Examples

Size of Operations Impacted

Operations at these sizes and sale prices that would fall within the new reporting requirement:

  • Cattle feeder that markets 6,000 head per year. Assuming out weight of 1,300 pounds and a sales price of $1.26 per cwt.
  • Feed yard that maintains approximately 9,000 head on feed. Assuming sales per head day of $3.00.
  • Dairy operation that milks 1,400 cows per day. Assuming sales provide receipts of $16.00 per cwt and 80 pounds/cow per day.

Remember, once your operation is large enough to require you to move to accrual-based reporting, it will be difficult to return to cash-basis reporting in subsequent years when your earnings are lower than the threshold. Under the Senate version or proposed changes, taxpayers are prohibited from switching back to cash accounting for four years — even if your income drops below the $10 million gross receipts threshold.

Tax Payments Due

The simplified examples below are for illustrative purposes only. Tax accounting is complex so it’s essential to seek the counsel of CPAs who are intimately familiar with these changes and with the agriculture industry to determine exactly how the tax-law change will impact your operating capital.

Cattle Feeder: 6,000 head

  • Cattle feeder that is feeding 6,000 head.
  • Under cash accounting rules, the feed is an expense as paid.
  • Accrual accounting rules would capitalize the cost of the feed until the cattle are sold.
  • The feed would still be purchased, but no deduction under the accrual method, so cash would be used to pay for the feed and there would not be a deduction so the tax would be
Head Pounds Gained Price Per lb. Expense
6,000 500 0.75 $2,250,000 (feed cost)
    At 40% tax rate: $900,000 in tax due

Cattle Feeder: 60,000 head

  • Cattle feeder that is feeding 60,000 head.
  • Under cash accounting rules, the feed is an expense as paid.
  • Accrual accounting rules would capitalize the cost of the feed until the cattle are sold.
  • The feed would still be purchased, but no deduction under the accrual method, so cash would be used to pay for the feed and there would not be a deduction so the tax would be owed also.
Head Pounds Gained Price Per lb. Expense
60,000 500 0.75 $22,500,000 (feed cost)
    At 40% tax rate: $9,000,000 in tax due

Crop Farmer

  • Row crop farmer who normally sells his grain after the end of the year and collects the cash at that time.
  • He also pays for seed and fertilizer in the fall and deducts those expenses when he pays for them.
  • Under accrual rules, the grain would be income when raised or delivered, not when cash is collected, and the expenses would be capitalized, not expensed when paid for.
  • He would have income to report without having received the cash, and have paid for expenses, to lock in supply or seed variety, but not get a deduction for the cash outlay.
5,000 Acres
5,000 225 = yield 3.50 = price $3,937,500 (deferred income)
5,000 100 (seed) 250 (fertilizer) $1,750,000 (prepaid expense)
Net: $5,687,500
At 40% tax rate: $2,275,000 in tax due

Dairy Operation

  • Dairy raises their own replacement heifers.
  • Assume it takes 1,500 to raise them until they are ready to calve.
  • The expenses under cash basis allows the farmer to deduct the cost used to raise the heifers.
  • Accrual accounting would require those costs to be capitalized and no deduction for the cash used to purchase the feed.
Heifers Cost to Raise Expense
2,500 1500 $3,750,000
At 40% tax rate: $1,500,000 in tax due

Feedyard

  • A feedyard finances feed for its customers, and has not received the cash for the feed, but has paid cash to buy the inputs that are fed to the cattle.
  • Cash basis allows a deduction for the feed, but there is not income until the feed is collected from the customer.
  • Accrual accounting would require the feed to be purchased with cash, and income to be recorded, even though the customer has not paid his feed bills, increasing the amount of capital needed for the yard, since there is not a deduction for the cash that went out of the business.
Head Feed Financed per Head Expense
25,000 350 $8,750,000
At 40% tax rate: $3,500,000 in tax due

DISCLAIMER
FAQs are included as examples only. The effects of this proposal on individual taxpayers may vary. Taxpayers should not use the information in these FAQs as tax advice and are encouraged to seek assistance from their own Certified Public Accountant or attorney prior to making specific business or tax planning decisions.


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