Many prosperous individuals who own businesses reduce their taxable income by operating a backyard farm on either their primary residence or a second property. Because the definition of a farm varies from state to state, you will need to confirm that your agricultural land is eligible for certain tax write-offs by contacting the agriculture department of your home state and the board that oversees your franchise taxes. Additionally, it is recommended that you seek the advice of a tax expert. The Internal Revenue Service (IRS) is more concerned with whether or not a loan for farm land is being run as a business rather than a hobby rather than the size of the farm itself.
Why You Should Define your Farm
Before checking things off your list, you should define your farm. To qualify for farm income and losses from the IRS, you must grow fruits and vegetables, rear animals, poultry, fish, or fish or grow fruits and vegetables. It is vital to keep accurate records for the farm, mainly labor and equipment costs, maintenance, and sowing. If the IRS audits your firm, you must provide accurate records as proof that you have claimed all of your allowable deductions.
If a farm fails to generate a profit for three out of every five years, the Internal Revenue Service classifies it as a non-deductible hobby. Farms that breed horses are given a more extended profit ramp-up period, but they are still required to turn a profit every two out of every seven years.
Farm Tax Write-Offs
Deductions That Can Be Taken From Your Taxes
The Internal Revenue Service permits you to deduct regular and necessary business expenses associated with running the farm, just like it would for any other type of business. This includes any costs associated with utilities, such as watering crops, equipment, and even products you acquired and intend to resell later. For resale or to fulfill a requirement of the business, such as milk production, the cost of livestock is deductible. Depreciating expensive pieces of heavy machinery, such as tractors and silos, spread tax breaks over a more extended period, typically many years.
Additionally, the deductible is both the principal and interest paid on loans. Any assistance you recruit, whether employees or independent contractors, counts as a labor expense and is entirely deductible. The Internal Revenue Service (IRS) will also permit a farm to average the farm income from the current year with the farm income from the previous three years, reducing the farm’s existing tax due in a very prosperous year.
Reduced Rates of Property Taxes
If you are the owner of an authorized farm, you may qualify for a decrease in the property taxes you must pay. Check with the agriculture department in your home state and the assessor’s office in your county to discover whether you are eligible for the program. Some states don’t require large plots to get a break. In New Jersey, an individual or business needs only five acres and $500 in sales to be eligible for a decrease in property taxes.
The state of California has a set of regulations that can provide property tax benefits, ranging from 25 to 75 percent; the most significant exemptions are for properties that are at least 100 acres in size and have signed agreements to remain undeveloped for a minimum of ten years.
Although the price you paid for farmland cannot be deducted from your taxes, several other tax deductions are connected with owning farmland. The interest paid on loans used to purchase agricultural land might be deducted. It is possible to deduct any interest paid on loans to improve the land. Removing trees and undergrowth, constructing access roads, and wet tiling ground are examples of ways that farmland can be improved. The interest spent on supplies and equipment is tax deductible as well.
Taxes The farm’s share of the property’s annual tax bill is tax deductible. Use a percentage of the taxes paid if you have a home on the farmland where it is located. Determine how much of the inheritance should go to the residence and how much should go to the land by dividing the whole amount. For the most up-to-date information on the value of farmland measured in terms of acres, you should contact the tax office in your area. Products like feed, fertilizer, chemicals, and gasoline explicitly purchased for use on a farm are exempt from sales tax. You are allowed to deduct the amount of taxes you paid on these goods from the taxes you owe on your income. Keep the receipts from any gas purchases that require you to pay road tax because you may be eligible for a refund of that tax when you file your tax return with the federal government. Publication 510 of the Internal Revenue Service has more information.
Farm buildings should be written down in over twenty years. To determine the relative values of the land and the buildings on it, consult the mortgage appraisal you had done or the local tax assessor. Depreciation can also be claimed for improvements made to the agricultural property, such as the installation of wetland tile. The value of acquired farm equipment can be written off over seven years. The IRS occasionally alters the procedures that can be used; for instance, in 2010, a deduction of one hundred percent was permitted in the first year; thus, check the instructions for Form 4562 each year. You can also employ the depreciation technique that works best for your requirements regarding new equipment. You might have chosen to use the straight-line depreciation technique in 2010, for instance, in place of the 100% method if your income wasn’t high enough to justify using it with the 100% method. Other things, such as computers used for your farming business, are eligible for depreciation over five years. Items may be entirely written off by Section 179 in specific scenarios.
Farm supplies. Any money spent on equipment or supplies for the farm is tax deductible. Examples of items that fall under the category of agricultural supplies are feed, fertilizer, chemicals, and bedding. In addition, you can deduct the cost of any office supplies you use on your farm. Tax deductions can be taken for things like printer cartridges, paper, business cards, and phone and fax lines if used in a farming enterprise. Keep track of all your receipts, and consult your tax preparer about any changes that may have been made to the tax code.
Maintain accurate records of the total number of miles driven for farm-related purposes. Take note of the date and the mileage at the beginning and finish of your inspection of the agricultural machinery. If you plan on getting fertilizer at the mill, jot down the same information. Note that you went to the store to get an extension cord so you can utilize it on the farm if you do so. The federal government establishes the rate that can be deducted per mile for any farm-related miles.
If you’re a farmer looking to take advantage of tax write-offs, consult with a professional tax preparer or accountant to ensure you’re taking advantage of all the available deductions. With some planning and effort, you can maximize your tax savings and keep more hard-earned money.