Measurement Issues in Assessing Farm Profitability through Cash Tax Returns

It is widely accepted that net farmincome reported on an accrual-adjustedincome statement is a moreappropriate profitability measurethan net farm income reported onSchedule F of the federal tax return,which is prepared using cash basisaccounting. However, a commonpractice among agricultural lendersis to use Schedule F net farmincome, which uses the cash basis ofaccounting, as a proxy for accrual-adjustednet farm income. A studyof 1,045 individual Illinois farms’records from 2002 through 2006found the median absolute annualpercentage difference between athree-year average cash and a three-yearaverage accrual-adjusted netfarm incomes is 57 percent for farmsof stable size; 43 percent for farmswith annual gross revenue increasingat rates of less than 5 percent, 50percent at rates of 5-10 percent, and58 percent at rates over 10 percent;and 61 percent for farms with adebt-to-asset ratio greater than 40percent.