Tax Write Offs for Farmers
Whether your farm is your sole source of income or it is a part-time venture, you are in business to make money. You will incur a variety of expenses as you operate your farm and attempt to earn money throughout the year. Fortunately, these expenses are tax write-offs that can reduce your taxable income and the amount you will pay in taxes at year-end.
Income from Farming
A farmer receives money at different times throughout the year. While it may not seem like a write-off, determining when you record your income will have the same tax effect. A farmer can choose between the cash or accrual method of accounting, or a hybrid of the two.
The cash method requires you record all income and expenses when you constructively receive or spend the funds. Constructive means the money is in your account or you gave it up for a purchase. You will include in your net taxable income all monies you actually receive or spend within the year.
The accrual method requires you record income when you earn the money rather than receive it. If you sold crops for instance on December 12 and do not receive the money until January 1 you will record the income in December. You will also expense or write-off the expenditure when you incur it instead of when you actually pay for it. This allows you to better track your business by keeping income and expenses together in the same period.
A hybrid, called the crop method, allows the farmer to plant a field one year and not claim the associated expenses until the crop comes in during the following year. This helps to prevent an excessive loss one year and then a large taxable gain in the next.
Deductible Expenses
A tax write-off or deduction from income, affords the farmer the ability to decrease his taxable income and overall tax liability for the year. Any expense that the farmer deems necessary to the operation of her business is a deductible expense. The Internal Revenue Service will look for reasonableness when determining whether to accept these expenses, but if you can justify the expense as necessary to your operation it will be an allowable write off.
Purchasing Equipment
Like any business, farms need equipment to operate. Any equipment you purchase during the year can be a tax write-off for the farm. You can either deduct the entire expense (with some limitations that are subject to change) by using a section 179 expense, or depreciate the property over the useful life of the item.
A section 179 expense is a method of rapid depreciation allowing the farmer to write-off the entire cost of the item in the year of purchase. This works well if you have a large profit in the current year and expect income to drop off in future years.
In the event you project your income to be stable in the future, depreciating the property over its useful life is prudent. This will give you the opportunity to write off a portion of the expense each year of its use and will more appropriately match the expense of the item to the income it helps you earn.
Personal Expenses
The Internal Revenue Service understands that farmers generally have their personal residence on the farm in which they operate. Personal expenses such as fuel, electricity, water, telephone and insurance co-mingle in the operations of the business. You are required to determine a method of allocation that will appropriately separate the personal from the business expenses, as personal expenses are not deductible. This may not be easy to do and the IRS realizes this, so any method that appears reasonable is accepted.
One method is allocating by square foot. Total the square footage of all the buildings on the farm and separately total square footage of buildings for personal use only. Divide the personal use by the total farm use and you will arrive at a percentage of personal use to allocate. Multiply this percentage by the total personal expenses that entwine themselves in the business so you can extract the personal usage.
Report the Expenses
Farmers report all their income and expenses on a form 1040 Schedule F. This form is simply an additional schedule to your personal 1040, not a separate tax return. The net profit or loss from this form will flow through to your 1040 to determine the taxes owed. The amount of taxes will depend on a myriad of factors that do not relate to the farm, including other income and expenses you may have in addition to your farm profits.
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