Tax time is rapidly approaching again. A farm is a business and like all businesses, a farm needs all the help it can get when it comes to saving on taxes. Here are some farm tax tips regarding deductions, income averaging and commodity wages that can help lessen the tax burden.
Deductions
- Ordinary and Necessary Expenses – Farmers may deduct these kinds of expenses if they paid them for their business. According to the IRS, an ordinary expense is a common cost for that type of business. A necessary expense is one that is appropriate for that business.
- Full Purchase Price Deduction – Section 179 of the IRS tax code lets businesses, including farms, deduct the full purchase price of qualifying equipment, software or breeding livestock bought or financed during the tax year. The maximum deduction is $500,000.
- Employee Wages – Farmers may deduct reasonable wages paid to a their part-time and full-time farm employees. The law requires that Social Security taxes, Medicare taxes and income taxes be withheld from these wages.
- Repayment of a Loan – If a farmer takes out a loan and uses it for his farming business, then the interest paid on the loan is tax-deductible.
- Depreciation – Tangible farm equipment – buildings, equipment and vehicles and more – can be depreciated and deducted.
Income Averaging
The IRS lets farmers average their income by shifting some of it to the past three years. This can save on taxes if farm revenue in the current year is high but low in the previous years.
Commodity Wages
Wages paid in commodities instead of cash are exempt from Social Security taxes, Medicare taxes and withholding taxes for both the employee and the farmer. This reduces the farm’s overall tax burden and can result in a significant annual tax reduction. It is important, though, that the farmer give up all control of the commodity.
Need a tax review? If so, then please contact us. Specific tax strategies can reduce a farm’s taxes but are often complicated. We are here to help.
