Farms include ranches, ranges and orchards. Some raise livestock, poultry, or fish and others grow fruits or vegetables. Individuals report their farm income on Schedule F (“Profit or Loss From Farming”). If you own a farm, here are nine tax tips you should know about:
- Crop insurance. Insurance payments from crop damage count as income. Generally, you should report these payments in the year you get them.
- Sale of items purchased for resale. If you sold livestock or items that you bought for resale, you must report the sale. Your profit or loss is the difference between your selling price and your basis in the item. Basis is usually the cost of the item. Your cost may also include other amounts you paid, such as sales tax and freight.
- Weather-related sales. Bad weather such as a drought or flood may force you to sell more livestock than you normally would in a year. If so, you may be able to delay reporting a gain from the sale of the extra animals.
- Farm expenses. Farmers can deduct ordinary and necessary expenses they paid for their business. An ordinary expense is a common and accepted cost for that type of business. A necessary expense means a cost that is proper for that business.
- Employee wages and benefits. You can deduct reasonable wages and other compensation you paid to your farm’s full- and part-time workers, including reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. You must withhold Social Security, Medicare, and income taxes from their wages. You can also deduct the cost of benefits you provide to your full- and part-time workers (including your spouse if a true employer-employee relationship exists), such as medical insurance or contributions to a retirement plan.
- Loan repayment. You can only deduct the interest you paid on a loan if the loan is used for your farming business. You can’t deduct interest you paid on a loan that you used for personal expenses.
- Net operating losses. If your expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid in prior years. You may also be able to lower your tax in future years. However, if you don’t actively participate in the farm activity, your losses may be limited.
- Farm income averaging. You may be able to average some or all of the current year’s farm income by spreading it out over the past three years. This may cut your taxes if your farm income is high in the current year and low in one or more of the past three years.
- Tax credit or refund. You may be able to claim a tax credit or refund of excise taxes you paid on fuel used on your farm for farming purposes.
And, of course, we are always willing to help. If you have questions or want to discuss your specific situation, please give us a call.