Tax Breaks for Small Farms

U.S. agriculture has taken some serious hits over time. Settlers fanned across the land, taming prairies and searching for water, but attempts to create farmland from indigenous soils proved catastrophic when the Dust Bowl of the 1930s hit – a direct result of farmers’ and ranchers’ attempts to change the ecology of the land. These days, technology, chemistry and innovation influence large farm operations. However, small family-run farms still dot the landscape aided, in part, by state and federal government tax breaks farmers receive to help them survive such as amortization of farm equipment and machinery.

Defining a Small Farm

The Internal Revenue Service’s definition of a small farm has changed radically over the last few decades. What was once identified as a rural operation dedicated to planting and harvesting food and/or raising animals has come to include fish farms, orchards and vineyards, according to the IRS, and that definition continues to evolve.

Small farms are categorized as small businesses, but the tax breaks they receive differ from those given to other types of small businesses, according to Fox Business News. For example, small farmers can spread out the declaration of profits to avoid paying higher taxes following a year of profit taking.

Exploring Hobby Farms

The IRS identifies and disqualifies “hobby farms” when giving tax breaks earmarked for small-farm owners. Hobby farms have been claimed as tax shelters by wealthy people looking to avoid paying taxes on pastoral spreads, horse shelters, and ranches maintained exclusively for leisure and enjoyment. A true small farm is a full-time businesses. Section 183 of the U.S. tax code explains the ins and outs of tax allowances for hobby farms.

Avoid a hobby farm designation by operating your small farm in accordance with standard business practices. Be prepared to give the IRS your business plan, profit and loss statements, bank account verification, daily activity logs and financial records to make it easy to differentiate your business from a hobby farm.

Validating Income Sources

Even if you declare a variety of income sources when preparing taxes for your small farm, you must show enough income to prove that you’re running a business that offsets tax breaks. That said, to avoid an audit, you must also prove that you’re not a hobby farm. Typically, hobby farms show profits year after year; this is rarely the case with small farm businesses, many of which are happy to break even.

Typical income categories you can take to offset tax breaks include property sale gains, interest income, sharecropper rent, royalties and dividends, pensions, and income received via alimony, estates, trusts and partnerships.

Seeking Out Tax Breaks

Offset the aforementioned revenues by posting on your tax return typical small-farm expenses and assets, such as farm machinery purchases, operational costs, vehicle purchases and maintenance, advertising or other marketing associated with products your small farm produces, chemicals, feed, fertilizer, pesticides, salaries and benefits.

Receive depreciation tax breaks by accounting for equipment amortization, shipping expenses, insurance, legal fees and supplies necessary to run the administrative portion of your small farm.

Additional Tax Breaks

While land can’t be depreciated, if you happen to own a vineyard, the IRS offers an “appellation” tax credit to reduce the amount of taxes paid by growers in a calendar year. You can also get tax breaks for soil and water conservation if your small farm uses ecological methods and techniques to rehabilitate land and/or recycle water – as long as you have receipts to back up your claims.

For more information on tax breaks associated with the amortization of farm equipment and machinery, consult IRS pamphlet 535. Finally, if you allocate part of your small farm to wind energy pursuits, you might be entitled to receive energy tax breaks from the government as well.

Obtaining Necessary Tax Forms

Prior to the 2018 tax year, most small-business owners had to complete IRS Forms 1040, 1040a or 1040EZ, but now there is a new, redesigned IRS Form 1040 that streamlines the aforementioned into a single form. However, farmers will still use Schedule F to detail the year’s profits and losses, says analyst Rich Schell, writing for HobbyFarms.com. While Schedule C is often employed to record non-farm-related declarations, a small farmer can use this schedule to seek tax breaks for expenses associated with consultants, laborers, veterinarians, and advisory services required to plant and harvest crops or to maintain the health and well being of farm animals.