By moving income from the current tax year forward a deferred payment contract can help decrease tax liability in that year, especially if income was unusually high, says Kim Dillivan, SDSU Extension Crops Business Management Field Specialist. Deferred payment contracts can also be used to better match income with cash flow needs. However, he said if circumstances at tax reporting time should dictate, a producer can declare the income from a deferred contract in the tax year the grain was sold, rather than the successive year when payment was received.
"Deferred grain contracts qualify as installment sales, and with installment sales producers may ‘elect out’ of reporting income when received and instead report the income in the year the grain was sold," says Dillivan of the tax law which allows grain farmers to accelerate the income from deferred contracts into the year of sale.
He also says that a producer using cash accounting can choose to report as 2013 income, revenue received in 2014 from a deferred contract initiated in 2013. For example, producers who sold grain using these types of contracts in 2013 will not receive payment until 2014.
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"Typically, with cash accounting, the sale of grain is taxed in the year when payment is constructively received, which may be different than the year the grain was produced or sold," he said. "Constructively received means the income was credited to the seller's account or is made available to the seller without restriction."
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