Doing your taxes when you own a business is complicated. Doing your taxes when you own a farm is even more complicated. Farmers often have multiple streams of income as well as different expenses, both of which affect their taxes. Keep reading to learn the top tax tips for farmers.
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Does the IRS Recognize Your Farming Activity?
First, you need to classify your farming activity. Does the IRS recognize it as farming or is it a hobby? While the laws are complicated, a simple way to look at it is like this:
If you operate a farm for profit and use the funds for your livelihood, the IRS will likely recognize it as a farm. If you operate a small garden and sell your produce at the local farmer’s market or to your neighbors, but you have a full-time income from something non-farm related, the IRS probably won’t consider it farm income.
What’s the difference? If the IRS recognizes your income as farm income, you may be eligible for more write-offs and deductions. If it’s just hobby income, you don’t get those same write-offs, so make sure you are clear with your intentions before you start.
Claim all of Your Income
Farmers often have income from many sources. As a general rule, you should report all of it in order to avoid an audit. Just what qualifies as income? The sky is the limit, but here are a few examples:
- Money paid to you for work on another person’s farm
- Income from the sale of crops or livestock
- Proceeds received from crop insurance
- Proceeds received from any federal programs for crop disasters
- Rental income from your farm
- Prizes from farming competitions
This is just a short list. Consult with your tax accountant to see if the income that you make from your farm should be claimed.
Know Your Deductions
Luckily, the IRS allows you to take many deductions as well. A few of the long list of deductions include:
- Standard farm expenses
- Wages paid to employees
- Interest paid on a farm loan if it’s used for your farming business
- Cost of supplies
- Cost of veterinary bills for your livestock
- Insurance costs
Again, consult with your tax accountant to determine if your farming expenses are deductible. Just like your personal taxes, not every expense can be deducted, but the IRS does allow many options for farmers to lower their tax liability.
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Pay Your Kids
If your kids help you on the farm, go ahead and pay them. While this may sound silly, it can help you on your taxes. The IRS allows you to deduct wages you pay your children. Even better news, you don’t have to withhold social security taxes or federal unemployment tax until they are 18 and 21 respectively.
Don’t Forget About Business Expenses
Chances are that you do ‘other farming work’ outside of the farm. After all, you are running a business. You may be able to deduct business expenses just like someone running a non-farming business out of their home. For example, if you use a home office, deduct it. If you have a net operating loss, use it to lower your taxes.
Don’t do Your Taxes Yourself
The final tip is to get help with your taxes. Farming taxes are complicated. You may understate or even overstate your income. You may overlook important deductions and write-offs. Why take a chance? Hire an accountant with farming experience so that you know you are only paying what is necessary while taking the advantages of being a farmer.
Taxes for farmers are definitely more complicated than most other businesses. Get the help you need to take the right deductions and claim the right income. This way you know you are paying what you should, but not overpaying on your income taxes.
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