Farmers running a for profit business have special tax forms required of them when filing with the IRS. Any farm that receives income from the sale of products raised on the farm (or bought for resale) fills out a Schedule F in order to report net income gain or loss from the farm in any one tax year. This includes income generated from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. Income from a nursery operation is also reported on the Schedule F. Filling out your Schedule F is important for several reasons. Many banks and other lenders will require a copy of your Schedule F in order to process loans. It is also required to be on record for exclusive farm use tax assessment purposes. The Schedule F is also a useful tool to understand your farm’s financial status, i.e. are you making money, which products sell the most, and what are your largest expenses?
There are a number of intricacies associated with the Schedule F and your best resource guide for this is IRS Publication 225: A Farmer’s Tax Guide. Generally, you are required to report income from sales of any of your farm’s products. As well, there are some other things to keep in mind about reporting farm income. You may be able to delay reporting a gain from selling off animals or other products because of weather-related problems until the next tax year if you qualify. You also typically have to report income from agricultural payments for conservation programs or direct payments like crop insurance or disaster related farming payments except for cost-share programs. For instance, if you have received payment and reimbursement for organic certification from the government in 2009, you will need to report this income on your Schedule F. If you receive payments from a cooperative, you may need to report that income as well. Again, a great resource is the Farmer’s Tax Guide and a local accountant!
The list of deductible expenses related to the farm business is extensive, so make sure you keep all of your receipts for farm-related expenses throughout the year and think about using a bookkeeping program to track expenses if you don’t already. The IRS defines deductible expenses as “ordinary and necessary costs of operating a farm for profit.” These expenses include insurance, labor hired, repairs & maintenance, interest, travel expense, feed, fertilizer, seed, advertising, marketing fees, etc. For a full list of deductible expenses, read through the Farmer’s Tax Guide. Remember that keeping receipts from all of your purchases is important if you are ever audited in the future.
If you work with an accountant, they can help you fill out your Schedule F for the year, but some farmers also do their own taxes by using tax software like Intuit’s Turbo Tax®, which leads you systematically through filling out the proper tax forms for your farm business. The tax forms are then stored for future use once you submit, so that you can refer back to them and easily access them for loan applications or other uses. Recordkeeping throughout the year is extremely important as you can save a lot of time if you have adequately tracked expenses and income through a bookkeeping program. We’ve all heard of the farmer stashing receipts in a shoe box and when tax time comes around, that same farmer must spend hours sorting through receipts to understand how much the farm spent in one year and how much it made. But, staying organized and keeping better records can avoid this struggle. As well, keeping accurate and organized records has more benefits: moderating your farm’s progress as a business, helping you with banks and creditors by keeping more accurate financial statements, helping you to organize expense receipts, and finally, tax preparation and documentation is easier if you have kept good records.
Finally, find yourself a tax advisor or accountant that can help you sort through your questions. Setting up organized systems for recordkeeping to track income and expenses will help make your tax work easier each year.