As congressional leaders work on reforming the federal income tax code, farmers and ranchers should pay attention to suggested changes and in particular, a proposal that requires businesses with more than $10 million in gross receipts to use the accrual method rather than the cash method of accounting.
Josh Rolph of the California Farm Bureau Federation Federal Policy Division said the House Ways and Means and the Senate Finance committees released drafts of changes to the federal tax code in March and November of last year.
"Even though it's unlikely that Congress would tackle tax reform in an election year, it's important for farmers and ranchers to be ready, especially when Congress is tackling the budget and trying to find cost savings," Rolph said. "Something like this proposed cash/accrual change would mean more money coming into the federal government and that is why we're taking this so seriously."
As a C-corporation, S-corporation or a partnership, the cash accounting method is currently allowed with average gross receipts up to $25 million. Both House and Senate committees addressing the federal tax code have proposed reducing the threshold for switching from cash accounting to accrual accounting to $10 million of gross receipts. Only those conducting business as sole proprietors would continue to have no cash accounting limitation.
The proposal will also affect many farms and ranches that as stand-alone businesses have less than $10 million in gross receipts. When related businesses are aggregated and have combined gross receipts more than $10 million, Rolph said, each of the related businesses would be required to use the accrual method of accounting.
"In my practice alone, I have many family farming companies with over $10 million of gross receipts," said certified public accountant Mark Croce of Croce, Sanguinetti & Vander Veen Inc., based in Stockton. "These entities have always used the cash method of accounting. A switch to the accrual method would have a huge impact on any farmers with crops harvested in the fall with payment schedules stretching into the following year."
The move to accrual accounting would cause farmers to potentially have to borrow money to pay taxes, as farm crop receivables are not collected in the typical 30- to 60-day time frame as would be the case for most companies, Croce explained.
Tom Coleman, a pistachio grower in Madera, said under cash accounting, he reports taxes based on the money he has received or expenses of items he has put to use. Under the accrual method, the problem is farmers do not know what they are going to be paid for their crop.
"When we deliver our crop to the processor, they give us a rough idea of what we are going to get paid, but (under accrual) we would have to guess what we are going to get paid and show that as having received it. But, what if we don't receive it?" Coleman said. "I can't see where that would work, so to pay taxes on a number that you don't know just doesn't work."
"A bank required me to use accrual one time several years ago and the accounting fees to make the conversion just one time was just under $20,000" Coleman added.
Mark Watte, a diversified farmer from Tulare County, agreed that agriculture is unique compared to other businesses, due to the timing that payments are received for the crop and how this impacts a farmer's overall cash flow.
"With accrual, you'd pay taxes on whatever is earned in that particular year, but certainly in agriculture because of timing and pricing, we can have huge variations in our income," Watte said. "Having the cash basis is something we really need so that we do not have such huge ups and downs on our income tax. We're still receiving income from our 2012 pistachio crop—not a lot but there's still some, so there's a long lead time, especially on crops where you can't forward contract on the futures market."
Other issues that Farm Bureau is watching closely in the tax reform debate include repealing or scaling back certain tax deductions important to farmers and ranchers, and a new system of depreciation.
"Cash accounting combined with the ability to accelerate expenses and defer income gives farmers and ranchers the flexibility they need to optimize cash flow for business success, to plan for business purchases and to manage their tax burden by targeting an advantageous level of taxable income," Rolph said.
CFBF supports defeating the proposed cash-to-accrual tax-law change as part of the Farmers for Tax Fairness coalition created last fall. The coalition, Rolph said, shows that this isn't just a California issue; it will affect a lot of people nationwide.
To learn more about the campaign and how farmers are impacted by the proposed federal tax code changes, go to: http://fairfarmtax.com. To learn more about proposed tax reform changes in Washington or provide input, go to https://taxreform.gov.
(Christine Souza is an assistant editor of Ag Alert. She may be contacted at firstname.lastname@example.org.)