When Getting Your Hands Dirty Really Pays: Tax Tips for Farmers
The farming industry has represented a vibrant part of our country since its founding, and it continues to thrive today-from big time commercial farmers to little moms and pops who have capitalized on the rising demand for locally grown food by turning the farmers’ market into a viable livelihood. In an effort to support this age-old industry, especially in times of recession, the government provides a host of special tax incentives for farmers. However, navigating the complex IRS tax code associated with these incentives can be tall order.
This represents an opportunity for CPAs, enrolled agents and other tax professionals who are in a position to offer tax assistance to taxpayers working in the farming industry. This is why, over the past several year, tax tips for farmers have been gradually included in Tax CPE-the tax continuing education courses required of any registered tax agent to maintain their professional certification.
Professionals looking to tap this market can do so by digesting the following tips and then communicating to them their farming clients.
IRS Publication 225
Any tax professionals looking to develop a further understanding of the tax incentives for farming should first download and read IRS Publication 225 – Farmer’s Tax Guide. It was co-authored by the IRS and farm extension specialists, and explains in plain language the complicated tax rules that apply to most farmers.
Business vs. Hobby Farming
There are significant financial differences between the classification of a farm as a business versus its classification as a hobby. When the farm does not constitute the taxpayer’s sole or primary business, the related deductions are significantly limited. When a farm is the primary business, dozens of tax incentives are instantly available. Again, Publication 225 explains the criteria for classifying a farm as a business, most notably, (a) demonstrating intent to make a profit and (b) succeeding in making the farm a profitable venture in three years of a five-year period.
All in the Family
It is not uncommon for Farmers to employ their own kin, namely their children, due to the advantageous tax benefits for the parents as well as the children. However, certain rules govern these perks. When a child is between the ages of 7 and 18, and the farm is not incorporated, then social security taxes do not need to be paid in connection with their employment. The wages are also still deductible on Schedule F.
The majority of farmers are confronted with a unique business situation insofar as it is difficult for them to estimate how much they will produce and sell in advance. Because of this tax professional should advice them to stay active in year-round tax planning. To this end, an CPA or enrolled agent working with a farming clients should help prepare a mock return a few times per year to ensure they understand their tax liability.
According to the IRS, taxpayers are required to depreciate capital farm asset purchases over the period of their usefulness, as opposed to a one-time deduction of the full expense. Capital assets can include such items as farm buildings and equipment.
Home and Business
It is more often the case than note that farmers live where they work. This can present certain difficulties come tax time, particularly around separating business and home costs because many bills (such as electricity or gas) are often shared. However, the IRS does allow farmers to estimate the percentage of these expenses that related to the farming business.
The vast majority of farmers buy livestock, equipment and other items for the sole purpose of resell them. The IRS does permit the deduction of these expenses, along with charges for transporting livestock and farm equipment.
The IRS states “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).” The agency also makes it clear that farmers do not need to be engaged in a farming business during any base year, and that farmers running the farm business as an individual, a partnership, or an S corporation also qualify.
The IRS also provides certain special incentives for farmers whose business has been impacted by bad weather. Meaning, if a farmers are forced to sell more livestock, for instance, than usual because of weather-related conditions, they are able to then delay reporting the gain until the next year.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.