Tax Tips

10 Tax Tips For Farmers

15 Minutes
January 10, 2022

Hey, all of you farmers and ranchers! March 1^st will be here before you know it. Let’s go over some tax tips before you get that return filed.

First, do you know why you have to file by March 1^st? Hopefully, you do, but if not, here’s why –

Since you have income from a farming business AND you do not pay any estimated tax payments throughout the year (or by January 15^th) then you have to file and pay your entire tax due on or before March 1^st.

You are considered a farmer, in the eyes of the IRS, if at least two-thirds of your gross income for the current tax year or the prior tax year is from farming. For example, if your spouse earns a non-farming income of $100,000 and your gross farming income is $200,000, then $100,000 + $200,000 = $300,000 and $200,000 / $300,000 = ⅔ or 66.7%.

If it’s the other way around and your spouse earns a non-farming income of $200,000 and your farm income is $100,000 then the March 1^st deadline does not apply to you, but these other tax tips still may apply!

1. INCOME OF FARMERS

How about we start with an easy one? What income counts and how should you be reporting it?

Here’s a list of farming income to report:

Sales of livestock or other resale items
Sales of livestock, produce, grains, and other products you raised
Cooperative distributions (Form 1099-PATR)
Agricultural program payments
Commodity Credit Corporation (CCC) loans reported under election and loans forfeited
Crop insurance proceeds
Federal crop disaster payments
Income from custom hire or machine work
Fuel tax credit or refunds

Wait, what about cash rent income? If you cash rent your farmland to another person and DO NOT materially participate, then that income should be reported on a Schedule E.

This matters because you do not pay self-employment tax on a Schedule E. You pay self-employment tax on a Schedule F.

If you crop share and DO NOT materially participate then this income will be reported on Form 4835 in the year that you convert the shares to money. Form 4835 net income or loss will carry to the Schedule E, which again, isn’t included in self-employment income. To read more on material participation, click here!

Now let’s move on to livestock…

2. KEEP TRACK OF LIVESTOCK

Keeping good records on your livestock can really benefit you come tax time. The classes of livestock are reported differently to the IRS and can have some tax savings if you follow the tax code.

You need to separate and categorize your livestock transactions as livestock purchased for resale, livestock raised, livestock purchased to be held, livestock raised to be held. Included in those transactions should be the cost or basis of the livestock, not just the income received.

The sale of raised livestock (not held) or livestock purchased for resale is reported on the Schedule F, and is subject to self-employment tax.

Livestock held for draft, breeding, sport, or dairy purchases (bought or raised) is reported on Form 4797. Which is taxed as capital gains income, and that is the lowest category of tax you can pay. So, you want this!

This is especially important to keep track of if you sell your livestock in pairs, because the tax consequences may be different even if you received one price for the pair of livestock.

So, if you have livestock you not only need a good set of books but also a good record of inventory.

3. FARMERS GIFTING GRAIN

Gifting grain allows farmers to exclude grain income from being taxed while still being able to deduct the expenses.

This is often an under-utilized strategy for farmers to reduce their taxable income. Which not only saves on income tax but also self-employment tax.

You can either gift grain to a charitable organization or your children. You should contact the co-op or grain elevator and charitable organization receiving the grain ahead of time. Then to make the grain gift the farmer delivers the grain and puts it in the organization’s name. Then the charitable organization can determine when to sell the grain.

This is the same process when gifting grain to children. The children can determine when to sell the grain that’s in their name and the income they receive is not taxable to you. Although it will be taxable to your children.

As long as your children are not materially participating in farming then the grain income is treated as unearned income. Which is taxed as a capital gain, and you already know that’s the tax you want! If your child holds on to the grain for longer than one year from harvest, then the proceeds are treated as a long-term capital gain which has the following tax rates, 0%, 15%, or 20% depending on your child’s income.

One thing to keep in mind is that gifting to children that you claim as a dependent may result in kiddie tax. Be sure to always consult with your tax professional about your family’s tax situation.

4. NET OPERATING LOSSES (NOL)

If you have an excess farming loss that is disallowed for the current tax year, then you can treat that loss as a net operating loss carryover.

Hopefully, that didn’t sound like a bunch of gibberish.

Basically, if you can’t take your loss in the current year because it’s too big of a loss then you can use that loss in future tax years.

Saving this loss for future tax years will reduce that year’s taxable income. Which will save you taxes in the future!

Your tax professional should have software to keep track of this, but it is a good thing to be aware of yourself. Being aware of an NOL that you have coming will help you make good operating decisions for the upcoming year.

You can also carry it back to receive a refund on taxes you paid previously. Check with your tax professional on the best option for you!

5. PREPAID EXPENSES

Prepaid expenses are beneficial if you use the cash basis method of accounting. You can deduct your prepaid farm expenses in the year you pay for them to even out your income and expenses.

Aside from tax benefits, this can also guarantee delivery and lock-in prices on crop inputs for the upcoming year.

Prepaid expenses must meet the following conditions:

Must be for an actual purchase, not a deposit for an upcoming purchase
The expense has a business purpose and is not solely for tax avoidance
The expense does not result in material distortion of income

If you deduct prepaid expenses in the year you pay for them, you are limited to 50% of the other deductible farm expenses for the year. Unless you are an exception.

First, let’s give an example of what the limit looks like.

During 2024, you purchased a total of $60,000 prepaid expenses for use on your farm in the upcoming year. Your other deductible farm expenses totaled $100,000 for 2024. You must calculate 50% of $100,000 (the current deductible farm expenses). Therefore, you are limited to $50,000 in prepaid expenses.

This means you will use $50,000 of the prepaid expenses on the 2024 tax return and the rest ($10,000) on the 2025 tax return when you use or consume the expenses.

Now let’s see if you’re an exception and do not have to follow this limit on prepaid deductions. The prepaid deduction limit doesn’t apply if you are a farm-related taxpayer and either of the following apply:

Your prepaid farm supply expenses are more than 50% of your other deductible farm expenses because of a change in business operations due to unusual circumstances.
Your total prepaid farm supply expenses for the preceding 3 tax years are less than 50% of your total other deductible farm expenses for those 3 tax years.

Also, you are a farm-related taxpayer if any of the following tests apply to you –

Your main home is on a farm
Your principal business is farming
A member of your family meets (1) or (2).
1. Your family, for this purpose, includes spouse, parents, grandparents, children, grandchildren, brothers and sisters, half-brothers and half-sisters, aunts and uncles and their children.

6. 179 DEDUCTION OR BONUS DEPRECIATION

If you’re a farmer you are probably already aware of the 179 deductions and bonus depreciation, but let’s go over it just in case.

The section 179 deduction allows you to deduct qualified property during the year it’s placed in service rather than depreciating over several years.

For 2024 the maximum amount you can elect to deduct for most section 179 property is $1,220,000. Some qualifying property related to farmers include:

Purchased breeding livestock
Machinery
Agricultural structures
Drainage tile

The qualifying property can be new or used, however, you cannot buy the asset from a related party (lineal descendant).

Another accelerated depreciation method is bonus depreciation. Which allows you to take 60% of the qualified property acquired or placed in service after September 27, 2017, and before January 1, 2025. Again, the qualifying property purchased can be new or used and cannot be purchased from a related party.

*Bonus depreciation will continue to phase down each year: 40% in 2025, 20% in 2026, and 0% in 2027.

7. FAMILY FARM LABOR

Sorry farm kiddos, you don’t get to pull the child labor laws on your farming parents.

There is no minimum age for children to work on small farms or family farms, as long as they don’t miss school. Children working in agriculture can do jobs at age 16 that are particularly hazardous, as deemed by health and safety experts, that most workers must wait until 18 to do.

If you hire a child as an employee you can deduct reasonable wages for farm work. If your child is under the age of 18, then you do not have to pay social security and Medicare taxes on the wages paid.

The month the dependent child turns 18 their wages are subject to social security and Medicare taxes.

This is a great deduction for the farm operation and a way to incentivize kids to help around the farm and earn money doing so.

8. SEP IRA

Just because you are a self-employed farmer doesn’t mean you’re excluded from retirement plans.

There is a Simplified Employee Pension Plan that allows self-employed individuals to contribute to a traditional IRA.

SEPs can provide a significant source of income at retirement by allowing self-employed individuals to contribute 25% of net earnings from self-employment (not including the deduction for SEP contributions) up to $69,000.

This is a huge difference in annual contribution limits compared to setting up a regular Roth or Traditional IRA, which is $7,000 per year.

You can still set up a regular IRA and contribute to a SEP-IRA as a self-employed individual.

The contributions made to a SEP-IRA are a deductible expense. So, you get to use your SEP-IRA contributions as a farm deduction for the current tax year. The contributions must be paid by April 15^th to use on your prior-year tax return as a deduction.

For example, if you want to deduct a SEP contribution on your 2024 tax return, you need to make the SEP contribution by April 15^th of 2025.

Please note that since you get to deduct your SEP contributions over the years, you will pay taxes on your SEP-IRA withdraws once you reach retirement age. Since these are pretax contributions.

This is a great option for self-employed farmers. It not only is a tax deduction but a wonderful retirement plan. You can also offer this as a retirement plan for your farm employees!

9. HOME OFFICE DEDUCTION

If you use a portion of your home to conduct farming business, you can expense some of your otherwise nondeductible expenses. For instance: mortgage interest or rent, home insurance, utilities, etc.

You may qualify for the home office deduction if these two things apply to you:

you regularly use a portion of your home exclusively for business purposes. This deduction applies to both homeowners and renters.
also, if your home is your principal place of business.

There are two options when calculating the home office deduction: the regular method, and the simplified method.

The Regular Method allows you to claim a tax deduction based on the percentage of your home office square footage in comparison to your total home square footage. With this percentage, you can claim home-related expenses.

Calculate the home office deduction using the regular method with these steps:

Determine your home’s total square footage and the square footage of your home office.
Divide the home office square footage by the total home square footage
Multiply the percentage by the sum of your home’s allowable expenses (i.e., mortgage interest or rent, insurance, utilities, repairs, etc.)

There is no maximum to how much you can claim when using the regular method.

However, there is a maximum when using the simplified method. The maximum home office deduction that you can take with the simplified method is $1,500. Which is $5 per square foot with a maximum of 300 square feet.

The perks of using the simplified method are, of course, because it’s simple! The other highlights include allowing you to claim home-related itemized deductions in full on Schedule A. Also, for the years the simplified method is used, there is no home depreciation or recapture of depreciation.

Typically, if your home office is small, then you will get a slightly larger deduction by using the simplified option. Of course, this does depend on the area that you live in. If you live in a high-cost area then you may benefit more from the regular method with a small home office. If your home office is bigger, then it may be worth doing the extra calculation and recordkeeping to take the maximum deduction.

10. FUEL CREDITS FOR FARMERS

Most farmers are familiar with dyed diesel fuel and dyed kerosene, which is dyed for a nontaxable use. Meaning you must use it only on a farm for farming purposes or for other nontaxable purposes.

When you use undyed diesel for farming or any other qualifying purpose then you can recover the excise tax paid on the undyed diesel by claiming a credit or filing for a refund. Excise tax is collected at the time of sale on undyed diesel as it’s sold for highway use vehicles.

If you use any undyed diesel for farming purposes don’t miss out on the fuel credit!

There are a lot of rules and regulations for fuel credits, so be sure to study up on the IRS Farmer’s Tax Guide Chapter 14 to learn more.

Being educated on the IRS Farmer’s Tax Guide can help your farm operation a lot with tax savings. We appreciate our farmers and don’t want them to miss out on tax savings!