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Mandatory Inventory Adjustment (MIA)
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 the lower of fair market value or 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 a 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!