Episode Details

5 tax tips every farmer should know

Credit Karma Tax® 

1. Know whether your farming activity counts

Who does the IRS consider a farmer? If you grow veggies in your backyard garden on the side and sell them at a roadside farm stand, does that qualify you as a farmer?

The IRS says you’re a farmer if you “cultivate, operate or manage a farm for profit, either as an owner or a tenant.” Farms include plantations, ranches, ranges, orchards and groves, and you can raise livestock, fish or poultry, or grow fruits and vegetables.

But your backyard produce sales probably won’t qualify you as a farmer for tax purposes — especially if you also work a full-time job that’s not farming-related. Instead, the IRS would likely consider the money you make from your victory garden as hobby income, since you don’t depend on that income for your livelihood.

As a result, you wouldn’t have access to the tax breaks the IRS affords farmers.

2. Know what you must claim as income

As a farmer, you’re likely to have multiple streams of income, and there may be some income sources that you didn’t know you needed to report.

To help, here’s a quick list of farming income you may have to report.

• Sales of livestock and other resale items
• Sales of livestock, produce, grains and other products you raised
• Distributions from a cooperative
• Agricultural program payments
• Commodity Credit Corporation loan proceeds (you can choose to count this as income if you pledge part or all your production to secure the loan)
• Crop insurance proceeds
• Federal crop disaster payments
• Income you received for custom hire or machine work
• Gasoline or fuel tax credit or refunds

If you own a farm operated by a tenant and you didn’t materially participate in the farm’s management or operation, you’ll also need to report rental income based on crop or livestock shares the tenant produces. But you won’t have to pay self-employment tax on the rental income.

As a farmer, you may have many sources of taxable income — including bartering, cancelled debt, prizes from livestock competitions and more. See IRS Publication 225 to learn more about farm income. Because there are so many different income sources you must report, it’s important to keep meticulous records throughout the year to make it easier to file your return correctly. You’ll report the income, along with your expenses, on Schedule F of Form 1040.

3. Know what expenses you can and can’t deduct

Farmers get a lot of deductions for the expenses they incur, but that doesn’t mean you can deduct everything. Here are the five expenses you can’t deduct.

• Personal or living expenses that don’t produce farm income (e.g., the cost of repairing your home)
• Expenses of raising anything you or your family used (e.g., if your farm business is growing vegetables, but you raise hens for your family, the costs of raising those chickens is nondeductible)
• The value of raised animals that died
• Inventory losses
• Personal losses

Fortunately, the list of expenses you can deduct is much longer. Here are some examples.

• Seeds and plants
• Veterinary costs for livestock
• Depreciation
• Chemicals
• Feed
• Fertilizers and lime
• Insurance (other than health)
• Mortgage interest
• Storage and warehousing

See Part II of Schedule F for a comprehensive list of deductible farm expenses.

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4. Take advantage of other tax breaks

In addition to deducting your expenses, there may be other deductions and credits you can take as a farmer.

Home office deduction

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