TL;DR: Most farmers use cash accounting for taxes because it’s simpler, but growing farms often use accrual to track true profitability. Here is how to decide which one makes sense for your farm business.
There are two main ways to track your farm’s income and expenses: Cash or Accrual. The most common method is cash filing, simply recording money as it hits or leaves your bank account. However, some farms choose accrual to see the bigger picture of their financial health.
This IRS breaks down the difference between the two. Here is our version specifically for farmers:
What is Cash Filing?
The cash method means you count transactions only when money actually changes hands.
- If you sell and get paid today –> today’s income
- If you buy seed and pay today → that’s today’s expense
It works just like your bank account: money in, money out. This is why most farmers use it—it is easier to manage and aligns well with the seasonality of farming (e.g., buying fertilizer in December to lower your tax bill for that year).
What is Filing Accural?
Accrual means you report income when you earn it and expenses when you incur them, regardless of when the cash actually moves. Let’s say you invoice a customer for seedlings but they pay you next month—accrual accounting counts for it today instead of next month.
- If you sell a crop today, but get paid next month → accrual counts it today
- If you grab supplies now but pay later → accrual counts when you get the supplies
Why do this? It helps farmers see the true profitability of their operation. For example, if you have a barn full of grain that you haven’t sold yet, cash accounting says you are “broke,” but accrual accounting shows you have valuable inventory assets.
How Do I Known What’s Right for Me?
Cash filing is default. If your farm is small or simple, cash is the most straightforward bucket. If your farm is growing, has significant inventory, accrual accounting might be necessary.
You don’t have to figure this out yourself. We work with farmers to handle their bookkeeping and tax strategy, whether you file on cash or accrual.
Learn more about how we help farmers save time and money with our bookkeeping.