Farmers urge lawmakers to keep cash accounting option
Washington-The increase in tax compliance costs that would come with the elimination of cash accounting as an option for many taxpayers would especially hurt farmers, ranchers and other small businesses that already work with very thin margins, Sarah Windham, senior manager of South Carolina-based Dixon Hughes Goodman LLP, told Congress recently. Windham testified at the request of the South Carolina Farm Bureau.
Almost all farmers use the simple, straightforward cash method of accounting in which income is not recognized until cash or other payment is actually received. Also under the cash accounting method, expenses are not taken into account until they are actually paid.
"This method is used in determining profitability because it most accurately reflects the true financial picture of a farming operation," Windham told the House Small Business Committee's Subcommittee on Economic Growth, Tax and Capital Access.
Windham used the fictitious Farmer Brown as an example.
"If Farmer Brown sold a bushel of corn in November with the understanding that he would be paid in January, under the cash method, Farmer Brown would record the payment in January when he received payment from his customer. Any expenses associated with growing and preparing the corn for market would be recorded when Farmer Brown paid his suppliers. This method is not dissimilar to maintaining and reconciling a simple checking account," she explained.
In the absence of cash accounting, farmers and ranchers would be forced to use accrual accounting, which simply doesn't work with the way family farms and ranches operate.
"Since their income can fluctuate widely from year to year, accrual accounting, coupled with our progressive tax system, would likely cause farmers to pay more taxes over time than a company in a different industry with stable income over the same time period. Cash accounting allows them to accelerate expenses or defer income, giving farms the option to even out their taxable income comparable with long-term earnings of other industries," Windham said.
In addition, switching to accrual accounting would likely force family businesses to hire bookkeeping assistance and/or spend money on accrual accounting systems-adding another expense as the costs of production skyrocket.
At least one congressional tax proposal would reduce the number of incorporated farms, such as family partnerships, eligible to use cash accounting. Under this particular tax reform plan, family farms and ranches operating as C-corps would see the threshold for switching from cash accounting to accrual accounting shrink from $25 million to $10 million of gross receipts. IRS rules in many cases would lump multiple segments of a family business together, easily putting farms and ranches over that $10 million gross receipts cash accounting threshold.
The $10 million threshold would also apply to farming S-corps and partnerships that have never had a switchover threshold.
When related businesses are aggregated and have more than $10 million in combined cash receipts, each of the related businesses would be required to use the accrual method of accounting.
Pointing to a study by Informa Economics showing it would cost farmers and ranchers as much as $4.84 billion in taxes over the next four years if they have to switch from cash accounting to accrual accounting, Windham cautioned that the rural communities and other small businesses and industries agriculture supports will also pay the price.
"Over 24 million people, or 17 percent of the U.S. workforce, are employed in agricultural industries," she said. "The estimated $4.84 billion in taxes that would be required to be paid by farms could very easily limit the ability of those farms to hire additional employees or may cause them to lay off employees if they are forced to downsize."