American Farmers Tax Deductions
Many successful business people own homes in the country, with significant acreage around them. If you're one of these people, and you're tired of paying big taxes on that extra land, you may want to consider using it for a small farm. On a small farm, you can raise crops or livestock. Here are a few tips to making the most of a small farm on your land. The number of small farms in America is on the rise, according to the U.S. Department of Agriculture, meaning that increasing numbers of people are filing farm-related taxes every year. While the USDA defines a small farm as one that produces less than $250,000 through the sale of agricultural commodities, the reality is that the majority of small farms have sales of under $10,000. No matter how much their sales are, farm owners typically spend a lot of money bringing goods to market, so it is important for them to be able to take advantage of every possible tax deduction. small farms can take advantage of many tax deductions.
- 1. Tax Breaks for Small Farms
- 2. Tax Breaks for Land Used for Agricultural Purposes
- 3. Define Homeowners Insurance Broad-Form Policy
The number of small farms in America is on the rise, according to the U.S. Department of Agriculture, meaning that increasing numbers of people are filing farm-related taxes every year. While the USDA defines a small farm as one that produces less than $250,000 through the sale of agricultural commodities, the reality is that the majority of small farms have sales of under $10,000. No matter how much their sales are, farm owners typically spend a lot of money bringing goods to market, so it is important for them to be able to take advantage of every possible tax deduction.1. Check your local zoning rules.
Before you do anything, make sure your local zoning department allows farming. If you're growing food for you and your family only, you don't have to worry. But once you start selling the food you grow, or livestock you raise, you'll need a special business permit and potentially the okay from the health department.
Get the details on tax breaks. (They're different for each state.)
While all 50 states provide tax breaks for agricultural land, their rules are different, depending on where you live and what you're farming. Most states require you put a certain amount of land in use, and some require a certain amount in profits, to show that you're actually in the small farm business.
Prove your intention to make a profit.
To be a real farm business, you'll need to show your intention to make a profit, though you don't have to actually make a profit each year. The IRS will want to see your business plan, profit and loss statements, verification of your bank account, daily activity logs and financial records showing typical farm expenses and assets. These might include farm machinery purchases, operational costs, vehicle purchases and maintenance, and costs for chemicals, feed, fertilizer, pesticides, salaries and benefits.
You can get additional tax breaks if you're willing to give up development rights on your land, and donate a conservation easement to a charitable land trust. This will permanently reduce the market value of your property and allow you to claim a deduction on your tax return. You can also tap tax breaks for alternative energy, like using solar panels to generate electricity for your farm.
This article is not intended as legal or tax advice. You should always seek advice from an independent tax advisor based on your individual circumstances.
Avoid the "hobby farm" label.
In order to get the tax breaks, you need to prove to the IRS that your farm is an actual business - not a hobby farm. A hobby farm is a "farm" - typically a few horses, other livestock or crops - used for leisure and enjoyment.
Normal Operating Costs
Conservation expenses are deductible if they are for the preservation of farmland and water, the prevention of erosion or protection for endangered species. Allowable expenses include the construction of dams and ditches, brush clearing and windbreak planting. Soil projects such as terracing and soil treatment to restore fertility are also deductible, as are any specific operations done as a part of the Endangered Species Act. Before conservation projects can be deducted, farmers must demonstrate that the projects are part of an approved plan from the USDA or another agency.
Small farm owners can deduct the cost of the depreciation of farm equipment such as trucks and tractors, buildings, improvements and necessary machinery. They may not deduct depreciation of their homes, personal vehicles or anything else not directly involved in producing income. Depreciation is also not allowed on furniture, land or animals purchased for resale.
Small farmers are allowed to deduct the cost of hired labor, including anything paid toward retirement plans or health benefits. Other allowable deductions are interest expense related to the farm and its operations, insurance, repairs and the renting or leasing of farm vehicles or machinery. Property taxes, employment-related taxes and equipment taxes are all also deductible.
The IRS does not allow the deduction of any personal living expenses, such as repairs to the family home, that do not result in farm income. They also do not allow farmers to deduct the value of anything raised for personal use or consumption, nor can farmers deduct the value of farm animals that died. In addition, no deductions are allowed for any type of personal losses or the loss of inventory, no matter what the reason. If the IRS determines that the farm is not being run as a business, it may apply what is called the "hobby loss rule," and deductions will be limited to the amount of income for the year.
Normal Operating Costs
The IRS allows farmers to deduct normal operating costs for their farms, including such expenses as feed and fertilizer, as well as livestock, seed and other essential items. Farmers may also deduct a reasonable amount of costs for things such as utilities and upkeep, provided they do not deduct costs that were for personal use only. Mileage is an allowable deduction for a vehicle used for farm work, including the sale of goods, and the taxpayer can choose whether to use the standard deduction or actual costs.