Freddie Barnard, Paul Ellinger

Christine Wilson

Measurement Issues in Assessing

Farm Profitability through Cash Tax

Returns

Outline• Use 2001-2006 IL FBFM data

• Compare accrual income reporting to cash basis income tax reporting (not simply cash v accrual)

• Test the myth “it averages out over time”

• Income/Expense accounts that result in higher discrepancies

Previous Research

• Using 1984-1990 data:

- Absolute mean difference : 70% - leverage greater than 40% : 140%

Data• Schedule F income and expenses

• FBFM “defined” accrual adjusted financial statements

• Tax v Economic Depreciation

• 2001-2006 (pre high income years)

• 1045 Grain farms

Demographics

2002 2006

Tillable Acres 914 968

Percent Land Owned 18% 20%

Total Assets ($millions) 1.17 1.69

Age 50 54

Net Farm Income 32,145 96,340

Schedule F v Accrual

20022003

20042005

20065 Year

Average

0

25,000

50,000

75,000

100,000

Schedule F Income Accrual Income

Differences

2002 2003 2004 2005 20060

10,000

20,000

30,000

40,000

50,000

60,000

70,000

ActualAbsolute

2002 2003 2004 2005 20060%

10%

20%

30%

40%

50%

60%

70%

ActualAbsolute

3 and 5 Year Averages

(2002-04) (2003-05) (2004-06) (2002-06)0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Actual

Absolute

(2002-04) (2003-05) (2004-06) (2002-06)49%

50%

51%

52%

53%

54%

Actual

Absolute

Schedule F v AccrualEconomic depreciation constant

20032004

20052006

5 Year Average

0

25,000

50,000

75,000

100,000

Schedule F Adj Depreciation Accrual Adjusted

Absolute Differences

2003 2004 2005 2006 5 Year Average

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Crop Inventory ChangeLivestock Inventory ChangeAccts Receivable ChangePrepaid Expenses ChangeAccts Payable ChangeAccrued Interest ChangeDifference in Depreciation

Differencesby revenue growth rate

(2002-04) (2003-05) (2004-06) (2002-06)0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

Less Than 5%5 to 10%Greater than 10%

Differences by Leverage

(2002-04) (2003-05) (2004-06) (2002-06)0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

Less than 0.2020 to 40%greater than 40%

Summary• Average annual difference 59%

• 52% when 3 or 5 year averages used

• Depreciation, crop inventory changes and prepaids

• Impacts profitability-based financial ratios