10 Tax Tips for Farmers
There ain’t much an old country boy or girl like you can’t hack – except for a hefty tax bill. Crop problems, hired hands, pregnant livestock and busted tractors all complicate your return. Fortunately, the Internal Revenue Service offers numerous benefits if you own a plantation, ranch, range or orchard to raise livestock, poultry or fish or grow fruits or vegetables.
Here are 10 tips for farmers’ tax returns:
1. Crop insurance proceeds. Insurance payments from crop damage count as income. Generally, report these payments in the year you get them. Damages also include your inability to plant because of drought, flood or other natural disaster.
2. Deductible farm expenses. You can deduct ordinary and necessary expenses you paid for running and operating your farming business. An ordinary expense is a common and accepted cost for a given type of business; a necessary expense means a cost appropriate for your farming business.
3. Employees and hired help. You can deduct reasonable wages you paid to your farm’s full- and part-time workers. You must withhold Social Security, Medicare and income taxes from wages.
4. Sale of items purchased for resale. If you sold livestock or items that you bought for resale, you must report this resale. Your profit or loss is the difference between your selling price and your basis in the item (usually the cost of the item, which may also include other amounts you paid such as sales tax and freight).
5. Repayment of loans. You can only deduct the interest you paid on a loan if you used the loan for your farming business. You can’t deduct interest you paid on a loan that you used for personal expenses.
6. Weather-related sales. Bad weather such as drought or flood may force you to sell more livestock than normal in a year. If such conditions apply to you, you may qualify to delay reporting a gain from the sale of the extra animals.
7. Net operating losses. If your expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid in prior years. You may also be able to lower your tax in future years.
8. Farm income averaging. You may be able to average some or all of your current year’s farm income by spreading it over the past three years. This may lower your taxes if your farm income is high in the current year and low in one or more of the past three.
9. Fuel and road use. You may be able to claim a tax credit or refund of excise taxes you paid on fuel used on your farm for farming purposes. You can claim only a credit for the tax on gasoline used for farming purposes but can claim either a credit or refund for the tax on aviation fuel used for such purposes.
10. Farmers Tax Guide. For more details, see IRS Publication 225, “Farmer’s Tax Guide.” You can get it on IRS.gov or by calling the IRS at (800) TAX-FORM (800-829-3676).
You may need these additional IRS resources to document taxes for your farming income:
- Schedule F, “Profit or Loss From Farming,” which you file with your IRS Form 1040 tax return;
- the Agriculture Tax Center that details these and other tax considerations for farmers and agriculture professionals;
- the Small Business and Self-Employed Tax Center that you use if you file Form 1040 and associated schedules and your farm’s assets are under $10 million.
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Written by Scott Keen, CPA, a manager in the accounting and audit department of Glass Jacobson in Owings Mills, Md.
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