For farmers or those involved in a farming-related industry, there are specific laws with the tax revenue code that apply to their unique income and expenses. Therefore, if you operate or work on a farm, you need to follow these laws when you prepare your tax return.
This publication, the seventh in a series of articles on taxes for farmers, focuses on Income from Other Sources outside of those covered in previous articles. The previous entries covered Recordkeeping and Accounting, Income from the Sale of Farm Products, Rent Income, Agricultural Program Payments, Income from Cooperatives, and Cancellation of Debt.
When you receive income for your work related to farm products, property, or related services, you must report the fair market value of that income on your tax return. This law also applies when you trade one farm product for another farm product, property, or service. Such a trade is considered barter income.
For example, if you help a neighbor build a fence and he gives you a hog for your labor, you must report the fair market value of the hog as ordinary income. The amount of ordinary income you report is typically the fair market value, which is also your basis in the property.
Loans Made Below Market
A loan made below market is a loan made with an interest rate below the current interest rate or with no interest at all. If you make a loan at an interest rate below the current interest rate, you may have to report income from the loan in addition to stated interest received from the borrower.
If you receive pay related to custom work you perform outside of your farm or from the use of your farm property or machinery, such pay is considered income even if income tax is not withheld from the pay. Such pay is considered income regardless of the form it takes, whether cash, property, or services.
Easements and Rights-of-Way
An easement or right-of way is when your land is used for an alternate specific purpose, sometime as a requirement from the federal government or other governmental agency. Examples of easements or rights-of-way include constructing electrical or telephone towers, laying pipelines, or allowing the animals of one farmer to cross the lands of another farmer.
When you receive income related to an easement or right-of-way, the treatment of the income may vary depending on the circumstances. The income may need to be reported as income, result in a reduction in the basis of the involved land, or both.
Fuel Tax Credit and Refund
If you receive a fuel tax credit or refund and you deducted the cost of the fuel and excise tax as an expense that reduced your income, you must include the tax credit or refund in your income.
Illegal Federal Irrigation Subsidy
The federal government has made irrigation water from certain reclamation and irrigation projects available for agricultural purposes. The amount required to be paid for this water less the amount you actually paid for this water is considered an illegal subsidy. You must report such difference as income.
If you receive prize income related to your farm livestock or other products at a contest, exhibition, or fair, you must report the prize as income. If the prize is in the form of a product or property, you must report the income as the fair market value.
Condemned, Destroyed, Sold, or Stolen Property
If property you own is condemned, destroyed, sold, or stolen, you may have to report an ordinary or capital gain on the property.
Recapture of Certain Depreciation
If you obtained a section 179 deduction for property used in your farming business and at any point during the recovery period you do not use it at least 50 percent in your business, you must recognize part of the deduction as income.
Refund or Reimbursement
Typically, you must include in income the refund, reimbursement, or recovery of an item for which you took a deduction in a previous year.
Sale of Soil and Other Natural Deposits
If you remove and sell fill dirt, gravel, loam, sand, topsoil, or other natural deposits, you must recognize the monies received as ordinary income.
Where can I turn with questions about farming income and taxes?
If you have questions about taxes pertaining to farming income or other parts of your tax return, you should speak with a tax attorney. There are tax attorneys who specialize in tax laws related to farming and all other areas.
By completing the form below or by calling the telephone number located at the top of this web site, you can get in touch with a tax attorney, one who has the training and experience to answer your questions and. Know that all conversations with a tax attorney are completely confidential, and the first consultation is free of charge. Therefore, you should get in touch with a tax attorney today to get the help you need.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.