Should Our Farm Be On An Accrual Or Cash Basis Of Accounting?

Question
Our company owns a farm. According to IRS publication 225 most farmers use the cash basis of accounting since it is easier, but some farmers are required to use the accrual basis of accounting. Should our farm be on an accrual or cash basis? What should we use for our farm if we have an unincorporated business? Also, is the inventory method required?

Answer
You are correct that certain farmers taxed as corporations, family corps & tax shelters must use the accrual basis of accounting as noted specifically IRS Publication 225. Furthermore, the inventory method is generally required for farmers using the accrual method.

The reason the accrual method is the norm is because it matches revenues to the expenses incurred to earn the revenue and provides a more accurate representation of the business. Furthermore, the net income is more even year to year and doesn’t have large swings as the case can be for the cash basis farmers. This is the most recommended approach.

References: IRS Publication 225

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