40.28 Farming Expenses

Certain types of expenses related to farmers enjoy special tax treatment. Here are some key rules unique to farmers:

Depreciation.

There are special recovery periods for certain farm animals and equipment, including farm buildings and agricultural structures (see IRS Publication 225).

Prepaid farm supplies.

While cash method farmers usually can deduct expenses in the year they are paid, prepaid farm supplies must be deducted ratably over the period in which they are used. However, there is a special exception that allows them to be deducted in the year of payment if they do not exceed 50% of other deductible farm expenses (including depreciation and amortization); any prepaid expenses in excess of this limit are deductible in the following year.

Caution

Farming Losses Cannot Be Used as a Tax Shelter

There is a limit on how much of certain subsidies can be used to offset nonfarm income on Schedule F. The limit is the greater of $300,000 ($150,000 for married persons filing separately) or the net farm income received over the past five years.

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Livestock feed.

While the cost of feed usually is deductible in the year it is consumed, it can be deducted in the year of payment if:

Breeding fees.

A cash basis farmer can deduct breeding fees as a business expense; an accrual method farmer must capitalize the fees and allocate them to the cost basis of the calf, foal, or other animal to which they relate.

Fertilizer and lime.

You can deduct the cost of fertilizer and lime in the year of payment or you can capitalize the cost and deduct a part of it each year in which the benefit lasts as long as the benefit lasts more than one year.

Soil and water conservation expenses.

Usually, these expenses must be capitalized. However, you can elect to deduct them within limits (the deduction cannot be more than 25% of gross income from farming).

Reforestation expenses.

You can deduct up to $5,000 ($10,000 if married filing jointly). Costs in excess of this dollar limit can be amortized over 84 months.

Excess far m losses.

If you receive any direct or counter-cyclical payments under Title I of the Food, Conservation, and Energy Act of 2008 or Commodity Credit loans, your ability to use farm losses to offset non-farming business income is limited. The limit is $300,000 in losses or net farm income over the last five years, whichever is greater. Losses limited in the current year by this rule can be carried forward to subsequent years.

Filing Tip

Farm-Related Net Operating Losses

When expenses exceed farm income, a net operating loss may result. Unlike most business net operating losses that have a two-year carryback, farm net operating losses can be carried back for five years (40.21).

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