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Tax change could impact crop and livestock producers

Proposals would require businesses with more than $10 million in gross receipts to use accrual accounting.

 The U.S. Senate Committee on Finance issued a proposed set of tax code changes that would negatively and significantly affect many agricultural producers, both crop and livestock. 

The proposed rule change would limit the number of agricultural businesses that can use cash accounting, requiring many to shift to the accrual method of accounting. This move is opposed by many agricultural groups including the American Farm Bureau Federation as well as the Farm Financial Standards Council.

“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,” said Brian Kuehl, director of federal affairs for Kennedy and Coe LLC. “Under this proposal, farmers could be required to pay taxes on products for which they have not yet received payment.”

Kennedy and Coe, a national agricultural accounting and consulting firm, said the impact of the proposed rule could limit the growth and stability of some agricultural businesses and is actively opposing it.

“These changes could affect the economic viability of many operations,” added Jeff Wald, CEO of Kennedy and Coe. “Agriculture works very differently than other types of American business. We hope members of Congress remember that farmers, ranchers and feeders operate in a high-risk commodity environment unique to agriculture.”

The proposal released by the majority staff from the Senate Finance Committee follows on the heels of a similar proposal released by the U.S. House Ways and Means Committee in March of 2013. 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 Kennedy and Coe, this proposal could affect feed yards responsible for 73% of U.S. beef production and dairies producing approximately 30% of the U.S. milk supply.

“This proposal impacts many feed yards, hog farms, dairies, and row crop operations,” said Kuehl.  “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.”

Last month, the Farm Financial Standards Council issued a statement criticizing this proposed accounting change: “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 August, Wald wrote to Rep. Dave Camp (R., Mich.), the chairman of the House Ways and Means Committee. In his letter, Wald asked Chairman Camp to reconsider the proposal given the significant impact that it would have on U.S. agriculture. Producers who are concerned about whether this proposal would affect their operations are encouraged to contact their members of Congress. 

Senate Finance Committee chairman Max Baucus (D., Mont.) is looking for feedback from stakeholders and the American public 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 January 17, 2014 and comments can be sent to: [email protected]

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