The amount of money you pay the IRS is based on how much profit you’ve made that year. Before we begin any discussion on agriculture tax deductions, it’s important that we remind you: it is illegal to deduct any expenses that are not legitimate.
Having said that, we’ve spent the past 40+ years helping clients who run ag operations keep as much of their hard-earned money as possible through the use of valid tax deductions. We believe that you shouldn’t make the mistake of overstating your profits, and you shouldn’t send the IRS any more money than what you rightfully owe.
(That’s one reason we put together another blog post recently: “How to Save On Your Farm Taxes By Knowing What Vehicles are Eligible for Section 179”. If you’ve got cars, trucks, and tractors moving around on your farm, it’s definitely worth a read!)
To help you further know what kinds of deductions your agriculture business can take advantage of, we thought we’d briefly run through a list that the IRS put together. These items are covered in detail in IRS Publication 225, The Farmer’s Tax Guide.
It’s an extremely long document that could seem a little overwhelming! But since taxes are what we do all day, every day, we’ve read it carefully and are ready to help you save as much money as possible. Once you’ve looked over this list, you might be surprised at how many tax deductions you have lying around already!
Common Agriculture Tax Deductions
- Prepaid Farm Supplies – Any feed, seed, fertilizer, supplies (even poultry) that you bought this year, but haven’t used can be deducted. However, you can’t claim more than 50% of your total deductible farm expenses in one year.
- Prepaid Livestock Feed – The IRS has 3 rules it applies here:
- Is it for the purchase of feed rather than just a deposit? (There are specific terms to the transaction and a right to a refund, for example.)
- Does it have a business purpose rather than just tax avoidance? (Taking advantage of a fixed price or securing preferential treatment with the seller.)
- Will the deduction result in a distortion/misrepresentation of your income? (It’s a customary practice done around the same time each year that isn’t excessive for your typical income.)
- Labor – Wages you pay to people who work on your farm are deductible, as are any costs associated with boarding, health insurance, worker’s compensation, etc.
- Repairs and Maintenance – Expenses made for the routine upkeep of your buildings and vehicles can be deducted. However, significant improvements to depreciable property would be considered capital expenditures.
- Interest – While there are several rules that apply here (our tax pros can guide you through them if you want more information), generally speaking, you can deduct any interest paid or accrued this year on loans for your mortgage or farm-related purchases as a farm business expense.
- Breeding Fees – These are generally deductible. However, if the breeder guarantees live offspring, you’ll have to do some capitalization adjustments as the cost basis of the offspring.
- Fertilizer and Lime – If the benefits of soil improvement to your farmland last a year or less, you can deduct the full cost of any materials you purchase for that reason. If the benefits last more than a year, you’ll need to capitalize the improvements and take smaller deductions over however long the benefits last.
- Taxes – Real estate, property, social security, Medicare, unemployment taxes, and taxes on any farm assets that apply are deductible for the tax year in which you are filing. You cannot deduct self-employment tax on yourself, however. See your tax professional for complete details on federal, state, and local taxes that apply to your situation.
- Insurance – Premiums you pay for various types of insurance that are “ordinary and necessary” for running your farm are deductible.
- Rent and Leasing – You can deduct what you pay to rent or lease property and equipment needed to operate your ag business. If your home is part of what you are renting, you’ll need to make adjustments for the parts that are only for personal use.
- Depreciation – Typically, things you purchase that last more than 1 year are deducted gradually over time. However, there may be Section 179 applications where you can deduct the entire amount of the purchase in the first year. (We covered this more in a recent post titled “What’s Important to Know About Section 179 vs Bonus Depreciation.”)
- Business Use of Your Home – If you “exclusively and regularly” use your home to conduct business, you can deduct some of it on your taxes. You’ll have to distinguish between business and personal use, though. See IRS Publication 587 for an easy way to sort that out.
- Truck and Car Expenses – Gas, oil, licenses, repairs, etc. can be deducted from your taxes or you can choose the standard mileage rate of 56 cents in 2021. (If you operate 5 or more vehicles at the same time, however, that mileage rate doesn’t apply to you…you must deduct actual expenses.)
- Travel Expenses – If you travel in order to conduct business related to your farm (e.g. transporting cattle or harvests) and you are away for more than a day, you can deduct those expenses. The IRS is on the lookout for “lavish and extravagant” expenses, so don’t consider the detour to Disney deductible.
- Tenant Housing Expenses – If you have housing on your property for the use of temporary or seasonal workers, costs related to the maintenance of those buildings are deductible.
- Items Purchased for Resale – You can choose either the cash accounting method or the crop method for deducting things like chicks, seeds, and young plants. How that works out and what you can deduct depends on your situation, so check with your tax advisor. (However, you can’t ever deduct the costs of chickens and plants used as food for your own family.)
- Capital Expenses – While capital expenses related to improvement of your property or business are not usually deductible (the depreciate instead), you can possibly deduct costs related to:
- Fertilizer, lime, etc.
- Soil and water conservation
- Section 179 equipment and property
- Start-up costs
- Reforestation costs
- Other Expenses – quoted directly from the IRS…
- Accounting fees.
- Advertising.
- Business travel and meals.
- Commissions.
- Consultant fees.
- Crop scouting expenses.
- Dues to cooperatives.
- Educational expenses (to maintain and improve farming skills).
- Farm-related attorney fees.
- Farm magazines.
- Ginning.
- Insect sprays and dusts.
- Litter and bedding.
- Livestock fees.
- Marketing fees.
- Milk assessment.
- Recordkeeping expenses.
- Service charges.
- Small tools expected to last 1 year or less.
- Stamps and stationery.
- Subscriptions to professional, technical, and trade journals that deal with farming.
- Tying material and containers.
- Utilities and Internet
Nondeductible Agricultural Expenses
The following items are a few of the things that cannot be used as deductions on your taxes:
- Personal, Family, and Living Expenses
- Loss of plants, produce, and crops
- Loss of livestock
- Losses from sales or exchanges with people you’re related to
- Costs of raising crops you don’t harvest
- Costs related to gifts
- Repayment of loans
- Estate, inheritance, legacy, and gift taxes
- Club dues and membership fees
- Fines and penalties
Partner With a Tax Expert to Get it Right!
As a hardworking farmer who simply wants to pay your taxes while taking advantage of every possible deduction you’re entitled to, you deserve to be able to keep as much of your money as possible. The work you do feeds our community and the nation, and the more money that you’re able to put back into your agricultural business the better off we all are.
To make sure you’re not missing out on valuable agriculture tax deductions, give us a call at (731) 668-4482 or schedule a call with one of our tax professionals today.
We have over 40 years of experience helping farmers with their taxes, and we’d love to show you what we can do for you!
