IRS Publication 225: Farmer’s Tax Help

IRS Publication 225, the Farmer’s Tax Guide, provides the framework for how federal tax laws apply to farming. For tax purposes, a farmer is anyone who operates or manages a farm to make a profit, whether as an owner or a tenant. This definition covers a wide range of operations, including:

• Livestock, dairy, poultry, fruit, and truck farms
• Ranches
• Plantations
• Orchards

Recognizing Farm Income

Farm income includes the money or value of property received from the cultivation and sale of agricultural products, which is reported on Schedule F (Form 1040), Profit or Loss From Farming. This covers sales of harvested crops, produce, and livestock. When selling livestock, it is necessary to distinguish between animals held for sale and those held for draft, breeding, or dairy purposes. The profit from selling animals raised or purchased for resale is considered ordinary farm income.

Government farm program payments must be included in your gross income. This includes market gain from repaying a Commodity Credit Corporation (CCC) loan, agricultural program payments, and conservation payments. Cost-share payments for conservation practices are generally taxable unless they qualify for a specific exclusion.

Crop insurance proceeds and disaster payments are also treated as farm income and are taxable in the year they are received. A special rule may allow you to defer reporting these proceeds until the following year. This applies if you use the cash method of accounting and can show that under normal circumstances, you would have included the income from the damaged crops in a later year.

Income from custom hire or machine work, which occurs when you use your farm machinery to perform services for other farmers, is considered farm income. This category also includes other sources like the sale of gravel from your farmland, breeding fees, and rent received for the use of your pasture.

Deducting Farm Expenses

To be deductible, a farm expense must be both ordinary and necessary for the operation of the farm business. These are the costs of carrying on the business that are not capital expenditures, meaning they are for items used up within one year.

Car and truck expenses incurred while conducting farm business are a common deduction. You can calculate this using either the standard mileage rate, which is 70 cents per mile for 2025, or your actual expenses. The actual expense method involves tracking all costs associated with the vehicle, including gas, oil, repairs, and insurance, and then allocating the portion used for the farm.

The costs of fertilizer, lime, and other materials used to condition land are fully deductible in the year they are paid for if their benefits last one year or less. A special rule allows you to elect to deduct these expenses in the current year even if their benefits last longer than a year.

For cash-basis farmers, the cost of feed purchased for livestock and the cost of seeds and plants purchased for cultivation are deductible in the year of payment. For large prepaid feed expenses, certain conditions must be met to secure the deduction in the year of payment, such as having a clear business purpose.

Reasonable cash wages paid for farm labor are a deductible expense. The cost of board, health insurance, and other non-cash benefits provided to employees can also be deducted. You cannot deduct the value of your own labor or the labor of your spouse or minor children if you are a sole proprietor.

Repairs and maintenance costs that keep your property in its ordinary operating condition are deductible. Costs that result in an improvement or restoration of the property must be capitalized and depreciated.

Interest paid on farm mortgages and other loans used for the farm business is also deductible. This includes interest on loans to purchase land, machinery, or livestock. You can only deduct the interest that has accrued and been paid during the tax year.

Managing Farm Business Assets

A farm business asset is property with a useful life of more than one year that is used in the farming operation, such as tractors, barns, and breeding livestock. The tax treatment of these items differs from current operating expenses because their cost is recovered over a period of years.

An asset’s “basis” is your investment in it for tax purposes. For a purchased asset, the basis is its cost, including freight and installation charges. For a raised asset like breeding livestock, if you use the cash method of accounting and have deducted the costs of raising the animal, its basis is zero.

Depreciation is the process of deducting the cost of an asset over its useful life. The Modified Accelerated Cost Recovery System (MACRS) is the primary method for depreciating most farm property. Under MACRS, assets are assigned to specific property classes, which determine the depreciation period. For example, new farm machinery is 5-year property, while fences and used machinery are 7-year property, and grain bins are 10-year property.

The Section 179 deduction allows you to treat the cost of certain qualifying property as an expense rather than a capital expenditure. For 2025, the maximum Section 179 deduction is $1,250,000, with a phase-out threshold of $3,130,000. This allows an immediate deduction of the full purchase price of qualifying new or used equipment in the year it is placed in service.

Bonus depreciation is another accelerated depreciation provision. For property acquired and placed in service in 2025, you may be able to take an additional 40% bonus depreciation deduction. This is taken after any Section 179 deduction and before regular MACRS depreciation.

When you sell or dispose of a farm asset, you must calculate the gain or loss. The gain or loss is the difference between the amount you receive from the sale and the asset’s adjusted basis. If you have a gain, it may be treated as either ordinary income or a capital gain, which is often taxed at a lower rate. Gain from the sale of depreciable property, to the extent of depreciation previously taken, is “recaptured” as ordinary income.

Key Accounting Methods and Special Provisions

Your choice of an accounting method determines when you report income and deduct expenses. The two primary methods for farmers are the cash method and the accrual method. Once a method is chosen, you must generally get IRS approval to change it by filing Form 3115, Application for Change in Accounting Method.

The cash method of accounting is the most common. Under this method, you report income in the tax year you receive it and deduct expenses in the tax year you pay them. This method offers flexibility in managing taxable income, as you can time the payment of expenses or the sale of products to shift income between years.

The accrual method of accounting provides a more accurate picture of a farm’s annual profitability. Under this method, you report income in the year you earn it, regardless of when you receive payment. You deduct expenses when you incur them, not necessarily when you pay them, and this method requires the use of inventories.

Special tax provisions exist to provide relief in certain situations. If weather-related conditions, such as a drought or flood, force you to sell more livestock than you normally would in a year, you may be able to postpone reporting the gain from the sale of the additional animals to the following tax year.

Commodity Credit Corporation (CCC) loans offer a unique choice. The first option is to treat the amount as a loan, in which case you have no taxable income until you sell or forfeit the commodity. The second option is to elect to include the loan amount in your income in the year you receive it, which can be strategic if your tax bracket is lower in that year.