How Not To Do a Deferred Payment Contract

For every good deferred payment situation we see with farmers there always seems to be about five bad ones.  We got the following from a reader of the blog:

“Some of my clients tell me that they have deferred payment contracts set up ahead of the sale, but when they sell it, they don’t decide to take a check or put it in the deferred payment contract until a certain date in December, which the Elevator sets up. They do tax planning before that date. Then on or before the date set by the elevator, they tell the Elevator which sales should be in cash and which sales should be put on the deferred payment contract. Is this a problem or are they okay because they had the deferred contract set up ahead of the sale and they just waited to decide when to make that determination?”

This is likely a problem.  When the sale occurs, the contract for sale needs to be immediately tied to the deferred payment contract.  The elevator allowing the farmer to do their year-end tax planning and then telling the elevator how much to put into the deferred payment contract really means all of the sales should be taxable in the year of sale and none of the sales will qualify for deferral even those that went into the deferred payment arrangement.

The rules are fairly strict on doing deferred payment contracts and if you don’t follow them, you will lose on an audit.