Deferred Grain Tickets.
When you deliver grain to a purchaser but do not receive payment for the delivery until after your fiscal year, which for non-incorporated farms is December 31, this is known as deferring your grain sales. The ticket you receive typically shows the date of delivery and when the date of the pre-determined payment amount is to be. As most farms operate on a cash basis, revenue is reported not when the product has been delivered but when the payment is received. If you must sell your grain and cannot store it due to either your storage facilities are already at maximum capacity or you don’t want to run the risk of spoilage, then deferring your grain sales is an option to choose.
Deferred grain tickets can be especially useful if your harvest was much more bountiful than what was originally anticipated resulting in having more product to sell for that year. The problem within is that the extra revenue could push your operations into a higher tax bracket, meaning that more of your sales would be exposed to a higher tax rate. By taking some of that extra product and ‘pre-selling’ it to a purchaser, it could help in reducing any sales that would be susceptible to a higher tax rate that year and pushing some sales to the following year. This could also assist in your year-to-year tax planning as a tool by leveling your revenues and providing consistency in the amounts of revenue reported on an annual basis. Then when it comes time to pay your taxes, you would have a better idea of how much taxes you would be owing. This is known as ‘smoothing out by reducing the volatility of fluctuating prices and the unpredictability of crop turnout, which can cause swings of high and low revenues from year to year.
Consideration should be taken when determining if you should defer some of your grain sales. If your operations did not have an especially large crop production in a certain year, you might want to recognize the sales in that year as your sales might not be pushed to a higher tax bracket (whereas the next year might be a great production year and would have more than enough product to sell). You might also want to consider external economic conditions as well. If you think that the crop price for your crop will be lower in the following year than the current price, you may want to continue selling now while you can still get a favorable price. An alternative to deferring your grain sales is by claiming an Optional Inventory Adjustment (OIA) for that year (see our February 2019 newsletter article for more details on OIA). Claiming OIA rather than deferring grain sales has the benefit of timing, as delivering grain to be deferred must be done before the fiscal year-end while claiming an optimal OIA amount can be done while your preparing your taxes, whether it be personal or on a corporate level.
Important clarification: if you have taken payment for the grain that is dated in the current
fiscal year but have opted to hold off on depositing the funds until the following year, this is not considered deferring the grain sale. From CRA’s standpoint that would be considered revenue in the current fiscal year as you had the funds in your possession.
Also important to note if you are planning to incorporate your farming operation; deferred
grain cannot be transferred to the corporation. In other words, even if a corporation is active in the next fiscal year when the payment is received the revenue would still be considered personal and would have to be reported on your personal tax return. Without the proper planning, this could translate into a large tax bill. So for individuals planning to transfer their farm operation into a corporation, it is very important to consult with your accountant before engaging in grain deferrals.
If you have any questions on using grain deferrals and how they may benefit your operation, don’t hesitate to contact on Ag Team for more details.
To all the crop farmers… HAPPY HARVEST!!!