This means the farmer will report the crop into income in the year it was placed under loan
For example, assume a farmer is participating in a three-year farmer loan reserve program. If a year of high prices occurs and all of the grain under the three-year loan reserve program is sold, the result is a spike in the taxpayer’s income for that year. That is because the grain is income in the year that it is disposed of if an election has not been made to treat the loan as income. In order avoid that result, the farmer is permitted to treat the loans as income. This has the favorable result of evening out year-to-year income by offsetting the income from the crop with the expenses of raising the crop. When the crop is eventually sold, there will be taxable income only to the extent that the sale price exceeds the loan amount.
However, there is an advantage in not paying tax any sooner than required and, therefore, farmers (particularly those in higher brackets) may not want to treat CCC loans as income. The preference may be to roll the income as far as possible without paying tax on it. Thus, it is an important consideration for tax planning purposes to consider whether to treat CCC loans as income or as loans. The point is that a choice is available.
It is important to understand the tax ramifications of making or not making the election to treat CCC loans as income
- If the loan is paid by forfeiting the commodity to the CCC, no income is reported if an election has been made to treat the loan as income upon receipt. The farmer’s basis in the grain offsets the loan liability. But, there could be either a gain or loss on the farmer’s Schedule F if the farmer’s liability on the loan is more or less than the farmer’s basis in the grain. However, if no election is made, the amount of the loan is reported as income upon forfeiture (redemption).
It is important to understand the tax ramifications of making or not making the election to treat CCC loans as income
- If the commodity is redeemed by paying off the loan with cash, the farmer has a basis in the commodity equal to the loan amount if an election has been made to treat the loan as income. If no election was made, the farmer has a zero basis in the commodity.
It is important to understand the tax ramifications of making or not making the election to treat CCC loans as income
- If the redeemed commodity is sold, the farmer has income (or loss) equal to the sale price of the commodity less the amount of the loan (which is the basis in the commodity), if an election to treat the loan as income was made. If not, the farmer has income equal to the selling price of the commodity.
It is important to understand the tax ramifications of making or not making the election to treat CCC loans as income
- If the redeemed commodity is fed to livestock, the farmer has a feed deduction equal to the amount of the loan (which is the basis in the feed), if an election has been made to treat the loan as income. If no election was made, the farmer does not get a feed deduction.
It is important to understand the tax ramifications of making or not making the election to treat CCC loans as income
- Regardless of whether the CCC loan is treated as a loan or as income, interest that the farmer pays to the CCC on the loan is deductible in the year it is paid for a cash-basis farmer.
As noted above, normally the repayment of a CCC loan has no tax impact. That’s the case regardless of whether or not the taxpayer has made an election to treat the loans as income. But if a farmer has elected to treat CCC loans as income, the courts are divided as to the outcome if the loans are redeemed in the same year they are taken out. The Fifth Circuit Court of Appeals has held that no income is realized from the loan on a crop redeemed in the same year. Thompson vm’r, 322 F.2d 122 (5th Cir. 1963), aff’g and rev’g, 38 T.C. 153 (1962). On the other hand, the Ninth Circuit Court of Appeals has taken the position that the loan triggers income even though it is redeemed in the same year. United States v. Isaak, 400 F.2d 869 (9th Cir. 1968).