IRS Publication 225, Farmer's Tax Guide - John R. Dundon II, Enrolled Agent
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IRS Publication 225, Farmer’s Tax Guide

IRS Publication 225, Farmer’s Tax Guide

This post is a brief overview of IRS Publication 225, Farmer’s Tax Guide. According to this IRS Publication you are in the business of farming if you cultivate, operate or manage a farm for profit, either as an owner or a tenant. A farm includes livestock, dairy, poultry, fish, and fruit. It also includes plantations, ranches, ranges and orchards. Generally small farms report to the IRS using Schedule F attached to Form 1040 or 1065.

The IRS has made it clear that as a farmer you would benefit explicitly understanding that:

1. You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.  Don’t play games with this.  Not worth it.

2. If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to postpone until the next year the reporting of the gain from selling the additional animals and creating billable hours for your accountant, be careful here as well.

3. You may be able to average all or some of your current year’s farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.  This strategy also justified jobs for many accountants.  You should pay a pro to know this.  Smilarly you should only use this strategy after deliberate consideration.

4. The ordinary and necessary costs of operating a farm for profit are deductible business expenses.  An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business. The lesson learned here is to take care to precisely document and categorize each and every transaction as efficiently as possible.

5. You can deduct reasonable wages paid for labor hired to perform your farming operations. This includes full-time and part-time workers. You must withhold Social Security, Medicare and income taxes for employees. This is where a LOT of Farmer’s are getting dinged lately.  Again – employment tax is just something you cannot mess around with – the ranch hands – unless under the terms of an independent contractor agreement should be treated by default as employees receiving W2’s.

6. You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.

7. If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.  Avoid this if at all possible for a wide variety of reasons.

8. You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.

9. You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.