Tax return not a good measure of farm income

By James Kurtz, University of Minnesota Extension

ST. PAUL, Minn. (2/4/2008) —Farmers who do not have a good income statement often rely on the Schedule F from their tax return to measure their income.

An income statement measures profit or loss in a given length of time. In the case of farms, this is usually one year, and the year should be the same as the tax year. Since most farmers are on the cash basis for taxes, their Schedule F only shows the amount of cash sales less cash purchases, and an allowance for depreciation.

However, the Schedule F is a poor tool to measure profitability. It measures the amount of cash that was handled, but gives no hint as to whether:

only a portion of a crop was sold (or two crops),
all of the year’s bills were paid (or some of the previous year’s bills),
all income earned was collected.

An “accrual adjusted income statement” combines the cash basis farm records with the inventories from the balance sheets (the beginning and end of the year) to give a true measure of profitability. The income statement produced by the FINPACK software is called FINAN, and is an accrual adjusted income statement. Other accrual adjusted income statements exist that measure income in a similar way.

An adequate net income statement is absolutely key to the survival of a farm business. Without a good accrual adjusted income statement, how do you know if there is a profit?

It’s important for the farm family to have good financial statements, and to understand them. After all, it is their financial life.

“Ag Business Management” series of fact sheets at www.extension.umn.edu/AgBusinessManagement. Click on “publications.”

Any use of this article must include the byline or following credit line:
James Kurtz is an ag business management educator with University of Minnesota Extension. Media Contact: Julie Christensen, U of M Extension (612) 626-4077, reuve007@umn.edu

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