It is often said that there are two sure things in life: death and taxes. This holds true for most people. However, for individuals or groups with the capital to invest heavily in farms, taxes are a reality they won’t need to face thanks – in part – to agricultural exceptionalism and an exploitable tax code.
One of the most influential factors is the use of cash, rather than accrual, accounting. With cash accounting, revenue and expenses are only recognized by tax authorities when money actually exchanges hands. In line with this approach to accounting, tax payments are more flexible because they only need to be paid after the actual payment is received for the goods. Conversely, accrual accounting requires that taxes be paid as soon as the goods are exchanged or the services are rendered. Accrual accounting is the general standard for tax liability, albeit any business can employ cash accounting. However, it is often less compatible with non-farming businesses.
Such allowances enable the intentional mismatching of income and expenses, by allowing a shift in expenses to high-income years. This means that farmers [or farm investors] can manipulate their tax liabilities to suit their immediate financial needs. The progressive nature of taxes allows for a reduction in the long-term aggregate [overall] tax liability. In other words, they reduce their tax burden by ‘saving’ their tax deductions or write-offs for years when they have had a high income years.
Beyond the ability to shift expenses and income, each farm business type is allowed to deduct up to $5,000 of its expenditures and receive an investment tax credit [ITC] for newly purchased depreciable property within the acquisition year. The recovery period for depreciable property is split into four periods, three years, five years, ten years, and eighteen years. Since a tax recovery period is shorter than the useful life of the investment, farmers are able to write off property costs before the property stops contributing to farm income. Again, this contributes to the mismatching of incomes and expenses, especially since new property purchases often bring the tax burden to $0.
If the tax burden would be calculated to be less than $0, the ITC can be applied retroactively up to three years or forward up to fifteen years. Such tax benefits can be utilized by farmers and farm investors. Ergo, farming has involved into a popular tax shelter for non-farmers.
When combined, these elements often lead to lower tax liability and more tax benefits for high-income taxpayers than for low-income taxpayers. In many cases, tax liabilities are completely eliminated for wealthy individuals or groups because they can afford to purchase enough capital goods to offset actual operational costs. These tax policies influence farm production patterns, management practices, farm size, and production ideologies.
For decades the United States government has been aware of the impact of its tax policies on the structure of the farming sector. For example, in 1985, the Joint Economic Committee of Congress of the United States concluded that
“Federal income tax policies have: (a) exerted upward pressure on farmland prices; (b) helped concentrate farmland ownership with high-income farmers and non-farmers, as opposed to beginning farmers; (c) encouraged the substitution of capital for labor; (d) supported growth trends in the number of very small farms and very large farms, at the expense of medium-sized family farms; (e) reduced efficiency in some farm activities through induced changes in management practices; and (f) increased supplies and lowered prices for some farm commodities in particular, and possibly for all farm commodities in general.”
- Kelley, D. H., Steinmeyer Jr, B. E., & Vinton, G. G. (1985). Tax Accounting Rules for Farmers and Ranchers. SDL Rev., 31, 255.
- United States. Congress. Joint Economic Committee. (1985). The 1985 economic report of the President: hearings before the Joint Economic Committee, Congress of the United States, Ninety-ninth Congress, first session, February 5, 7, 20, 26, and 28, 1985. Washington: U.S. G.P.O.