Tax Deductions for Farm and Hunting Land

Owners of rural land used for agricultural production or hunting leases may be eligible for tax deductions. A farm can include stock, dairy, poultry, fruit, and truck farms, as well as plantations, ranches, and orchards. The availability of these deductions hinges on whether the landowner’s activity is recognized by the IRS as a for-profit business.

Qualifying as a Business for Tax Purposes

Deducting expenses for farm or hunting land depends on whether the activity is a business or a hobby. The IRS presumes an activity is for profit if it was profitable in three of the last five tax years, or two of the last seven for horse-related activities. If this safe harbor isn’t met, the IRS may scrutinize the landowner’s intent to determine if the operation is a hobby.

If the profit presumption is not met, the IRS uses a nine-factor test to determine if a profit motive exists. A primary factor is operating in a businesslike manner, which includes keeping accurate records, using a separate bank account, and having a business plan. The expertise of the taxpayer or their advisors is also a factor, and using consultants can show a serious intent to be profitable.

The time and effort the taxpayer spends on the activity is also weighed. Significant personal time suggests a profit motive, while limited involvement may point toward a hobby. The IRS also reviews the history of income and losses, the taxpayer’s financial status, and elements of personal pleasure. For instance, if a high-income individual consistently generates losses from a cattle breeding operation they enjoy, the IRS may argue it is a hobby.

No single factor is decisive, and the determination is made by looking at the overall picture presented by all nine factors. A landowner must be prepared to demonstrate that their primary purpose for the activity is to generate income or profit. Business expenses are fully deductible and can create a loss to offset other income, whereas expenses from a hobby are generally not deductible.

Deductible Operating Expenses

Once an activity qualifies as a business, a landowner can deduct all ordinary and necessary expenses paid during the tax year to carry on that trade. These recurring costs are for the day-to-day functioning of the farm or hunting operation and are distinct from capital expenditures.

Farming Expenses

For a farming business, a wide array of direct costs are deductible. These include:

• The cost of feed, seed, plants, and fertilizer.
• Gasoline, fuel, and oil used in farm machinery.
• Veterinary fees, breeding fees, and the cost of medicines for livestock.
• The costs of minor repairs and maintenance on farm equipment and structures that do not add significant value or prolong the asset’s life.

Hunting Lease Expenses

Landowners who lease their property for hunting can also deduct their direct operating costs. Common deductions include:

• Liability insurance to protect the landowner from accidents.
• Costs associated with advertising the hunting lease to potential clients.
• Legal fees incurred for drafting lease agreements.
• Annual costs of maintaining the hunting environment, such as planting food plots, maintaining access trails, or repairing hunting blinds.

Shared Land Expenses

Expenses tied to the land itself are also deductible based on business use. These include property taxes on the business acreage and the business portion of mortgage interest and utilities. Careful allocation is required if the land has mixed uses, such as a personal residence on the same parcel.

Capital Expenditures and Depreciation

A capital expenditure is the cost of acquiring or improving an asset with a useful life of more than one year. This includes purchasing equipment like tractors, constructing buildings like barns, or making land improvements such as building roads or drilling a well. These costs cannot be fully deducted in the year they are incurred.

The cost of these long-term assets is recovered over time through a process called depreciation. Each year, the business deducts a portion of the asset’s cost, reflecting its wear and tear, age, and obsolescence. The IRS provides specific recovery periods for different agricultural assets, such as seven years for farm machinery, while fences and grain bins have different schedules. This allows the landowner to recover the asset’s cost over its useful life.

Tax law provides methods to accelerate these deductions. Section 179 allows a business to deduct the full purchase price of qualifying property in the year it is placed in service, up to a limit. Bonus depreciation is another provision allowing an additional first-year deduction for qualifying assets, though the available percentage phases down over time.

These accelerated depreciation methods can lower a landowner’s taxable income in the year of a major purchase. For example, a qualifying farm business that buys a new tractor for $100,000 could potentially use Section 179 to deduct the entire amount in the current tax year. This is instead of spreading the deduction over seven years.

Specialized Conservation-Related Deductions

Landowners may be eligible for deductions designed to encourage land conservation. The primary deduction is for a qualified conservation contribution, or conservation easement. This involves a landowner permanently giving up certain development rights while retaining ownership of the land.

To qualify, the easement must be donated in perpetuity to a qualified organization, such as a government agency or a public land trust. The purpose must be for outdoor recreation, protecting a natural habitat, preserving open space, or preserving historically important land. The deduction’s value is determined by a qualified appraisal and is generally the difference in the property’s fair market value before and after the easement.

The deduction for a conservation easement is limited by the landowner’s adjusted gross income (AGI). A taxpayer can deduct the donation’s value up to 50% of their AGI, with a 15-year carryforward period for any unused amount. For qualified farmers and ranchers, this limit increases to 100% of their AGI.

A farmer can also choose to deduct certain expenditures for soil and water conservation or erosion prevention. These expenses, which might otherwise be capitalized, include costs for leveling, grading, terracing, and constructing earthen dams. The annual deduction for these expenses is limited to 25% of the gross income from farming.

Required Documentation and Tax Forms

To claim business deductions, landowners must maintain records to substantiate their claims in an IRS audit. Records should include dated receipts, invoices, and canceled checks for all expenses. For vehicle expenses, a mileage log detailing the date, miles driven, and business purpose of each trip is required. Other important documents include hunting lease agreements, bank statements from a separate business account, and a log of time and effort invested in the operation.

Income and expenses from farming activities are reported on Schedule F (Profit or Loss From Farming), which attaches to the landowner’s Form 1040. Operating expenses like feed and seed are entered in Part II of the form. Depreciation of capital assets is calculated on Form 4562 (Depreciation and Amortization), and the total deduction is then carried to Schedule F.

Income from leasing land for hunting is typically reported on Schedule E (Supplemental Income and Loss). The expenses associated with the hunting lease, such as advertising and insurance, are deducted on this same form. If the landowner provides substantial services to the hunters, the activity might be considered a trade or business reported on Schedule C (Profit or Loss from Business). Proper form selection depends on the specific facts and circumstances of the operation.