Things You May Not Know About Farm Income and Deductions

If you are in the business of farming, here are some things you may want to know before filing your federal tax return.

1. Crop Insurance Proceeds - Include in income any crop insurance proceeds that you receive as the result of crop damage. The proceeds are generally included in the year they are received.

2. Sales Caused by Weather-Related Condition - If there is more livestock sold than you normally would in a year because of weather-related conditions (including poultry), you may be able to postpone reporting the gain from selling the additional animals until the next year.

3. Farm Income Averaging - You may be able to average all or some of your current year's farm income and refigure your tax over the three prior years.  This may give you a lower tax if your current-year income from farming is high, and your taxable income from one or more of the three prior years was low.

4. Deductible Farm Expenses - The ordinary and necessary costs of operating a farm for profit are deductible business expenses.  An ordinary expense is an expense that is common and accepted in the business.  A necessary expense is one that is appropriate for the business.

5. Employees - Reasonable wages paid for labor hired to perform your farming operations can be deducted.

6. Items Purchased for Resale - You may be able to deduct the cost of livestock and other items purchased for resale in the year of sale.  This cost includes freight charges for transporting the livestock to the farm.

7. Net Operating Losses - If the deductible loss from operating your farm is more than your other income for the year, you may have a net operating loss.  If you have a net operating loss this year, it can be carried to other years and deducted.  You may be able to get a refund of all or part of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8. Repayment of Loans - The repayment of a loan cannot be deducted.  However, if the proceeds of a loan are used for farm business expenses, the interest paid on the loan can be deducted.

9. Fuel and Road Use - You may be eligible to claim a credit or refund of excise taxes on fuel used on a farm for farming purposes.

10.  Post-2009 Farm Losses May Be Limited - For tax years beginning after 2009, the Farm Act limits the farming loss of a taxpayer, other than a C corporation, for any tax year in which any applicable subsidies are received.  The losses are limited to the greater of (a) $300,000 ($150,000 for a married person filing separately), or (b) the taxpayer's total net farm income for the prior five tax years.

For more information regarding income and expenses for farming and farm rentals, please give this office a call.

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