Prepaid Livestock Feed
If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests.
- The payment is for the purchase of feed rather than a deposit.
- The prepayment has a business purpose and is not merely for tax avoidance.
- Deducting the prepayment does not result in a material distortion of your income.
If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier.
If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed.
This rule does not apply to the purchase of commodity futures contracts.
Payment for the purchase of feed.
Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase.
purchase. The following are some factors that show a payment is a deposit rather than for the purchase of feed.
- The absence of specific quantity terms.
- The right to a refund of any unapplied payment credit at the end of the contract.
- The seller's treatment of the payment as a deposit.
- The right to substitute other goods or products for those specified in the contract.
A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit.
Farmer's Tax Guide