Farm Tax Write Off
A farm is a small business developing a product to sell in an attempt to earn money. Farms, like any business, have expenses necessary to produce their product. The Internal Revenue Service allows the farmer to write off these expenses, along with a few others, against the income they earn.
Cash or Accrual?
Farmers can choose between the cash or accrual method of accounting or a mix of the two called the crop method. The one you use determines when you claim the tax write-offs and income earned.
Using the cash method requires farmers to record their income and expenses when they actually receive or spend the money. The Internal Revenue Service considers the use of credit cards or a loan to pay for expenses as money spent, for purposes of this method. Income is recorded when the money is received.
The accrual method requires you to record income and expenses as you earn or incur them. For instance, if you purchased supplies on a vendor account in December and did not pay for them until January, you would record the expense in December. It's the same for income: if you sold a crop in December and did not receive payment until January, you will record the income in December.
Farmers can also use a special method called the crop method, which helps them keep income and expenses together. If a crop is set to come in during the following tax year and the planting expenses are in the current tax year, you can delay claiming the expenses until the income from the crop comes in. This will balance out the taxable income each year, rather than having a loss in one year and a gain the next.
Prepaid Supplies
Farmers purchase items in bulk and prepay many of their expenses. If the farm uses the cash method of accounting, only 50 percent of the cost of prepaid supplies is deductible in the current year. The balance of the cost will become a write-off in the year of its use.
Depreciation
Farmers can depreciate the equipment they purchase to operate their business. Depreciation simply means to spread the cost over the useful life of the item. This helps the business properly keep the expense of the item in the same year it helps earn income. For instance, a tractor earns income for the farm each year of its useful life. Spreading a portion of the cost over several years will help keep the expense with the income it earns.
Additional Depreciation
The Internal Revenue Service realizes allocating the cost of equipment over several years may not afford the farmer the ability to purchase a new piece of equipment. Paying now for a piece of equipment means cash out of your pocket now and a future deduction may not make the most sense. A section 179 expense allows the farmer to take the entire purchase price in the year of purchase as a tax write-off. There are some limitations to this expense that are subject to change, but this enables a farm to use money that may otherwise be spent on taxes to purchase a new piece of equipment.
Schedule F
Farm expenses are reportable on a form 1040 Schedule F. The net income from this schedule will become taxable on your personal form 1040 tax return. The Schedule F can be complex and you should spend time reviewing publication 225 from the Internal Revenue Service prior to filling it out.
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