For many farmers, income in 2021 is going to be the strongest in years, but two of the biggest tools they reach for to reduce the tax bill -- Section 179 depreciation and prepaying for inputs -- could be more complicated to use than usual.
DTN tax columnist Rod Mauszycki explains in the edited Q&A below.
Q: Equipment makers and suppliers are struggling under current supply chain issues and, in some cases, deliveries are deeply delayed. For farmers who ordered equipment and were counting on receiving it this year for tax purposes, what are the implications if a dealer can't meet their promised deadline?
A: The rule is equipment has to be placed in service by the end of the year, but there is considerable gray area. A combine purchased in December will not be "in service" until late the following year. So, it may not qualify as a depreciable asset in the current year. I have never seen the IRS be that rigid, but I have seen them ask for proof the equipment was delivered to the farmer by year-end. So, long and short, equipment should be on farm by Dec 31.
Because several equipment manufacturers have said they can't deliver until spring 2022, the concern is that prepaids (seed, fertilizer and chemical) will be in demand. We have heard that several input dealers are requiring farmers take possession of prepaids by year-end. I believe the concern is they will oversell the prepaids and due to delivery issues, farmers may not get prepaids when they need them.
Q: Why is that important from a tax perspective?
A: The question is will there be enough inputs to go around. The concern is that retailers could oversell supply. Many of the input guys are saying they'll sell it to you, but you have to take delivery or else they cannot guarantee you'll get it when you want it. From a tax perspective, then it technically isn't a prepaid because the inventory wasn't allocated to you. Therefore, it wasn't yours, it was basically just a deposit.
Will the IRS attack that stuff? Probably not, because the invoices will look like prepaids, but retailers are probably scared right now thinking about what happens if they get sued because a farmer can't get his seed on time and has to plant late and there are now crop issues. (If you are planning on storing pesticides this winter, here are four tips to make sure you do it safely: https://www.dtnpf.com/…).
We started encouraging clients to start planning for their prepaids in October under the premise that sometime by December, the prepaids might not be there. If you wait too long and the input guys are saying you have to take delivery -- once the inventory is out, I don't think they're going to be doing prepaids. They're going to say, "Sorry, everything is sold. We don't know if we'll get it in." And just like that, you'll have to pick up another half a million dollars of income on your taxes.
Q: Do farmers have any other alternatives if their plans for prepaids fall through?
A: With crop prices, those who aren't planning with deferrals and other things, they could end up having to pay extremely high prices for used equipment at auction, all for avoiding tax. Why buy year-old equipment for the cost of brand, spanking new equipment? But they're going to be forced into a situation where unless they want to pay the tax, they're going to have to be aggressive on year-end equipment purchases.
Katie Dehlinger can be reached at firstname.lastname@example.org
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