Either one page names the method, the person and the year, or the answer depends on whether the accountant picks up the phone. The Internal Revenue Service, in its Farmer’s Tax Guide, says that “You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming”, and that “If you later want to change your accounting method, you must generally get IRS approval”, which is requested on Form 3115. One decision, taken once, carried forward by default ever since.
The farm behind that sentence is ordinary. The method was fixed at the first return, most likely by the accountant, and it has renewed itself every year since without anyone opening it. Activity, ownership and structure changed in the meantime. The method neither changed nor was confirmed, because no date existed on which to confirm it. Ask who chose it and in what year, and the answer is a phone call to somebody outside the gate.
What the rule leaves open is larger than what it fixes. The same guide states that “Except in a few cases, the law does not require any specific kind of records” and that “You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses.” The system was handed to the farm, and the farm handed it on. That is the same line a written succession plan already draws between what management keeps and what goes out to an attorney and an accountant.
What holds the choice in place, in five sets of rules
Four of the five rules read for this article make the method easy to keep and awkward to undo. The fifth runs the other way and puts itself back on trial at every deposit, and it is worth saying why: it is not a regime the farm files under at all, but a deposit scheme chosen one deposit at a time, and a rule of that kind cannot renew itself in silence. The contrast is the point. Nothing about a method of this kind makes it self-renewing by nature; four of these five made it that way, and the one built differently behaves differently. Not one of the five asks the farm to record which one it is under.
| Where, and who publishes the rule | How the method gets settled | What holds it in place |
|---|---|---|
| United States, Internal Revenue Service | An accounting method is chosen with the first return that includes a farm schedule | Changing it generally needs IRS approval, requested on Form 3115 |
| Brazil, Lei 8.023 of 1990 | The law names three forms and ties each to a band of gross revenue, so the form follows the law rather than a choice made at the desk | Two of the three forms carry a bookkeeping duty, and missing it means the result is set at twenty per cent of gross revenue for that year |
| Uruguay, Dirección General Impositiva | Producers opt between two taxes, and all holdings under the same owner settle the same one | Opting into the general tax holds for at least three financial years, and so does opting into full books |
| Argentina, ARCA | The simplified regime carries a category reviewed twice a year | Doing nothing keeps the category, and ARCA can reassign it on its own initiative |
| Australia, farm management deposits scheme | Deposits are chosen one at a time, and may be made at any time | Nothing carries it forward: each deposit is a fresh decision, and the income test, taxable non-primary production income not exceeding A$100,000, is run again in the year of each one |
The Uruguayan guidance carries the sharpest line of the five. The Dirección General Impositiva records the criterion that keeping full books, which means knowing the real result, does not stop a taxpayer from settling on the estimated basis. Knowing what the farm earned and choosing how the farm declares it are two separate decisions, and only the second one renews itself in silence.
Who is in the room when the decision gets made
Advisers are consulted often and decisive less often. Hayden, Mattimoe and Jack interviewed 27 farmers in Ireland, mapped 62 strategic expansion decisions across six categories, and then put the findings to a group of three industry specialists. Where accountants appear in those decisions, the study reports them as a source of advice more often than as a key advisor, and agricultural consultants come out the other way round. Land purchase and buildings investment split the two of them: accountants turned up more for land purchase and less for buildings, and the agricultural consultants the other way about.
This is a qualitative study in one country, and it counts decisions rather than farms. It describes how those 62 conversations ran. It does not measure how often the same thing happens anywhere else, and the authors do not claim it does.
That is why the line on the page asks for a name and a year, and why not known is a legitimate thing to write on it. Not known is the entry an accountant can correct in writing. A guess is the entry that goes unchallenged.
The purchase that answers the tax question without naming it
Machinery is where the tax decision usually lands without being called one. Paulson, Schnitkey and Zulauf, reading twenty years of machinery cost on Illinois grain farms, write that “Costs increase more rapidly during high income periods as producers make machinery investments and manage their taxable income.” The purchase is being timed against the tax year, on farms where nobody has written down which tax rule it is being timed against.
Read that against the Irish study and the overlap is uncomfortable. Machinery investment is one of the categories where both accountants and agricultural consultants showed low involvement. The purchase that carries the tax decision is among the least advised of the six.
Timing is what turns a purchase into a tax decision. Under the cash method the IRS counts income in the year you actually got it, and also in the year it was credited to your account or put at your disposal without restriction, and it takes an expense in the year you pay it, so the week a cheque is banked or a machine is paid for decides which year the line belongs to. That is the field a written investment plan fixes before the money is in the room, and the same field that decides which year each line of a budget built on a declared price assumption shows up in.
What farms write down, and what they leave out
Production gets recorded and money often does not. Mdoda and Nontu surveyed 150 smallholder vegetable growers across two district municipalities of the Eastern Cape, in South Africa, and found far more of them keeping track of what the land produced than of what the business earned.
That gap is the one this page exists to close. A farm that can tell you exactly what came out of the ground frequently cannot tell you under which rule it declared the sale.
How long the paper has to stay findable
Longer than most filing habits assume, and rarely for one single period. In the United States the Farmer’s Tax Guide runs three at once: the general rule is “at least 3 years from when your tax return was due or filed or within 2 years of the date the tax was paid, whichever is later”, employment tax records go to “at least 4 years after the date the tax becomes due or is paid, whichever is later”, and records about a piece of property are kept until the deadline runs out for the year that property is sold or otherwise disposed of.
Lei 8.023 in Brazil draws one line instead of three, holding the books and the documents behind the return until the five-year limitation period it names has run.
So the number is not the point and the shelf is. Whichever country the reader files in, the periods that bind are the ones published where the return goes, and more than one period means more than one shelf. The page being written here needs one line saying where each of those shelves physically is, and the accountant is the person to confirm in writing how many there are. A retention rule that nobody can act on is a retention rule the farm does not have. The same shelves hold the slips that answer a different question, which is what the money cost in a closed cycle, once the tax paid is added to the interest and the bank fees.
The date the choice comes back to the table
Two of the five rules carry a date of their own that arrives whether or not the farm does anything, and three leave the date to the farm. The Dirección General Impositiva fixes the Uruguayan agricultural financial year to close on 30 June, so the option meets a fixed edge every year.
ARCA reviews the Argentine simplified regime category twice a year and is explicit that where nothing has changed and the taxpayer does nothing, the category stays as it is, while it reassigns the category on its own initiative where the taxpayer should have moved and did not. Everywhere else the date has to be invented, and inventing it is the part of this subject that belongs to the farm rather than to a professional.
That date is the same instrument as a scheduled review date on a set of goals, pointed at a decision that renews itself instead of expiring. It also marks the only piece of this subject that sits inside the planning axis, because it is the only piece that ends in a decision somebody on the farm takes, records and owns. A name and a date beside the choice is the last of the four functions of management doing its work on one sheet of paper.
Where to start
One hour, with the last filed return and the folder of tax slips on the table. One page, five lines, one date, and a copy the accountant has seen.
The page is worth most to the person who was not there when the choice was made. Whoever made the call at the first return remembers roughly why. The partner, the successor, the manager hired last year and the buyer running due diligence do not, and none of them can rebuild it from the returns alone. Filed under accounting is where this decision goes to stop being anybody’s, and one sheet of paper takes it back without changing a single number on it.