Hertsel Shadian, Attorney at Law, LLC

Tax Tips Related to Farm Income and Deductions

3 April 2012

A taxpayer is in the business of farming if he or she cultivates, operates or manages a farm for profit, either as an owner or as a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. A farm also includes plantations, ranches, ranges and orchards. Following are 10 key points for farmers in regard to federal income taxes.

1. Crop insurance proceeds. Farmers must include in income any crop insurance proceeds which they receive as the result of crop damage. Farmers generally include those proceeds in the year they receive them.
2. Sales caused by weather-related condition. If a farmer sells more livestock, including poultry, than he or she normally would in a year because of weather-related conditions, he or she may be able to postpone until the next year the reporting of the gain from selling the additional animals.
3. Farm income averaging. Farmers may be able to average all or some of their current year’s farm income by allocating that income to the three prior years. This may lower a farmer’s current year tax if their current year income from farming is high, and their taxable income from one or more of the three prior years was low. This method does not change a prior year tax, it only uses the prior year information to determine a farmer’s current year tax.
4. Deductible farm expenses. The ordinary and necessary costs of operating a farm for profit are deductible business expenses.  An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business.
5. Employees and hired help. A farmer can deduct reasonable wages paid for labor hired to perform his or her farming operations. This includes full-time and part-time workers. Farmers must withhold Social Security, Medicare and income taxes for employees.
6. Items purchased for resale. A farmer also may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.
7. Net operating losses. If a farmer’s deductible expenses from operating his or her farm are more than their other income for the year, the farmer may have a net operating loss. Like other taxpayers, farmers can carry that loss over to other years and deduct it. A farmer also may get a refund of part or all of the income tax he or she paid for past years, or may be able to reduce his or her tax in future years.
8. Repayment of loans. A farmer cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if the proceeds of the loan are used for the farming business, a farmer can deduct the interest that he or she pays on the loan.
9. Fuel and road use. A farmer may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.
10. Farmers Tax Guide. More information about farm income and deductions is available in IRS Publication 225, Farmer’s Tax Guide, which is available at the official IRS website at www.IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676).

For more information about this topic, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Please also feel free to share this article with others that might benefit from this information.