Grain inventory

[sdtaxman]

I have a client that is a seed and feed mill. They purchase grain and then resell it, some as seed, some as feed, and some to commercial millers. In the past we have valued grain inventory at market value which has been almost the same as cost (very small difference) however this year the client wants to value at market which will create a bigger difference to cost than in the past. This increase in inventory over estimtated cost would be about $25,000. About 5% of the total inventory. This just happens to add to the profit since this year he had a bad debt that had to be written off of $21,000.

Do you see anything wrong with increasing the inventory value? Any suggestions on how to handle are appreciated.

[Davc]

See Form 3115 and instructions.

[outwest]

The problems I see are...

First, the general options are

1. Cost
2. LOWER of cost or market under the regs.

In other words you can write down inventory in some circumstances but not write up.

If the issue is financial statements, GAAP is moving toward some fair value provisions but we are not there in the US yet. Still lower of cost or market.

[Bees Knees]

First, the general options are

1. Cost
2. LOWER of cost or market under the regs.

In other words you can write down inventory in some circumstances but not write up.

That is true in general for most businesses. However, farmers are allowed to use some unique inventory valuations not available to others. One is the farm-price valuation method, mentioned on page 5-25 of TTB. Pub 225 describes this and nothing is said about it being restricted to the lower of cost or market value. Therefore, farmers can write up inventory to market value. This would lower the cost of goods sold deduction by increasing ending inventory.

I agree with the other post that if you choose to change methods, you need to do the 3115, which is something you need to take into consideration if you don't want to use the method used last year.

[outwest]

I'll have to read that later..

my curiosity is tickled. But this is a feed mill. Even though they buy farm commodities and sell the feed (more than likely) to dairies or livestock feeders, they're not a farmer.

Don't know about your neck of the woods, but most farmers around here are cash basis so the inventory method is generally irrelevant. Except when filling out the net worth statement for the annual visit to the banker or if they exceed the prepaid expense limits.

On another practical matter, I'm not sure I'd do a 3115 for this small a item. Or I wonder what the harm is in deducting a loss currently.

Speaking of farmers, with this jump in commodities, maybe we'll be dragging out the Schedule J (if memory serves me right) this next year and doing averaging.