Accounting and Tax Service for Agribusiness
The farming industry has its own specific challenges and obstacles to success, but it is a critical industry which benefits everyone in this country, so it’s important that farmers receive all possible assistance with federal tax issues from an accountant familiar with the challenges of farming.
Benjamin H. Johnson, CPA, serving Farmville, VA and the surrounding region, is an accountant who is well acquainted with the ebb and flow of agriculture and the farming business, and all the federal and state tax laws which pertain to it. Several of those issues are referenced below, with some commonly asked accounting questions included afterward.
Sources of income for an Agribusiness
The most common sources of income for farmers are through the sale of produce, grains, livestock, and other products which are either purchased or raised right on the farm for sale. All of this income is reportable on IRS form Schedule F, which specifically deals with Profit or Loss from Farming.
In addition to sales of farm-raised items, bartering is considered to be another fairly common source of income. Bartering is the practice of trading products raised on the farm for property, other farm products, labor, or personal items from a second party. For example, if one farmer helps another harvest a corn crop and receives four goats in return for his labor, the fair market value of the four goats must be reported on Schedule F.
Some other sources of income which must be reported are through custom hire income (e.g. machine work), Commodity Credit Corporation (CCC) loans, agricultural program payments, crop insurance proceeds, Federal crop disaster payments, and cooperative distributions.
Allowable deductions for Agribusiness
One of the most common deductible expenses in the farming industry is money paid to farm employees, even if the worker is related to the farmer. All that is necessary is that a true employer/employee relationship exists between the two, and labor wages become deductible. Taxes must be withheld on those wages however, if the child is at least 18 years of age.
A second very common deductible in the farming industry is depreciation, which applies to buildings, machinery, equipment, livestock, furniture, and vehicles. The test for whether something is depreciable or not is that it must satisfy these four factors: any depreciable property must be something the farmer owns, it must be used in the farming business, it must have a measurable lifespan, and it must be property that remains useful well beyond the year it was brought into service.
Some other expenses incurred for the sake of the business (that could be partially personal expenses) are gasoline, electricity, telephone, oil, water, vehicle maintenance and repairs, insurance, and taxes. A portion of these expenses may be deducted as farm expenses based on use allocation.
While most of these also have to be allocated partly to personal usage, there is an allowable deduction for them, as long as they are at least partly used in the conduct of farming operations.
There are several aspects of losses which can have a major impact on tax accounting in the farming industry. First of all, losses can generally be used as an offset against other sources of income during the same tax year. Losses can also be carried backward to prior years or forward to future years to offset tax liabilities in those years.
Deductible losses for a farmer are limited to the ‘at-risk’ amount of a farmer’s investment, which is the amount of money a farmer has invested in the business. Any farm which incurs losses over an extended period of time may be considered a hobby in the eyes of the government rather than as a business operation, and in this case, all regulations pertaining to farming no longer pertain.
One tax advantage that some agribusinesses may want to take advantage of at some point is a conservation easement. A conservation easement is a unique legal agreement that offers advantages to large landowners. It permanently limits uses of the land in order to protect its conservation values. Landowners retain many of their rights, including the right to own and use the land, sell it, and pass it on to their heirs.
The IRS provides a tax deduction based on value reduction if certain conditions are met. A property owner can create a deductible conservation easement through donation. Click here to learn much more about the benefits of conservation easements and how they work.
Frequently asked questions about tax issues related to farming and agriculture
Q: Which farm expenses am I allowed to deduct?
A: You are allowed to deduct all expenses that are specifically related to agricultural production, and administrative expenses such as office expenses, travel, dues, etc.
Q: Can I deduct interest on loans?
A: Interest on loans can only be deducted if the proceeds of the loan are used in your farming business – when used on personal items, interest is not deductible.
Q: What are net operating losses, and can I use them to my advantage?
A: When deductible expenses for the year exceed your actual income, you have a net operating loss. You may be able to get a refund for past tax years, or you may be able to use it to reduce tax in future years.
Q: How can farm income averaging benefit me?
A: This method allows you to average this year’s income out over the past three years, and this might be of benefit to you if your current year taxes are much higher than they have been for the past few years. While it does not affect your tax for those prior years, it may have a big impact on your tax liability for the present year.
Q: Are wages paid to farm employees deductible?
A: Wages paid to both full-time and part-time farm employees are deductible, but you must withhold social security, income tax, and Medicare from those wages.