The Internal Revenue Service (IRS) recognizes two primary accounting methods for reporting farm income: the cash method and the accrual method. The choice of method affects when income and expenses are reported on your tax return, and certain requirements apply based on the size and structure of your farm business.
Cash Method
- Income Recognition: Under the cash method, you report income in the tax year you actually or constructively receive it. Constructive receipt occurs when income is credited to your account or set aside for your use, even if not physically received.
- Expense Deduction: Expenses are deducted in the year they are paid.
- Common Use: Most farmers use the cash method because it is simpler and easier to maintain records.
- Eligibility: Farm corporations or partnerships with average annual gross receipts of $31 million or less for the three preceding tax years (and not tax shelters) may use the cash method for tax years beginning in 2025.
- Reporting: If using the cash method, you complete Part I of Schedule F (Form 1040), Profit or Loss From Farming.
Accrual Method
- Income Recognition: Income is reported in the year it is earned, regardless of when payment is received. This includes income that is due, paid, earned, or taken into account in financial statements.
- Expense Deduction: Expenses are deducted or capitalized in the year they are incurred.
- Purpose: The accrual method ensures proper matching of income and expenses in the correct tax year.
- Inventory Requirement: If you use the accrual method, you generally must include animals and crops in your inventory. Inventory valuation methods include cost, lower of cost or market, farm-price method, and unit-livestock-price method.
- Reporting: If using the accrual method, you complete Parts II and III of Schedule F, and Part I, line 9.
- Mandatory Use: Certain large farm businesses (e.g., farm corporations or partnerships with gross receipts exceeding $31 million) are required to use the accrual method.
Inventory and Valuation Methods
- Farmers using the accrual method must generally include animals and crops in inventory.
- Permissible inventory valuation methods include:
- Cost
- Lower of cost or market
- Farm-price method
- Unit-livestock-price method
- The chosen method must conform to generally accepted accounting principles (GAAP) for similar businesses and clearly reflect income.
Changing Accounting Methods
- You generally choose an accounting method when filing your first Schedule F (Form 1040).
- To change your accounting method later, you must obtain IRS approval by filing Form 3115, Application for Change in Accounting Method.
Source:
Publication 225 - Farmer's Tax Guide (2025)
Schedule F - Profit or Loss From Farming (2025)
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.