The Commodity Credit Corporation (CCC) is the USDA’s financing institution with programs administered by the Farm Service Agency (FSA)

  Among other things, the CCC makes commodity and farm storage facility loans to farmers where the farmers’ crops are pledged as collateral. These loans are part of the price and income support system of the federal farm programs. 

A CCC loan involves a farmer pledging bushels of grain as collateral for a loan

How is the loan reported for tax purposes?  What happens when the loan is paid back?  What are the tax reporting rules that apply?  These questions are the focus of today’s post.

  The loan allows the farmer to create cashflow without the need to sell the grain.  If prices rise, the grain can be sold, and the loan (and interest) paid off with the farmer keeping the balance. 

Farmers using the loan method (and their tax preparers) should recognize that the loan method can create a high income with no cash flow in the year the grain is sold

What if prices don’t rise?  This points out a key aspect of the CCC loan program.  When a farmer seals grain (places it in storage and pledges it as collateral to secure a CCC loan), the farmer retains the ability to forfeit the grain in the future if the loan value exceeds commodity prices.  Because most CCC loans are nonrecourse, upon maturity, if the loan plus interest is not paid, the forfeiting of the commodity to the CCC as full payment for the loan effectively establishes a minimum price.  The farmer can forfeit the grain if prices drop below the loan value, and still retain the ability to market the grain later if the commodity price increases.  The forfeiting of the loan to the CCC as full payment is known as “redemption.”  Once redemption occurs, the farmer can then sell the grain, feed it to livestock or store it. 

Loan method.  By presumption, every farmer treats CCC loans as loans for tax purposes.  Thus, for a farmer on the cash method of accounting, there is no taxable income from the loan until the year in which the commodity is sold or the crop is forfeited to CCC in full satisfaction of the loan.  If grain is forfeited to the CCC in satisfaction of the loan, the taxpayer will receive a Form 1099-A from the USDA.  The amount of the loan forfeited is reported on line 5b of Schedule F with the same amount entered as taxable income on line 5c. 

Income method.  CCC loans may, by election (and without IRS permission), be treated as income in the year the proceeds of the loan are received. I.R.C. §77.  The election can be made at any time (I.R.C. §77(a)), but the IRS has ruled that, if a farmer elects to treat CCC loans as income, it applies to all loans originating that year.  Priv. Ltr installment loans in Vermont. Rul. 8819004 (Jan. 22, 1988).  Actually, the CCC loan is not income.  Rather, the amount reported as income is the cash proceeds of the CCC loan which then serves as the grain’s income tax basis.  I.R.C. §1016(a)(8).  The amount of the income is entered on line 5a of Schedule F.  The election constitutes an adoption of an accounting method and is binding for future years.  Treas. Reg. §1.77-1.  An election statement reporting the details of the loan must be attached to the farmer’s return for the year the election is made.  See IRS Pub. 225 and the Instructions to Schedule F.  Also, the election to treat CCC loans as income applies to all commodities for that taxpayer.  Treas. Reg. § 1.77-1.