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.
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.
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.