Do Farmers Get Tax Breaks? Deductions and Credits

Farming is a unique industry with distinct tax considerations. The tax code provides specific provisions designed to offer tax advantages to eligible farmers. Understanding these benefits is important for managing a farm’s financial health.

Qualifying as a Farming Business

The Internal Revenue Service (IRS) distinguishes between a “farming business” operated for profit and a “hobby farm.” Only activities conducted with a genuine profit motive generally qualify for farm tax deductions and benefits. If an activity is deemed a hobby, expenses can only be deducted up to the amount of income generated by that activity, meaning losses cannot offset other income.

The IRS considers several factors when determining if a farming activity is conducted for profit. These include maintaining accurate books and records, implementing strategies to improve profitability, the taxpayer’s expertise and effort, and the expectation that assets may appreciate in value.

Other considerations include the taxpayer’s success in other activities, the history of income or losses, and occasional profits. The financial status of the taxpayer is also examined; if farming is a primary income source, it is more likely to be viewed as a business. A farming activity is presumed for-profit if it has made a profit in at least three of the last five tax years, or two out of seven years for horse breeding.

Key Deductions and Special Tax Rules

Farmers can utilize various deductions and special tax rules to manage taxable income. These provisions recognize the unique nature of agricultural operations and their fluctuating income streams, helping farmers reduce their tax liability.

Deductions

Ordinary and necessary farm operating expenses are generally deductible. These include costs directly related to running the farm, such as feed, seed, fertilizer, fuel, repairs, wages, rent, veterinary fees, utilities, insurance premiums, and interest expenses on farm loans. Expenses must be directly related to the farming activity and not for personal use.

Farmers can deduct the cost of certain assets over their useful life through depreciation. This applies to farm equipment, machinery, buildings, and single-purpose agricultural structures. Accelerated depreciation methods, such as Section 179 expense deduction and bonus depreciation, allow for immediate or rapid write-offs of eligible property. Section 179 permits farmers to deduct the full purchase price of qualifying equipment in the year it is placed in service. For 2023, the maximum Section 179 deduction was $1.16 million, with a phase-out beginning if equipment purchases exceed $2.89 million.

Bonus depreciation provides an additional first-year deduction for eligible assets. For assets placed in service in 2024, 60% bonus depreciation is available, phasing down in subsequent years. This allows farmers to write off a significant portion of the cost of new or used equipment in the year it is acquired.

Farmers using the cash method of accounting can deduct prepaid farm supplies, such as feed, seed, and fertilizer, in the year of purchase, even if used later. This deduction is generally limited to 50% of other deductible farm expenses.

Expenses for soil and water conservation can be deducted. These include costs for grading, terracing, contour farming, and constructing drainage ditches or ponds. To qualify, practices must be consistent with a conservation plan approved by the Natural Resources Conservation Service (NRCS) or a comparable state agency. The deduction is capped at 25% of gross farming income, with excess amounts carried over.

Special Tax Rules/Income Treatments

Farmers may elect to average their farm income over prior years. This “farm income averaging” helps mitigate the impact of fluctuating agricultural income by spreading a portion of current year’s farm income over the three prior tax years.

Farmers can defer reporting certain crop insurance proceeds or federal disaster payments to the following tax year. This deferral is generally available if crops are destroyed or damaged and the farmer’s customary practice is to sell more than 50% of the crop in the year following production.

Special rules apply to the sale of livestock due to drought, flood, or other weather-related conditions. Farmers can defer income from the sale of livestock (other than poultry) sold in excess of normal business practice due to adverse weather. This deferral allows the gain to be postponed to the following tax year or allows for an involuntary conversion if replacement livestock are purchased within a specified period.

A qualified conservation easement may allow for an exclusion from gross income for certain land value if a perpetual conservation easement is granted. This provision encourages the preservation of agricultural land and natural resources.

Available Tax Credits

Tax credits directly reduce a farmer’s tax liability dollar-for-dollar, offering a significant benefit. Several credits are available that can benefit agricultural operations.

The Fuel Tax Credit is a significant credit for farmers. Farmers can claim a credit or refund for federal excise taxes paid on fuel used for off-highway business purposes, such as in farm equipment or tractors. This credit amounts to $0.183 per gallon of gasoline and $0.243 per gallon of undyed diesel fuel. Careful records of fuel usage must be maintained to claim this credit.

Other credits may also apply depending on specific farm activities. A Biofuel Producer Credit may be available for those who produce and sell or use biofuels. General business credits, such as those for employer social security and Medicare taxes paid on certain employee tips or for clean vehicles, could also apply if eligibility criteria are met.

Reporting Requirements for Farmers

Accurate record-keeping is foundational for proper tax compliance and substantiating deductions and credits. Farmers must track all income and expenses for correct reporting and completing necessary tax forms.

IRS Schedule F, Profit or Loss From Farming, is the primary form used by farmers to report farm income and expenses. This schedule summarizes the farm operation’s financial performance, calculating net profit or loss. It is filed with the farmer’s individual income tax return, typically Form 1040.

Other forms may also be required depending on farm activities. Form 4797, Sales of Business Property, is used to report the sale of farm assets like machinery or land. Form 4835, Farm Rental Income and Expenses, is used by landowners who rent out farm land but do not materially participate in farming activities. This form reports rental income based on crops or livestock produced by a tenant.

Farmers generally pay estimated taxes throughout the year to cover income tax and self-employment tax obligations. A special rule allows farmers to pay estimated tax by January 15 of the following year, or file their income tax return and pay all tax due by March 1. This rule provides flexibility given the seasonal nature of farm income.