Tax Guide for Farmers – Deductible Expenses, Part 11 – Items Purchased for Resale

The Internal Revenue Code provides the laws that govern the reporting of federal income tax. For those with a farming business, the code includes sections on farming-related income and expenses. One such section, which is the subject of this article, includes travel expenses related to farming businesses.

This article is the tenth 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, Insurance, Rent and Leasing, Business Use of Your Home, Truck and Car Expenses, Travel Expenses.

Deduction of Items Purchased for Resale

Livestock

If you are using the cash method of accounting, you can deduct the cost of livestock and other items purchased for resale in the year in which the sale occurs. The cost you can deduct typically includes freight charges for transporting the livestock to the farm. You deduct the costs by entering them on Schedule F, Part I.

Hens and Baby Chicks

If you are using the cash method of accounting, you can deduct the cost of hens and baby chicks purchased for use in commercial egg production or for raising for resale. These costs can also be deducted as an expense on Schedule F, Part I in the year paid, so long as you take the deduction consistently and taking the deduction does not distort your income.

Seeds and Young Plants

You can also deduct the cost of seeds and young plants bought for development and cultivation before resale as an expense on Schedule F, Part I when paid, if you take the deduction consistently and you do not calculate your income using the crop method.

If you use the crop method, you can choose to delay deduction of the cost of seeds and young plants until you sell them. You must obtain IRS approval to use the crop method. If you do use the crop method, you must deduct the cost from the selling price to determine your profit. This calculation is performed on Schedule F, Part I.

Limitation of Deductions

If you deduct the cost of hens, baby chicks, seeds, or young plants as an expense, you must report their entire selling price as income. You cannot also deduct the cost from the selling price.

You cannot take as a deduction the cost of seeds and young plants for Christmas trees and timber as an expense. Rather, these costs can be deducted through depletion allowances.

The cost of chickens and plants used as food for your family is never an allowable deduction.

You must capitalize the cost of plants that have a preproductive period of greater than two years, unless you qualify to opt out of the capitalization rules.

Choosing an Accounting Method

You can elect either the crop method or cash method for deducting the cost of items for resale in the first year you buy chicks, egg-laying hens, pullets, or seeds and young plants. You must use the same method for chicks, egg-laying hens, and pullets. You can use a different method for seeds and young plants.

Once you elect a method for any of these items, you must use it for those items until you get IRS approval to change your method.

Other Deductible Expenses

Following are some of the other expenses you can deduct from farm income on Schedule F, Part II:

  • Accounting fees
  • Advertising
  • Business travel and meals
  • Commissions
  • Consultant fees
  • Crop scouting expenses
  • Dues to cooperatives
  • Educational expenses related to improving farming skills
  • Farm-related attorney fees
  • Farm magazines
  • Ginning
  • Insect sprays and dusts
  • Litter and bedding
  • Livestock fees
  • Marketing fees
  • Milk assessment
  • Recordkeeping expenses
  • Service charges
  • Small tools expected to last no more than one year
  • Stamps and stationary
  • Subscriptions to professional and trade journals related to farming
  • Tying materials and containers

How can I get more help on income and expenses related to my farming business?

You can get the help you need by speaking with a tax attorney. A tax attorney is someone who uses their training on tax laws to help their clients legally maximize their refund.

If you call the telephone number at the top of this web site or complete the form below, a tax attorney will get in touch with you to answer your questions and begin providing you the help you need. The first consultation with a tax attorney is completely free of charge, confidential, and does not obligate you to anything further.

Therefore, please get the help you need today by getting in touch with a tax attorney.

Connect with Mark on Google+

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.