When the Farm Bill was signed into law, much was made of how the new programs provided certainty for farmers and how the newly revised crop insurance program, livestock disaster assistance, and dairy program provided producers with a safety net against natural or market disasters. What was not said was that there was no protection against the biggest threat to the profitability and sustainability of American agriculture: the government itself. While, with one hand, Congress was doling out programs that would help manage risk, with the other hand they were writing new tax laws that would eliminate any financial management farmers and small businesses have.
Each year when most farms figure their federal taxes, they do so using a method called cash accounting. This accepted practice gives operations a good deal of flexibility on managing expenses, capital, and cash flow. It is also very useful for operations that produce a crop in one tax year and sell it in another. Cash accounting has been used for decades, but now meddling minions on Capitol Hill want to force farmers to switch to accrual accounting.
Proposed changes to the tax code restricting the use of cash accounting by agricultural operations would reduce agriculture’s access to capital by as much as $12.1 billion over the next four years, according to a study released today by Kennedy and Coe, LLC and Farmers for Tax Fairness. The study, prepared by the independent research firm, Informa Economics, revealed that U.S. agricultural producers forced to switch from cash-basis to accrual-basis accounting under new laws would have to pay out as much as $4.84 billion in taxes during the next four years. Additionally, the borrowing capacity of these operations would decrease by another $7.26 billion over the same time period. “The Informa study quantifies what we’ve been hearing from producers across the U.S.,” said Jeff Wald, the CEO of Kennedy and Coe, a national agricultural accounting firm. “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.”
In 2013, the U.S. House Ways and Means Committee and the majority staff for the U.S. Senate Finance Committee both released discussion drafts of tax-reform proposals that would reduce the number of agricultural operations that can use the cash method of accounting. In January, thirty-three 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. “Farmers in America have used cash accounting for decades,” adds Brian Kuehl, Director of Federal Affairs for Kennedy and Coe. “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. It just doesn’t make sense. Producers already face enough risk.”
When the tinkerers in Washington talk about tax reform, they often talk about closing loopholes so fat cats have to pay their share. Rarely do they talk about the impact of such action on ordinary, hard-working, business people; and, most times, they are unaware of the consequences of their actions. “The impact of these changes would extend far beyond producers and would affect their lenders, processors, and other key suppliers,” said Kuehl,. “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.”
If you want an example of how this change would affect your farm, just ask your CPA or tax preparer to figure your taxes on an accrual basis. “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,” according to 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.”
Certainly our federal tax laws need some reforming, but the reforms need to benefit those who pay the taxes — not just those who collect them. Next time your Congressman boasts to you how they are providing a safety net for farmers, tell them you need a safety net to protect you from Congress.
By Gary Truitt