How Deferred Grain Contracts Can Help Your Farm
Maximize Your Profits This Year
With increasing prices in all commodities, coupled with good production and USDA payments, a lot of farmers could be experiencing higher profits in 2021, as compared to previous years. One tool a farmer could utilize when facing higher profits are deferred grain contracts.
What is a Deferred Grain Contract?
Deferred grain contracts is where grain is sold at the local elevator, but payment is deferred to a future date. Most times, that payment date would be the first of the ensuing calendar year. Most farmers do not understand that these contracts can provide tax flexibility.
Deferred contracts can be brought back into the tax year they were entered, even though cash will not be received until the next tax year. This can only be done on a contract-by-contract basis. Therefore, it would be recommended to break up a sale into several contracts instead of having one large contract. If a particular contract is brought back into the tax year it was entered, the grain will not be taxed in the subsequent year the cash was received. If cash inflow for operation purposes is not a need, deferring grain could be the preferred selling approach. Accelerated depreciation and deferred grain contracts coupled together could allow a farmer to maximize tax brackets, especially when higher tax rates are looming.
How Does a Deferred Grain Contract Work?
To better visualize how this tool can help you and your farm, read on for an example.
John Farmer has 10,000 bushels of corn to sell but does not need any more cash to operate the farm through the end of 2021. John decides to sell the corn in December of 2021 due to favorable prices and contracts the grain in two 5,000-bushel contracts with payment in January of 2022. Upon completion of John’s tax return in February, it is recommended John pay a little more income tax to maximize the bracket he is in. The amount needed to accomplish this is one of the 5,000-bushel contracts and is taxed on the 2021 income tax return. The other 5,000-bushel contract will be taxed in 2022.
There are many tools a farmer can use to maximize their profits, including deferred grain contracts. To understand how these contracts can affect your business, contact your Adams Brown advisor today.