I’ll be the first in line to say: taxes are boring. Reading about taxes is boring, filing for taxes is annoying….etc, etc. BUT when a little bit of research can help you save money, taxes get a little more interesting, don’t they? Read on to find out what farm tax advantages you may be eligible for.

I started this research because in addition to our horse farm, Fairway Stables will have other aspects that could qualify as “farm-related activities”. (If you want to read more about tax exemptions for horse farms in particular, find that here [Coming Soon!]).  And, frankly, I want to know every way I can strategically build our stables to save money on taxes. 

But before we get started: I’m not a tax advisor, and this is not tax advice. This content is for general educational purposes only. If you have any questions, ask your accountant. (If you’re looking for an accountant who actually understands your business, contact me. I trust one firm with all of my family’s and clients’ businesses.)

Without further ado, let’s look at what farm tax advantages are out there for farms and homesteading businesses. 

Table of Contents:

1. What qualifies as a farm for tax purposes? 
2. What qualifies as an agricultural exemption?
3. Is your farm a hobby or a business?
4. What can farmers or homesteading businesses write off for taxes
5. Farm tax application form
   1. Creating the Organization
      1. Organizing documents
      2. Bylaws 
   2. Employer Identification Number (EIN)
      1. Application form PDF

What qualifies as a “farm” for tax purposes?

The IRS considers an organization a “farm” or “agricultural” business when it involves raising livestock, cultivating land, raising crops (or aquatic livestock), raising flowers or ornamental plants, etc., as the main purpose of the business. “Livestock” includes animals raised in captivity for slaughter or domestic purposes, like pigs, sheep, cattle, or horses.  Farms include ranches, plantations, open ranges, and orchards where you can raise livestock, or grow fruits and vegetables. Also check out this article to find out if your local zoning laws consider you eligible to carry out farm activities on your property.

Make sure your homesteading activity qualifies for farm tax advantages.

If you grow a cut flower garden in your backyard, and sell flowers or bulbs on the side, are you considered a “farmer” who would qualify for farm tax advantages?

According to the IRS, you’re a “farmer” if you “cultivate, operate or manage a farm for profit, either as an owner or a tenant.” That is a pretty broad definition! The main thing to keep in mind is that the farming endeavor has to be the main purpose of the business. For example, you can’t just have horses in your backyard and hope to get an agricultural tax exemption. 

In other words, your homesteading can’t just be a hobby. For example, if you work a full-time job that isn’t related to homesteading or farming, you may not qualify for a farming tax exemption because your homesteading would be considered a hobby. So, what is considered a hobby, and what is a business? 

What is a homesteading hobby vs. a homesteading business? 

Hobby versus Business Losses 

If a business shows no intent to make a profit, the IRS assumes the activity is a hobby and will disallow deductions for expenses in excess of income. The general test to measure profit motive is whether the activity has generated a profit in any three out of five consecutive tax years. This “hobby loss” test does not determine that a business must be considered a hobby, but only allows the IRS to look at the business in more detail.

The actual decision of whether a business should be considered for profit is based on nine factors set forth in IRS regulations. Taxpayers can protect themselves by keeping good records that indicate a profit motive based on the following nine factors.

The 9 factors that separate a hobby from a business:

1. Does the producer look like a business? For instance, good books and records are kept. Also, methods of operation are changed if they are not working, and techniques that hope to improve efficiency are attempted.
2. Can the producer take advice? Show evidence that experts have been consulted and their advice has been followed. Read books, took classes, attended workshops, paid advisers, etc. 
3. Does the producer spend time on the farm? Spending time and effort on the farm is an indicator of profit motive. Employing competent persons to run activities on the farm may also indicate profit motive. 
4. Is anything on the farm worth money? An increase in land value, cattle, or other assets could point to expected profit—even if current operations or practices are not showing a profit. 
5. Has the producer done this before? If the producer has a history of turning unprofitable ventures into profitable ones, one can assume a profit motive. 
6. What has been happening on the farm? Are the losses mainly a start-up situation? Have there been unforeseen circumstances such as drought, fire, theft, depressed market conditions, etc.? 
7. Has the producer made any money? An occasional small profit offset by persistent high losses would probably indicate there is no profit motive. 
8. Is the producer making money doing anything else? If there is no substantial income from other sources, the profit motive is probably indicated. However, the existence of other income might just show good planning and would not necessarily negate the profit motive. 
9. Is the producer having fun? The presence of personal pleasure or recreation in an activity can be used by the IRS to claim the activity as a hobby, but the other eight factors listed here must also be taken into account. The fact that a person enjoys a business is not sufficient to disallow the profit-making motive.

In other words…

In short, if the IRS determined that your homesteading business was a hobby based on these 9 factors, you wouldn’t have access to the tax breaks the IRS affords farmers. Keeping good, thorough records to back up all 9 of these elements would help you demonstrate your profit motive if you had to fight for your business classification.

What expenses can farmers deduct, and not?

Here’s what you can deduct as a farmer (See Part II of Schedule F for a comprehensive list):

• Storage
• Warehousing
• Mortgage interest
• Feed
• Chemicals
• Certain insurance
• Seeds 
• Plants 
• Veterinary costs
• Fertilizers and lime
• Depreciation 

However, there are 5 expenses that you can NOT deduct as a farmer:

• Personal losses
• Inventory losses
• Personal or living expenses that don’t produce farm income 
• The value of raised animals that died
• Expenses of raising anything you or your family used (for example, if you sell cattle for business, but grow a garden, the garden costs are not deductible).  

What do you need to report as income?

This is a great question to ask your accountant, but keep an eye out for the following:

• Gas/fuel credits/refunds
• Federal disaster payments 
• Agricultural program payments
• Crop insurance proceeds
• Sales of livestock
• Sales of produce, grains, etc 

Ask your accountant about IRS Publication 225 to find out if you have other farm income you can report, and ask if you need to report your income and expenses on Schedule F of Form 1040. And the best thing you can do? Keep complete records, receipts, and bookkeeping records as you run your farming business.

What are some other possible farm tax advantages?

Claiming fuel credits

If you used gasoline or other fuels for farming purposes, you might be able to claim a credit or refund on the excise taxes you paid. Note, however, that you can’t get a credit or refund for taxes paid on dyed diesel fuel and dyed kerosene.

Before you claim a fuel credit, be sure you understand the rules, requirements and limitations for doing so. Check out IRS Publication 225 to learn more.

In addition to deducting your expenses, there may be other deductions and credits you are eligible for as a farmer.

Home office deduction

You may be able to deduct certain expenses using the home office deduction if you used your home to conduct farming business. In order to qualify, you must have used part of your home exclusively and regularly as the principal place of business for your farming operation, and you cannot have another fixed location from which you managed and administered your business.

Check out IRS Publication 225 to learn more about business use of your home when you’re a farmer.

Deducting net operating loss

Farming can be an unpredictable business. One year you may have a bumper crop and make a tidy profit, while the next year sees drought and disease eroding your income. When deductible losses from operating your farm exceed your other income from the year, or you experience a personal or business loss that was more than your income, you can see a net operating loss.

When that happens, you may be able to carry the loss back up to two years and deduct it from income you had in those years. If you carry the loss back, you may be able to get a refund for all or some of the income tax you paid for that past year. Alternatively, you can choose to carry the net operating loss forward for up to 20 years.

Earned income tax credit

Although it’s not specifically designed for farmers, the earned income tax credit may be available to you if you meet the qualifications.

The credit is designed for working people with low to moderate income, so you may not be eligible if your net farm profit exceeds a certain amount. Check out the IRS publication on the EITC for more information.

How to claim your farm tax advantages.

To qualify for farm tax advantages, you will need to create your exempt organization with the IRS. To do this you will need to submit copies of your farm’s organizing documents and its bylaws. Details on exactly what information is required in these documents can be found on the IRS website.

When you create your organization, you must have an Employer Identification Number (EIN), even if you do not have any employees. This number is like a social security number for your business. To apply for your EIN, you will fill out an application called Form SS-4. You can find that form here.

Conclusion…

Owning and operating a farm is hard work, but the government provides special tax benefits to those who go into the business of farming. As a farmer, it’s critical that you stay organized throughout the year, so that you’re not scrambling come tax time.

Also, it may be wise to work with a tax professional who specializes in farming and can help you maximize your eligible tax deductions and credits to reduce your tax liability as much as possible.

Mentioned in this article:

• How to (Legally) Make Money Homesteading
• The Complete Legal Guide to Homesteading
• How Zoning Laws Can Affect Your Farm

Read next:

• The Best Business Structure for Your Farm
• 3 Tips On How To Name Your Horse Farm (Legally)
• Trademarking Your Homestead Business