Quick Guide to Deducting Farm Expenses
The Internal Revenue Service (IRS) allows businesses to deduct certain expenses when calculating their taxable income. Farms are among those businesses that can deduct expenses related to the operation of the business. However, you don’t necessarily need to have a large commercial operation to deduct farm expenses.
Under IRS regulations, “you are in the business of farming if you cultivate, operate, or manage a farm for profit.” Thus, if you raise livestock or grow produce for a profit, you run a farm according to the IRS. This entitles you to deduct expenses associated with maintaining the land and operating the farm.
For property owners with a little extra land, it may be worth using a portion of the land for farming. Doing so will allow you to deduct expenses that you wouldn’t otherwise be able to deduct. However, there are a few things to keep in mind before clearing your land and opening up your farming business.
Verify Local Zoning Regulations
Zoning regulations typically don’t prohibit landowners from growing produce or raising some types of animals on their property. However, selling produce or livestock or raising certain types of animals may require you to apply for a special permit or obtain the okay from the health department.
Understand the Potential Tax Breaks
While the IRS oversees federal taxes, states also have their own tax laws, which vary significantly. While every state allows the deduction of farming expenses in some situations, it is important to understand the specific laws that apply in your state.
Make Sure Your Farm is a Business
Under IRS rules, only farms operating as a business are eligible for tax breaks. In other words, if you have a “hobby” farm, you won’t qualify. To avoid the label of a hobby farm, you may need to show that your farm occupies a certain portion of your land or that you attempt to generate a profit. While you don’t need to actually turn a profit, you should have evidence that you are trying to do so. For example, developing a business plan, maintaining separate bank accounts, and keeping detailed financial records of your farming activities will help prove your farm is a business.
Beef up Your Tax Breaks
Aside from the traditional farming deductions, you may qualify for other tax breaks in certain circumstances—for example, if you agree not to develop your land or if you donate a conservation easement to a charitable land trust. Doing this will reduce the value of your land, decreasing your tax burden. You may also be able to get other tax breaks for using alternative energy on your farm—for example, by installing solar panels to generate power.
Contact Schmiedeskamp Robertson Neu & Mitchell LLP for Assistance
If you have a little extra property you aren’t using and are considering starting a farm to take advantage of the tax breaks, reach out to the Illinois business lawyers at Schmiedeskamp Robertson Neu & Mitchell LLP. Over the last century, we’ve grown our practice by helping closely held and family-owned businesses with the unique challenges they face. With our extensive experience working with farmers and other small businesses, we can effectively advise you on setting up your small farm to maximize the tax benefits. To learn more and to schedule a consultation, give us a call or connect with us through our online form.