The Internal Revenue Code includes laws that govern the unique income and expenses associated with farming. One such section of law pertains to expenses incurred by a farm business.
This article is the first in a series on the various business expenses associated with farming. This article is specifically on deductible expenses. If you operate or work on a farm, the materials covered in these articles may be of use.
Expenses for a Farm Business
In general, a farmer can deduct the current costs of operating their farm. The Internal Revenue Code defines a cost as an expense you are not required to capitalize or include in inventory.
However, there are certain exceptions where the amount you can deduct may be limited. These exceptions include the costs associated with feed for livestock and purchasing certain other supplies. In addition, if you incur an operating loss in a given tax year, there may be a limitation that prevents you from taking it all.
You may deduct the ordinary and necessary costs associated with operating a farm for a profit. Ordinary refers to a cost incurred by most farmers. Necessary refers to a cost that is useful and helpful in operating the farm.
If you receive a reimbursement for an expense, you must reduce the amount deducted by the amount of the reimbursement. If the expense and reimbursement occur in the same year, you must deduct only the unreimbursed amount. If you receive the reimbursement in a year after the expense has been deducted, you must include the reimbursement in income.
Personal Versus Business Expenses
There may be some expenses you pay that are a mix of personal and business. Examples of such expenses include but may not be limited to automobile maintenance, electricity, fuel, gasoline, insurance, interest, natural gas, oil, rent, repairs, taxes, telephone, and water.
When you incur such expenses, you must allocate them between personal and business use. There is not a defined method required for performing this allocation. In such a situation, the IRS will accept any reasonable allocation, which they will evaluate on a case-by-case basis.
You can deduct only the business-related portion of these expenses.
Prepaid Farm Supplies
Prepaid farm supplies includes any of the following:
- Feed, seed, fertilizer, and other similar farm supplies not used during the year.
- Poultry bought for use in your farm business.
If you use the cash method of accounting, you may deduct expenses for farm supplies only up to 50 percent of your other deductible farm expenses. However, you may be exempt from this limit if either of the following apply:
- Your prepaid farm supply expense exceeds 50 percent of your other deductible farm expenses because of a change in business operations caused by unusual circumstances.
- Your total prepaid farm supply expense for the previous three tax years is less than 50 percent of the total farm supply expense for the previous three tax years.
You are a farm-related taxpayer if any of the following are true:
- You primary residence is a farm.
- Your primary business is farming.
- A member of your family has a farm as their primary residence or farming as their primary business.
Where can I get more help about deductible farming expenses or other tax questions?
You can work with a tax attorney to get answers to your additional questions or get help filing your tax return. There are tax attorneys who specialize in income and expenses related to a farm business.
Please call the phone number found at the top of this web site or complete the short form below. Someone will be in touch with you to give you the help you need.
The first consultation with a tax attorney is completely free of charge. As with other attorneys, all conversations with them are confidential.
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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.