Tax Guide for Farmers – Losses from Operating a Farm

The Internal Revenue Code contains laws that govern reporting of federal income tax. The Code includes a section of laws on farm business expenses.

This section of the Code on farm businesses includes how to handles losses from operating a farm. Farm business losses are the focus of this article.

Losses from Operating a Farm

When your deductible farm expenses exceed your farm income, it is considered a loss for your farm business. The Tax Code may place a limit on the amount of the farm business loss you can actually deduct. These limitations fall into two categories:

  • At-risk limits
  • Passive activity limits

If your deductible loss after apply these limitations than your income from other sources, you likely have a net operating loss.

At-Risk Limits

The at-risk requirement limits the amount you can deduct for a loss for most business, which includes farm businesses. The at-risk requirement limits the deductible loss for an activity to the amount you have at risk in the activity.

You are at risk in any activity for the following amount:

  • The value of the money and property you have contributed to the business activity, and
  • The amount you borrow for use in the business activity, when you are personally liable for the loan or when you pledge personal property not used in the business to secure the loan.

You cannot include in the at-risk amount any money you borrow from someone who has an interest in the business activity or a person affiliated with someone who has an interest in the business activity.

Passive Activity Limit

A passive activity is defined as any activity related to conducting a trade or business in which you do not participate materially. Material participation is determined on an annual basis and occurs when you perform any of the following:

  • You spend more than 500 hours performing the activity,
  • Your participation in the activity accounts for essentially all of the participation in the activity by any and all individuals,
  • You spend more than 100 hours performing the activity, which was as much as any other individual who participated in the activity,
  • You participated materially in the activity for any five of the previous ten years,
  • The activity involves the providing of personal services and you participated materially for any three prior years, or
  • You participated in the activity on a regular and continuous basis during.

If the activity is a passive activity, you can typically only deduct losses from the activity up to any amount of income from the passive activity.

Excess Farm Loss Limits

An excess farm loss is typically the amount of your farming loss that exceeds the amount of the limitation defined below.

For any tax year after 2009, excess farm losses may not be deductible if you received certain farming subsidies. This limitation applies to any farming business that is not a C corporation that receives a Community Credit Corporation loan. In such cases, your deductible loss is limited to the larger of:

  • $150,000 for a married filing jointly person or $300,000 for others, or
  • Your total net farm income from the previous five years.

Farming losses related to casualties, disease, or drought are not considered or included for purposes of the above calculation.

Disallowed excess farm losses can be carried forward to the next tax year, where they are treated as deductions in that tax year.

Who can provide additional help concerning nondeductible farming expenses?

By speaking with a tax attorney, you can get answers to your questions about nondeductible farming expenses, as well as any other tax questions. Tax attorneys are professionals trained to know the law and to use it to help their clients. Their goal is to legally minimize the mount you spend on income taxes.

By completing the web site below or calling the phone number above, you can speak with a tax attorney. The first discussion with a tax attorney is completely free of charge, so 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.