Frequently Asked Questions
Who is eligible for the Prepayment of Farming Supplies?
Available to cash-basis taxpayers in the trade or business of farming who are 'qualified farm-related taxpayers' or whose prepaid supplies are less than 50% of other deductible farming expenses.
How does the Prepayment of Farming Supplies work?
Allows cash-basis farmers to deduct the cost of feed, seed, fertilizer, and other supplies in the year purchased rather than the year consumed, provided the prepayment does not exceed 50% of total deductible farming expenses.
What law authorizes the Prepayment of Farming Supplies?
The Prepayment of Farming Supplies is authorized under IRC §464 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §464
Source: Internal Revenue Code, Title 26, United States Code
§ 464. Limitations on deductions for certain farming expenses(a) General ruleIn the case of any taxpayer to whom subsection (d) applies, a deduction (otherwise allowable under this chapter) for amounts paid for feed, seed, fertilizer, or other similar farm supplies shall only be allowed for the taxable year in which such feed, seed, fertilizer, or other supplies are actually used or consumed, or, if later, for the taxable year for which allowable as a deduction (determined without regard to this section).
(b) Certain poultry expensesIn the case of any taxpayer to whom subsection (d) applies—(1) the cost of poultry (including egg-laying hens and baby chicks) purchased for use in a trade or business (or both for use in a trade or business and for sale) shall be capitalized and deducted ratably over the lesser of 12 months or their useful life in the trade or business, and
(2) the cost of poultry purchased for sale shall be deducted for the taxable year in which the poultry is sold or otherwise disposed of.
(c) ExceptionSubsection (a) shall not apply to any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, or other casualty, or on account of disease or drought.
(d) Certain persons prepaying 50 percent or more of certain farming expenses(1) Taxpayer to whom subsection appliesThis subsection applies to any taxpayer for any taxable year if such taxpayer—(A) does not use an accrual method of accounting,
(B) has excess prepaid farm supplies for the taxable year, and
(C) is not a qualified farm-related taxpayer.
(2) Qualified farm-related taxpayer(A) In generalFor purposes of this subsection, the term “qualified farm-related taxpayer” means any farm-related taxpayer if—(i)(I) the aggregate prepaid farm supplies for the 3 taxable years preceding the taxable year are less than 50 percent of,
(II) the aggregate deductible farming expenses (other than prepaid farm supplies) for such 3 taxable years, or
(ii) the taxpayer has excess prepaid farm supplies for the taxable year by reason of any change in business operation directly attributable to extraordinary circumstances.
(B) Farm-related taxpayerFor purposes of this paragraph, the term “farm-related taxpayer” means any taxpayer—(i) whose principal residence (within the meaning of section 121) is on a farm,
(ii) who has a principal occupation of farming, or
(iii) who is a member of the family (within the meaning of section 461(k)(2)(E)) of a taxpayer described in clause (i) or (ii).
(3) DefinitionsFor purposes of this subsection—(A) Excess prepaid farm suppliesThe term “excess prepaid farm supplies” means the prepaid farm supplies for the taxable year to the extent the amount of such supplies exceeds 50 percent of the deductible farming expenses for the taxable year (other than prepaid farm supplies).
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