Farmers looking to purchase a farm and start a business or even farmers in their early years of production all have the ability to save more money on their taxes, rather than a well-established farm. New farms tend to have more tax leniencies when it comes to tax credits due to the importance of food security and the high barriers to entry.
If you’re looking to start a farm, have already made the purchase or are already a few years underway, then you can take advantage of certain tax credits that only apply to you or are more likely to occur in the early stages of a farming business, such as losses and start-up costs.
Deduct Start-up Costs
Farmers can deduct up to $5000 in start-up costs, as long as they were acquired or paid after October 22, 2004. This is great for new farmers, since the initial start-up can be quite burdensome. For large farm investments, $5000 may not even put a dent in the initial cost, but for smaller farms this is very beneficial. Nonetheless, it’s still worth deducting.
Farms early on may find it difficult to get the swing of things, just like any business, but there seems to be such an initial investment that it may be awhile before actually earning a profit. If this is the case, then farmers can average out their income over the past three years to potentially lower taxes for the current year.
Deduct Loan Interest
The interest paid from loans taken out for farming operations can be deducted. Keep in mind, using the cash method, this does not apply to interest paid by using another loan and the interest can’t be deducted if paid before the year it’s due, but only during the year it’s due. Using the accrual method, only interest accrued during the tax year can be deducted and must be allocated to either one of the following categories:
- Trade or business
- Passive activity
Employment Tax Credit Benefits
Hired hands are oftentimes a must for farming operations, especially organic or sustainable farms, since they require more physical labor. This is beneficial since labor costs can be deducted. You can even deduct health insurance, workers’ compensation, along with other labor costs.
Rental & Crop Share Write Offs
Some farmers might benefit more if they rent equipment when starting their farming operation. Such instances are if there is greater risk involved and the farmer doesn’t want to purchase equipment. If this is the case, you deduct payments, but only if it is a lease and not a conditional sales contract. This will be determined as part of the agreement. If it is a conditional sales contract, then damages, repairs, interest and maintenance can be deducted.
Crop shares are percentages of crop harvests paid by the renting farmer to the land owner for using his or her land. This expense is deductible. However, if you pay rent in crop shares it can’t be deducted if you deduct the costs of raising the crops.
Deduct Damages & Depreciation
Buildings, equipment and even property have a depreciation factor to take into account when operating a farming business. As mentioned above, if renting, make sure to verify it as a conditional sales contract or a lease in order to know how to properly deduct the depreciation, as well as other deductibles.
Damages are covered through insurance. These can typically be deducted as a business expense and are include as fire, storm, crop, theft and liability damages.
These expenses don’t come close to what will be experienced or accrued by a farmer, but you can go on the IRS’s website and search for publication 225. This form will somewhat clearly tell any farmer what they need to know.
About the author
Sam Ott writes for Absolute Auction & Real Estate Co, who offers farms for sale in Northern Missouri. Visit their website for more information on listings in Northern Missouri.