ST. PAUL -- Year-end tax planning for calendar year 2008 is upon us, and a relevant topic for farm managers is deferred payment contracts. This is an area of concern for farm operators as they execute year-end tax planning strategies.
Farm managers should be aware of the implications of deferred payment contracts. A deferred payment contract is not a price later or hedge-to-arrive contract. A deferred payment contract is where the farm operator transfers ownership of the grain and/or livestock and signs a contact that requires payment early the following year.
Coverage
With a deferred payment contract, the taxpayer is an unsecured creditor after delivery and before receiving payment. Deferred payment sales are not covered by state bonding requirements to cover the claims of grain producers in the event of an elevator failure. That means if the grain elevator fails while you are holding this contract, you will be the last person paid out of the bankruptcy court.
If performed correctly, deferred payment contracts may be an effective tool for year-end tax planning. From a risk management standpoint, producers should exercise caution when using deferred payment contracts. Always consult with your tax adviser to examine your individual situation.
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Editor's Note: Holcomb is an agricultural business management educator with the University of Minnesota Extension Service in St. Paul.
