Tax Guide for Farmers – Deductible Expenses, Part 2

The Internal Revenue Code includes laws that govern the unique income and expenses associated with farming. One such section of law pertains to expenses incurred by a farm business.

This article is the second in a series on the various business expenses associated with farming. The first articles in this series was also on deductible expenses, Deductible Expenses, Part 1.

If you operate or work on a farm, the materials covered in these articles may be of use.

Prepaid Livestock Feed

If you report income and expenses using the cash method of accounting, you cannot take as an expense in the current year the cost of feed for your livestock that will be consumed in future years, unless you meet all of the following requirements:

  1. The payment in question is for the purchase of livestock feed rather than merely a deposit on the future purchase of livestock feed,
  2. The payment for livestock feed is for a business purpose rather than for the purpose of tax avoidance, and
  3. The deduction of the payment does not result in a material distortion of your income.

If you meet all three of these requirements, you can deduct the prepayment of livestock feed, subject to the limits on prepaid farm supplies. If you fail to meet one or more of these requirements, you can only deduct the prepaid feed expense in the year in which it is consumed.

Purchase versus Deposit

A payment for feed may be a deposit on feed rather than a purchase of feed when one or more of the following are true:

  • There is not a specific quantity or terms for the purchase
  • There is a right to a refund of any unapplied payment credit at the end of the contract
  • The seller of the feed treats the payment as a deposit
  • There is a right to substitute other goods for those specified in the product

Regarding the final point, the right to substitute ingredients to change the mix of the feed to meet the dietary requirements of your livestock will not be considered a suggestion of a deposit.

Business Purpose

A payment has a business purpose if you have the expectation of receiving a business benefit from prepayment of the cost of livestock feed. Business benefits include but may not be limited to:

  • Fixing a maximum price
  • Securing a supply of feed
  • Securing preferential treatment in expectation of a shortage of feed

In addition, the prepayment may be for a business purpose if the prepayment was a condition required by the seller for a specific reason.

Material Distortion of Income

Whether the deduction of prepaid livestock feed expenses materially distorts your income may be determine based on one or more of the following factors:

  • Your normal business practice in conducting your livestock business
  • The amount of the expense in relation to past purchase amounts
  • The time of the year in which you made the purchase
  • The amount of the expense in relation to your income for the year

Who can give me additional help with questions about deductible farming expenses or other tax questions?

You can speak with a tax attorney who specializes in income and expenses related to a farm business to get answers to your tax questions or help filing your tax return.

You can call the phone number found at the top of this web site or complete the short form below to get started today. Someone will be in touch with you to help answer your questions and provide whatever help you need.

Your first session with a tax attorney is free of charge, and all conversation with your tax attorney are confidential.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.