With the tax deadline rapidly approaching, many family farms might be wondering how to maximize their tax deductions. Here are 5 tips to maximize your farm refund.
1. Ordinary and Necessary Expenses: Farm expenses can be deducted if they are accurately documented (receipts). Ordinary expenses are what is needed in order to run the farm and are expected to be deducted. Necessary expense is one that is not necessarily expected but still appropriate for the needs of the farm.
2. Depreciation: Buildings, machinery (vehicles and equipment), copyrights, patents and even computer software can depreciate and therefore can be deducted. Truly, any tangible property, with the exception of land, can be deducted as depreciation if it used in the farm business.
3. Employee Wages: Once Medicare, social security and income taxes are taken out of your employees’ wages the rest can go to tax deductions. This includes wages that may be paid to one’s own children who work on the farm. It must be established as a true employee/employer relationship and some taxes maybe exempt depending on the age of the child.
4. Loan Repayment: If you have taken out a loan for the farm, the interest you have paid into the loan can be deducted.
5. Farm Income Averaging: Some farms have the option of averaging their income. This is an average income made by the farm spread out into a three year average. This will allow for a deduction if the income made this year is higher than that of previous years.
Bonus: Download the IRS’s Tax Guide for Farmers for extra help and to maximize your deductions and answer any questions.
The first step in maximizing your farm profits is to understand how to use the tax system to your advantage and how to start your tax year off right. Make sure you protect your farm investment, contact us for more information.