ST. PAUL -- Year-end tax planning for calendar year 2008 is upon us, and prepaid farm expenses are one area of concern for many farm operators as they execute year-end tax planning strategies.
If you (the farm operator) use the cash method of accounting to report your income and expenses, your deduction for prepaid farm expenses in the year you pay for them is limited to 50 percent of the other deductible farm expenses for the year (all Schedule F deductions minus prepaid farm expenses).
Here's an example: During 2008, you bought fertilizer ($4,000), feed ($1,000) and seed ($500) for use on your farm in the following year. Your total prepaid farm expenses for 2008 are $5,500. Your other deductible farm expenses totaled $10,000 (total schedule F expense minus prepaid expenses) for 2008; therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50 percent of $10,000) for 2008. The excess prepaid farm supplies expense of $500 ($5,500 to $5,000) is deductible in the later tax year you use or consume the supplies.
In recent years, farming has been a profitable enterprise. Many cash-basis tax filers utilize prepaid expenses at year-end to balance expenses with income. This practice also allows farm producers to guarantee delivery and lock in prices on crop inputs for the following year. However, there is a limit as to how much a farm operator may prepay.
Exceptions
ADVERTISEMENT
There are a couple of exceptions: The limit on the deduction for prepaid farm expenses does not apply if you are a farm-related taxpayer and either of the following applies:
Your prepaid farm expense is more than 50 percent of your other deductible farm expenses because of a change in the business operations caused by unusual circumstances.
Your total prepaid farm expense for the preceding three tax years is less than 50 percent of your total other deductible farm expenses for those three years.
The maximum prepaid amount is calculated each year based upon the final figures on the Schedule F. Fall-applied fertilizer and lime does get treated differently. If fertilizer and lime are purchased late in 2008 and applied before Jan. 1, the fertilizer and lime expense is not considered a prepayment for tax purposes and thus is not subject to the 50 percent rule.
This information piece is offered as educational information only and not intended to be legal or financial advice. For questions specific to your farm business, consult with your tax preparer.
Editor's Note: Holcomb is an agricultural business management educator with the University of Minnesota Extension Service.
