U.S. farmers represent the best of what makes our nation great. Hard-working men and women who get things done day in and day out without a lot of fanfare provide the rest of us with delicious food, soft cotton, and warm wool…just to name a few.
If anybody deserves a break, it’s a farmer. Fortunately, many states provide big tax breaks for farmers as a way of saying “thanks.” We’ll take a look at what’s available and how they work (especially here in Tennessee where our offices are located.)
Tax Breaks For Farmers
Tennessee recognizes how essential farmers are to our state. From the very beginning of our history, agriculture has been the foundation of our state’s economy. However, like so many other industries, it is dramatically different now than it was just a couple of generations ago.
The landscape of ag operations continues to change at a rapid pace, too. New technologies and techniques allow farmers and ranchers to do even more with their properties and work more efficiently. Things like precision GPS, farm automation, laser scarecrows, and dedicated field “lanes” for farming equipment continue to push farming forward.
But those advancements aren’t cheap. It can be unbelievably expensive to run a farm these days. According to Farm Bureau, “production costs are rising faster than commodity prices, making it harder than ever to break even.”
With that in mind, TN farmers can be grateful for tax breaks like these:
- No sales tax on the purchase of qualifying materials. Thanks to a new law that took effect on January 1, 2023, ”qualified farmers and nursery operators may purchase building material, fencing material, warranties, and most other items of tangible personal property used primarily in agricultural operations exempt from sales and use tax.”
We discussed this in more detail in this post: “2023 TN Farm Tax Exemption (What You Need to Know to Shop Tax-Free)”
Items included are those that are “primarily used for agricultural operations” such as- Machinery & equipment
- Building material
- Fencing material
- Repair services
- Software
- Grain bins
- Crop-dusting aircraft
- Trailers
- Gasoline or diesel fuel
- Seeds
- Fertilizer
- Pesticides
- Utilities (water, electricity, natural gas)
- Containers
- Cars & trucks
- Clothing
- No tax on revenue from products grown (or produced) and sold directly from your farm. If 50% or more of the produce, livestock, poultry, or nursery stock a farmer sells directly is grown or produced by them and then sold directly to their customers without a “middle man”, then the gross revenue from those sales is tax exempt.
- Sales to other farmers are exempt from business tax. If you run an agricultural operation providing services to farmers or other ag businesses, then you are exempt from paying state and municipal-level business tax. If you lease property for agricultural, airport, forest, mining, oil, or public utility purposes, you can avoid paying business tax for that as well.
- No franchise or excise tax for certain entities. How your business is structured can save you money. If your farm operation is a sole proprietorship, general partnership, or some type of nonprofit, you may be eligible to avoid paying state franchise and excise taxes.
Tax Benefits of Owning a Farm
There are many advantages to owning a farm in Tennessee, even if you aren’t the one actively using it for agriculture-related activities. The state provides tax exemptions for the following categories of ag businesses:
“Farming or the Holding of a Personal Residence” (FHPR) Exemption
Even if your farm operates as an LLC, Limited Partnership (LP), or Limited Liability Partnership (LLP), you may be able to avoid franchise and excise taxes. In order to qualify:
- 95% of the voting rights, interest, or profits must be owned by people who are close relatives of each other
- Farming represents at least 66.67% of the company’s activity or the business owns one or more of a member’s personal residence for more than 5 years
“Family-Owned Noncorporate Entity” (FONCE) Exemption
This applies to businesses that generate investment income from farming activity. To qualify:
- The farm must be family owned.
- Revenue must come from the passive rental of residential or farm property, dividends, interest, annuities, or sales of stocks/securities.
- The property in question must be used for legitimate agricultural purposes as defined by the state.
Conservation Easement
Tennessee farmers may also want to consider putting part of their property into a Conservation Easement which permanently restricts how the land can be developed or subdivided in order to reduce their taxes. Here’s how it works:
- Landowners enter into a voluntary legal agreement with the state.
- They retain the right to live on the land, pass it to their heirs, continue using it, and control access to it.
- By agreeing not to develop the land further (beyond reasonable personal use), the property value is decreased.
- The land owner may then be able to reduce the amount of property taxes they pay (depending on factors such as zoning, land use, etc…consult your local laws and legal professionals to be certain).
(For more on possible deductions related to conservation easements, see the Land Trust TN website.)
Agriculture Tax Credit
There are many potential tax credits available to farmers. To know which applies to your specific situation, it’s best to sit down with your CPA directly.
One that is often overlooked in the agriculture industry, however, is the “R&D tax credit.” Since farmers are constantly coming up with new and improved ways to get products to market, it could be a great option to look into.
Established by the IRS in 1981, it was designed to encourage U.S. businesses to continue coming up with innovative ways to improve their industries. In 2015, the PATH (Protecting Americans From Tax Hikes) Act made it a permanent part of the tax code available to businesses of all sizes.
To qualify, a business must be able to demonstrate expenses related to developing or improving products or processes in its industry. Those R&D expenses can then be reduced dollar-for-dollar on their tax bill.
For farmers, that might look like coming up with new ways to store harvests, manage livestock, improve field techniques to increase yields/enrich soils/reduce environmental impact, etc.
(Learn more about “What’s New for R&D Tax Credits” in this article by ADP.)
How to Qualify For Farm Tax Credit
First, you need to make sure you’re actually a farmer. That may seem odd, but the IRS has specific definitions for “farm”, “farmer”, and “farming.” To qualify for tax credits and deductions, you must meet their standards. Someone raising a couple of horses as pets or a few chickens in their backyard, for example, wouldn’t qualify. Find out more on the specifics in this post we did on “9 Questions To Help You Know Whether Or Not You’re Really A Farmer to the IRS.”
To qualify for an Agricultural Sales and Use tax exemption in the state of Tennessee, farmers need to fill out this application.
To know if you qualify for other possible tax credits, consult your favorite CPA.
Find a Good Farm Tax Accountant
Speaking of which…we can help with that!
Managing your farm’s finances and taxes can be overwhelming. With all that you’re responsible for, it just shouldn’t be that way.
Many accounting services have no experience with farm taxes. We understand the agriculture business and have been working with farmers all across West Tennessee (through our 6 locations now) for over 40 years! If you’re needing a good farm tax accountant to help you keep your ag operation running smoothly, schedule a call today!