Nondeductible Farm-Related Expenses
Not every expense of the farm can be written off. Some expenses are personal in nature and are nondeductible. Other expenses may be subject to limitations. Nondeductible expenses include:
- Personal or living expenses that do not produce farm income (e.g., taxes, insurance, and repairs to the home). If you pay expenses (such as electricity) that is used for both personal and farm purposes, you must allocate the expenses accordingly (and deduct only the farm portion). While personal expenses are not deductible, there is 1 exception. You may claim a tax credit for the excise tax on kerosene used in your home for heating, lighting, and cooking (discussed earlier in this chapter). Also, a portion of the home may qualify for a home office deduction as discussed in Chapter 18.
- Expenses of raising anything consumed by you and your family.
- The value of animals or crops you raised that died. The costs of raising the animals or crops were separately deductible (under the rules discussed throughout this chapter).
- The cost of raising unharvested crops sold with land owned more than 1 year if you sell both at the same time to the same person. Instead, add these costs to the basis of the land for purposes of determining your gain or loss on the sale. Similarly, the cost of unharvested crop you buy with land is added to the purchase price of the land. This cost is then taken into account to determine your profit (or loss) when you later sell the land.
- Fines and penalties. However, penalties you pay for exceeding marketing quotas are deductible. If such penalties are paid by the purchaser of your crop, you simply report the net amount you receive as income (you do not claim a separate deduction for the penalties).
Where to Claim Farming Expenses
Self-Employed
Farming expenses are deductible in Part II of Schedule F. There are specific lines for various types of farming expenses. There is also a catchall line for reporting other expenses. If there are more than 6 other expenses, attach a statement to the return listing these other deductions.
Partnerships and LLCs
Farming expenses are deductible in Part II of Schedule F. There are specific lines for various types of farming expenses. There is also a catchall line for reporting other expenses. Schedule F is attached to the partnership return, Form 1065.
Most expenses are not separately stated items passed through to partners and members. They are simply part of the entity’s ordinary business income or loss. Therefore, partners and members in LLCs report their net income or loss from the farm on Schedule E.
S Corporations
Farms operating as S corporations claim deductions on the corporation’s return, Form 1120S. Most expenses are not separately stated items passed through to shareholders. They are simply part of the corporation’s ordinary business income or loss. Therefore, shareholders report their net income or loss from the farm on Schedule E.
C Corporations
Farms operating as C corporations report their expenses on the corporation’s return, Form 1120. This form contains separate lines for deducting certain costs. Other costs must be reported on the catchall line for “other deductions” with an explanation attached. Shareholders do not report any income (or loss) from the corporation.
All Taxpayers
The credit for federal tax on fuels is figured on Form 4136, Credit for Federal Tax Paid on Fuels.
Instead of claiming the credit on the current return, the taxpayer may be entitled to a refund. The refund is claimed on Form 8849, Claim for Refund of Excise Taxes.
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