Farmers with livestock often purchase feed to supplement any feed produced on the farm. The amount paid for feed—If the feed is consumed within the tax year by livestock raised for a profit—is an ordinary and necessary business expense. The total amount of feed purchases are reported and deducted on Line 16, Schedule F.
Example 1. Robert operates a commercial cow-calf herd as a production enterprise on his farm. This year Robert bought supplemental feed and minerals to pre-condition his cows prior to breeding in the spring. Additionally, he bought mineral supplements for the grazing season and creep feed for the calves as they were weaned from their mothers. All of this feed was consumed within the tax year. Robert spent $20,000 for these feed items. Robert reports this on Line 16, Schedule F.
Prepaid Feed
Often farmers and ranchers will pre-pay feed costs to feed animals through the winter. Cash basis farmers are generally allowed to deduct the cost of farm supplies such as feed, seed, and fertilizer, even though they will not use the supplies until the following year. This allows farmers to take the deduction in a year prior to the consumption of the feed.
I.R.C. § 464 limits the amount of the allowable deduction for prepaid expenses. Generally, prepaid farm expenses cannot exceed 50% of other deductible farm expenses (including depreciation), unless a farm-related taxpayer meets one of the following two exceptions:
- The prepaid farm supplies expense is more than 50% of the other deductible farm expenses because of a change in business operations caused by unusual circumstances OR
- The total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of the total other deductible farm expenses for those 3 tax years.
In addition to the 50% limitation, the cost of supplies purchased in the current year for use in the following year is deductible by a cash basis taxpayer in the current year only if:
- the expenditure is a payment for the purchase rather than a mere deposit,
- the prepayment is made for a business purpose and not merely for tax avoidance, and
- the deduction in the tax year of prepayment does not result in a material distortion of income.
Example: Everett raises heritage breeding hogs using a pasture-based plan. In the winter he has covered shelter the hogs can access. On November 1, Everett issues a check for $10,000 to Tasty Livestock Feeds on his account from which he can make draws as he picks up feed on a weekly basis. The weekly feed price is determined by fluctuations in market conditions. This payment is a mere deposit. It cannot be deducted in full on Everett’s Schedule F. Everett is allowed a current deduction for the weekly feed purchases for November and December based on the receipts and respective draws for these weeks.
The Center for Agricultural Law and Taxation is a partner of the National Agricultural Law Center (NALC) at the University of Arkansas System Division of Agriculture, which serves as the nation’s leading source of agricultural and food law research and information. This material is provided as part of that partnership and is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.