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How to Figure Farm Tax Deductions

1.

Operate a farm for profit. Not-for-profit farming or farming as a hobby does not allow deductions as Schedule F (Form 1040) Profit or Loss from Farming provides.

2.

Keep accurate records. Maintain files for all of your expenses on the farm. Claim some expenses in full and deduct others by "reasonable allocation" of the portion used for the farm.

3.

Choose cash or accrual method of accounting for your farm income and expenses. Cash method of accounting is generally easier than accrual method and is more commonly used for small businesses. Cash method counts income as it is received and expenses as they are paid. Accrual method is more difficult to keep up with as it counts income when the sale occurs and counts expenses when the goods are received. This choice is essential to figuring farm deductions.

4.

Obtain a copy of Schedule F of Form 1040 to review the possible deductions and make file folders for these topics to figure farm tax deductions at the end of the taxable year. The costs of operating a farm for profit are a deductible business expense, and the income from a farm is taxable. Farm income is entered in Part I of Schedule F, and the gross farm income is calculated on Line 11.

5.

Deduct all labor expense whether payment is in cash or noncash. You can include the employer's share of Social Security and Medicare taxes. Include your children and spouse as employees if they work for you, and pay Social Security and Medicare taxes for them. Give each a W-2 at the end of the year and deduct this as labor expense.



Do not deduct household upkeep as a part of farm expense. Keep your home expenses separate or allocate the portion of an activity that is farm business. Save receipts to see if you can deduct for business use of your home o if you use your home for administrative or management activities relating to farming. This deduction has limitations, and some years it may not be deductible.

6.

Deduct repair and maintenance of farm equipment and structures incurred in the calendar year. You can also deduct all interest expenses relating to the farm mortgage or equipment purchases.

7.

Keep records for deduction of property taxes and insurance, including your liability insurance and worker's compensation insurance payments.

8.

Deduct car and truck expense by calculating the actual cost of operation for business purposes, or use a standard mileage rate calculation. The 2009 rate was 55 cents a mile.

9.

Review Publication 225 carefully and document those expenses that are deductible that apply to your farming business. Complete Part II of Schedule F to take the deductions to which you are entitled. The total deductions allowed are figured on Line 35. Subtract the deductions from the profit entered on line 11, and the amount on Line 36 is the net profit or loss from farming.

10.

Enter the calculations from Schedule F, Line 36, net farm profit or loss, on Line 18 of Form 1040. This figure subtracts your farm tax deductions from income or profit so you enter only the net profit or loss on the Form 1040.

Tips and Warnings

  • Contact a tax professional if you have questions about how to figure your farm tax deductions that you cannot answer with Publication 225. The IRS can answer questions at 800-829-1040. See your attorney for legal advice.


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