Agriculture Tax Deductions
Common Agriculture Tax Deductions
Prepaid Farm Supplies – Any feed, seed, fertilizer, supplies (even poultry) that you bought this year, but haven’t used can be deducted. However, you can’t claim more than 50% of your total deductible farm expenses in one year.
Prepaid Livestock Feed – The IRS has 3 rules it applies here:
Is it for the purchase of feed rather than just a deposit? (There are specific terms to the transaction and a right to a refund, for example.)
Does it have a business purpose rather than just tax avoidance? (Taking advantage of a fixed price or securing preferential treatment with the seller.)
Will the deduction result in a distortion/misrepresentation of your income? (It’s a customary practice done around the same time each year that isn’t excessive for your typical income.)
Labor – Wages you pay to people who work on your farm are deductible, as are any costs associated with boarding, health insurance, worker’s compensation, etc.
Repairs and Maintenance – Expenses made for the routine upkeep of your buildings and vehicles can be deducted. However, significant improvements to depreciable property would be considered capital expenditures.
Interest – While there are several rules that apply here (our tax pros can guide you through them if you want more information), generally speaking, you can deduct any interest paid or accrued this year on loans for your mortgage or farm-related purchases as a farm business expense.
Breeding Fees – These are generally deductible. However, if the breeder guarantees live offspring, you’ll have to do some capitalization adjustments as the cost basis of the offspring.
Fertilizer and Lime – If the benefits of soil improvement to your farmland last a year or less, you can deduct the full cost of any materials you purchase for that reason. If the benefits last more than a year, you’ll need to capitalize the improvements and take smaller deductions over however long the benefits last.
Taxes – Real estate, property, social security, Medicare, unemployment taxes, and taxes on any farm assets that apply are deductible for the tax year in which you are filing. You cannot deduct self-employment tax on yourself, however. See your tax professional for complete details on federal, state, and local taxes that apply to your situation.
Insurance – Premiums you pay for various types of insurance that are “ordinary and necessary” for running your farm are deductible.
Rent and Leasing – You can deduct what you pay to rent or lease property and equipment needed to operate your ag business. If your home is part of what you are renting, you’ll need to make adjustments for the parts that are only for personal use.
Depreciation – Typically, things you purchase that last more than 1 year are deducted gradually over time. However, there may be Section 179 applications where you can deduct the entire amount of the purchase in the first year. (We covered this more in a recent post titled “What’s Important to Know About Section 179 vs Bonus Depreciation.”)
Business Use of Your Home – If you “exclusively and regularly” use your home to conduct business, you can deduct some of it on your taxes. You’ll have to distinguish between business and personal use, though. See IRS Publication 587 for an easy way to sort that out.
Truck and Car Expenses – Gas, oil, licenses, repairs, etc. can be deducted from your taxes or you can choose the standard mileage rate of 56 cents in 2021. (If you operate 5 or more vehicles at the same time, however, that mileage rate doesn’t apply to you…you must deduct actual expenses.)
Travel Expenses – If you travel in order to conduct business related to your farm (e.g. transporting cattle or harvests) and you are away for more than a day, you can deduct those expenses. The IRS is on the lookout for “lavish and extravagant” expenses, so don’t consider the detour to Disney deductible.
Tenant Housing Expenses – If you have housing on your property for the use of temporary or seasonal workers, costs related to the maintenance of those buildings are deductible.
Items Purchased for Resale – You can choose either the cash accounting method or the crop method for deducting things like chicks, seeds, and young plants. How that works out and what you can deduct depends on your situation, so check with your tax advisor. (However, you can’t ever deduct the costs of chickens and plants used as food for your own family.)
Capital Expenses – While capital expenses related to improvement of your property or business are not usually deductible (the depreciate instead), you can possibly deduct costs related to:
Fertilizer, lime, etc.
Soil and water conservation
Section 179 equipment and property
Start-up costs
Reforestation costs
Other Expenses – quoted directly from the IRS…
Accounting fees.
Advertising.
Business travel and meals.
Commissions.
Consultant fees.
Crop scouting expenses.
Dues to cooperatives.
Educational expenses (to maintain and improve farming skills).
Farm-related attorney fees.
Farm magazines.
Ginning.
Insect sprays and dusts.
Litter and bedding.
Livestock fees.
Marketing fees.
Milk assessment.
Recordkeeping expenses.
Service charges.
Small tools expected to last 1 year or less.
Stamps and stationery.
Subscriptions to professional, technical, and trade journals that deal with farming.
Tying material and containers.
Utilities and Internet
Nondeductible Agricultural Expenses
The following items are a few of the things that cannot be used as deductions on your taxes:
Personal, Family, and Living Expenses
Loss of plants, produce, and crops
Loss of livestock
Losses from sales or exchanges with people you’re related to
Costs of raising crops you don’t harvest
Costs related to gifts
Repayment of loans
Estate, inheritance, legacy, and gift taxes
Club dues and membership fees
Fines and penalties
What Vehicles are Eligible
In the past, Section 179 has been jokingly called “The Hummer Loophole” because so many business owners were using it to effectively get “free” large SUVs by writing them off in the name of their company.
While the IRS has caught on to that particular scheme, Section 179 can still be a big benefit when it comes to purchasing large vehicles and especially farm equipment.
In order to determine if a vehicle is eligible for deduction under Section 179, you need to be able to demonstrate what percentage of use will be personal or professional. Because many common passenger vehicles can so easily be used 100% of the time for personal transportation, the IRS puts limits on how much they can be deducted. It all depends on the size of the vehicle and how it will be used.
Let’s find out what vehicles are eligible for Section 179!
Small Vehicles
If a vehicle used in a business more than 50% of the time has a GVWR (Gross Vehicle Weight Rating) less than 6,000 lbs, the deduction available under Section 179 may range anywhere between $5,580 and $11,160 in the first year.
These types of purchases might include a small car or a delivery van.
Smaller specialty vehicles like hearses, taxis, and cars used exclusively to transport people for hire are exceptions. Likewise, single cab pickups with full-size beds or light vans modified to have only cargo space behind the driver can often receive deductions above the amounts above.
Large Vehicles
Large, or “heavy”, SUVs, trucks, and vans qualify for larger Section 179 deductions. They also need to be used for business at least 50% of the time in order to qualify, though.
For instance, a large passenger SUV (like a Chevy Tahoe or Ford Expedition) may be deductible up to around $25,000. Vehicles that can be considered for deduction like this under Section 179 must have a GVWR above 6,000 lbs.
Specialty Vehicles
Vehicles and equipment that clearly have no intended use beyond their specific work environment qualify for full deduction under Section 179.
An example of this would be a farm tractor that can only be used in the field and would never be used for personal transportation. A backhoe or a tractor-trailer rig would also clearly not be usable as a personal vehicle, so the IRS allows 100% of the cost of the purchases to be applied.
And that’s where it gets good for the farmers!
How Section 179 Benefits Farmers
Imagine that you are one of the 2 million farmers needing to work your U.S.-average 400 acres. You really need to purchase a new tractor, but the price tag on anything that would remotely handle the demands of your farm is astronomical.
A tractor with 100+ horsepower can easily cost anywhere from $80,000 – $200,000 (or more!). And that’s before attachments!
There aren’t many farmers (or anyone else) with that kind of money lying around.
For the sake of this illustration, let’s assume you bite the bullet and get the $200,000 tractor. Applying Section 179 to the entire $200,000 purchase, you would realize a tax savings of $70,000. That brings the actual effective cost of your tractor down to $130,000.
(A handy website on this topic, Section179.org, has a great little calculator that will quickly show you how much you can save on equipment you plan to purchase for your farm business this year.)
Section 179 Is for More Than Tractors, Though!
Ag operations can apply Section 179 to a lot more than the vehicles they drive and the equipment they use in the field. The IRS allows the software they use, many of the structures necessary for managing the farm, and even some livestock to be deducted through Section 179!
Maximize Your Deductions
To take full advantage of Section 179 (and it’s constantly changing requirements and regulations), it’s important to make sure you partner with an experienced tax professional who not only knows the U.S. Tax Code but understands farming as well.
Any CPA can file taxes, but if you run a farming or ag operation with lots of expensive equipment and property on the line…you should expect more from your CPA.
