Most businesses use either the cash method or the accrual method of accounting. Generally, if a business produces, purchases, or sells merchandise, it must keep an inventory and use the accrual method for sales and purchases.

However, the accrual method for a business with inventory is not always required and it can use the cash method of accounting, even if it has inventory. Most small farming businesses (average annual gross receipts of $26 million (2021) or less for the three prior tax years) can use the cash method of accounting.

Inventory. Taxpayers that meet the $26 million (2021) gross receipts test are not required to account for inventories, but rather may use a method of accounting for inventories that either:

•  Treats inventories as non-incidental materials and supplies, or
•  Conforms to the taxpayer’s financial accounting treatment of inventories.

Continue reading: Farm Inventory and Accounting Methods 2021