AT. 2 Special Tax Requirements For Supplies On-hand at Year End
If you keep no records of how much of the supplies you have on hand and how much you use, you may deduct the full cost in the year it is paid.
If you keep any records that show inventory on hand and inventory used there is a general rule for all taxpayers, and a special rule for farmers.
Special rule for prepaid farm expenses (feed, seed, fertilizer, or other similar farm supplies):
Your deduction is capped at 50% of your total other farm expense deductions unless one of the following is true:
- 50% of other expenses exception
- 3-year total rule
AND one of the following apply:
- principal residence is on the farm
- principal occupation is farming
- taxpayer has a family member who lives on the farm or whose principal occupation is farming
No deduction is allowed if the payment is only a deposit, and the supplies must be intended to be used in the business within 12 months.
For more information see IRS Publications 225 and 535.
This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others.
