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MANDATORY
INVENTORY ADJUSTMENT This provision of the income tax act catches many farmers
by surprise! If you have a farm loss you may be counting on
using this loss to reduce your taxable income from other
non-farm sources. If you have a farm loss for the year, you
must ask yourself if you have any purchased inventory on
hand at the end of the year. Purchased Inventory consists of
fertilizer, chemicals, feed and livestock that have been
purchased, as opposed to feed or livestock that you have
raised yourself. It doesn't matter whether this inventory
was purchased in the year or carried over from several years
ago, which is often the case with purchased breeding
animals, they still are considered purchased inventory. If
you have any of these inventories on hand at the end of the
year, you are to value it at it's purchase price and add the
total of that amount back into your farm income for the
year. You add into income the lesser of the value of
purchased inventory or the amount of the farm loss. If for
example the farm loss was - $20,000.00 and you had purchased
inventory of $15,000.00 you would reduce your loss by
$15,000 to $5,000.00. The result of this is that you would
only be able to reduce off farm income for the year by the
amount of the $5000.00 loss instead of the $20,000 amount
that was the actual loss. The MIA amount of $15,000.00 is
not lost forever however as it can be deducted from farm
income the following year. Once again the following year you
must go through the same process in determining if you have
an MIA amount to add back in to income. The planning point to learn from this is that it is of no advantage if
you are in a loss situation, to go out and purchase inventory items to
increase your loss for the year. Purchasing fertilizer and livestock can
benefit you if you are in a profit situation to reduce farm income, but is
of no help if you will be in a loss!
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