If you run your farm as a business, then you can offset certain costs against your income to minimize your tax liability. The list of deductions is extensive, but generally, you can deduct expenses that are common and accepted in the farming business, as well as specific expenses that are appropriate for your farm.
Two Types of Deductions
Like any business, farmers are permitted to deduct their business expenses from their taxable income. Deductions are split into two categories:
- Current costs, which you deduct in the year they incurred
- Capitalized costs, which you deduct over a number of future years
For tax purposes, a farm includes livestock, dairy, poultry, fish, fruit and truck farms, as well as ranches, plantations, ranges, orchards and groves.
Deductions for Current Expenses
Current expenses are the everyday costs of keeping your farming business going, such as rent, electricity bills and interest on business loans. Some common farming expenses you might incur include the following:
- Wages paid to your farm's full- and part-time workers
- Livestock purchased for resale
- Animal feed, fertilizer, seed and similar farm supplies consumed during the tax year
- Repair and maintenance of farm property
- Routine maintenance of trucks, tractors and other farm machinery
- Dues to cooperatives
- Insect sprays and dusts
- Litter and bedding
- Livestock fees
- Milk assessment
- Tying material and containers
- Farm-related insurance
Rules for Deducting Current Expenses
Deducting current expenses is relatively straightforward; you simply subtract the amounts spent from your farm's taxable income in the year the costs were incurred. Generally, you should include these expenses on your Schedule F form. Take care with expenses that are part farm-related and part personal, such as electricity, water, fuel, telephone, car repairs and insurance. The personal part of these expenses is not deductible, so you'll have to allocate the expense between its farm and personal parts.
For example, suppose you paid $2,000 for electricity during the tax year. You used three-fourths of the electricity for farm purposes and the rest for heating your home. In this scenario, you can deduct $1,500 – three-fourths of the total electricity bill – as a farm business expense.
Deductions for Capitalized Expenses
If you buy farm property with a useful life of more than a year, you cannot deduct the amount spent all in one go. Instead, you must spread the cost over the time you use the asset. Examples of capital assets include the following:
- Farm buildings
- Vehicles and equipment
- Water wells
- Irrigation pipes
- Land preparation costs
- Road building
- Renovations and improvements that go beyond routine repair
- The cost of soil-enriching agents whose benefits last substantially more than one year
You can't deduct the cost of farmland because land does not wear out or get used up.
Rules for Deducting Capitalized Expenses
There are many rules for how capitalized farm expenses must be deducted or depreciated, but it generally involves writing off the cost through tax deductions that you claim each year. IRS Publication 225 has detailed instructions (see Resources). One valuable tax break is found in Internal Revenue Code section 179. Instead of depreciating an asset, you can elect to recover all the costs of a qualifying capital expenditure, up to a total of $500,000, by deducting it in the year you place the property in service. Qualifying assets include agricultural or horticultural structures, storage facilities, farm machinery and equipment, and livestock.