Cash Accounting: Farmers May Deduct Full Price of Supplies

August 06, 2015

One of the most important federal tax provisions for specialty crops is cash accounting.  In a recent Tax Court hearing the specialty crop farming company prevailed against the Internal Revenue Service (IRS). Agro-Jal Farming Enterprises, Inc. is a farming corporation in Santa Maria, California that has always used the cash method of accounting when managing their strawberry and vegetable crops.  Agro-Jal buys packaging materials in bulk and regularly prepays for large quantities to ensure crops don't spoil for want of packaging. Packaging produce quickly is an important part of the fresh and profitable process. Agro-Jal uses the cash method for its tax accounting but the accrual method for its financial statements. The IRS Commissioner concedes that Agro-Jal's packing materials are deductible expenses, and that Agro-Jal is generally entitled to use the cash method, but he challenges the timing of Agro-Jal's deductions. The issue is one of considerable interest to farmers generally. The Commissioner argued that Agro-Jal must defer its deductions for field-packing materials until each clamshell, tray, carton, or wrapper is used or consumed but the Tax Court found in favor of Agro-Jal Farming Company.

To view the opinion, click here.


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