Relieving farm cash flow problems with commodity credit loans
In general, yields have been above expectations for both corn and soybeans in 2016, but commodity prices are also at low prices that we have not seen for several years. Cash flow is going to be tight going into 2017. In previous years, farmers have had excellent incomes and have offset that by using the Section 179 Expense Election. This has allowed them to expense up to $500,000 of qualifying asset purchases, which included machinery purchases. This has been done for several years and now a lot of farmer’s depreciation schedules have little or no depreciation to use in 2016 and future years. With little cash to purchase assets in 2016 in order to use the Section 179 Expense Election, many farmers may find that they have higher taxable income than expected and still have payments to make on machinery loans. In past years, to help minimize taxes, many farmers have also rolled grain sales ahead and prepaid expenses. This year the high costs of inputs in comparison to commodity prices along with loan payments to make has tightened up cash flow. So, the dilemma is how to create cash flow and not create taxable income in a year when income may already be higher than expected.
With the higher commodity prices and excellent farm incomes the past few years’ commodity credit loans have not seen the use they once did. This may change now that commodity prices are lower and cash flow is tight. When a farmer takes out a loan from the Commodity Credit Corporation (CCC) and pledges their grain as collateral, they have a choice as to declare the loan as taxable income in the year they receive the loan or declare it as a loan and then declare the taxable income in the year the grain is sold. The farmer is not limited as to what the Commodity Credit loan can be used for. They could prepay for seed, fertilizer or chemicals and possibly capture some discounts for early payment, plus reduce taxable income for 2016 or make payments on loans that may have a higher interest charge.
Tax treatment of CCC loans
To report the CCC loan as income in the year the loan is received you report it on the Schedule F on line 5a. Once the CCC loan is reported as taxable income in the year received then it must also be reported in future years as taxable income in the year it is received. This can be changed by filing Form 3115, Application for Change in Accounting Method. Changing from reporting a loan as taxable income in the year received back to reporting it as a loan is an automatic election, but Form 3115 must be filed. This gives the farmer the flexibility to switch back and forth year to year if desired. Form 3115 only needs to be filed when switching from income to loan, it does not need to be filed when switching from loan to income.
It may have been some time since a farmer has taken out a CCC loan. They may not remember how they treated the last loan for tax purposes and may have to look at some past tax returns to find out. CCC loans are one way to generate some cash flow and the farmer has the choice as to how to treat it for income tax purposes. As always, consult with your tax professional to determine what is best in your situation.
Charles Brown, farm management specialist, 641-673-5841, firstname.lastname@example.org