—Lancaster Farming, Saturday, March 24, 1973
26
Farmers Switching to Accrual Accounting
One of the surest ways to clip
the wings of the tax-loss farmer is
to require farmers to report
income by the accrual accounting
method
That’s not likely to come to
pass in the near future, though
there is this possibility: that
more and more farmers will
switch to accrual of their own
accord as the rules for cash
accounting become more and
more restrictive
In a new ERS study of cash and
accrual accounting, the analyst
points out many lawmakers in
the past have favored the cash
method over accrual. He believes
they recognized the accrual
method to be an “appropriate
means of accurately reporting
farm transactions . but that it
should not, as yet, be required of
all farmers.”
This was apparent when the
Congress took up tax-loss far
ming proposals to be in
corporated into the Tax Reform
Act of 1969 For various reasons
legislators did not push for
complete withdrawal of the cash
accounting option They did, on
the other hand, agree on certain
provisions which encourage the
use of accrual accounting
Millions Use Cash
Future changes in the cash
accounting system would affect
millions of farmers Over 95
percent of them exercise their
legal right to report farm income
by the cash method rather than
the accrual
As explained in the ERS study,
many farmers prefer cash ac
counting because they don’t have
to keep complicated records of
inventory "hanges
Cash accounting also offers a
big advantage for the farmer
who’s expanding his operation
vet trying to maintain an
adequate income. Since he
doesn’t have to pay annual taxes
on inventory increases, his tax
obligations can be postponed, and
this frees cash to invest in the
farming operation
Cash accounting compared to
accrual also allows greater'
flexibility in adjusting net income
from year to year Too, sales of
raised breeding livestock may
sometimes result in lower
taxation than under the accrual
system.
The basic difference between
cash and accrual accounting has
to do with the handling of ex
penses and receipts from the
business.
Supppse a farmer takes
delivery of $5OO worth of feed on
December 15 and charges the
purchase. He’s billed for it in
January and pays it then.
Under the cash method, the
feed outlay is considered a farm
expense in January. Under ac
crual, the $5OO is a cost deduction
in December when the farmer
incurred the obligation to pay.
However, he must report the
value of feed on hand on
December 31 as part of his ending
inventory.
Example of handling receipts
A farmer raises and feeds
livestock during the year but
doesn’t sell any.
Under cash accounting, he has
no income until payment for the
livestock is actually received.
Under accrual, he has income—
the increase in the value of
livestock and crops on hand at the
end of the year compared to the
value at the beginning.
Farmers Get a Break
Farmers have been privileged
to use either method since 1915.
The adminstrative ruling of that
year was designed to spare them
onerous bookkeeping chores.
Most other businessmen were
given no choice but to use the
accrual system
What was no anticipated was
that some “farmers” would use
cash accounting to avoid taxes on
their nonfarm income. Year after
vear they would claim large farm
losses which could be legally used
to offset other taxable income.
Then when they sold out, they
benefited again by receiving
capital gains treatment on
certain items, which are taxed at
a lower rate than ordinary in
come Under the accrual method,
they would have lost some of the
favorable treatment otherwise
given capital assets.
Tighter Rules
Better known as tax-loss far
ming, this abuse of special tax
rules for farmers led to several
provisions in the Tax Reform Act
of 1969. One of these requires
people with large nonfarm in
comes and large farm losses to
keep an “excess deductions
account,” which in essence raises
the taxes on the sale of capital
assets.
However, the Act says tax
payers can be exempt from
keeping the excess deductions
account if they report farm in
come on the accrual basis.
Like cash accounting, accrual
accounting offers advantages to
some farmers.
For example, farmers who
must sell 2 years of production in
a single year can, for tax pur
poses, spread out their income by
virtue of the inventory feature.
Other farmers may wish to
keep income and taxes on a more
current basis than cash ac
counting allows. This par
ticularly applies in years when
deductible expenses exceed the
receipts and there is little off
farm income against which this
loss can be offset.
Total tax liability may be less
than under cash accounting when
tax rates or cash income go up, or
when inventories decline. This is
because property accumulated
may have always been reported
as income and taxed in prior
years as per the inventory
feature.
Added Benefits
Another advantage is the
income and thus qualify for
greater Social Security benefits.
To sum up, under certain
circumstances some farmers
would be better off using the
accrual system while others
would not.
Those switching to accrual
should keep in mind they might
have to pay higher taxes for the
year the change is made. Under
current law, income for that year
would include all previously
untaxed farm wealth (not in
cluding appreciation in real
estate). For instance, ad
iustments would have to be made
Buy less protein
By harvesting haylage in
the bud stage, you capture the
crop when its nutrient content is
highest. Saving protein-rich
leaves means reducing or
eliminating supplements. Some
90% of the digestible protein is
found in leaves. Good haylage
will score 20-25% crude protein.
FOR FURTHER INFORMATION CONTACT
PENN-JERSEY
HARVESTORE SYSTEMS, INC.
likelihood of increased Social
Security benefits. Certain capital
gains are excluded from self
employment income. Since,
under accrual accounting, more
of the value of livestock may be
treated as ordinary income,
accrual farmers may have
higher yearly self-employment
if a farmer had a beginning in
ventory of unsold livestock on
which he’d already claimed
expense deductions. This income
and tax obligation, however, may
be spread over a 10-year period.
Farmers could also ease the
tax burden by changing to ac
crual in a year when tax rates are
low, inventories are low, or tax
exemptions are high.
Where a farmer knows in
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advance he will sell a large
of his accumulated inventor;
might choose that year for
changeover. His tax lial
would be high anyway, bul
closing inventory would be
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