Measurement Issues in Assessing Farm Profitability through Cash Tax Returns
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It is widely accepted that net farm
income reported on an accrual-adjusted
income statement is a more
appropriate profitability measure
than net farm income reported on
Schedule F of the federal tax return,
which is prepared using cash basis
accounting. However, a common
practice among agricultural lenders
is to use Schedule F net farm
income, which uses the cash basis of
accounting, as a proxy for accrual-adjusted
net farm income. A study
of 1,045 individual Illinois farms’
records from 2002 through 2006
found the median absolute annual
percentage difference between a
three-year average cash and a three-year
average accrual-adjusted net
farm incomes is 57 percent for farms
of stable size; 43 percent for farms
with annual gross revenue increasing
at rates of less than 5 percent, 50
percent at rates of 5-10 percent, and
58 percent at rates over 10 percent;
and 61 percent for farms with a
debt-to-asset ratio greater than 40
percent.