Taxes on Farmers: What You Need to Know

For many, farming is more than just a business—it's a way of life. But like any business, farming comes with its share of tax responsibilities. Understanding taxes is essential for farmers who want to keep their operations profitable and compliant with the law. Whether you’re a small-scale farmer or run a larger agricultural operation, it’s important to know how farming taxes work and what breaks you can take advantage of.

In this post, we’ll explore the key aspects of taxes that apply to farmers, the benefits available to them, and some tips to help you navigate the system.

Are you a farmer looking for help with your taxes? Call Turner Business Solutions at (316) 285-0125 or schedule a free consultation online.

1. What Are Farming Taxes?

Farming taxes are the taxes that apply specifically to income and activities related to agricultural operations. These include the growing, raising, and harvesting of crops, livestock, poultry, or fish, among other agricultural products. Farmers are subject to both federal and state taxes, but there are several deductions, credits, and special provisions in the tax code aimed at benefiting farmers.

2. Common Deductions for Farmers

Farmers can take advantage of a variety of tax deductions to reduce their overall taxable income. Here are some of the most common:

• Operating Expenses: This includes anything that is necessary for the day-to-day operations of your farm, such as seeds, fertilizer, feed, fuel, labor costs, and repair and maintenance of equipment. These are fully deductible as ordinary business expenses.

  
  

• Depreciation of Equipment: Farming equipment like tractors, harvesters, and other machinery can be depreciated over time. This means you can spread out the cost of the equipment over several years, reducing your taxable income annually. Bonus depreciation and Section 179 expensing allow you to accelerate the depreciation deduction in the year the equipment is purchased.

  
  

• Soil and Water Conservation Expenses: Farmers can deduct costs related to soil and water conservation efforts, such as erosion control or irrigation projects, as long as the expense is consistent with a conservation plan approved by the Natural Resources Conservation Service (NRCS).

  
  

• Hired Labor: Wages paid to hired help, including contract labor, are fully deductible. This includes wages paid to family members working on the farm.

  
  

• Livestock and Feed Costs: The cost of purchasing livestock or feed can be deducted as a business expense. If livestock is raised for sale, the cost of raising the animals can also be deducted.

  
  

• Interest on farm loans: Interest paid on loans used for farm purposes, such as buying land, equipment, or livestock, can be deducted as an expense.

  
  

3. Farm Income and Schedule F

Farmers report their income on Schedule F (Form 1040), which is specifically used for farming income and expenses. Here, farmers report the income from the sale of products like crops, livestock, or other agricultural goods. It also includes income from services such as machine work, breeding, and other farm-related activities.

Key sections of Schedule F include:

• Gross income from farming activities.

  
  

• Total expenses, where deductions are applied.

  
  

• Net profit or loss, which is carried over to the main tax form (Form 1040).

  
  

4. Estimated Tax Payments

Farmers are often required to make estimated tax payments throughout the year, rather than paying a lump sum during tax season. The IRS requires farmers to make estimated payments if they expect to owe at least $1,000 in tax for the year. Most farmers can avoid penalties for underpayment if they file and pay the balance of their tax due by March 1.

5. Self-Employment Tax

Farmers are considered self-employed and must pay self-employment tax. This covers Social Security and Medicare taxes. For 2023, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). Farmers can deduct the employer-equivalent portion of the self-employment tax when calculating their adjusted gross income.

6. Farm Losses and Carryover

One benefit of being a farmer is the ability to claim farm losses. If your farm operates at a loss, that loss can be deducted from other income on your tax return. In certain circumstances, farm losses may even be carried forward or back to other tax years to offset profits in those years, which is known as net operating loss (NOL) carryover.

7. Tax Credits for Farmers

There are several tax credits available to farmers that can directly reduce the amount of tax owed. Some of these include:

• Biofuel Producer Credit: This is available to farmers who produce biofuels such as ethanol or biodiesel.

  
  

• Renewable Energy Tax Credit: Farmers who invest in renewable energy, such as solar or wind power, may qualify for tax credits to offset installation costs.

  
  

• Conservation Credits: Farmers can receive tax credits for implementing conservation practices like reducing soil erosion, protecting water quality, and preserving wetlands.

  
  

8. Estate and Gift Taxes for Farms

Passing a farm from one generation to the next can trigger estate and gift taxes. However, there are several provisions to help family farms avoid high tax burdens in these situations. The Qualified Family-Owned Business Interest (QFOBI) deduction can reduce the taxable value of the estate, and special use valuation allows farmland to be valued based on its agricultural use rather than its potential development value.

9. Consult a Tax Professional

Navigating the complexities of farming taxes can be challenging, and every farm operation is different. Hiring a tax professional who specializes in agriculture is often a wise investment. They can help you take advantage of all the available deductions and credits, ensure you’re complying with IRS rules, and potentially save you thousands of dollars in taxes.

Conclusion

Understanding farming taxes is crucial for minimizing your tax burden and keeping your farm profitable. From deductions on operating expenses and depreciation to tax credits for renewable energy investments, the tax code offers several opportunities for farmers to reduce their taxable income. Be sure to stay on top of your tax responsibilities, make estimated tax payments, and seek professional advice to ensure you’re making the most of the available tax benefits.

By staying informed and taking proactive steps, you can better manage your farm’s finances and position yourself for long-term success.

Call Turner Business Solutions at (316) 285-0125 to speak to a tax professional about your farm. You can also schedule a free consultation online.