3.4.2. Other Agricultural Tax Deferral Programs
The production and sale of eggs, like a cattle feeding operation, has a life cycle that begins at the end of one year and ends in the next. Hens purchased at the end of a year lay eggs for a single year, and then are sold for slaughter. For programs that qualify for the cash method of accounting, the flocks, prepaid feed, and other expenses are at least partially deductible in the year the expense is made, and income from the eggs and sale of the hens is made in the following year.
Deductions for prepaid expenses may not exceed 50% of other deductible farm expenses in the year they are incurred. Any prepaid expenses in addition to the deductible amounts must be deducted in the following year, when the expense is used or consumed. Capital is highly leveraged, and interest costs and expenses are tax deductible.
Example: Bantam Egg Farms, a DPP, purchases a flock of hens at the end of the year and prepays six months of feed and interest expenses. Expenses other than the prepaid expenses total $5,120,000.
|
Bantam Egg Farms (in thousands of dollars) |
|||
|
Tax Treatment—Cash Accounting |
Prepaid Expenses |
Dec 2020 |
2021 |
|
* = $5,120 x 0.5 |
|||
|
Total revenue |
0 |
$12,000 |
|
|
Non-prepaid expenses |
|||
|
Purchase of flock |
(5,000) |
– |
|
|
Management fee paid |
(120) |
(120) |
|
|
Total 2020 non-prepaid expenses |
(5,120) |
(120) |
|