As a farmer, you have to be aware of the tax laws that apply to you. A professional can help you determine the tax burden you face and make the right decisions. But how do you know what you are eligible to claim? The Internal Revenue Service (IRS) offers several guidelines that can guide you.
If you are a farming business, you may qualify for a number of tax breaks. For example, you may be able to deduct up to 25 percent of your expenses for soil and water conservation. You may also be able to deduct your share of employment taxes if your farming business is related to your employment. Various other tax provisions may affect your farm income. Regardless of your operations, you need to keep accurate records of your business to ensure you are claiming all of the applicable deductions and credits.
Farming is defined by the IRS as a trade or business involving the cultivation of land or the production of agricultural commodities. This definition is used to define many of the taxable items you can claim on your federal income tax return. Agricultural commodities include wheat, soybeans, corn, and dairy products. Some of the things you can claim are livestock costs, rental real estate, and interest on a loan.
Many farmers use the cash method of accounting when reporting their income and expenses. Under this method, the expense is deducted in the tax year it is incurred. However, you must be aware that cash receipts must be adjusted for changes in beginning and ending values.
Another way to reduce your tax bill is to claim Section 179 deductions. If you have certain property such as an auto, you can deduct as much as $500 in expenses from your tax return. These deductions aren’t available if you purchase the item in the year you pay for it.
Aside from the usual items like livestock and crops, you can claim improvements on your property. These can increase its value, extend its useful life, and adapt it for a new use. Also, you may be able to deduct expenses such as the cost of capitalizing your machinery.
You can even claim the cost of purchasing a new tractor. You can’t deduct a personal labor expense, but if your farming business involves the hiring of a spouse, you can deduct the wages.
Other ways to reduce your tax bill are to deduct interest on a loan, pay wages to a hired laborer, and claim your employer’s share of employment taxes. You can also claim the Section 179 expense deduction, which is the best known of the three. Alternatively, you may elect to use income averaging to lower your tax bill for a high-income year.
To qualify for the most prestigious and smallest tax breaks, you must operate your farm for profit. Depending on your circumstances, you might have to make quarterly estimated payments or make a single payment by the 15th of the month following the close of the tax year.