Anyone who cultivates, operates or manages a farm for profit, either as an owner or a tenant, is a farmer, according to the Internal Revenue Service. Tax credits are only a small part of farm tax benefits. The IRS gives farmers a fuel tax credit, and states give others: Nebraska offers a 10 percent "beginning farmer tax credit" for established farmers who rent land to newbies. But farm tax deductions and lower property taxes provide the biggest savings -- for businesses as well as individuals.
A planting of hay or a few cattle may qualify a business's otherwise unused acreage for agricultural tax rates. Fidelity Investments did so by raising 24 longhorns on 179 acres of its 340-acre Texas campus, according to a 2007 Wall Street Journal article. Taxes for that grazing land dropped from $319,417 to $715 -- $3.99 an acre. If you don't like cattle, ostriches, pygmy goats and emus will work too.
The IRS definition of a farmer covers a lot of ground -- and sometimes just a little. A farm can be a half-dozen acres or less, depending on the state. States also differ on minimum sales for establishing that your farm is a business; it also has to meet local regulations on acceptable crops and livestock. Check out previous land use disputes in the area so you won't be the first farmer in town to be sued for the sound and stench of agricultural operations, such as the 4 a.m. crowing habits of your irrepressible roosters.
The list of farm deductions is long, and it includes costs typical for farming, employee wages, the price of items that you buy to resell, vehicle costs and travel costs. You can also deduct space set aside in your home for a farm business office.
The full panoply of deductions is in IRS Publication 225, the instruction booklet for reporting farm income, which goes on Schedule F (Form 1040), Profit or Loss From Farming. You can also lower your personal income from farming by employing family members and deducting expenses for employees' houses -- tenant houses -- on your farm property.
Making a Profit
You can't use a nonprofit farm's losses to offset your personal income. To benefit from a farm for tax purposes, you have to make a profit in three of every five years -- two of every seven if you raise horses. If your farm gets off to a slow start, you can file IRS Form 5213 to obtain a few more years' time to put operations in the black. Once you've proved your mettle, the IRS presumes you're in it for the money.
The IRS estimates that $30 billion slips through its hands each year because of inappropriate deductions for hobbies disguised as businesses. The test of whether your farm is a hobby or a business includes whether you put in time and effort on farm operations and whether you change your methods of operation for the purpose of making a profit. Losses deducted because of unusual startup costs are a red flag, whereas losses from the normal course of business are not.
If you don't know an udder from an embouchure when you start farming, the IRS will keep an eye on your progress. But you can also acquire knowhow by hiring an expert adviser. Whatever you do, keep records of your time, your expenses, your tweaks in farm operations. The IRS likes its evidence on paper, not on the bottom of its shoes.
- IRS.gov: IRS Tax Tip 2012-56 -- Farm Income and Deductions -- 10 Key Points
- Forbes: Farm Like a Billionaire -- Harvest Tax Breaks; Ashleigh Ebeling
- Pennsylvania State University: Understanding Your Federal Farm Income Taxes
- IRS.gov: FS-2007-18 -- Business or Hobby? Answer Has Implications for Deductions
- Wall Street Journal: Why Texas Firms Are Keeping Cattle on the Back Forty
- IRS.gov: Publication 225 -- Farmer's Tax Guide (2014)
- Center for Rural Affairs: Tax Incentive Programs for Working with Beginning Farmers or Ranchers in Nebraska
- Congressional Research Service. "Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition," Page 97. Accessed Jan. 27, 2020.
- Internal Revenue Service. "Publication 225 Farmer's Tax Guide," Page 8. Accessed Jan. 26, 2020.
- Internal Revenue Service. "Schedule F (Form 1040 or 1040-SR) Profit or Loss from Farming," Pages 1-2. Accessed Jan. 26, 2020.
- Internal Revenue Service. "Publication 225: Farmer's Tax Guide," Pages 18-24. Accessed Jan. 27, 2020.
- Internal Revenue Service. "Publication 225: Farmer's Tax Guide," Pages 1-2. Accessed Jan. 26, 2020.
Sarah Brumley has written extensively on business and health-industry topics since 1995. Her work has appeared in publications ranging from Funk & Wagnall's yearbooks to "Medical Economics," a magazine for physicians. She holds a master's degree in finance from New York University.