Jay Capasso, UF/IFAS Columbia County. Halie Corbitt, UF/IFAS Columbia County. Paulette Tomlinson, UF/IFAS Columbia County.
Agriculture requires major investments before and during the growing season. Farmers need to invest in agricultural inputs (seed, fertilizer, pesticides, etc.) to produce and sell a final product. The more efficiently farmers manage these inputs, the better chance they have at making a profit once it is time to sell their grain, peanuts, livestock, etc.
There are end of the year financial decisions farmers can make to efficiently manage agricultural inputs: One method is pre-paying for agricultural inputs. Agricultural retailers are incentivized to book early orders with their customers to provide certainty they will sell their distributor’s product. Many retailers provide deals at the end of the year to guarantee orders for the new year. When it comes to supply, pre-ordering might ensure you will be able to purchase the input before it sells out. Supply chain issues in recent years have resulted in increased prices and reduced availability of many agricultural inputs. Preordering inputs could lock in lower prices and ensure product availability. However, farmers should check with their retailer about what happens if the price of the agricultural input you are pre-ordering decreases or if the product is unavailable come spring. Some retailers provide price protection. Prepaying does require faith that your retailer will supply you the input at the promised price at a later date.
Another reason farmers prepay for agricultural inputs is to manage their taxes. Farmers might be able to deduct expenses on agricultural inputs purchased before January 1st even though the inputs are not delivered to the farmer until the following year when needed. Whether a farmer is incentivized to deduct taxes for the current year depends on their income. It is best to discuss these decisions with your tax advisor to determine the best strategy. In situations when the deduction is not needed for the current year agricultural inputs can be purchased or prepaid after January 1st. Some basic rules to follow if one plans to deduct a prepaid expense:
- Make sure your invoice lists the specific product purchased at exact prices and quantities.
- According to the IRS “your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year.”
- The deducted payment covers costs that are reasonably expected to be utilized in the following year.
- Keep accurate, timely, and complete records of all expenses and income related to the farm business! 😊
For more information see the video below: