DEFINITION of Crop Method
Crop method is a special accounting method available to farmers who do not sell their crops in the same year that they planted and grew them. This allows them to charge the costs of production against sales revenue in the year it is actually realized.
BREAKING DOWN Crop Method
Crop method is one of several accounting methods available to farmers, which establish the rules for reporting income and expenses. Under this method, if a farmer does not harvest and dispose of the crop in the same tax year it was planted it can, with Internal Revenue Service (IRS) approval, use the crop method of accounting.
However, most farmers use the cash method, also known as cash basis, as it is easier to keep records. Under the cash method, all items of income received during the tax year are included in gross income, and the farmer deducts expenses in the tax year when it is paid.
Certain farm corporations and partnerships, and all tax shelters, have to use the accrual method of accounting — the standard accounting practice for most companies — to correctly match income and expenses. Here the farmer reports income in the year earned and deduct or capitalize expenses in the year incurred. Certain businesses engaged in farming have to use the accrual method, for their farm business, and sales and purchases of inventory items.
Generally, farmers can use any combination of the cash, accrual or crop method of accounting, if the combination clearly shows their income and expenses and it is used consistently. However, the following restrictions apply:
- If the cash method is used for figuring income, the cash method has to be used to report expenses.
- If the accrual method for reporting expenses is used, the accrual method has to be used to calculate income.
Once an accounting method is established, IRS approval is need before it can be changed.