The Honorable Orrin Hatch
Chairman
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200
The Honorable Ron Wyden
Ranking Member
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200
Chairman Hatch and Ranking Member Wyden:
This letter is in response to your June 16 request from public stakeholders for “ideas, proposals, and feedback on how to improve the American tax system.” We appreciate both the considerable thoughtfulness and energy you are putting into this tax reform effort, and the opportunity to share our views on important issues surrounding this initiative.
We write to voice our opposition to any proposals that would eliminate a vital element of our existing tax system that greatly benefits American agriculture, and by extension, rural communities: access to cash basis accounting. In 2013, certain leaders on both House Ways and Means Committee and Senate Finance Committee proposed legislation that would have required farming operations and other businesses with annual gross receipts of greater than $10 million (averaged over a three-year period) to use accrual basis accounting when determining their tax obligations. Farmers for Tax Fairness (FTF)1 was established in the fall of that year by concerned members of the agricultural community in opposition to these proposals.
For a host of reasons, FTF strongly supports preserving the tax code’s existing access to cash accounting for all agricultural businesses. Mandating a switch to accrual basis accounting would inflict significant financial harm on many of these operations and deny them the flexibility they need to succeed going forward.
For one, unlike many other impacted industries, farmers and livestock producers face very high input costs and wide swings in commodity prices, production, and income, meaning significant gross receipts frequently do not correlate to high overall operational profitability and an ability to pay higher taxes.
Such a change also would likely require affected producers to pay income tax on all deferred cash receipts they are carrying currently and would also restrict their ability to manage future risk by pre-purchasing inputs such as seed, fertilizer, or feed.
Moreover, agriculture producers’ margins are often vanishingly small. Where other industries and professional service firms often enjoy margins of 30 or 40 percent or more, agriculture typically has profit margins below 20 percent, and in many operations margins may average in the low single-digits, with some years profitable and some not. As a result, many agricultural operations survive on very modest profits despite experiencing significant gross sales.
Operations with high throughput and input costs would be particularly hard hit. For example, under this proposal, cash basis accounting would no longer be available to a:
- 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 8,000 head on feed, assuming sales per head day of $3.40.
- Dairy operation that milks 2,000 cows per day. Assuming sales provide receipts of $16.00 per cwt and 86 pounds/cow per day.
Beyond these few examples, this change has the potential to severely impact many diverse sectors of agriculture, including horticulture, egg production, fresh fruits and vegetables, orchard crops, and other similar segments of the industry.
Additionally, because agricultural producers endure significant price and production volatility from year to year, they rely on cash accounting to balance out that volatility and create more consistent cash flows and tax liabilities. To illustrate, USDA is estimating that net farm income in 2017 will see its fourth consecutive annual decline, and be approximately half of what it was in 2013. In these periods of low commodity prices access to cash accounting can preserve precious working capital that may be the difference between the operation surviving and failing.
Finally, aggregation rules could sweep many farm operations with less than $10 million in gross receipts into this prohibition. The 2013 proposals would have aggregated smaller operations with more than 50 percent common ownership, meaning that even businesses with less than $10 million in annual gross receipts could be affected if its owners also own other businesses. The rules pool businesses with related ownership together for the purposes of determining gross receipts, and if multiple related businesses total $10 million, each business would be required to use accrual accounting.
We are pleased that neither the Blueprint released by Republican leadership in the House of Representatives last June (“A Better Way – Our Vision for A Confident America,” June 24, 2016) nor President Donald Trump’s recent tax reform outline (“2017 Tax Reform for Economic Growth and American Jobs,” April 27, 2017) voice any support for this cash-to-accrual mandate for agriculture. That said, we understand the pressures facing your committee to offset the significant rate reductions envisioned by tax reform proponents, and we are concerned that tax writers may feel pressure to reanimate this concept as the package evolves and solidifies.
FTF has broad, national grassroots support for preserving cash accounting in agriculture and we are seeking your support in opposing any efforts to insert such a provision into the tax code in the tax reform process. Thank you again for your good work, for the opportunity to share our views, and for your consideration of this request.
Regards,
/s/ Ryan Stroschein
Farmers for Tax Fairness
K·Coe Isom, LLC
Washington, DC 20002
(202) 544-8200
1Farmers for Tax Fairness operates as an initiative coordinated by the national agriculture accounting firm K·Coe Isom, LLC, and not as a separate non-profit legal entity.