There may be a limit on your deduction for prepaid farm supplies if you use the cash method of accounting to report your income and expenses. This limit will not apply, however, if you meet one of the exceptions, described later.
Deposits are not considered prepaid farm expenses.
What is a Prepaid Farm Expense
Prepaid farm supplies are amounts you paid during the tax year for the following items:
- Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year
- Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business that would be deductible in the following year if you had capitalized the cost and deducted it ratably (for example, monthly) over the lesser of 12 months or the useful life of the poultry
- Poultry bought for resale and not resold during the year
What is Not a Prepaid Farm Expense
Prepaid farm supplies do not include any amount paid for farm supplies on hand at the end of the tax year that you would have consumed if not for a fire, storm, flood, other casualty, disease, or drought.
You can deduct an expense for prepaid farm supplies that does not exceed 50% of your other deductible farm expenses in the year of payment. You can deduct an expense for any excess prepaid farm supplies only for the tax year you use or consume the supplies.
The cost of poultry bought for use (or for both use and resale) in your farm business and not allowed in the year of payment is deductible in the following year. The cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry.
Farm Business Expenses section of Publication 225, Farmer’s Tax Guide