Supply chain struggles have put a damper on prepaid expenses. To obtain a valid prepaid expense, a farmer has to request a certain quantity of a product. If a supplier can’t provide that quantity, it isn’t a valid prepaid expense for the year.
“So many farmers think they can go down to the co-op and put a deposit down on a product for large sums of money,” Neiffer says.
“We’ve had several clients go through audits and fail on that front, despite our warnings. It just doesn’t work.”
Farmers sometimes climb on a tax treadmill ride that can last for decades. With COVID-19 aid, it might be even harder to hop off in 2022. Plus, farmers have received Emergency Relief Payments this year. These types of payments are similar to crop insurance, but you can only defer to the year after damage was incurred.
With the drought in the West, some cattle producers have been forced to downsize their operations. If you fall into this camp, consider a deferment.
“If a producer normally sells 500 head in a year, and this year they sold 1,000 head, they get to take that extra 500 head and either defer for one year, or up to four, five or six years — depending on how long the drought goes on,” Neiffer says.
If you’re planning to buy farm equipment before the end of the year, here’s a refresher on two tax tools you can use.
For example, if you buy a new piece of equipment for $300,000, you can depreciate that amount this year. Or you can depreciate the asset out over its useful life, Neiffer says. For example, a new combine can be depreciated out over five years.
“If you pay cash for equipment, deducting all of the depreciation up-front is fine,” he says. “But if you are financing 100%, you may want to elect out of full depreciation and match up the yearly depreciation amounts with your loan payments.”
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