Best Tax Deductions for Farming Businesses

Key tax deductions and recordkeeping tips to save your money

Running a farm is as much a way of life as it is a business. With planting, harvest and maintenance to manage, along with employees or seasonal help, the tax side of a farmer’s life can feel overwhelming. Knowing what counts as farming expenses and how to keep records can make a significant difference in your tax bill and your profit margins. This guide covers the most important deductions for farm business owners, some real-life examples of how they work and a few tips on keeping records in case your returns are reviewed.

Current operating expenses you can write off

Most of the day-to-day expenses that make a farm run are ordinary business expenses and can be claimed as deductions in the year they’re paid or incurred. Examples include:

• Feed, seed, fertilizer and chemicals Direct costs associated with crop production or care of livestock are usually deductible. Retain records of sales and related purchases, if possible tie to season or herd.
• Fuel and utilities: Gasoline, diesel, propane or electricity used for irrigation or refrigeration; heating fuel for livestock shelters can also be written off based on use.
• Repairs and maintenance: Identifying fences, mending tractors or keeping irrigation systems in working order are typically deductible as repairs. Capitalization and depreciation And in certain cases, you may have to simply capitalize and depreciate a major improvement.
• Supplies and small tools: Hoses, hand tools, gloves and small equipment that do not meet capitalization thresholds are typically direct write-offs.
• Labour and contractor fees paid: Wage payments to employees, labour paid to seasonal help, as well as payments made to independent contractors who provided services such as custom harvesting are deductible if the information is documented.

Depreciation and Section-style deductions

Farm Tractors, combines and other large assets used in the farm business—such as trucks and buildings—are generally capital assets. Instead of being fully expensed in the year they’re bought, these items are recovered through depreciation. But there are special rules that can provide for increased first-year deductions or bonus depreciation in the case of eligible property. Typical items to consider:

• Farm machinery and equipment: Depreciation is used to spread the cost over years, but there are special tax rules that might offer bigger deductions in the first year for certain conditions.
• Farm buildings and permanent structures: Barns, silos, tool sheds and other structures can often be depreciated over a longer life.
• Farm trucks and other farm business vehicles: Pickup trucks and other light vehicles used primarily for agricultural operations have special rules regarding depreciation and business-use percentage.

Insurance, interest, and taxes

A number of financial expenses relating to protecting and funding the farm may be deductible:

• Insurance premiums: Crop, liability, property and livestock insurance policies are typically deductible as ordinary business expenses.
• Interest on farm loans: Interest that is paid on mortgages or equipment loans, and operating loans used for farm business, generally is deductible in the year it is paid (subject to any limitations).
• Property and real estate taxes: Any tax levied on farm property that is directly related to the business can be deducted.

Conservation and environmental credits/deductions

If the runoff or conservation and environmental improvement project qualify, there may be tax incentives or credits. An example might be the cost of erosion control provisions, conservation easements or outlays to increase water use and irrigation efficiency. Some of these may take the form of deductions, and others might be in the form of tax credits or reduces taxable basis, so follow advice associated with best practice to make the above-mentioned improvement and keep documentation for work expended and expenses incurred.

Inventories and cost of goods sold

For businesses that sell specific inventory such as crops, livestock or other goods farmers use in their operations, inventory accounting is used in determining taxable income. Direct production costs, such as feed, seed and direct labour may be added to inventory and the cost of goods sold (COGS) when income is determined. It's helpful to know when to classify these items as immediate write-offs versus those that need to be included in inventory.

Special deductions and niche considerations

• Livestock and crop casualty losses: Losses of livestock or crops due to theft, pests, weather or disease may be deductible, but each often fall under specific rules for those deductions and documentation is generally required.
• Breeding and raising stock: Expenses incurred in rearing animals to be sold may be treated differently from those for animals actually used by the taxpayer, which impacts qualification for deductions.
• Farm rent and land lease payments: Money spent on renting farmland and leasing farm equipment is typically deductible.

Recordkeeping best practices

By simply keeping good records, you’re able to substantiate every tax deduction you decide to take. Adopt these practices:

• Keep different bank accounts and credit cards for the farming business to avoid mixing of personal and business expenses.
• Categorize and organize receipts, invoices and payment records by tax year. Record the rationale of every expenditure, which field, herd or crop it was relevant to.
• Keep a log capturing business miles, reasons and dates for the trips.
• Document the hours and wages paid to hired help, as well as proof of payment of any payroll taxes (in case you were not charged an independent contractor), or a signed contract with the person who was hired for work.
• Save documentation for a few years after filing, because some jurisdictions can audit returns based on certain programs or credits two years after you file.

Tax planning for minimizing your tax burden

Consider timing and tactics to assist in coordinating tax liabilities:

• Speed up or postpone expenses: If you can time purchases or prepay some costs, such as next year’s property taxes, this will bring those deductions into the tax year of your choice.
• Timing of capital investment matters: Buying or selling big-ticket equipment late in the year can affect depreciation benefits, taxable income.
• Tap retirement and benefit plans: Making contributions to your own and employee retirement plans comes with tax benefits while helping you achieve long-term goals.

When to seek a tax professional’s help

Ultimately, tax rules for farming have peculiarities and exceptions situation-specific and according to local regulations. More sophisticated ones can make the most of a professional check on issues such as depreciation methods, inventory treatment or conservation incentives and casualty loss rules. A good tax advisor can assist in ensuring that recordkeeping, filing options and long-term planning are consistent with business objectives.

Conclusion

Getting the most from farming tax deductions is a combination of knowing which costs are eligible, maintaining steadfast documentation and timing transactions in accordance with seasonal and business considerations. From daily operating costs such as feed and fuel to bigger investments in machinery and conservation practices, numerous expenses are deductible from taxable income if properly documented. By making clear records a priority and asking others for help with complicated rules, farming business owners can ensure that they are claiming the deductions they deserve and keeping their operations financially sound.