tax tips — September 12, 2011

Bringing in the Harvest

by Kelly Crawford

Reporting Farm Income and Expenses

reporting farm income and expensesDays are getting shorter, the air is getting crisp, autumn is around the corner and many farmers are bringing in their final harvest of the year. If you're a farmer, you put in many long hours and resources to grow the best crops and livestock. Now is the time to get your income and expenses sorted out before tax season arrives. We can help by covering some income sources and deductible business expenses for farmers, as listed on the IRS website.

Income Sources

Farmers receive income from many sources, but the most common sources are the sale of livestock, produce, grains, and other products raised or bought for resale. Schedule F is used to report the entire amount a farmer receives, including money and the fair market value of any property or service.

Bartering is another income source for farmers. Bartering occurs when farm products are traded for other farm products, property, someone else's labor or personal items. Other income sources include:

  • Cooperative distributions
  • Agricultural program payments
  • Commodity Credit Corporation (CCC) loans
  • Crop insurance proceeds and federal crop disaster payments
  • Custom hire income

The IRS' Publication 225 has more information on farm income sources.

Deductible Expenses

The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the business. A necessary expense is one that is appropriate for the business.

Wages paid for farm labor are an example of deductible expenses. If a farmer pays his child to do farm work and a true employer-employee relationship exists, reasonable wages or other compensation paid to the child is deductible. The wages are included in the child's income, and the child may have to file an income tax return. These wages may also be subject to Social Security and Medicare taxes if the child is age 18 or older.

Another deductible expense is depreciation. Farmers can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock or furniture. Farmers can also depreciate certain intangible property, such as copyrights, patents or computer software. To be depreciable, the property must:

  • Be property the farmer owns
  • Be used in the farmer's business or income-producing activity
  • Have a determinable life
  • Have a useful life that extends substantially beyond the year placed in service

Some expenses paid during the tax year may be partly personal and partly business.  Examples include gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest and taxes. Farmers must allocate these expenses between business and personal uses. Generally, the personal part of these expenses is not deductible.

An example would be if a farmer paid $3,500 for electricity during the year. He used a third of the electricity for personal use and two thirds for farming. Under these circumstances, two thirds of the expense is deductible as a farm business expense. Good recordkeeping must be maintained to document the business portion of the expense.

You can check out Publication 225 for more information about deductible expenses and reporting requirements.

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