Farm Income Expense - Feed Purchased

When reporting farm income and expenses, the deduction for feed purchased depends on whether you use the cash method of accounting and whether the feed is consumed in the same year it is paid for. If you purchase livestock feed for use in a future year, you may not deduct the cost in the year of payment unless specific conditions are met.

Deduction Rules for Prepaid Livestock Feed

Under the cash method, you can deduct the cost of prepaid livestock feed in the year paid only if all three of the following tests are satisfied:

• Payment for purchase, not a deposit: The payment must be for the actual purchase of feed, not a deposit. This is determined by facts and circumstances, such as a binding commitment to accept delivery at a fixed price, no right to refund, and no ability to substitute goods. A price adjustment based on market value at delivery does not, by itself, indicate a deposit.
• Business purpose: The prepayment must serve a legitimate business purpose, such as securing feed supply, fixing maximum prices, or obtaining preferential treatment during shortages. The prepayment must not be made solely to avoid tax.
• No material distortion of income: Deducting the prepaid feed must not materially distort your income. Factors considered include your customary business practices, timing of the purchase, and the expense relative to your annual income.

If any of these tests are not met, you must deduct the feed expense in the year it is actually consumed by your livestock.

Prepaid Farm Supplies Deduction Limit

Even if you meet the three tests above, your deduction for prepaid farm supplies (including feed) may be limited. If prepaid farm supplies (feed, seed, fertilizer, etc.) exceed 50% of your other deductible farm expenses for the year, your deduction is capped at 50% of those other expenses.

• Example: If your other deductible farm expenses are $100,000 and you prepaid $55,000 for farm supplies (including $10,000 for feed), your deduction is limited to $50,000. The remaining $5,000 is deductible in the year you use or consume the supplies.

Special Rules for Poultry and Items for Resale

For poultry (such as egg-laying hens or baby chicks) bought for use or resale, you may deduct the cost in the year paid if you consistently use this method and it does not distort income. However, if you buy livestock (like steers) for resale and do not sell them in the same year, you cannot deduct their cost until the year of sale.

Feed Assistance and Reimbursements

If you receive government feed assistance (e.g., under the Disaster Assistance Act of 1988), you must include the market value of donated feed or below-market-price feed in income. You may also deduct the same amount as a feed expense in the same year.

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Disclaimer: Always verify details with current IRS forms, instructions, and guidance from your state Department of Revenue. For complex situations, consult a CPA or tax attorney.