Farmers are relieved that the grain ticket deferral option has been saved, but they should also be aware of the optional inventory adjustment when planning their taxes.
Grain ticket deferrals are useful because they help to smooth income by allowing grain to be delivered in one year and cash to be received and tax paid in the following year. This is available for the sale of listed grains such as wheat, barley, rye, flaxseed and canola.
A mirror image planning tool is the optional inventory adjustment. Producers may use an OIA to include an amount in taxable income up to the fair market value of inventory on hand at the end of the year.
The amount of OIA included in the one year will then be deducted in the following year.
Both of these tools are useful, whether you are incorporated or a sole proprietor farmer.
Keep in mind that using OIA results in you paying tax now and getting a deduction later, while a grain deferral results in an income inclusion later in which the tax follows.
For example, Bob is the owner of Farming Inc. Due to market conditions he has cash income of $100,000 in 2017.
He has $300,000 worth of grain inventory in the bin from harvest at year end.
Since he did not sell all of his 2017 grain this year, he estimates that his cash income in 2018 will be roughly $700,000.
It will be important to try to keep Bob’s corporate income below $500,000 each year to take advantage of the small business deduction limit.
Without planning, Bob would pay 12.5 percent tax on his $100,000 of 2017 income, for a tax bill of $12,500.
In 2018 he would pay 12 percent on the first $500,000 and 27 percent on anything over $500,000 for a total tax bill of $114,000. The total tax bill over two years would be $126,500.
By using OIA, he will be able to pay the lower rate of tax in both years. Bob can choose to include $300,000 of his inventory in his 2017 net income through OIA and will have a tax bill of $50,000.
In 2018 this OIA from 2017 of $300,000 is deducted to result in taxable income of $400,000, keeping him under the small business deduction.
This results in a total amount of tax paid for both years of $98,000 for a savings of $28,500 compared to not using any planning.
A second option to address Bob’s potential high income in 2018 is for him to take his grain to the elevator and receive a grain ticket during 2018.
If he were to deliver $200,000 of grain to the elevator and defer the cash receipt to 2019, he can stay under $500,000 in 2018 to continue taking advantage of the small business deduction.
Both OIA and grain deferral tickets are useful tools that can help producers smooth income. You can use either option to keep incorporated farms below the small business limit or to keep yourself in a reasonable tax bracket.
Keep in mind other factors such as the risk of a grain buyer not being able to honour their outstanding grain tickets.
If you are considering the use of OIA or grain deferrals, you may want to consult with a professional to ensure the tool provides the maximum benefit.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: email@example.com.
Riley Honess and Bailey O’Donnell of KPMG contributed to this column.