Many times, we think of tax exemptions and immediately picture 501(c)3 nonprofits…churches, soup kitchens, and other similar charities. The government allows them to skip paying sales tax when they buy things they need in order to serve their community. However, did you know that the same benefit is available to farmers, ranchers, and other agricultural businesses as well?
As of January 1 of 2023, being a farmer in Tennessee comes with a lot more advantages…you can buy a lot of things tax-free now thanks to a new state law. If you’re interested in knowing how to qualify for a TN farm tax exemption, then this post is for you.
For over 40 years, we’ve not only helped farmers across West Tennessee file taxes and manage their accounting. We regularly find ways to save them money and grow their businesses. Since taxes are a big expense for ag operations, knowing how to get the most out of your farm tax exemption can really go a long way in keeping money in your pocket!
How to Qualify For A Farm Tax Exemption
An important note before we begin: you need to be a farmer with a farm to qualify for farm tax exemption.
That may sound obvious, and we’re not trying to be clever. There are actual definitions for these sorts of things that the IRS uses to determine who is (and isn’t) a farmer. Even though sales tax exemptions are handled on the state level, it’s helpful to have this “big picture” understanding when thinking about the topic. For more on that, take a minute to check out a post we did recently on “9 Questions To Help You Know Whether or Not You’re Really A Farmer to The IRS.”
Now, on to how to qualify for a farm tax exemption in Tennessee.
Farms, like many other businesses, must often purchase essential raw materials in order to produce a final product. (“You have to spend money to make money.”) Depending on the nature of the operation, that could include things like seeds and fertilizer. Or it could be animal-related: hay and feed.
Regardless of what you need to purchase as a farmer to successfully bring your particular product to market, you can benefit greatly by taking advantage of the farm tax exemption. After all, when all is said and done, business isn’t necessarily about how much you make…it’s about how much you keep.
One of the biggest expenses for farmers every year is taxes! So using the farm tax exemption is a great way to avoid throwing away your hard-earned money.
There are a couple of ways that the government determines tax exemption.
Sales tax exemptions are generally “entity based.” This means that the government determines which businesses or organizations qualify on a case-by-case basis (rather than a blanket “everyone who is a [fill in the blank] is automatically tax-exempt”).
In order to qualify for farm tax exemption, purchasers need to meet certain qualifications and properly register their business with their state’s department of revenue.
Sales tax exemptions may also be “product based.” In this case, the item itself has already been determined to be tax-free. There is no need to register in order to benefit from the exemption. For example, prescription drugs are tax-free in most states. Which products qualify varies from state to state, so you’d want to check your local laws if you’re not sure about a purchase.
TN Farm Tax Exemption
The Tennessee Department of Revenue now offers an “Agricultural Sales And Use Tax Exemption” to qualified farmers, ranchers, timber harvesters, and nursery operators in the state. In order to receive an exemption card and start saving money on the expenses necessary for running your ag operation, you must submit an application and meet certain criteria.
On the application, they’ll want to know things such as:
- Basic information about your business
- What type of agricultural operation you’re involved in
- The legal structure of your company (Sole proprietorship, Partnership, S Corp, etc) If you’re not sure which you should be, you might find these earlier posts helpful:
You’ll also be required to submit the following documentation:
- Tax returns with income information
- 1099s
- Proof of land qualification under the Agricultural Forest and Open Space Land Act
- Copy of your Schedule F
- Copy of either Form 4835 or Schedule E
- Detailed statement of why you qualify for an exemption. (This is often a copy of your business plan that explains when you bought your land, how many acres are in use and for what purposes, sales projections, and marketing strategies.)
The Department of Revenue requires that participants renew their exemptions every 4 years. (Since keeping good records is important, be sure to keep your old cards to support older purchases in the event of an audit.)
Benefits of Your TN Ag Tax Exemption
Once you have your exemption from the state, what can you use it for?
As of January 1, 2023, people who have a current agricultural exemption in Tennessee can use it to save money on products for their farm, ranch, timber operation, or nursery such as:
- Gasoline or diesel
- Seeds
- Fertilizer
- Pesticides
- Herbicides
- Livestock feed
- Livestock drugs
- Tree cutting equipment
- Or pretty much anything that will be used more than 50% of the time in your ag business.
Not everything is included, though! Vehicles (and the fuel to operate them) that are used on state highways are still subject to income tax.
For more information, see this press release, “Farmers Can Buy More Tax-Free In 2023”, from the state.
Check With Your Farm Tax Accountant
Being able to avoid sales tax on essential items for your farm business can be a huge boost to your bottom line! So be sure to check with your farm tax accountant when applying for and using your TN Ag Tax Exemption.
We’ve been helping hardworking farmers minimize expenses and maximize profits for over 40 years, so we know a thing or two. We can do the same for you! Schedule a call with our team to discover what it means to “expect more from your CPA.”
