Most farmers naturally assume they can use the cash method of accounting. Under this method, a farmer reports sales as they receive cash and are allowed to deduct expenses as they are paid.
There are certain exceptions to the cash method (such as electing to defer crop insurance proceeds), but all-in-all, farmers have been using this method for many years.
Under tax reform, the cash method has been expanded to include even more taxpayers, not just farmers. If your average revenues are under $26 million, then just about anyone can use the the cash method.
The key words are “just about”. If you are considered to be a farm syndicate, then you are required to be on the accrual method of accounting no matter the level of your sale. A farm syndicate is any farm business where 35% or more of losses are allocated to “limited entrepreneurs”.
For example, assume a farmer partners up with an accountant on a 50/50 basis. If the accountant does not meet any of the exceptions allowed (such as active management in the farm or any relatives of active managers), then this may be a farm syndicate.
If all of the owners are family members and one person is active in the farm, it is likely you will never be a farm syndicate. However, due to larger capital requirements, there continues to be more infusion of capital into farms by inactive investors. If this applies to your farm, you may not be allowed to use the cash method. If so, discuss this right away with your tax professionals.
