Pullman herald. [volume] (Pullman, W.T. [Wash.]) 1888-1989, 1921-02-18
ARE You LOSING MONEY ON
YOUR INCOME TAXP

3
The year of 1920 has been one of
the hardest years financially that
farmers have experienced for some
time. Many Washington farms are
showing losses this year, and due to
this fact, there is not much concern
about income taxes. However, one
point is often overlooked and that
is that this is a very favorable time
for farmers to change their method
or reporting income tax.
There are two methods of report
ing farm income for income tax pur-
poses. The one commonly used is
called the Cash or Cash Receipts
and Disbursement basis. This basis
does not show the true farm profit
and usually farmer will pay more
income tax over a period of years
than he would if he had used the sec
ond or inventory" basis for COM
putting farm income. If, for ex-
ample, a rancher should buy bunch
of steers, feed them for three years
and half and then sell at a $4,000
increase over the cost price and
should make his income tax on the
cash basis, he would have, under
this plan, a tax of $3.50. Under the
inventory plan this $4,000 would be
divided and figured as an income of
about $4,000 for each of the three
years, which would result in total
tax for the three years Of about
S156, or a total savings of about
1894. Both methods of reporting
are legally correct.
The cash basis is not a good or fair
basis of accounting, but when the
income tax law came into effect very
few farmers had adequate records
for making the income tax returns
and very few farm account books
made up from the view point of the |
farmer were to be had. The sim
plest way used was to let the farmer
report the total sales and total ex-
Penses for the year. Many farmers
have continued to report in this way
without having the facts at hand
to find out whether the cash basis |
is or is not fair to them and have |
continued to report on the cash ba-
sis because it was the easiest thing
to do.
If farmer who is reporting on
the cash basis should not sell his |
wheat until after the income tax re-
ports are due, under the cash basis |
there would be no receipt from sale
of wheat for that year and on a
wheat farm no income tax to pay. |
for the income is to be reported the
year in which the income is received. |
Should this farmer then sell his crop
III the spring and sell the crop grown
the second year before making his
income tax in the winter, it will be
seen that he would have two years
crops and one years expense. Thus
his income tax would be materially
increased for the reason that I'M
doubtedly his income would cause
the eight per cent tax and as we'll as
the super-taX to be imposed. Farm
ers who study the income tax reg
ulations will note that after the in
come reaches $4,000 the per cent of
taxation increases very rapidly. I'm
der the inventory basis, which is in
accordance with good accounting
principles and used in other lines of
business, the receipts, whether crops
are sold or not, are charged to each
years business. Some farmers have
called the accrued basis of report
ing the inventory basis. 1t REQUIRES
little more effort but it is the
only fair basis for farmers to report
upon. To use this method a farmer
must have an inventory of livestock,
crops and other farm property at the