Tax Advice for American Farmers

By: Roni Deutch | Posted: 10th November 2010

The farming industry has been a major part of America since our country began, and continues to thrive today. Fortunately, the government provides special tax incentives for farmers, but navigating the complicated IRS tax code can be difficult even for standard wage earning taxpayers.

1. IRS Publication 225

Before you even start thinking about the tax incentives for farming, you should download and read IRS Publication 225 – Farmer's Tax Guide. It was written by both IRS agents and farm extension specialists, and explains complicated tax rules that apply to farmers.

2. Business vs. Hobby Farming

There are significant financial differences between classifying your farm as a business versus a hobby. If your farm is not your sole or primary business then the related deductions you can claim are greatly limited. However, if you establish your farm as a business then you will become eligible for dozens of tax incentives. Publication 225 explains the criteria for classifying your farm as a business, such as demonstrating the intent to make a profit and actually making a profit in three years of a five-year period.

3. Keeping it in the Family

Farmers often employ their own children because of the advantageous tax benefits for both the parents and children. If your child is between the ages of 7 and 18, and your farm is not incorporated, then you can employ them without having to pay social security taxes. The wages are also still deductible on Schedule F.

4. Year Round Planning

Farmers have a unique business situation because it is much more difficult for them to estimate how much they will produce and sell in advance. Therefore it is smart to stay active in year round tax planning. It is also a good idea to prepare a mock return a few times per year to make sure you understand your tax liability.

5. Farm Depreciations

According to the IRS, you must depreciate capital farm asset purchases over the period of their usefulness, as opposed to deducting the full expense at once. Capital assets can include farm buildings, equipment, etc. For more information on depreciating expenses, check with a local tax professional who specializes in assisting farmers with their returns.

6. Home and Business

Most farmers live where they work, and come tax time it can be difficult to separate business and home costs, especially if some bills (such as electricity or gas) are shared. Fortunately, the IRS will allow you to estimate how much of these expenses are related to your farming business.

7. Resale Deductions

It is common for farmers to purchase livestock, equipment, or other items with the intention to resell them. The IRS will still allow you to deduct these expenses, as well as charges for transporting livestock and farm equipment.

8. Averaging Income

According to the IRS, “if you are engaged in a farming business, you may be able to average all or some of your current year's farm income by shifting it to the 3 prior years (base years).” Additionally, you do not need to be engaged in a farming business during any base year, and farmers who run the business as an individual, a partnership, or an S corporation can qualify.

The Tax Lady Roni Deutch and her law firm Roni Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced tax lawyers who can fight tax debts on your behalf.
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Tags: dozens, wages, social security, tax liability, parents and children, taxpayers, tax incentives, business situation, tax planning, period 3