When is the sale of grain not a grain sale

Each year, taxpayers experience changes to tax regulations as imposed by the Internal Revenue Service (IRS). Whether you’re impacted directly or indirectly, even the simplest of changes often generate a notice in the mail — which can cause alarm. However, when it comes to understanding the complexities surrounding tax laws, HBE is here to help you plan and prepare throughout the year to help you minimize your current and future tax liabilities.

One of the last minute changes imposed by the IRS this year applies to how farmers report grain sales.

Farmers filing a Schedule F with their individual income tax return are likely familiar with Form 1099-PATR which reports the amount of patronage dividends from cooperatives.  Income from patronage dividends is different from the income from grain sales because it is generated from making purchases such as fuel, fertilizer, seed and other farm supplies from those cooperatives.

In the last year, the Form 1099-PATR has included per-unit retain allocations. Per-unit retain allocations, as defined by the IRS, is “…an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. These allocations can be paid in money, other property, or qualified certificates.”

So how is this related to farming income? This amount is the total grain sales which a cooperative purchased from a farmer.  Per new IRS guidance, this income is now required to be reported as a cooperative distribution and not as a sale of grain.

If the income reported on Form 1099-PATR does not match the income reported on a Schedule F of an individual’s income tax return, you would receive a notice from the IRS advising you that that your income was understated and more tax is due.

For example:

If a farmer sold $200,000 of grain to the cooperative in the past, it was called a grain sale. However, now, it is considered a patronage dividend.  Therefore, if the IRS does a 1099 match, they will assume the income is understated by $200,000 and will issue a balance due notice for as much as $75,000 including penalties and interest.  To avoid this, the portion of grain sales that is included in box 3 of the 1099-PATR form must be moved to the Patronage Dividend line of Schedule F.

It is important to be proactive on all reporting issues, whether they are simple or complex, so that you can file a correct tax return and avoid receiving the IRS notification in the mail.

Please call our office if you have any questions regarding the matter discuss or other tax-related questions at (402) 423-4343 and let our tax experts help you.

Source: Internal Revenue Service. Patronage Dividends Agricultural Tax Tips. www.irs.gov

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