Farm Expenses

Ordinary and necessary business expenses related to farming generally are deductible. The timing of the deduction is determined by your method of accounting (cash or accrual). However, in addition to the types of expenses claimed by non-farm businesses, farmers may be able to claim deductions for expenses unique to farming activities and in ways more favorable than general tax rules would allow.

Prepaid Farm Supplies

If you are on the cash method of accounting, expenses generally are deductible when paid. However, if you prepay farm supplies, they must be deducted ratably over the period during which they will be used unless you qualify for an exception to this prepayment rule.

Prepaid farm supplies include:

• Feed, seed, fertilizer, and similar farming supplies not consumed during the year (other than what is on hand at the end of the year but would have been consumed had it not been for fire, storm, flood, drought, disease, or other casualty).
• Poultry bought for use in your farm business that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry.
• Poultry bought for resale and not resold during the year.

Prepaid farm expenses are deductible to the extent they do not exceed 50% of other deductible farm expenses in the year (including depreciation and amortization). Any prepaid expenses in excess of this limit are deductible in the following year.

If you are a farm-related taxpayer (your main home is a farm, your principal business is farming, or a member of your family lives on the farm or has farming as his or her principal business), you are not subject to the 50% limit if:

• Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances, or
• Your total prepaid farm supplies expense for the preceding 3 years is less than 50% of your total other deductible farm expenses for those 3 years.

Livestock Feed

Generally, even though you are on the cash basis, feed must be deducted in the year that your livestock consumes it. However, if you meet all of the following 3 tests for the advance payment of feed, you can deduct in the year of payment the cost of feed your livestock will consume in a later year (subject to the prepaid farm supplies limit):

This limit on deducting the advance payment of feed does not apply to the purchase of commodity futures contracts.

Labor and Related Costs

You can deduct reasonable wages that you pay for regular farm labor, piecework, contract labor, and other forms of labor hired to work your farm. This includes payments to your spouse or child as long as there is a true employer-employee relationship.

You can also deduct related costs including:

• The cost of maintaining houses and their furnishings for tenants or hired help (e.g., heat, light, insurance, depreciation, and repairs).
• Insurance related to the workers (e.g., health insurance and workers compensation).
• Employer’s share of FICA on farm wages.

You must reduce your deduction for wages by any employment tax credits you may be entitled to claim on such wages. These credits are explained in Chapter 7.

Breeding Fees

Cash method farmers may deduct breeding fees as a farm business expense. Accrual method farmers must capitalize such fees and allocate them to the cost basis of the calf, foal, and so on to which they relate.

Fertilizer and Lime

You have a choice of when to deduct the cost of fertilizer and lime used to enrich, neutralize, or enhance farmland.

• You can deduct it in the year you paid or incurred the expense (subject to the prepaid farm supplies rule discussed earlier in this chapter), or
• If the benefit from the material lasts more than 1 year, you can capitalize the cost and deduct a part of it each year in which the benefit lasts.

After you make your choice, you cannot change your reporting method without IRS consent.

Depreciation

Property used in farming generally is subject to the same depreciation rules as property used in nonfarm businesses. The rules for depreciation are discussed in Chapter 14. However, certain farming property has special recovery periods. Table 20.1 shows the recovery periods for property used in farming.

Instead of depreciating certain farm-related property, you may claim a first-year expense deduction (see Chapter 14). In addition to equipment and machinery used in farming, this deduction can be taken with respect to single-purpose agricultural or horticultural structures, grain bins, and drainage facilities.

TABLE 20.1 Recovery Periods for Farm Property

Soil and Water Conservation Expenses

Generally, soil and water conservation expenses must be capitalized. However, you can elect to deduct such expenses within limits. The deduction cannot be more than 25% of gross income from farming. Expenses must be consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture or a comparable state agency. Expenses eligible for this special write-off include:

• Treating or moving earth (e.g., leveling, conditioning, grading, terracing, contour furrowing, and restoration of soil fertility)
• Constructing, controlling, and protecting diversion channels, drainage or irrigation ditches, earthen dams, watercourses, outlets, and ponds
• Eradicating brush
• Planting windbreaks

They also include assessments by conservation districts for any of these expenses (but not more than 10% of your deductible share plus $500 and subject to the total limitation).

Endangered species recovery expenditures are included with soil and water conservation expenditures and land erosion expenditures to be currently deductible. Endangered species recovery expenditures are costs incurred for the purpose of achieving site-specific management actions recommended in recovery plans approved pursuant to the Endangered Species Act of 1973.

Reforestation Expenses

You can deduct up to $5,000 annually ($10,000 if married filing jointly) in qualified reforestation expenses. Amounts in excess of this dollar limit can be amortized over 84 months. For further details, see Chapter 14.

Miscellaneous Expenses

Ordinary and necessary business expenses common to all businesses (e.g., advertising costs or attorney’s fees) are deductible. Other expenses specific to farming activities that may be deductible as ordinary and necessary expenses include:

• Chemicals
• Fuels and oil
• Freight and trucking
• Ginning
• Insect sprays and dusts
• Litter and bedding
• Livestock fees
• Storage and warehousing
• Tying materials and containers
• Veterinary fees and medicine