In a NutshellFiling taxes for your farm business can get complicated quickly. These tax tips for farmers can help you learn what you need to report and how to take advantage of tax breaks available to you.
This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.
If city folks view farming life as simple, it may just be because they know nothing about filing taxes for a farm business.
Operating a farm often involves several different income sources and expenses, deductions and credits, all of which can complicate things when it’s time to file your taxes. While the average age for farmers as of 2012 was 58.3, first-time farmers are still entering the business — including millennials.
According to the USDA’s 2012 Agricultural Census, the number of farmers ages 25 to 34 increased nearly 2.2% between 2007 and 2012. What’s more, more than 469,000 farmers have been farming fewer than 10 years, and more than 171,000 have been farming for fewer than five years.
If you’re filing your taxes as a farmer for the first time — or are a long-time farmer who’s still confused about how farms get taxed — these five tax tips for farmers may help shed a little light on how it all works.
- Know whether your farming activity counts
- Know what you must claim as income
- Know what expenses you can and can’t deduct
- Take advantage of other tax breaks
- Get help with filing if you need it
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
- 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.
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
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.
In the end, the most important thing is that you properly report all income and expenses for your farming business, and get the most tax breaks that you’re eligible for. These tax tips for farmers may be a good start, but if you have questions regarding filing taxes as a farmer, check out the IRS website or consider consulting a tax professional.
Owning and operating a farm is hard work, but the government provides special tax benefits to those who go into the business of farming. As a farmer, it’s critical that you stay organized throughout the year, so that you’re not scrambling come tax time.
Also, it may be wise to work with a tax professional who specializes in farming and can help you maximize your eligible tax deductions and credits to reduce your tax liability as much as possible.
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.