In everyday conversations, if someone is described as a “farmer”, we automatically assume that we understand what they do on a basic level. However, when you use the term from the IRS’s standpoint, not everyone who farms is a farmer.
In this post, we’ll give you the official definition that matters when it comes time to take advantage of things like federal programs and tax exemptions.
What Is Considered a Farm For Tax Purposes?
The Internal Revenue Code (IRC) spells out exactly what “farm, farmer, and farming” mean when it comes to taxes. It is important to know whether or not your agricultural operation fits into their definition in order to file your taxes properly and take advantage of certain deductions and credits.
- Farm – The IRC uses the word “farm” in several places but the main definition states that a farm “includes stock, dairy, poultry, fruit, fur-bearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands.”
You might read that list and notice that not every possible variation of farm is listed. For instance, there is no mention of vineyards. That’s where the phrase “agricultural and horticultural commodities” comes in. In that instance, a vineyard that grows and sells grapes is a farm, but a vineyard that produces and sells wine is not.
If your operation does a combination of activities, some will qualify as a “farm” for tax exemption purposes while others may not. You’ll want your CPA to pay close attention to make sure it’s all kept straight. - Farmer – According to the first line of IRS Publication 225 (the “Farmer’s Tax Guide”), “You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant.”
If your motivation for farming is to produce a product that will bring a profit, you are a farmer and not simply a hobbyist. The IRS spells out the differences between a for-profit operation and a hobby in IRC Section 183 and in a fact sheet titled “Is Your Hobby a For-Profit Endeavor?”
Some examples include someone who harvests corn to take to a storage elevator, sells milk from their dairy cows to a processing facility, or sells cut flowers to a local florist. In these cases (and many other variations), the farmer isn’t involved in processing or modifying their product in any way. They simply raise it and sell it.
In order to be considered a “farmer” by the IRS for tax purposes, you must make at least ⅔ of your income directly from farm activities similar to the ones described above. For instance, if you also run a Bed & Breakfast or rent out your renovated barn as a wedding venue those are not “farm” activities. As such, they are taxed differently.
Here are some general questions they list that you can ask yourself to determine if the title “farmer” correctly applies to you. If you answer “yes” to the following, you are most likely a for-profit farmer in the eyes of the IRS.
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
You can read more about this by downloading the PDF, “Who’s a Farmer?”, from farmers.gov.
Minimum Acreage For Farm Tax
Another question that frequently comes up in this discussion is “how big does my farm have to be to be considered a farm?”
Since property taxes are handled at the local level rather than the federal level, the answer will vary from state to state. Generally speaking, there is no minimum acreage for farm tax exemption. There may, however, be specific acreage minimums required to be considered for certain land classifications such as a “greenbelt” property. (For example, here in Tennessee, Williamson County’s Greenbelt Program requires that 15 acres be actively engaged in agricultural production to qualify for those tax exemptions.)
You’ll want to contact your local assessor to find out about specific requirements in your situation.
How to Qualify For Farm Tax Credit
In addition to sales tax breaks on the purchase of farm materials and lower property taxes for your farmland, you can also save money by receiving tax credits for certain activities on your farm. For instance, if you “go green” and install solar panels or switch to certain fuel sources. You may also qualify for “Earned Income Tax Credit”.
Your best bet is to work with a good CPA who can help make sure you get every credit that should be yours.
Contact Us For Help With Your Farm Taxes
As you can see, besides being one of the most rewarding careers in the world, being a farmer also comes with a lot of exemptions, benefits, and special treatments when it comes to your taxes and finances. Our team can help you learn more about it all.
Since our company’s beginnings over 40 years ago in West Tennessee, we’ve worked with a lot of farmers to help them file their taxes right and keep as much of their money as possible. With 6 locations in Tennessee today (Jackson, Dyersburg, Paris, Brownsville, Martin, Milan, and the new Blue Oval City), our teams are ready and able to help you too. Read this post to learn how your CPA can provide helpful (and valuable) farm tax advice this year.
Then schedule a call today to get started!
