How to Claim Farm on Taxes: Reporting Income and Expenses

Farming comes with unique tax rules that impact what you owe and the deductions you qualify for. Whether you operate a small or large farm, understanding how to report income and expenses correctly is essential for staying compliant and maximizing savings.

Tracking revenue, deducting eligible costs, and maintaining accurate records help avoid IRS scrutiny while ensuring you take advantage of available tax benefits.

Criteria for Farm Status

The IRS defines a farm as a business engaged in cultivating crops, raising livestock, or managing orchards with the intent to generate profit. Farms qualify for tax benefits that other businesses do not, while hobby farms, which lack a profit motive, do not receive the same deductions.

To determine farm status, the IRS considers factors such as sales frequency, level of investment, and efforts to make the business profitable. Regular sales, participation in government farm programs, and maintaining business records help establish intent. Prior farming experience, consulting with industry professionals, and following standard agricultural practices also strengthen the case. Consistently reporting losses without a reasonable expectation of future profitability risks classification as a hobby, limiting deductible expenses.

Land use also plays a role. Properties primarily used for agricultural production, such as fields for crops or pastures for livestock, are more likely to qualify. Leasing land for farming may still allow the owner to claim farm status, but passive rental income is treated differently from active farming income. Participation in USDA conservation programs can also affect tax treatment.

Reporting Farm Income

Farmers must report all income from agricultural activities, including sales of crops, livestock, and farm-related services. Sole proprietors use Schedule F (Form 1040), while partnerships and corporations file different forms, such as Form 1065 for partnerships or Form 1120 for corporations.

Revenue from farmers’ markets, roadside stands, or community-supported agriculture (CSA) programs must be included as taxable income. Government payments, such as USDA subsidies or disaster assistance, are also taxable. Agritourism income from farm tours or hayrides must be reported.

Barter transactions must be accounted for. If a farmer trades produce for equipment repairs, the fair market value of the goods exchanged is considered income. Payments received in the form of goods, such as livestock feed or fertilizer, must also be included in gross revenue.

Crop insurance indemnities and disaster payments due to yield losses or weather-related damage are taxable in the year received unless the farmer qualifies for deferral. If a farmer reports income on a cash basis and the indemnity payment is for crops that would have been sold the following year, they may defer the income by attaching a statement to their return.

Deductible Farm Expenses

Farmers can deduct ordinary and necessary expenses related to their agricultural business. These deductions reduce taxable income and must be properly documented.

Crop Supplies

The cost of seeds, fertilizers, pesticides, and other materials used to grow crops is fully deductible. Farmers using the cash method deduct these costs in the year of purchase, while those using the accrual method deduct them when applied.

Government conservation programs, such as the Environmental Quality Incentives Program (EQIP), provide cost-sharing payments for soil and water conservation. These payments are taxable, but related expenses remain deductible. Prepaying for crop inputs, such as purchasing next season’s seeds before year-end, can help manage income fluctuations, but prepaid expenses cannot exceed 50% of total deductible farm expenses.

Equipment Repairs

Routine maintenance and repairs necessary to keep farm equipment operational are deductible in the year they are paid. This includes replacing worn-out parts, fixing machinery, and servicing tractors or irrigation systems. However, expenses that improve equipment beyond its original condition or extend its useful life must be capitalized and depreciated.

For example, replacing a tractor’s engine is a capital improvement subject to depreciation, while replacing a worn-out tire or fixing a hydraulic leak is deductible as a repair expense. The IRS provides guidance on distinguishing between repairs and capital improvements. Farmers should keep detailed records, including invoices and work orders, to substantiate repair deductions.

If a farmer leases equipment, lease payments are deductible as an operating expense. However, if the lease transfers ownership at the end of the term, the equipment must be depreciated instead of deducted as a rental expense.

Hired Labor

Wages paid to farm employees, including seasonal workers, are deductible. This includes employer-paid payroll taxes, such as Social Security and Medicare (FICA), which total 7.65% of an employee’s wages. Employers must also pay federal and state unemployment taxes (FUTA and SUTA), with FUTA generally assessed at 6% on the first $7,000 of wages per employee, though credits can reduce this rate.

Farmers hiring temporary agricultural workers under the H-2A visa program are not required to withhold Social Security and Medicare taxes, but wages paid to these workers are still deductible. Payments for contract labor—such as hiring independent workers for harvesting or custom fieldwork—must be reported on Form 1099-NEC if total payments to an individual exceed $600 in a year.

Providing non-cash compensation, such as housing or meals, may also be deductible if it is a condition of employment. For example, if a farm provides on-site lodging for workers as part of their job, the cost of maintaining that housing can be deducted. Proper classification of workers as employees or independent contractors is essential to avoid IRS penalties.

Depreciation of Assets

Farming requires significant investments in long-term assets such as tractors, barns, irrigation systems, and breeding livestock. Since these assets provide value over multiple years, their cost cannot be deducted in full during the year of purchase. Instead, depreciation allows farmers to recover the expense gradually, reducing taxable income over time.

The IRS uses the Modified Accelerated Cost Recovery System (MACRS) to determine depreciation schedules. Equipment and machinery typically fall under a five- or seven-year recovery period, while farm buildings, including silos and storage facilities, are generally depreciated over 20 years. Fences and drainage systems may have different classifications. Land itself is not depreciable, but certain land improvements, such as grading or soil conditioning, may qualify.

Farmers can use the 150% declining balance method, which accelerates deductions in the early years, or the straight-line method, which spreads the cost evenly over the asset’s life.

Section 179 expensing allows an immediate deduction of qualifying asset purchases up to $1,220,000 in 2024, with a phase-out threshold of $3,050,000. Bonus depreciation, currently set at 60% for 2024, provides an additional incentive for new and used equipment acquisitions.

Recordkeeping Requirements

Accurate financial records are necessary to substantiate income, expenses, and depreciation claims in case of an IRS audit. The IRS recommends keeping records for at least three years, though documents related to land purchases or asset depreciation should be retained indefinitely.

Receipts, invoices, and bank statements should be organized to track revenue and deductible costs. Farmers using cash accounting must document when income is received and expenses are paid, while those using accrual accounting must track when transactions are incurred. Payroll records, including W-2s and 1099s, must be maintained for at least four years.

Digital recordkeeping software, such as QuickBooks or FarmBooks, can streamline financial tracking and generate reports for tax preparation. The IRS accepts electronic records, provided they are legible and accurately reflect transactions. Farmers participating in government programs should retain documentation of payments and eligibility requirements, as these may be subject to verification.

Handling Livestock Sales

Income from livestock sales is reported based on whether the animals were raised for resale, breeding, dairy, or draft purposes.

Sales of animals raised for resale, such as feeder cattle or market hogs, are treated as ordinary farm income and reported on Schedule F. If the livestock was purchased and later sold, the cost basis must be deducted from the sale price to determine taxable profit. Breeding, dairy, or draft animals held for more than 12 months qualify for capital gains treatment, with long-term capital gains taxed at 0%, 15%, or 20%, depending on total income.

Farmers forced to sell livestock due to drought, flood, or other weather-related conditions may qualify for tax deferral. If the proceeds are reinvested in replacement livestock within four years, the gain is not immediately taxable. Insurance or disaster payments received for lost livestock must be reported as income unless deferred under specific IRS provisions. Proper classification of livestock sales ensures compliance and can reduce tax liability.