Understanding Your Federal Farm Income Taxes and Deductions

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If you own a farm, chances are that you have the ability to take advantages of many deductions on your tax returns. In order to do so, though, you’ll need to keep proper records so that you adequately record your income and expenses at tax time.

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Who Qualifies for Farm Deductions?

First, you should know how the IRS defines a farmer. It’s pretty basic – if you operate a farm with the intent to make a profit, you are a farmer. But, you must make farm include that you report on Schedule F in order to qualify. Basically, if you operate a farm, whether you own or lease the land, you may qualify as long as you do it for business purposes.

If you are a ‘hobby farmer,’ meaning your intent to farm is not to make a profit, you may take some deductions, but not all of them. The major difference here is that you report on your farm income as ‘other income’ on your 1040 – you do not complete Schedule F. You will also only be able to take deductions that are on Schedule A, rather than the more in-depth deductions farmers working for a profit can make.

In order to determine the difference, the IRS looks back at the last 5 years. If at least 3 of those years included farming profit, you qualify as a farmer.

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What Can you Deduct?

Knowing the expenses you can deduct will help you minimize your tax liability and hopefully increase your farming profits. A few of the most common expenses you can write off include:

  • Farm equipment – Any equipment you buy for use on your farm in an effort to increase profits may be written off. You will report the expense, but may only be able to take a portion of the write off during the first year as it may be prorated over its life expectancy.
  • Farm buildings – Any buildings you buy on the farmland that you own or lease may also be written off as an expense. You may not include the cost of the land, though.
  • Interest on farmland loans – You may be able to write off any interest you pay on the loans used to buy the farmland, but you cannot write off the full expense of the land.
  • Depreciation – You can deduct depreciation expenses on just about any machinery, buildings, vehicles, and even some livestock. You cannot deduct depreciation on your land, though.
  • Wages for farmers – If you employ any farmers on your farm, you may write off their wages, but you will have to cover their portion of the income, social security, and Medicare taxes.
  • Everyday expenses – You may be able to deduct certain expenses, such as utilities and insurance. You will have to determine which portion of the expenses is business related and which is personal, though. You may only write off the business portion of these expenses.
  • Mileage – You may write off mileage driven as long as you keep a careful log of the miles driven. Usually, it’s easier to take the standard mileage deduction rather than actual expenses, but if you keep careful records of the cost of using your vehicle for your farm, you may be able to deduct the actual expenses.
  • Net Operating Loss – If it costs you more to stay in business than you make, you have a net operating loss. You are able to use this to lower your tax liability not only this year, but you may be able to carry forward any unused portion into future years to lower your tax liability.

What is Self-Employment Taxes?

Since you are not working for someone, but rather work for yourself, you are responsible for both sides of the income tax. Otherwise known as self-employment tax, this covers your portion of the social security and Medicare tax that an employer would otherwise have paid for you.

By paying the self-employment tax, you cover your portion of the social security tax, which makes you eligible for social security income in the future. It will also help you become eligible for Medicare benefits when you are 65-years old.

Keep Careful Records

In order to take any of the above deductions or to accurately report your income, you need careful bookkeeping records. Whether you handle it yourself or you hire someone, you need ledgers that show every transaction for both income and expenses.

If you plan to take any deductions, you will need ample receipts to prove the expenses. You will also need proof of your income to show that you are accurately reporting it. As a general rule, you should keep all documents for at least three years in the event that the IRS has any questions on your returns.

Making the most of your farm deductions will help lower your tax liability and increase your profits. Keep careful records and ensure that you take the deductions that you are owed to make your farming venture as successful as possible.

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