5 Tax Tips Every Farmer Should Know from Credit Karma

5 tax tips every farmer should know

Credit Karma Tax®

1. Know whether your farming activity counts

Who does the IRS consider a farmer? If you grow veggies in your backyard garden on the side and sell them at a roadside farm stand, does that qualify you as a farmer?

The IRS says you’re a farmer if you “cultivate, operate or manage a farm for profit, either as an owner or a tenant.” Farms include plantations, ranches, ranges, orchards and groves, and you can raise livestock, fish or poultry, or grow fruits and vegetables.

But your backyard produce sales probably won’t qualify you as a farmer for tax purposes — especially if you also work a full-time job that’s not farming-related. Instead, the IRS would likely consider the money you make from your victory garden as hobby income, since you don’t depend on that income for your livelihood.

As a result, you wouldn’t have access to the tax breaks the IRS affords farmers.

2. Know what you must claim as income

As a farmer, you’re likely to have multiple streams of income, and there may be some income sources that you didn’t know you needed to report.

To help, here’s a quick list of farming income you may have to report.

• Sales of livestock and other resale items
• Sales of livestock, produce, grains and other products you raised
• Distributions from a cooperative
• Agricultural program payments
• Commodity Credit Corporation loan proceeds (you can choose to count this as income if you pledge part or all your production to secure the loan)
• Crop insurance proceeds
• Federal crop disaster payments
• Income you received for custom hire or machine work
• Gasoline or fuel tax credit or refunds

If you own a farm operated by a tenant and you didn’t materially participate in the farm’s management or operation, you’ll also need to report rental income based on crop or livestock shares the tenant produces. But you won’t have to pay self-employment tax on the rental income.

As a farmer, you may have many sources of taxable income — including bartering, cancelled debt, prizes from livestock competitions and more. See IRS Publication 225 to learn more about farm income. Because there are so many different income sources you must report, it’s important to keep meticulous records throughout the year to make it easier to file your return correctly. You’ll report the income, along with your expenses, on Schedule F of Form 1040.

3. Know what expenses you can and can’t deduct

Farmers get a lot of deductions for the expenses they incur, but that doesn’t mean you can deduct everything. Here are the five expenses you can’t deduct.

• Personal or living expenses that don’t produce farm income (e.g., the cost of repairing your home)
• Expenses of raising anything you or your family used (e.g., if your farm business is growing vegetables, but you raise hens for your family, the costs of raising those chickens is nondeductible)
• The value of raised animals that died
• Inventory losses
• Personal losses

Fortunately, the list of expenses you can deduct is much longer. Here are some examples.

• Seeds and plants
• Veterinary costs for livestock
• Depreciation
• Chemicals
• Feed
• Fertilizers and lime
• Insurance (other than health)
• Mortgage interest
• Storage and warehousing

See Part II of Schedule F for a comprehensive list of deductible farm expenses.

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4. Take advantage of other tax breaks

In addition to deducting your expenses, there may be other deductions and credits you can take as a farmer.

Home office deduction

You may be able to deduct certain expenses using the home office deduction if you used your home to conduct farming business. In order to qualify, you must have used part of your home exclusively and regularly as the principal place of business for your farming operation, and you cannot have another fixed location from which you managed and administered your business.

Check out IRS Publication 225 to learn more about business use of your home when you’re a farmer.

Deducting net operating loss

Farming can be an unpredictable business. One year you may have a bumper crop and make a tidy profit, while the next year sees drought and disease eroding your income. When deductible losses from operating your farm exceed your other income from the year, or you experience a personal or business loss that was more than your income, you can see a net operating loss.

When that happens, you may be able to carry the loss back up to two years and deduct it from income you had in those years. If you carry the loss back, you may be able to get a refund for all or some of the income tax you paid for that past year. Alternatively, you can choose to carry the net operating loss forward for up to 20 years.

Claiming fuel credits

If you used gasoline or other fuels for farming purposes, you might be able to claim a credit or refund on the excise taxes you paid. Note, however, that you can’t get a credit or refund for taxes paid on dyed diesel fuel and dyed kerosene.

Before you claim a fuel credit, be sure you understand the rules, requirements and limitations for doing so. Check out IRS Publication 225 to learn more.

Earned income tax credit

Although it’s not specifically designed for farmers, the earned income tax credit may be available to you if you meet the qualifications.

The credit is designed for working people with low to moderate income, so you may not be eligible if your net farm profit exceeds a certain amount. Check out the IRS publication on the EITC for more information.

5. Get help with filing if you need it

Credit Karma Tax® offers free filing for everyone, and supports some of the most-common tax forms used by business people, including Schedule F Profit and Loss from Farming. But depending on the complexity of your farm’s finances, you may want to get help from a tax professional. This may be especially important if you’re new to farming or you haven’t done your own taxes in the past.

Our next week’s guest will be Kyle Woiwood from LWBJ Accountants. We hope that conversation will shed some light on the changes year over year to pay attention too.

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