Explaining: Cash Accounting

If you think Turbo Tax is hard to understand, try navigating the modern tax code as an agricultural business. For farmers and ranchers, uncertain income, volatile commodity markets, and even weather conditions can throw a wrench into the best laid plans. Luckily, the use of cash accounting provides small agricultural businesses with the flexibility they need to effectively manage their tax burden.

Under a cash accounting system, revenue is recorded when cash is actually received from customers, and expenses are recorded when cash is paid to suppliers. Previous tax reform proposals eliminated cash basis accounting for all entities, including farmers with annual gross revenues in excess of $10 million. Loss of cash accounting could create a situation where a farmer or rancher would have to pay taxes on income before receiving payment for sold commodities. This would have had devastating impacts on affected farmers and livestock producers. Not only would paying the tax become difficult; cash flow problems could necessitate a loan to cover ongoing expenses until payment is received. The use of cash accounting helps to mitigate this challenge by allowing farm business owners to make tax payments after they receive payment for their commodities.

The Bottom Line:

NCBA supports the continuation of cash accounting to give ranchers the flexibility they need to manage taxes effectively.

Why it Matters

  • Volatile commodity markets make accrual accounting difficult to manage for small businesses and family farms
  • Cash accounting helps mitigate cash flow challenges that are a feature of agricultural production

 

Dave True, Rancher, WY

Cash accounting is important because of the variability in revenue from year to year to year. Losing cash basis accounting in agriculture would be a real tough thing for us.

  • For more information, please contact the
    National Cattlemen’s Beef Association.

    Ed Frank at 202-879-9125
    Max Moncaster at 202-879-9124

    1275 Pennsylvania Avenue NW
    Suite 801
    Washington, DC. 20004