Minimize Losses

The flip side would be the scenario where you are looking at a poor year for net income. Maybe it’s even a big net loss. In that case, you are going to reverse everything by accelerating revenue into this year and pushing expenses into next year. 

You might ask, “What does it matter whether I lose $20,000 this year or $100,000? Either way results in no tax.” 

That part is true. However, there may be a couple of reasons to reduce your net loss. One is your local banker and the other is the IRS. 

Your local banker doesn’t want to see large losses or large fluctuations in your net income. Furthermore, large net losses invite inconvenient audits, which makes some sense. From the government’s perspective, if you are losing $100,000 a year doing this business, why are you doing it?

This article was written by Shawn Williamson, CPA, for our November 2016 issue of Successful Farming magazine. 

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