Not many people enjoy tax season, especially when you own and operate a farm. As a farmer, you deal with many different income sources, expenses, deductions, and credits, all of which can make filing your tax return even more complicated. If you’re a farm owner and are struggling to understand how taxes work for farmers, you’re not a lot. To help make filing your taxes a bit less daunting, the team at AA Tax & Accounting Services, LLC has put together a guide to filing taxes as a farmer.
Determine If You’re Considered a Farmer
To make the most of the credits and deductions associated with farming, you need to be classified as a farmer in the eyes of the Internal Revenue Service (IRS). Do you own property that produces fruits and vegetables that are purchased on-site by the local community? Do you grow produce in your backyard and sell it at a roadside stand?
According to the IRS, a farmer is someone who “cultivates, operates, or manages a farm for profit, either as an owner or a tenant.” This can range from operations on a ranch and range to orchards and groves, and it can involve raising livestock and poultry or growing produce.
In most cases, you will not qualify as a farmer if you are a low-end operation growing fruits and vegetables in your backyard to sell as a side hustle. This income would be considered hobby income because your primary occupation isn’t farming-related, which means you would not have access to the same tax breaks as a qualified farmer.
Report on Your Farming Income
Come tax season, you need to be able to report all streams of income for the past year. While your primary source of income may be from sales of crops, there are a variety of types of farming income that need to be reported. A few of these include:
- Selling livestock
- Selling produce, grain, and other products
- Distributions from a cooperative
- Prizes from livestock competitions
- Agricultural program payments
- Crop insurance proceeds
- Federal crop disaster payments
There are quite a few types of farming income that need to be reported on come tax season. Because of this, you must keep a record of all income throughout the year so you can easily and effectively report income on your tax return.
Understand Which Expenses Can Be Deducted
As a farmer, there are quite a few deductions you can take advantage of. These include:
- Seeds and plants
- Fertilizers and lime
- Veterinary costs for livestock
While farmers can make a lot of deductions on their tax return, there are a few expenses that can not be deducted:
- Living expenses not related to farm income
- Value of deceased animals
- Inventory losses
- Personal losses
- Expenses from raising livestock or growing produce for personal use
Take Advantage of Tax Breaks
While there are plenty of opportunities for you to receive tax breaks from expensing qualified deductions, there are additional tax breaks and credits that farmers can take advantage of.
- Home Office – Is your personal residence also the home of your farm? If a portion of your home is used exclusively for your farming operation, you may be able to make the most of the home office deduction.
- Net Operating Loss – Because farming income can be extremely unpredictable and is dependent on the success of a crop, you can deduct losses when they exceed your other income from the year. When applicable, this loss can be deducted from income in the previous two years, allowing you to receive a refund. You can also opt to carry this net operating loss forward for up to 20 years.
- Fuel Credits – When operating your farm with gasoline or fuel, you may be eligible to claim a credit on the excise taxes you paid. Certain requirements and limitations include not receiving a credit or refund for taxes on dyed diesel fuel and dyed kerosene.
Call for Tax Consulting Services for Farm Owners
From one-time tax consulting services to ongoing consulting services, our tax consultants work with many clients, including farm owners, as their tax advisor and tax preparer. With our team, you can have peace of mind knowing that your tax team understands your farming taxes backward and forwards. We have first-hand experience working with farm owners to provide you with the most effective strategies for maximizing deductions and tax credits with our tax consulting services.
The AA Tax & Accounting Services team can help you execute the right tax strategies for your farming operation. Contact us to schedule an appointment.