Will Large Farmers Be Able to Use Cash Method in the Future?!

One of the advantages that all farmers (other than some farm “syndicates” and related entities) have is that they are allowed to use the cash method of accounting.  This method is allowed whether you are a sole proprietor, partnership, corporation or LLC.  Additionally, there is no limit based on the sales of the entity.

This may change if the proposal that the House Ways and Means Committee just issued this week ever passes.  Under their proposal, the cash method of accounting would be available to all natural persons (i.e. sole proprietors) regardless of sales levels, however, it would only be available to other business entities if their annual sales were less than $10 million.  Once your sales exceed this number (even once if it makes your average over 3 years exceed this level) you would be required to switch to the accrual method of accounting.  It is likely that some type of related party rules would be in place to bring in all entities owned by same family, etc. into the calculation.

For example, assume a father and two sons each have a corporation that farms 3,500 acres of land.  With the rapid rise in farm prices, each of their farm corporations generate $4 million of income.  Each entity’s sales amount is less than $10 million, however, on a combined basis, they exceed $10 million in sales.  Most likely all three corporations would need to switch to the accrual method of accounting.

If this happens, a large amount of income may be required to be recognized by the entity (think of all of your unsold grain at year-end).  Since this is a mandatory change in accounting, the IRS does allow you to spread this income over 4 years to lesson the impact on your operations.

However, if this proposal goes into effect, many of our farmers will lose a tax benefit that has been around for several years.

Paul Neiffer, CPA