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How to Simplify Farm Tax Time

Updated: Nov 19, 2020

Tax time may not be anyone's favorite time of year but it is a necessary part of the year. The good news is there are many tax benefits for people in agriculture. Farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables. Whatever you raise, it's good to know the ins-and-outs of agricultural taxes. Here are 11 things to help out or take into consideration this tax season.

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 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.) 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.) Farm income averaging  

The IRS states that "You may be a