Using Deferred Payment Contracts More Important in 2021?

  • Agribusiness
  • 5/26/2021

Deferred payment contracts allow farmers to push income into 2022. This year may be even more important to use these contracts if tax rates increase.

Farmers are allowed to sell their crops in 2021 but contract for the payment to be received in 2022.  These types of deferred payment contracts qualify for installment sale reporting for tax purposes.  This means that the farmer would normally pick up the income in 2022 (when payment is made) but can elect to accelerate the income into 2021.

This election is on a contract-by-contract basis which means we typically want to have a few smaller contracts and a few larger ones to allow us to pick and choose the best contract.

For example, assume that Clara is trying to report $150,000 of farm income for 2021.  She enters into three deferred payment contracts.  One for $50,000, one for $75,000 and one for $100,000.  When John prepares her tax return, he realizes that net farm income is actually negative $25,000.  This prevents Clara from taking advantage of the standard deduction and other credits.  Clara elects to bring into income the $75,000 and $100,000 contract bringing her farm income to $150,000.  John then assists her is creating a receivable on her books and records so that she will not double book the income when she receives it in 2022.

Farmers are currently faced with the prospect of higher tax rates which may or may not happen by year-end (most major tax laws happen in December).  Therefore, this year it is likely even more important to utilize deferred payment contracts.  If tax rates rise dramatically, the farmer can elect to bring those contracts into income this year and pay at a lower rate.  If rates do not rise, the farmer can simply report the income next year.

It is important to make sure that the contract meets the income tax rules.  If the farmer can demand payment before year-end, it is likely not a qualified deferred payment contract.  We have been involved with several disputes with the IRS on these contracts that did not need to happen.  Review these contracts with your tax advisor to make sure they will pass muster.

 

This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.

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