IRS Says Farmers Can Automatically Convert From Accrual Method To Cash Method

September 11, 2008 | Roger McEowen

Under the general rule, any taxpayer that produces or sells goods must report the income from the sale of the goods under the accrual method of accounting.  But, farmers and ranchers are allowed to use the cash method.  That’s a big deal because it allows farmers to time income and expenses through tax planning techniques which gives them a greater chance of adjusting income throughout the year to take advantage of the marginal tax brackets when it is advantageous to do so.  If farmers were limited to the accrual method, they would likely have greater annual fluctuations in income because of changes in levels of production and prices for agricultural commodities which impact annual end-of-year inventories.  Farm corporations with less than $1 million in gross receipts and family farm corporations with gross receipts of $25 million or less also need not use the accrual method.

Normally, to change an accounting method, a taxpayer must submit an IRS Form 3115 and get IRS approval.  But, over the past few years, IRS has granted various types of relief to certain types of taxpayers – in terms of allowing automatic conversion to the cash method.  For farmers, the rule has been that an accrual method farmer that wants to convert to the cash method must have average gross receipts of under $1 million to be eligible for the automatic conversion procedure.  That requires the taxpayer to file an IRS Form 3115 before the close of the tax year and pay a user fee of $3,800.  

Now IRS has said that for farmers (as defined the same way as those eligible for farm income averaging) that qualify (i.e., those that have to use the accrual method by virtue of I.R.C. §447 or I.R.C. §448) are eligible for an automatic change without IRS approval and without payment of a user fee.  Farmers can simply file Form 3115 at any time during the tax year, up to the filing date for the return (including extensions) for the year of the change.  That’s makes the change an easy task to undertake.  The only requirement is to File Form 3115 and calculate any I.R.C. §481 adjustment.  

The new procedure is effective immediately, so an extended 2007 return that is due September 15 or October 15 is eligible for the automatic change procedure.  Rev. Proc. 2008-52, 2008-36 I.R.B. 1, Appendix 14.13, effective August 18, 2008.