Keeping accurate records helps farmers determine deductions and credits.
Farmers do not pay taxes on many purchases used for farm production, including fuel. When a farmer pays federal taxes on fuel, he receives a credit on his federal income taxes for all federal taxes already paid. This is one example of farm tax credits. The Internal Revenue Service (IRS) defines farming for tax purposes. Taxpayers determined to engage in farming may receive farm tax credits.
Definition of Farming
The IRS defines farming as cultivating, operating or managing a farm for profit, as either an owner or a tenant. Farming includes livestock, poultry, dairy, fish, fruit and truck farms. Ranches, ranges, plantations, plant nurseries and orchards are all considered farms for tax purposes. In order to qualify for farm tax credits, a taxpayer must first be involved in farming and file taxes.
How Tax Credits Work
Tax credits work differently than deductions. The IRS allows farmers certain deductions and credits based upon the business of farming. Deductions reduce the taxable income, while tax credits reduce the amount of tax owed. For example, a farm is in a 28 percent tax bracket. A deduction of $1,000 saves the farmer $280 (1,000 x .28 = 280). A tax credit of $1,000 saves the farmer the entire $1,000 in tax payment.
Farm Tax Filing
Farmers are governed by the same basic rules applicable to other taxpayers. Farming requires the taxpayer to file specific forms for tax calculations. Farm income is reported on Schedule F (Form 1040). This schedule allows farmers to figure the net profit or loss from regular farming operations, according to the IRS. When farm products are sold, the difference between the selling price and the farm's basis in the item is the income of the farm. In addition, farms are subject to capital gains and losses from the sale of land, depreciable farm equipment, buildings and livestock.
Impact of Tax Credits on Farmers
Special tax provisions, such as tax credits, offer tax advantages to farmers. The government uses tax credits to encourage farming in the United States. Specific credits may only be available to certain farmers. For example, beginning farmer tax credits are only available to farmers who have been engaged in farming for a short amount of time. This encourages entrance into farming and continued growth. Other tax credits work to encourage the production of certain products, such as corn for ethanol. Through credits, the government guides farmers into certain areas where they want to see production.
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