LAFAYETTE, Ind. – Tax laws allow farmers more flexibility in reporting government payments than they may think, says George F. Patrick, a Purdue University agricultural economist. Patrick says farmers who use the cash method of accounting generally report receipts as income when received, and deduct expenses when payments are made.
“However, farmers may have some control over when government program payments are received and reported for income tax purposes,” Patrick said. “This allows some year-end tax planning by producers.”
Many farmers may put their corn, soybeans and wheat under the Commodity Credit Corp. (CCC) marketing loan program. Tax rules allow producers to treat the loans the same as other loans and not include the proceeds in income, Patrick said. Receipts from crop sales are reported as income in the year that the crop is sold. Producers may elect to report the CCC loan as income when received, Patrick said.
“In this case, the later redemption of the loan results in the farmer having a tax basis in the redeemed commodity, which is used in determining gain or loss, equal to the amount previously reported as income,” Patrick said. “However, once a CCC loan is reported as income when received, all subsequent loans must be reported as income when received.”
If market prices remain below the loan rate, producers may repay CCC loans at the posted county price (PCP). No interest expense is incurred, Patrick said. The difference between the loan rate and the PCP is the “marketing loan gain,” Patrick said.
“Producers who treated the CCC loan as a loan must include the marketing loan gain in income when the CCC loan is repaid. The sales price of the commodity would be included in income if the commodity is sold, and there would be no feed deduction if the commodity were fed.”Producers who report the CCC loan as income also should report the marketing loan gain on their Schedule F farm income and expense form, but not include the gain as taxable income.
Under this reporting procedure, the PCP, not the loan rate, is the tax basis for computing gain or loss on the sale of the commodity, Patrick said.
If the commodity is fed, the tax basis may be deducted as a feed cost. A loan deficiency payment (LDP) may be claimed on a commodity produced. Rather than receiving a CCC loan and then paying it off, a farmer can take the LDP for the difference between the loan rate and the posted county price – based on the prior day’s market – on the date the LDP is claimed, Patrick said. Patrick offers other tips when reporting government payments and CCC loans:
* Farmers can lock in a CCC loan repayment rate based on the PCP for a 60-day period, and speculate on higher cash prices. If repayment is not made until after Jan. 1, 2001, then the marketing loan gain income is deferred until 2001. “Although the LDP is based on specific dates, farmers do have some control over their reporting of activities, which influences when the LDP will be paid by the Farm Service Agency and included in income for tax purposes,” Patrick said.
* If grain is harvested and sold when delivered to the elevator, file Form CCC-709 with the Farm Service Agency (FSA). While the LDP rate is based on delivery date, actual payment is not made until the FSA receives evidence of production.
* For producers who store grain on-farm or in commercial storage, the LDP is set with FSA Form CCC-666. The FSA generally processes the forms and makes the LDP payment within 30 days.
“Thus, producers can establish the LDP, but by delaying reporting to FSA can defer payment and reporting of income into 2001,” Patrick said.
* Producers may now request payment of their 2001 production flexibility contract. Although payments are available to qualifying producers in 2000, a special provision by Congress permits producers to wait until the payments are received before considering them income.
“Producers with a low taxable income may want to take their 2001 payment before Dec. 31, 2000,” Patrick said. “Producers wishing to defer income into 2001 can delay requesting their payment until after Jan. 1, 2001.”