Tax Tips for Farmers

Article written by EricBank

In America, there is no small business more respected than the family farm. Yet for some reason, we have devoted very little blog space to the business of farming. We correct that oversight today by summarizing some important tax tips that farmers need to know.

Every State Has Farms

Farming is a big small business, with small family farms in all 50 states. For example, the Farmland Information Center discloses that the 15,000 farms in Arizona occupy more than 26 million acres. Agricultural and dairy farms are distinctive businesses that force farmers to weigh decisions carefully, in part to take tax consequences into account. That's no problems for large corporate farms that hire full-time farm accountants. However, small farms also need to know the tax laws because it can make the difference between a profit and loss for the year, and small farms often don't have a lot of resources to survive losses.

Crop Method of Accounting

Farmers generally use either the cash accounting or accrual accounting method. But did you know that the IRS also allows the crop method of accounting? Under this regime, you can defer recognizing expenses for crops sold in the year after sowing. You deduct all crop production costs, including seedlings and seeds, in the year you sell the crop, not the year you spent the money. That might be good or bad, but is generally helpful if your have a loss in the planting year, because you might avoid cumbersome loss carryover rules. 

Cash Accounting Affects Deductions

If you adopt cash accounting, keep in mind that, according the IRS, your deductions for prepaid expenses are limited to half of your other farm expenses that qualify for deductions. Prepaid expenses include the cost of feed, seed, supplies, fertilizer and any poultry -- usually chicks -- you bought that you were unable to sell. However, you might receive an exception if you had to alter your operating procedures due to unforeseen situations. Another exception is available if your prepaid expenses in the last three years amounted to less than 50 percent of all other deductible expenses in that period. 

Farm Inventory

If you operate a chicken hatchery and utilize accrual accounting, your incubating eggs are part of your inventory. You also include any livestock you want to sell. It's up to you whether to depreciate dairy, draft and breeding livestock or include them in inventory. If you run a fur farm, include the cost of the fur-bearing animals in inventory. Treat your growing crops as inventory, but if you need more than two years to produce finished crops, you can capitalize their costs. For instance, you can capitalize new wine-grape vines since they normally take at least three years to create a usable crop.

Inventory Valuation Methods

Farmers can use the farm-price method, which assigns the cost of each inventory item at its market price minus any selling costs, such as freight, commissions and transportation to market. Ranchers can pick the unit-livestock-price method: You classify your livestock by age and type and then use a standard unit price for each animal within each group. Include in inventory all your raised livestock. You can, however, exclude feed hay from inventory. Exclude sold or lost animals.