Tax Guide for Farmers – Deductible Expenses, Part 7

There are sections of the Internal Revenue Code dedicated specifically to income and expenses of farming businesses. A portion of these sections addresses farming expenses related to rents and leasing, which is the subject of this article.

This article is the seventh in a series on deductible business expenses associated with a farming business. The previous articles on deductible expenses covered Prepaid Farm Supplies, Prepaid Livestock Feed, Hired Labor, Interest, Taxes, and Insurance.

Rents and Leasing

If you lease the property used in your farming business, you can typically deduct the monies you pay for rent on Schedule F of Form 1040. However, you are not permitted to deduct the rent you pay related to crop shares if you deduct the cost of raising the crops as a farming business expense.

If you make advance payments of rent, you can only deduct in the current tax year the portion of the rents related to this tax year. Future rents must likewise be deducted in the year to which they pertain.

If you pay to rent a farm used in your farming business, you cannot deduct the portion of the rent that applies to the fair market rental value of the farm home in which you live.

Contract for Leasing or Purchasing

If you lease a building or equipment used in your farm, whether or not the rent monies you pay are deductible depends on if the agreement is a conditional sales contracts rather than a lease. If the agreement is a conditional sales contract, the payments made under the contract are payments for the purchase of the property.

In a conditional sales contract, you cannot deduct the amount of the payments as rent. Instead you must capitalize the cost of the property and deduct depreciation over the useful life of the property. In addition, if the agreement is a conditional sales contract, you can deduct any portion of the payments that covers interest, as well as costs for repairs, insurance, and other expenses related to the property.

What is a Conditional Sales Contract?

The determine on whether or not an agreement is a conditional sales contract is based on the intent of the parties involved in the agreement. There is not a prescriptive set of criteria that can be used to always determine the intent behind an agreement. However, an agreement can typically be considered a conditional sales contract if one or more of the following are true:

  • The agreement applies part of the payment to building equity in the property.
  • You receive title to the property after you make a specified number of payments.
  • The amount you pay to use the property for a short period of time is comparable to the amount you would pay to obtain title to the property.
  • Your payments total much more than the fair market value of the property.
  • You have the option to purchase the property at a discounted amount as compared to the fair market value of the property.
  • You have the option to purchase the property at a discounted amount as compared to the total amount of payment you would make under the entire agreement.
  • The agreement states a portion of your payment is to cover interest or a portion of the payment can readily be identified as interest.

Motor Vehicle Leases

If your lease agreement includes a terminal rental adjustment clause, the payments are tax deductible unless the agreement others qualifies as a sales contract. A terminal rental adjustment clause provides for an adjustment in the rental price based on the amount lessor could sell the vehicle for at the end of the lease.

Where can I get further help with my farming business income taxes?

A tax attorney is the best resource to help you with your income tax preparation. For those with a farming business, there are tax attorneys who are uniquely qualified to answer your tax questions.

If you call the telephone number at the top of this article or complete the form below, someone will get in touch with you to have you speak with a tax attorney. Remember the initial consultation with an attorney is free of charge, and only a tax attorney can offer you the benefit of attorney-client privilege. Therefore, you have every reason to get in touch with a tax attorney today.

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by Mark Johnston

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.