There’s more than one way to sell cattle at tax time
Many cattle producers face an unusual circumstance this tax year. Quickly rising 2014 cattle prices generated a lot of profit, so producers are looking for ways to reduce income tax liabilities by deferring 2014 income until 2015. Prices continue to hold steady so producers might consider income deferment on 2015 income, too.
Curt Barnekoff, a certified public accountant with WIPFLI-GHG in Havre, Mont., offers suggestions for several ways to sell cattle in one year, yet get paid in the next year.
“You can hold the check in your wallet and deposit it whenever you want to,” he notes.
Holding check a no-go
But the Internal Revenue Service considers having a check in a wallet as a constructive receipt because a person has access to the money and controls whether to spend it or not, even if the money is not in a bank account. The income then must be declared on a tax return.
“Holding a check is convenient, but it is not allowed for income tax purposes. Also, there is the risk of whether the check will still be good. And what if you lose your wallet?” Barnekoff asks.
Another option is to let the buyer hold the money until the seller asks for it.
“You still have the constructive receipt problem because you can have the money whenever you ask for it. And what if the buyer disappears, files bankruptcy or dies? You have no documentation,” says Barnekoff.
An easy solution would be to write up a contract with the buyer, as long as the contract is not assignable or transferable. If it were, then the IRS would consider the contract as giving the cattle seller some economic benefit — and, thus, a constructive receipt.
Again, the buyer could vanish without a trace, leaving the seller holding a flimsy piece of paper.
Eliminating some of the worry
Barnekoff suggests using an unrelated third party to hold the money as a deferred contract.
The third party, buyer and seller all sign agreements. The third party — usually a financial institution — sticks the check into a holding account and gives the money to the seller when specified in the agreement.
The seller cannot receive “interest” on the money because that would constitute economic benefit in IRS lingo, but most banks pay a “premium” that just happens to equal the current interest rate.
Using a third party, the seller no longer has to worry about the buyer disappearing, but deferred-payment sales accounts are only insured by the FDIC up to $250,000.
Money from all of a third party’s deferred payment agreements are in one account so that account is probably much higher than $250,000.
The seller can elect to be paid whenever he or she chooses, whether that is the next year or 10 years from now. Also, the seller can divide a single sale into several deferred payment agreements.
For example, if a cattle producer sold $300,000 worth of calves in 2014, she could elect to receive $150,000 in 2015, 100,000 in 2016 and $50,000 in 2017.
“You can defer for as long as you want, or get partial payments, but you have to decide that when you set up the agreement,” says Dan Majerus, president of Stockman Bank in Conrad, Mont.
“Agriculture is the only industry that can mess with income timing. We should use that to our advantage,” says Barnekoff.
Schmidt writes from Conrad, Mont.
Producers are looking for ways to reduce income tax liabilities.
One option is to let the buyer hold the money until the seller asks for it.
Or use an unrelated third party to hold the money as a deferred contract.
This article published in the April, 2015 edition of WESTERN FARMER-STOCKMAN.
All rights reserved. Copyright Farm Progress Cos. 2015.