Ten things to know about farm income and deductions

SACRAMENTO – Anyone who earns money managing or working on a farm is in the farming business. Farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables. Here are 10 things about farm income and expenses that the IRS wants farmers to know.

Crop insurance proceeds. Insurance payments from crop damage count as income. They should generally be reported the year they are received.

Deductible farm expenses. Farmers can deduct ordinary and necessary expenses as business expenses. An ordinary farming expense is one that is common and accepted in the farming business. A necessary expense is one that is appropriate for that business.

Employees and hired help. A farmer can deduct reasonable wages he/she paid to his/her farm’s full and part-time workers. He/she must withhold Social Security, Medicare and income taxes from the employees’ wages.

Items purchased for resale. If one has purchased livestock and other items for resale, they may be able to deduct their cost in the year of the sale. This includes freight charges for transporting livestock to your farm.

Repayment of loans. It is only possible deduct the interest paid on a loan if the loan proceeds are used for the farming business. It is not permissible to deduct interest on a loan used for personal expenses.

Weather-related sales. Bad weather may force a farmer to sell more livestock or poultry than they normally would. If so, they may be able to postpone reporting a gain from the sale of the additional animals.

Net operating losses. If deductible expenses are more than income for the year, it may mean a net operating loss. A loss can be carried over to other years and deducted. It may be possible to get a refund of part or all of the income tax paid for past years, or to reduce tax in future years.

Farm income averaging. It may be possible to average some or all of the current year’s farm income by spreading it out over the past three years. This may lower one’s taxes if their farm income is high in the current year and low in one or more of the past three years. This method does not change the prior year tax. It only uses the prior year information to figure the current year tax.

Fuel and road use. It may be possible to claim a tax credit or refund of federal excise taxes on fuel used on a person’s farm for farm work.

Farmers Tax Guide. More information about farm income and deductions is in Publication 225, Farmer’s Tax Guide. It can be downloaded at IRS.gov, or call the IRS at 800-TAX-FORM (829-3676) to have it mailed.

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