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IRS Tax Tips for Organic Farmers

IRS tips about farm income and deductions

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Updated March 31, 2012

Taxes are a necessary evil for everyone, even organic farmers. However, the IRS does attempt to make things a little easier with their tax tip guides. This year, they published a special must know tax tip guide especially related to deductions and income, just for farmers. Below are some of those tips, plus extra tips and information about your farm taxes this year.

  • Crop insurance proceeds: When doing your taxes, include income proceeds during the current year, from insurance that resulted from crop damage.

  • New fuel mileage rate for 2011: During any year, farmers are often eligible to claim a credit or refund of federal excise taxes on fuel used on a farm, so long as the fuel was used for farming purposes. For 2011 specifically, standard mileage rates for operating a car, van, pickup, or panel truck for each mile of business use is 51 cents per mile (January 1 through June 30, 2011) and 55.5 cents per mile (July 1 through December 31, 2011).

  • Some start-up costs are deductible: Starting in 2011, you can choose to deduct up to $5,000 of your business start-up costs, so long as they were paid or incurred after October 22, 2004.

  • Averaging farm income: One way to possibly lower your current year's taxes is average all or some of your current year's farm income by allocating it to the three prior years. If your current year income from farming is high, while your taxable income from one or more of the three prior years was low, this could lower your taxes.

  • Weather based sales: You may be able to postpone reporting gains made from livestock during the current year if the increased sales were due to weather-related conditions.

  • Labor deductions: You can deduct a reasonable amount paid to laborers, including full-time and part-time workers. For employees you have to ithhold social security, medicare and income taxes.

  • Crop shares: If you paid rent in crop shares this is included in self-employment earnings for the year if you meet one of the four material participation tests at the time the crop shares are produced. Crop shares used for feeding livestock also counts. To figure your self-employment earnings on crop shares, use the fair market value of the crop shares.

  • When choosing a deduction type: The IRS defines deductible costs as ordinary and necessary. An ordinary expense one that is common and accepted in the farming business. A necessary expense is an expense that's appropriate for the business.

  • Resale deductions: If you bought any items for resale, those costs may be deductible and includes livestock and the freight charges for transporting livestock to the farm.

  • Losses may be deductible: To gain a refund or a possible tax reduction in future years, you might be able to carry losses this year over to another year. This works if your deductible expenses from farm operations came out to more than other income for the year.

  • Farm loan interest: Interest paid on a loan taken out specifically for your farm business is deductible.

  • Self-employed health insurance: As of 2011, you can't deduct self-employed health insurance deduction you report on Form 1040, line 29, from self-employment earnings. See the instructions for Schedule SE (Form 1040).

  • Figuring net earnings: If you need examples of the three ways to figure your net earnings, which include regular method, farm optional method and nonfarm optional method, visit the net earnings section of IRS publication 225.

All other information and tax tips regarding 2011 farm taxes can be found in IRS Publication 225, Farmer's Tax Guide. The guide is available online (pdf) or you can call the IRS at 800-TAX-FORM (800-829-3676) to have a copy sent to you.

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