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 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 newly proposed laws would have to pay out as much as $4.84 billion in taxes during the next four years. Additionally, 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, chief executive officer 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.”
According to the study, “In aggregate, these farms have less than $1.4 billion in current cash on hand to pay the additional taxes. 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 downsize to survive (e.g., sell land or livestock).”
“The impact of these changes would extend far beyond producers and would affect their lenders, processors, and other key suppliers,” said Brian Kuehl, director of federal affairs for Kennedy and Coe. “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.”
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 cash method of accounting.
“Farmers in America have used cash accounting for decades,” adds Kuehl. “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.”
The study used U.S. Department of Agriculture 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 Assn., National Corn Growers Assn. 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,” according to Bob Stallman, president of AFBF. “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.”