Potential Tax Changes Could Cost Ag $4 Billion

Borrowing capacity, access to capital threatened under legislative committee tax drafts

Published on: Feb 20, 2014

A proposed change in the tax code to restrict the use of cash accounting for farm operations would reduce ag's access to capital and cost agriculture $4.8 billion in taxes over the next four years, a new Informa Economics study finds.

The study, released Wednesday by Kennedy and Coe, LLC, and the group Farmers for Tax Fairness, shows that the switch from cash-basis to accrual-basis accounting under proposed new laws would decrease borrowing capacity farm operations by $7.26 billion over the same time period.

"The Informa study quantifies what we've been hearing from producers across the U.S.," Jeff Wald, CEO of ag accounting firm Kennedy and Coe, said in a press statement. "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."

TAX TROUBLE? Borrowing capacity, access to capital threatened under legislative committee tax drafts
TAX TROUBLE? Borrowing capacity, access to capital threatened under legislative committee tax drafts

The study is based on tax reform proposal discussion drafts released last year by the U.S. House Ways and Means Committee and the majority staff for the U.S. Senate Finance Committee.

The proposals would reduce the number of agricultural operations that can use cash method of accounting.

"Farmers in America have used cash accounting for decades," said Brian Kuehl, Director of Federal Affairs for Kennedy and Coe. Kuehl explained that 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," Kuehl said. "It just doesn't make sense. Producers already face enough risk."

Related: U.S. Senate Committee Tax Proposal Would Harm Farmers

According to the study, in aggregate, affected farms have less than $1.4 billion in current cash on hand to pay additional taxes that would be due if the accounting method is altered. 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 sell land or livestock to survive, Kuehl notes.