How to Simplify Farm Taxes
Updated: Jun 22
Tax time is probably not your favorite time of year but it is necessary part of the year. If you're a farm, then the good news is that there are many tax benefits for people in agriculture including farms, plantations, ranches, ranges and orchards. Whatever you raise of grow, it's good to know the ins-and-outs of agricultural taxes and be informed and prepare for tax time.
Here are 11 tips to consider for your next farm taxes
1.) Crop insurance proceeds
Insurance payments from crop damage count as income. Generally, you should report these payments the year you get them. A cash basis farmer must include proceeds from crop insurance and federal disaster programs in gross income for the tax year during which they receive the payments.
2.) Deductible farm expenses
Farmers can deduct ordinary and necessary expenses they paid for their business. An ordinary expense is a common and accepted cost for that type of business. A necessary expense means a cost that is appropriate for that business.
In agriculture, these ordinary and necessary expenses include car and truck expenses, fertilizer, seed, rent, insurance, fuel, and other costs of operating a farm. Schedule F itemizes many of these expenses.
3.) Farm help, 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 their wages. If you paid cash wages of $20,000 or more to employee farm workers in any calendar quarter in the current or prior tax year you will need to
There are instances where you don't have to pay this. Some farmers will hire a crew leader or crew boss as independent contractors to provide farm labor. The crew leader hires the necessary farmworkers and pays their wages. In that case, the crew leader is the employer of the farmworkers for tax and other legal purposes and will need to withhold and pay their employment taxes. If you hire a crew leader to provide labor, you must make sure not to treat the crew leader and the farmworkers the leader hires as your employees. You may not supervise or otherwise control the crew leader or farmworkers. Your control is limited to accepting or rejecting the final results the crew leader achieves. If you don't want to give up control over the workers who labor on your farm, don't hire an independent contractor crew leader. If you do treat a crew leader like your employee, you'll be responsible for the taxes of the farmworkers he or she hires.
If you hire a crew leader to furnish you with farmworkers, you must keep a record of the crew leader's name, permanent mailing address, and employer identification number (EIN). If the crew leader has no permanent mailing address, record his or her present address. Keep this with your tax records.
4.) Sale of items purchased for resale
If you sold livestock or items that you bought for resale, you must report the sale. Your profit or loss is the difference between your selling price and your basis in the item. This is usually the cost of the item. Your cost 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 the loan is used for your farming business. You can’t deduct interest you paid on a loan that you used for personal expenses.
6.) Weather-related farm sales
Bad weather such as a drought or flood may force you to sell more livestock than you normally would in a year. If so, you may be able to delay reporting a gain from the sale of the extra animals. A farmer who sells livestock because of a shortage of water, grazing, feed production or other consequences of a weather related condition may postpone the payment of income tax on the taxable gain from the sale. There are two separate and distinct tax treatments, both of which apply only to weather related sales of livestock in excess of normal business practice. For 2020 the IRS has already stated that they are allowing some of these capital gains to be differed.
7.) Farm net operating losses
If your expenses are more than your 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.) Average farm income
The IRS states that "You may be able to average some or all of the current year's farm income by spreading it out 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 years."
Using Schedule J to spread out your income allows you to average your current tax bracket with previous years to avoid being taxed at a significantly higher rate this year. This treatment can make sense for any of the following reasons:
Your current taxable income places you in a higher marginal tax bracket than prior years. The income earned at the higher rate can be applied retroactively to prior years with lower rates-saving you money.
If the farm income averaging election has not been utilized in earlier years. The IRS will let you amend prior years’ filings to capture those benefits.
If you anticipate a higher income or higher tax rates in the future. You can apply income averaging for three years which sets you up for a profitable use of this treatment in future years.
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.
Not all fuels are taxed. There are a variety of circumstances where the government may not tax or implement reduced taxes, including the following:
Business use of gasoline in a vehicle that is not registered for highway use
Gasoline and kerosene used in commercial aviation
Undyed diesel fuel used in farming or for some bus transportation (They make the distinction that undyed diesel is taxed; Diesel that has been dyed red is untaxed)
To be clear, only the “ultimate user” of the fuel is eligible for the credit for untaxed use. In other words, if you weren’t the one who burned the fuel, then you usually can’t claim the credit.
10.) Farm property tax breaks
All 50 states give a creak to property tax rates to agricultural land in an effort to help farmers and/or fight urban sprawl. But how easy it is to claim this break varies greatly, and some states recoup back taxes if the land is taken out of farm use.
11.) Filling out the IRS Schedule F
The schedule F asks about your principal farming activity or crop; your income from selling livestock, produce, grains or other products; and whether you received farm income from cooperative distributions, agricultural program payments, Commodity Credit Corporation loans, crop insurance proceeds, federal crop disaster payments, or any other sources.
An important note: We are not accountants. Much of the information from this article is from the IRS site but if you are unsure of tax law, please talk to an accountant or the IRS.
Additional IRS Resources:
Schedule F, Profit or Loss From Farming
Farmers Tax Guide
We know tax season isn't always easy but hopefully some of these tips will give you some added benefits this tax season.