Running a farm can be cumbersome when you consider several expenses and income sources, credits and deductions, etc., which makes things complicated when it is time to file taxes.
Everyone filing their taxes as a first-timer will find these essential tax tips incredibly helpful. It will shed some light on how things work.
Know if the IRS classifies you as a farmer
Who does Uncle Sam define to be a farmer? Are you a farmer if you grow tomatoes in your garden and offer them for sale by the roadside?
According to Uncle Sam, a farmer is someone that operates, manages, and cultivates a for-profit farm purpose. As a result, ranches, orchards, plantations and groves, fish, livestock, poultry, vegetables, and fruits, etc., are all farm activities.
Your effort in your backyard garden might not classify you as a farmer, according to Uncle Sam. This is true, especially when you have another job full-time and it is not related to farming. Uncle Sam will simply classify the money you make from such activity as hobby income since the income is not your source of livelihood.
With this, you might be exempted from tax breaks the farmers enjoy.
Know What can be claimed as income
A farmer will likely have a series of income sources, and chances are, you also have some income sources you didn’t know you had to report.
Here is a list of series of farming income one must report:
Livestock sales alongside other items
Sales of grains, produce, livestock, and other things you produced
Cooperative distribution
Payment from an agriculture program.
Loans from Commodity Credit Corporation
Proceeds from crop insurance
Payment for crop disaster from the federal government
Tax credits and refunds for fuel and gasoline
For owners of a farm operated by someone else (a tenant), and the owner did not take part in the farm's operation and management, the rental income will be reported, which will be a factor of the livestock and crop produced by the renter. However, the owner will be spared from self-employment taxes on rental income.
There could be a series of taxable income for a farmer like canceled debt, livestock prizes, bartering income, etc. There is detailed information about farm income on IRS Pub 225. Due to the enormous amount of income sources, one must have a pertinent and meticulous record of every transaction as a farmer. With this, filing of taxes will be easy and accurate.
Utilize tax breaks
There are some deductions and credit one can take as a farmer.
Home office deduction
If you used your house for farming operations and other businesses, you might qualify for a home office deduction. A part of your home must be used specifically and regularly for the farming business operation. Also, there cannot be another fixed location where the farm business is managed. IRS publication 225 has more information on business use of the home as a farmer.
Net Operating Loss deduction
There are many uncertainties in the farming operation. There might be a bountiful harvest in a year where your profit will be decent. The next year could come with disease and drought, which will significantly affect your income. If there is a business or personal loss that exceeds your income value, it is called a net operating loss.
In cases like this, one might be able to carry such a loss back for as much as two years and remove any income from the years. Carrying the loss back might qualify you for a refund for some or all of the paid income tax in previous years. Also, one might prefer to carry such net operating loss to future years – for as long as 20 years.
Earned Income Tax Credit
While this is not targeted at farmers, one might take advantage of it provided the criteria are met.
This is a credit for working-class folks who are in the low to medium-income bracket. As a result, you might not qualify if the net profit from your farming activity is above a specified limit.
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