The IRS states that the ordinary and necessary costs of operating a farm for profit are deductible business expenses. There are countless deductions that may apply to your farm and taxes, but be aware that not all farms are eligible for all deductions. Learn more about farm deductions and their associated rules below.
Important note - before doing your taxes, it's always wise to speak with a real live tax professional for the best advice to fit your personal situation.
1. Should You Bother with Deductions?
When doing taxes you can itemize deductions or take the standard deduction that applies to you and others in your tax bracket. The standard deduction is always a basic dollar amount that essentially reduces the amount of income that you can be taxed for. If your allowable itemized deductions are greater than your standard deduction you should spend the time to itemize your deductions. Keep in mind that some people have to itemize deductions because they cannot use the standard deduction.
Also keep in mind that tax rules cover what expenses can be deducted and WHEN those expenses can be deducted. Some expenditures are deductible during the year incurred while others must be taken over a number of future years. The difference is current vs. capital or capitalized expenditures.
2. Typical Business Deductions
Deductible farm expenses are normally associated with the costs of operating your farm. Because income tax is a progressive tax, the more you earn, the more you pay. Deductions help offset some of those costs. Some general allowed deductions for organic farmers are listed below:
- Advertising, including cost of website hosting, paper advertising and other marketing costs.
- Bad debts
- Car and truck expenses, including some fuel costs if the vehicle was used for the farm.
- Some costs associated with conservation practices you've put into place.
- Funds used to repair machines or equipment.
- Employee health care benefits.
- Medical expenses (not including health care insurance premiums).
- Fees paid for legal and professional services, including the cost of doing your taxes.
- Office supplies and new office equipment, for example a computer or desk.
- Rent for land vehicles and animals used in farming.
- Travel and entertainment.
- Breeding fees for livestock.
- Some utilities used on the farm.
- Livestock vet bills.
- Taxes such as real estate and personal property taxes on farm business assets.
- Livestock purchased for resale.
- Charitable deductions including cash or goods.
Remember, for deductions you want to take, be sure to save all receipts, and track inventory or property you donate.
3. Personal vs. Business Expenses
Note that some of the expenses you can deduct may be tricky, as they may be applied to both your personal and business life. For example, fuel used on the farm, for farm purposes, counts as a business expense, but if you use the same truck to drive around town on personal business, that portion of your fuel is personal, not business. Other examples of partial business vs. partial personal expenses may include items such as rent, oil, water, electricity, telephone, automobile upkeep, repairs, insurance, interest and taxes.
In most cases, you'll need to allocate percentages among these expenses and usually the personal percentage of these expenses is not deductible.
4. Start-Up Costs
As of 2011, start-up costs up to $5,000 are deductible for organic farmers. It's possible to elect to deduct the $5,000 paid or incurred after October 22, 2004.
5. Deductible Losses
Net operating losses are when your actual deductible expenses from operating your farm add up to more than your income for the year. If you like, you can usually carry that loss over to other years and deduct it. The benefit is typically a refund or being able to reduce your taxes in future years.
6. Prepaid Goods
Often you may purchase inputs or other supplies during the year that you don't actually use during the tax year. These are prepaid supplies. You can deduct these but this is not the same as unused supplies that were somehow damaged. For example, if you lost a bunch of seed due to fire or drought, these are not prepaid supply deductions.
Overall, your prepaid deductions may be limited to 50% in the year you pay for them.
7. Prepaid Livestock Feed
Prepaid livestock feed is a special prepaid case. Assuming you use the cash method of accounting, which is most common, you can't deduct feed your livestock may consume in another year without meeting some rules, which include:
- You paid for the feed vs. making a deposit.
- You have a genuine business purpose for purchasing the feed early.
- Deducting the prepayment does not result in a material distortion of your income.
If you fail to meet any one of the three rules above, you can't deduct the prepaid feed.
8. Home Office Deductions
If you live on the farm, there's a good chance you have an office somewhere in that space. If you do have a home office, it may be partially deductible and that includes expenses such as mortgage interest, insurance, utilities, repairs, and depreciation. However, claiming home office use is tricky. To deduct, your office must meet two basic IRS requirements:
- Regular and Exclusive Use - Your home office space must be regularly used for conducting business not for other activities.
- Principal Place of Your Business - Your home must be your principal place of business. If you do happen to conduct business outside of your home as well, you may still qualify for the home office deduction. You may also deduct expenses for a separate free-standing structure at your home, such as a studio, garage, or barn, if that space meets the exclusive and regular use rules.
If you use credit to finance business purchases, you can deduct the interest paid on some of that credit interest, for example interest on your farm mortgages or other proceeds that you used for your business.
10. Insurance Deductions
Insurance deductions are a biggie for organic farmers. Not only can you deduct premiums paid for fire, storm, crop, theft and liability but you can also deduct premiums paid for health and accident insurance for you and your employees, workers’ compensation insurance, state unemployment insurance on your employees and business interruption insurance.
Of course, insurance deductions are subject to IRS rules, but in most cases they're deductible. Plus, because insurance premiums involve hefty amounts of cash they can really make a difference on your taxes, so track costs religiously.
11. Learn More About Farm Deductions
See IRS form 225 Farmer's Tax Guide (pdf) for more information on all deductions. Once you've got this form open go to section 4, Farm Business Expenses. Section 4 is long, about nine pages in all, but well-worth a good read as these deductions can help you keep more money in your pocket.