Farming can be a magnet for tax deductions.
As with any other small business, a farm or ranch can be used to write off a variety of expenses as tax deductions. The key phrase to hone in on when analyzing the applicable Internal Revenue Service (IRS) code is that the deduction was incurred as an "ordinary and necessary" cost of pursuing that particular business. You should consult the IRS for an in-depth discussion of exactly what is an appropriate write-off and what isn't, but there are general claims that can be made.
Deductible Expenses
Everyday direct costs associated with running your farm or ranch are deductible. Some expenses would include: livestock feed; medicine and vaccines; crop fertilizer; machinery like tractors, hay balers, and mowers; fencing supplies; cooperative dues, consultant fees; farming magazine subscriptions; educational expenses; and office supplies. To make it simple, any expense you find necessary to further your pursuit of running a profitable farm or ranch is tax deductible. Don't forget business related travel expenses, advertising and marketing costs, plus any fees paid to professionals such as an attorney or accountant for business-related issues.
Labor
Farmers and ranchers often hire help to assist in the daily operation of the business. Wages paid to such workers are a tax deductible expense, though care should be taken to process wages legally. The IRS differentiates between an employee and independent contractor. Designating your help as an independent contractor reduces the expense and bookkeeping workload for the employer but take care that yours fall in the strict definition of the category, which generally means they conduct their work at the time and place of their choosing. Otherwise, you should call them employees and be sure to withhold Social Security, Medicare, and income taxes from each paycheck. You can still deduct the full amount paid, including health insurance, workers' compensations, and other benefits, but should declare it all and make sure Uncle Sam gets his due.
Repairs and Maintenance
Another major expense category for farms and ranches that is fully deductible is the cost of repairs and maintenance. Know the difference between expenses for repairs and those for capital expenses. Simple repairs and routine maintenance are jobs, like repainting fence posts to keep them from rotting or rusting, or replacing shingles on the barn roof. A capital expense involves major work that substantially increases the value of a property or adapts it to a different use. For example, fixing a few shingles on the barn roof is a repair but replacing the entire roof is a capital expense. While a capital expense may be depreciable, it is normally not deductible.
Accountants
Understanding the IRS definitions of what is tax deductible and what isn't can be intimidating. A good accountant can be an expense that returns itself many times over in tax accuracy and peace of mind. Many accountants will even answer simple questions for free over the phone at no charge. Filling and filing your own farm or ranch tax forms can certainly be done, especially if you have a knack for numbers and reading legalese. If not, an accountant would love to talk to you.
Tags: farm ranch, capital expense, barn roof, farm ranch deductible, independent contractor
