It’s that joyful time of year again.
No, I’m not talking about chick hatching time or seed catalog time. It’s not time for lambing, nor is it time to harvest the tomatoes.
It’s tax time.
Of course, I write that introduction in jest – after all, who really likes doing their taxes?
With the exception of maybe accountants (who after all, stand to make a few bucks from us regular folk!), I don’t think anybody really likes doing their taxes. If you have a homestead, it can be even trickier to do your taxes. Things get even more complicated when you start making a bit of money from your farm.
Keep in mind that you don’t have to overcomplicate things, though. There are plenty of tax tips you can follow to make doing taxes bearable – and hopefully, as painless as possible.
Tax Tip 1: Define Who You Are and What You Do
Before you do anything else, you need to figure out who you are – hobbyist or farmer.
Figure out whether you are actually a farm – or if you are a homestead. You also need to differentiate between whether you are a small farm business or a hobby farm.
The key difference between a hobby farm and a small business farm is profit. If you make a profit for three out of five years, you are a small business farm. If you don’t, you are a hobby farm. The one exception to this is if you are a farm that breeds horses. In this case, you only need to make a profit in two out of seven years.
The IRS looks at these different categories in different ways. For example, for the IRS to allow you to claim farm income and losses, you have to raise poultry, livestock, or fish, or grow fruits and vegetables. You need to keep records about equipment costs, labor, seeding, maintenance, and anything else that you might deem relevant.
Accurate records not only help you figure out what can count as business income and expense, but they are also required as proof of your deductions if you do get audited.
Try to avoid the hobby farm label if you plan on claiming farm income on your taxes. A hobby farm is one that only produces food for itself – and does not make a profit. Even if you’re selling a few eggs here or there to your neighbors, you still probably aren’t going to qualify as a small farm business.
The term “homestead,” on the other hand, isn’t really recognized by the IRS or most state taxation agencies. Therefore, it’s important that you identify whether you are a hobby farm or a small business farm for taxation purposes.
Tax Tip 2: Have Your Finance Records in Order
Here’s where it can get kind of tricky. Remember how I said that you need to show income in order to be a true farm business? That’s only half the battle.
To be a true farm business, you don’t have to actually make a profit each year. You just need to show an intention to make a profit. You may have to provide documentation such as:
- A business plan
- Profit and loss statements
- Bank account verification
- Daily activity logs
- Financial records of assets and expenses
- Evidence of operational costs
- Vehicle purchases and maintenance
- Costs for chemicals, fertilizer, pesticides, feed, salaries, etc
This is why it is so important to keep expenses for everything that you do and everything that you purchase. Keep detailed records and make sure you are being as thorough as possible in your reports and record-keeping. Don’t forget about “free” money either, like grants or loans – these all factor in.
Tax Tip 3: Double and Triple Check Your Zoning
This is something you really should do before you start your homesteading or farming operation in general. However, it’s even more important that you check your local zoning rules before filing your taxes. If your local area doesn’t allow farming and you’re trying to claim farm income, you’re bound to get yourself into hot water.
Now, if you are truly operating just a hobby farm or a small homestead, it’s often not a problem if you are not agriculturally zoned. Most areas don’t require you to be. However, if you are only producing food for your family only and you aren’t making any kind of profit, you should not be claiming business income and deductions for your farm anyway.
Tax Tip 4: Research Tax Breaks
All 50 states provide tax breaks for agricultural land and agricultural operation. However, the rules in each of those states are different. Make sure you look into the profits required and the amount of land put in use to ensure that you can file as a small farm business with the IRS and your state taxation agencies.
As with any business, the IRS lets you deduct both ordinary and business expenses that you need to run the farm. This might include items such as:
- Utility expenses
- Equipment (including tractors, silos, etc)
- Services (veterinary care, breeding, etc)
Sometimes you can include livestock, whether it’s for resale or for a business need (such as replacing dairy cows).
In some cases, large purchases can be depreciated over time, which will allow you to extend the deduction over a period of years. You can often deduct loans and loan interest as well as labor expenses (regardless of whether it’s paid out to a person on payroll or as a private contractor).
The IRS will also allow you to average your current year’s farm income with the previous three years of income, reducing your tax liability in a particularly profitable year.
Even property taxes can help you out. If you have a permitted farm, you may be able to get a reduction in property taxes. This varies depending on these states, but it’s worth looking into. In New Jersey, for instance, you only need to have five acres with $500 in sales to qualify for a property tax reduction.
Tax Tip 5: Don’t Forget Your Losses
One of the most common reasons why people begin to claim farm income on their taxes is to help offset some of their other income. Owning a farm is expensive, and it can be tough to make a profit. This is usually because you’re bound to experience losses.
Whether an early fall freeze kills your tomatoes or sickness sweeps through your litter of piglets, you may be able to take deductions from a loss. The exception to this is if you receive an insurance claim. If you receive payment for an insurance claim, it will be counted as income and that is taxable, too.
Tax Tip 6: Think Green
You might be able to get some extra tax breaks if you are willing to forgo the development rights on your land. You might also be able to donate a conservation easement to a charitable land trust. This will reduce the overall market value of your property. However, it will also allow you to claim a deduction on your tax return.
Other tax breaks to look into include the installation of solar panels to generate electricity for your farm or other alternative energy improvements.
Tax Tip 7: Consider Consulting an Accountant
Tax laws are complicated. As much as you might enjoy doing things yourself – and I know you do, because why else would you decide to start a farm or homestead – it might pay off to meet with a tax professional.
Not only can an accountant help uncover tax breaks and deductions that you may have missed, but he or she may be able to identify big mistakes on your return. A small tax write-off taken incorrectly here or there may not seem like a big deal. The reality is that it is going to attract an audit – and accrue potential fines.
Of course, you should keep in mind that these tax tips are in no way intended to serve as tax or legal advice. If you’re finding yourself confused by the lingo and not sure where to start when it comes to your farm taxes, make sure you consult a true professional, as I mentioned.
Hopefully, within a few years, you will be harvesting serious tax breaks. Ideally, they will be just as bountiful as your fall crop of acorn squash!