Since several equipment manufacturers have stated that they will only be able to deliver in spring 2022, there is concern that advance payments (seeds, fertilizers and chemicals) will be required. We have heard that several farm supplies dealers are demanding that farmers obtain prepayments by the end of the year. I believe the concern is that they will oversell the prepayments and due to delivery issues, farmers may not get prepayments when they need them.
Q: Why is this important from a tax point of view?
A: The question is whether there will be enough input to get around. There is concern that retailers may oversell supply. A lot of the input people say they’ll sell it to you, but you have to take delivery or they can’t guarantee you will get it when you want it. From a tax point of view, it is technically not an advance payment, as the inventory has not been assigned to you. So it wasn’t yours, it was basically just a deposit.
Will the IRS attack this stuff? Probably not, because the bills will look like prepayments, but traders are likely to be scared thinking what will happen if they are sued because a farmer cannot get his seeds on time and has to sow too late and there are now harvest problems. (In case you have pesticide storage this winter, here are four tips to do it safely: https://www.dtnpf.com/…).
We started encouraging customers to start planning their prepaid credits in October, with the premise that the prepaid credits may run out at some point in December. If you wait too long and the input people say you have to take delivery – once the inventory is exhausted, I don’t think they will prepay. They’ll say, “Sorry, it’s all sold. We don’t know if we can get it in.” And just like that, you have to raise another half a million dollars in income from your taxes.
Q: Do farmers have other alternatives if their prepayment plans fail?
A: At harvest prices, those who don’t plan on deferrals and other things may end up paying extremely high prices for used equipment at auctions to avoid taxes. Why buy year old equipment at the cost of brand new equipment? But they will find themselves in a situation where if they don’t want to pay the tax they will have to be aggressive about year-end equipment purchases.
Katie Dehlinger can be reached at email@example.com
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