A proposed change in the tax code to restrict the use of cash accounting for farm operations would reduce ag's access to capital and cost agriculture $4.8 billion in taxes over the next four years, a new Informa Economics study finds.
The study, released Wednesday by Kennedy and Coe, LLC, and the group Farmers for Tax Fairness, shows that the switch from cash-basis to accrual-basis accounting under proposed new laws would decrease borrowing capacity farm operations by $7.26 billion over the same time period.
"The Informa study quantifies what we've been hearing from producers across the U.S.," Jeff Wald, CEO of ag accounting firm Kennedy and Coe, said in a press statement. "This tax payment and subsequent loss of financial flexibility will have a major negative effect on America's agriculture. Meeting the immediate tax burden is going to be very difficult for most of the affected operations."
The study is based on tax reform proposal discussion drafts released last year by the U.S. House Ways and Means Committee and the majority staff for the U.S. Senate Finance Committee.
The proposals would reduce the number of agricultural operations that can use cash method of accounting.
"Farmers in America have used cash accounting for decades," said Brian Kuehl, Director of Federal Affairs for Kennedy and Coe. Kuehl explained that cash accounting is a simpler form of accounting and allows farmers to better manage volatility and risk.
"They are already at the mercy of external factors for input prices, commodity prices, and weather. Requiring a change to accrual-based accounting takes away the one thing they can actually control: their cash flow," Kuehl said. "It just doesn't make sense. Producers already face enough risk."
According to the study, in aggregate, affected farms have less than $1.4 billion in current cash on hand to pay additional taxes that would be due if the accounting method is altered. If the tax bill associated with deferred income comes in an unprofitable farm year or if the producer cannot otherwise meet the capital requirements, the farmer or livestock producer may have to sell land or livestock to survive, Kuehl notes.
"The impact of these changes would extend far beyond producers and would affect their lenders, processors, and other key suppliers," Kuehl said. "Producers will no longer have these funds available to buy tractors and combines, or invest in labor and other inputs. These purchases support a lot of small towns and ag-related businesses, small and large. The economic effects of these proposals are potentially staggering."
The study used USDA data to estimate the financial impact of congressional proposals to require agricultural operations with more than $10 million in gross receipts to shift to the accrual form of accounting.
In January, 33 agricultural organizations including the American Farm Bureau, the National Cattlemen's Beef Association, National Corn Growers Association and National Pork Producers Council sent a letter to the Senate Finance Committee expressing their concerns about the proposed changes to the cash-accounting rules.
"Cash accounting combined with the ability to accelerate expenses and defer income gives farmers and ranchers the flexibility to manage their tax burden on an annual basis by allowing them to target an optimum level of taxable income, commensurate with long-term annual earnings," said Bob Stallman, President of the American Farm Bureau Federation.
"Cash accounting also gives farmers and ranchers the flexibility they need to plan for major investments in their businesses and in many cases provides guaranteed availability of some agricultural inputs."
View the full study: Implications of Restricting the Use of Cash Tax Accounting by Agriculture.