Farmers and Agribusiness Companies are granted certain tax breaks and industry-specific deductions from the IRS. The service understands both the complexities and constraints of farmers as well as their essential role in our nation's economy. I have listed out the top ten most important tax benefits, accounting methods, and tax deductions related to farmers.
1. Farms with less than $25 Million of Average Gross Receipts can use the Cash Basis of Accounting
Companies, including farms, with less than $25 million in average annual gross receipts for the past three years, can elect to use either the cash or accrual method of accounting. Under the cash method, the accounting is simpler and allows the taxpayer to record revenue when the cash is received and expenses when the cash is paid. Under the accrual method, revenue is recorded when it is earned and expenses are recorded when the expense becomes a liability, not when the cash is paid. Farmers with under $25m in average gross receipts are allowed to use the cash method, which allows them to record crop sales in the year the cash is received and to record expenses when the payments are actually made. In this method, the farmer simply records expenses as they are paid. There are positives and negatives to both methods, but farmers are allowed some flexibility in making this election.
2. Farmers using the Accrual Method of Inventory have multiple options:
A. Farm-Price Method
Farmers who use this method value inventory items at their market price, reduced by the amount of money it would cost to dispose. This must be used consistently across all non-livestock inventory.
B. Unit-Livestock-Price Method
Farmers who use this method for valuing livestock must group livestock together by their type and age. Then, the taxpayer must apply a standard price for each type or group of animals/age. The taxpayer should include all livestock in inventory regardless of their purpose (ex: held for resale, breeding, etc).
3. Income Choice – Receipt of Commodity Credit Corporation Loan
Farmers who receive a Commodity Credit Corporation loan
have the option to be taxed on the receipt of the loan in the year of receipt or in the year they repay the loan. This allows for some tax planning opportunities for the taxpayer.
4. Home Office Deduction
Just like any home business, farmers are eligible to take a deduction for the portion of their home that they use as an office. There are two ways to calculate this: the first is the actual expense method which tracks all of your household, utility type expenditures and calculates a pro-rata expense amount based on the home office square footage (subject to certain limitations). The second option is the Simplified Method which allows $5 for every square footage of home office space (up to a maximum deduction of $1,500). Farmers should be aware that when they designate a portion of their home as an office, they are eligible for a deduction.
5. Beneficial Property Tax Rates
This benefit is generally well known in the agricultural industry. Numerous states and municipalities provide a reduced property tax rate for farmers. This varies by jurisdiction but is something to be aware of.
6. Cancellation of Qualified Farm Debt Exclusion
Generally, under Internal Revenue Code Section 108, the cancellation of debt is taxable income to the taxpayer that is no longer liable for paying the debt. This also applies to exchanges of an asset or partnership interest (not to be confused with 1031 Exchanges
) for partial satisfaction of a debt. If a taxpayer transfers an ownership interest in their farm or a piece of equipment which is less than the value of an outstanding debt to a creditor in exchange for the elimination of that debt, the taxpayer would incur taxable income for the difference in value (i.e. the excess amount of the debt that was cancelled over the fair market value of the asset or interest transferred in satisfaction of the debt). However, there is an exception provided for the cancellation of Qualified Farm Debt.
7. Insurance Recovery Option
When a farmer receives an insurance settlement on their crops, the receipt is considered taxable income. However, a farmer can elect which tax year they want this receipt included in taxable income. The two years of choice are the tax year the insurance settlement is received or the tax year the crop would have been sold had it been grown, harvested, and sold in a non-catastrophe year.
8. Conservation Easement Deduction
If a farmer establishes a conservation easement on their property, they receive a tax benefit Under current federal law, the taxpayer is allowed a deduction limited to 30% of their adjusted gross income in the year of the deduction, and any amount not used in the first year can be carried forward and used over the next five years.
9. Income Averaging Option
Certain qualifying farming businesses can elect to be taxed on an average tax rate of their running three years of income. This election, which is calculated on Schedule J of an individual's Form 1040 can have huge implications if a farming business has extremely high profits
in one year compared to previous years where they were subject to a lower tax bracket. This allows farmers to spread the tax effects of a strong income year over multiple years.
10. Weather-Related Livestock Sales – income timing election:
When weather impacts a farmer's ability to provide enough feed or if a disaster forces a farmer to dispose of more animals than in previous years, certain taxpayer-friendly provisions may apply. The first option, which is provided under Internal Revenue Code Section 1033(e), allows farmer's the ability to postpone gain recognized upon the forced disposition of herd, cattle, or livestock as a result of weather conditions. For example, if a severe drought makes the cost of food for livestock too expensive and the farmer's response is to sell off the livestock, then there is the potential ability to defer paying taxes on the gain recognized on the sale of those cattle. The farmer is required to replace those previously sold off livestock within two years (or four years if the area is a federal disaster area) to avoid tax on the initial sale (if the replacement livestock or property is of equal or additional value).
The second provision allows farmers who are in a federal weather-related disaster area to postpone taxes on excess sales of cattle or livestock for one year. Guidance for this election is found under Internal Revenue Code Section 451(e). The farmer has to document that their current year livestock sales were the result of the weather disaster, among other requirements.
Tax planning is essential to any taxpayer. But, given the number of farm-specific rules and regulations previous mentioned, there is a bigger tax planning opportunity for taxpayers in this industry.
This article should not be construed as, and should not be relied upon as legal or tax advice.
Tyler Davis works for SVN Saunders Ralston Dantzler real estate and also owns his own CPA Firm, Tyler Davis CPA where he provides tax preparation and tax consulting services. SVN Saunders Ralston Dantzler is leading agricultural land and commercial brokerage and development based in Lakeland, FL. Tyler can be contacted at firstname.lastname@example.org.