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Ten Tips for Farm Tax Returns

There are many tax benefits for people in the farming business. Farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables.  Here are 10 things about farm income and expenses to help at tax time.

  1. Crop insurance proceeds.  Insurance payments from crop damage count as income. Generally, you should report these payments in the year you get them.
  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.
  3. Employees and hired help.  You can deduct reasonable wages you paid to your farm’s full and part-time workers employed for ordinary and necessary farm work. You must withhold Social Security, Medicare and income taxes from their wages.
  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. Basis 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.
  7. Net operating losses.  If your farm expenses are more than farm 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.  You may be able to average some or all of the current year’s farm income by spreading it out over the past three years. This may lower your taxes if your farm income is high in the current year and low in one or more of the past three years.
  9. Fuel and road use.  You may be able to claim a tax credit or refund of excise taxes you paid on fuel used on your farm for farming purposes.
  10. Farmers Tax Guide.  For more details on this topic see Publication 225, Farmer’s Tax Guide.

Additional resources for farm tax reporting available from the IRS:

Should you need help in the preparation of your personal income tax return,  an appointment may be made with one of our Directors of Audit and Tax Services by reference to the CONTACTS page above.  Standard rates and terms for service will apply.

DISCLAIMER: This information is extracted with permission from IRS regulations and publications.  It is general in nature and the specifics of each taxpayer’s circumstances are different.  In addition, these regulation interpretations may be subject to change from year to year depending upon new tax legislation, reform and litigation, as well as IRS changes in interpretation of new and existing laws and court rulings.  We therefore are not responsible for the application of this general information to the specific circumstances of a reader unless we have been engaged as the reader’s tax preparer or consultant.

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