General principles of accounting provide that loan proceeds received are not treated as income to the borrower. However, farmers and ranchers may make an election [I.R.C. § 77] to treat CCC loans as income. Originally, this election was irrevocable, but in 2002, IRS issued a Revenue Procedure allowing this election to be revoked. Additionally, the election and subsequent revocation of the election may be made repeatedly, and farmers and ranchers have a helpful tool to manage farm income. [Rev. Proc. 2011-14, 2011-4 I.R.B. 330]. To revoke the election, farmers and ranchers use IRS Form 3115, Change in Method of Accounting. It should be noted that that this revocation is made on a “cut off basis,” meaning that income reported in the past on loans received cannot be removed from those years as a result of the election.
For tax management purposes, the farmer or rancher can elect to treat a CCC loan as income. The election is made by simply reporting the loan as income on Line 5a.
Example 1. George and his tax preparer decide that for the current year, making the election to treat his $100,000 CCC loan as income is a good option to accomplish George’s long-run business goals. Therefore, George reports the income on Line 5a as illustrated below.
Example 2. George in Example 1 above, repays his loan in March of the following year. Since he took out his CCC loan, the commodity price increased so that when George sold his commodity, he received $200,000. Because George made the election to treat his $100,000 as income, he now has basis of $100,000 in the commodity and reports the sale on Lines 1 a, b, and c, thus treating the commodity as a “purchased for resale item.”
CCC loan elections require farmers to keep accurate records and maintain clear communication with their tax professionals. Without these safeguards, there is a risk of double taxation on the $100,000.
Many farmers and ranchers treat their CCC loans as loans. In this case, when the loan is repaid, and the crop is sold, income is reported on Line 2 as a raised sale (see the line 2 section of this series). This strategy is generally followed when the price of grain is expected to be higher in the future (as illustrated in Example 2). The loan is used to create a revenue stream with which to meet obligations. Any interest paid to the CCC is an ordinary and necessary business expenses and is taken as a deduction on Line 21b (discussed in a separate section).
Sometimes the price of the commodity under loan doesn’t rise and the farmer, who treats the loan as a loan, forfeits the loan and then reports the loan proceeds received in the past as the sales price of the commodity. Forfeited loans are reported on Lines 5b and 5c to facilitate keeping the income streams separate.
Example 3. Lisa uses the cash method of accounting. She treats her CCC loan as a loan. At harvest, Lisa marketed corn she raised using the CCC loan and received $150,000. Lisa anticipated the price of corn would increase several months after harvesting her corn; however, that did not happen. Instead, Lisa’s local corn price was less than the per bushel loan value. As such, it made economic sense for Lisa to forfeit the loan and release the corn to the CCC as full payment. This requires Lisa to report the $150,000 as a corn sale, fully taxable. Lisa reports this transaction on Lines 5b and 5c of her Schedule F. Frequently this type of transaction occurs over two tax years. The loan is created in the year of production, and the repayment of the loan is in the subsequent year.
Sometimes, farmers will repay the loan to the CCC at a Posted County Price (PCP) less than the commodity’s loan value. The difference is reported to the farmer on a CCC-1099-G and the difference is reported by the farmer.
Example 4. Jerome receives a CCC loan (corn) for $150,000 but does not make the election to treat the loan as income. When the PCP in Jerome’s county was $3.25 he repays the loan to CCC with $135,000 and then sells the corn for $145,000. Jerome will receive a CCC-1099-G from CCC for $15,000 [$150,000 - $135,000} and he must report this difference on his Schedule F as shown below.
In this fact pattern, Jerome has total income of $160,000 for his corn [$145,000 + $15,000]. He received $150,000 of loan proceeds which he used to pay expenses; he took advantage of a low PCP to pay off the loan and simultaneously sold his corn. This example illustrates another instance of when clear communication and planning is essential to correctly report these transactions for income tax purposes.
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.