Feed Lot

APR 2013

Feedlots and cow/calf operations in the beef industry who feed 500 or more has annually on grains and concentrates; maintain 500 or more beef cows; backgrounder, stocker/grower, preconditioner; veterinarian, nutritionist, consultant

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FEEDLOT FOCUS BY MARK BATTERSBY Cash or accrual accounting What is the best for your operation? What is the best accounting method for your feedlot business, the one that will produce the most favorable results for the feedlot operation, its financial picture and, of course, the lowest tax bill? It should come as no surprise that everyone (individuals, business entities, etc.) must use a consistent accounting method, a set of rules for determining when and how income and expenses are reported. Although it generally boils down to a choice between the cash method and an accrual method, our tax rules also allow special methods of accounting for certain items of income and expenses, or a combination method using elements of the other methods. Naturally, a cow-calf, stocker or cattle business must use the same accounting method to figure its taxable income as it uses to keep its books. The cash basis method recognizes revenues when money comes in and recognizes expenses when money is paid out. Cash basis doesn���t recognize accounts receivable or payable. For example, only when a bill is paid does the operation recognize an expense. The accrual method of accounting, on the other hand, tracks accounting events in real time. When a customer signs a purchase order or a contract, the accrual system 10 registers it as a sale ��� even though receipts were $25 million or less it may be weeks or months before for each prior tax year after 1985. full payment is actually received. Anecdotal evidence suggests Similarly, where the feedlot operathat use of the accrual method intion contracts for or orders goods or creases the feedlot operation���s acservices, the accrual system doesn���t cess to scarce funding. Although wait until payment is actually made few lenders require use of the acto record it as an expense. While this option helps presEXPENSE ent a more accurate picture BA RECORDS of the business, the comREPORT SH plexity of the accrual method frequently results in the business owing taxes on income it has ASSETS yet to receive. Whether the CREDIT feedlot operation is considered to be a ���farm��� business or not, also fac- VERIFICATION MAN tors into determining FINANCIAL the best method of accounting for income and exINFORMATION penses. Generally, a taxpayer engaged in the trade or business of crual method, budget and accountfarming is allowed to use the cash ing experts agree that ���cash��� acmethod for its farming business. counting is not appropriate for a However, certain corporations loan program because costs occur (other than S corporations) and sporadically and need to be acpartnerships that have a partner counted for over the long term. that is a corporation must use an Most individuals and many sole accrual method for their farming proprietors with no inventory, use business. For family corporations the cash method because they find engaged in farming, the exception it easier to keep records. However, to the rule requiring the use of the if an inventory is necessary or reaccrual method applies if gross quired to account for income, an ACCOUNTING FEED���LOT April/May 2013

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