FARMERS often use cash planning accounting to help push forward income from one year to another, but a new proposal to overhaul the federal Tax Code could significantly alter how crop and livestock producers have become accustomed to doing business by better reflecting when they have cash in their pocket rather than cash on paper.
The proposal, released in November by the Senate Finance Committee majority staff, follows on the heels of a similar proposal the House Ways & Means Committee released in March.
Both proposals would require businesses with more than $10 million in gross receipts to use accrual accounting. Both proposals would affect smaller operations by aggregating related businesses to determine whether the businesses collectively have more than $10 million in gross receipts. If they do, then each related business would be required to use accrual accounting.
According to data provided by national agricultural accounting and consulting firm Kennedy & Coe, this proposal could affect feedyards responsible for 73% of U.S. beef production and dairies producing approximately 30% of the U.S. milk supply.
"This proposal impacts many feedyards, hog farms, dairies and row crop operations," said Brian Kuehl, director of federal affairs for Kennedy & Coe. "Agriculture is a capital-intensive business. Many companies have more than $10 million in gross receipts but have very thin profit margins or even operate at a loss. Further, family businesses much smaller than $10 million in gross receipts could be impacted since the proposal would group related businesses together.
"We are concerned that this change would force many agricultural businesses to pay a significant up-front tax payment and limit their ability to weather price volatility," Kuehl said. "Under this proposal, farmers could be required to pay taxes on products for which they have not yet received payment."
"These changes could affect the economic viability of many operations," added Jeff Wald, chief executive officer of Kennedy & Coe.
That could send a ripple effect through rural economies, he warned. For instance, input providers such as feed or fertilizer dealers are often the ones who see pre-purchases as a result of cash accounting. If you stop allowing that method, Wald explained, "there's certainly going to be a squeeze."
Agricultural lenders also have equity concerns. Kuehl explained that if you're required to make $4 million in tax payments at a certain time, you've reduced the equity. Although it's likely that loans will still be available, higher costs will come with the now higher rates.
This move is opposed by many agricultural groups, including the American Farm Bureau Federation and the Farm Financial Standards Council.
The council issued a statement criticizing the proposed accounting change, saying, "For income tax purposes, the council believes that the cash method currently allowed for farmers and ranchers should be retained. Switching to the farm accrual method could subject agricultural producers to much larger swings in income due to dramatic market changes that might occur at year-end."
In October, a coalition of agricultural stakeholders met with House leaders on the issue. Earlier this summer, the same coalition wrote a letter to the Senate Finance Committee explaining, "Cash accounting, combined with the ability to accelerate expenses and defer income, gives farmers and ranchers the flexibility they need to manage their tax burden."
Kuehl said the issue really is about the timing of the tax payments rather than the level of taxes. He explained that "this isn't something that's going to bring in billions of dollars to the treasury to fix the deficit" because it provides only a short-term infusion of cash, and in the end, "everyone has to pay on the income they've been pushing."
Senate Finance Committee chairman Max Baucus (D., Mont.) seeks feedback from stakeholders on the discussion drafts as he continues his work to overhaul the Tax Code. Feedback on the cost recovery and tax accounting rules discussion draft is requested by Jan. 17, 2014, and comments can be sent to Tax_Reform@Finance.Senate.gov.
Kuehl said he expects the Senate Finance Committee to take those comments received and introduce a bill by February, with a committee markup to follow soon thereafter. Floor activity will depend on what's decided by Dec. 13 within the budget framework, he added.
"If there's room in it for the tax package, it could change the calculus," Kuehl said. He does not expect a big end-of-the-year tax package this year, but the first quarter of 2014 will be telling on whether broader tax reform will move forward in 2014 or stall out until 2015.
Kennedy & Coe plans to coordinate with the Farm Bureau and a number of universities to gather data on the overall impact of the proposed change.
"For agriculture, an operation can achieve $10 million in gross receipts and be unprofitable. That's unheard of in other industries," Kuehl noted.