We all know that you pay taxes on the money you make during the year. We also know that one of the nice things about our current tax code is that business owners are able to deduct expenses from those taxes in order to reduce their overall tax bill.
Farms are businesses too. But they aren’t always profitable. So the question we’re faced with is “Can you deduct farm expenses without income?”
Read on and find out what you can do when your farm doesn’t make any money.
Can You Deduct Farm Expenses Without Income?
Let’s cut to the chase with a simple answer, then unpack it: Yes. Under certain circumstances (which we’ll cover in a minute) farmers that have expenses greater than their income can still deduct those expenses on their tax return.
It’s a fairly common scenario in the farming world, especially among farms and ranches that are just getting started. There are a lot of upfront costs involved with getting any kind of agricultural business off the ground. Regardless of whether you’re raising corn or cows (or any number of things), it takes time to get a finished product to market so you can start receiving income.
Thankfully, the IRS understands this and makes allowances for farmers to claim certain deductions even when there is no income coming in.
But now another question surfaces: “Is your farm a business or just an expensive hobby?” The answer to that is a big factor in determining whether or not you can deduct related expenses on your taxes.
Under certain circumstances farmers that have expenses greater than their income can deduct those expenses on their tax return.
Is Your Farm a Hobby Or A Business?
If the IRS considers your ag operation a legitimate business rather than simply a hobby, you are allowed to deduct certain “ordinary and necessary” expenses associated with running that business. However, if it doesn’t meet the requirements to be a business, you cannot deduct expenses (but are still required to report any income).
The IRS uses 11 criteria for determining if a farm or ranch is a hobby or business. As they state in their tax tip on how to tell the difference between a hobby and a business for tax purposes, “All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.”
- Do you carry out the activities of the operation in a businesslike manner, maintaining complete and accurate books and records?
- Do you put time and effort into the activity to show that you intend to make it profitable?
- Do you depend on income from the activity to support yourself and your family?
- Do you have personal motives for doing the activity such as personal enjoyment and relaxation?
- Do you have enough income from other sources to support the activity in question?
- Is it normal to have losses due to circumstances beyond your control during the startup phase of businesses like yours?
- Has the activity gone through a change in operation methods in order to increase profitability?
- Do you have the knowledge necessary to conduct this activity as a successful business?
- Have you been successfully profitable with similar activities in the past?
- Does the activity currently make a profit?
- Can you reasonably expect to make a profit in the future from the appreciation of assets used?
How you answer these questions will help you determine whether or not you (and the IRS) can reasonably consider what you are doing to be a legitimate business for profit or merely a side hobby for your personal enjoyment. (We covered this topic in more detail in a previous post as well: “9 Questions To Help You Know Whether Or Not You’re Really A Farmer To The IRS.”)
If your farming is actually a for-profit business, congratulations! You are part of a very special group of people who make the rest of society possible. We’re grateful you’re here.
Unfortunately, with great responsibility comes great paperwork. When farmers file their tax returns, the IRS requires them to include a “Schedule F” which reports all of their income and expenses for that year.
1040F
IRS Schedule F, “Profit or Loss From Farming”, is filed along with tax return forms 1040, 1040-SR, 1040-SS, 1040-NR, 1041, or 1065. Once you’ve determined that you are indeed running a business, Schedule F is the place where you, as a farmer, can significantly reduce your tax burden by deducting the expenses related to running your agricultural operation.
Not every expense is deductible, however, so don’t go overboard trying to get out of paying what you legitimately owe. The IRS doesn’t look kindly on that sort of thing.
Some of the items that can be deducted include:
- Exclusive and regular business use of your home (designated square footage set aside for farm administration activities, not your entire house because you discuss farm life there from time to time)
- Vehicle expenses
- Fuel
- Chemicals and fertilizers
- Feed and seed
- Labor
- Equipment and property rental
- Repairs and maintenance
- Supplies
- Capital depreciation
Items that cannot be deducted include:
- Personal living and family expenses
- Land purchases
- Loan principal repayment
- Loss of plants or livestock
- Costs of crops you don’t harvest
- Club dues and membership fees
- Fines and penalties
For more on what can and cannot be deducted, be sure to also read the post we did on “Over 17 Agricultural Tax Deductions That Can Help Your Farm Keep More Cash.”
Tax Form 4835
Additionally, if you lease land to a farmer but do not actively participate in the growth of plants or livestock on it, you need to file Form 4835. This form reports the income you receive from the tenant.
Typically, farmers will enter into a crop-lease agreement with the renter in which they receive a portion of the crops (or livestock) on a portion of the income generated by those things on that land in exchange for the use of the property. Farmraise.com has written a good comprehensive guide to Form 4835 for farm and ranch owners if you want more information.
Farming Losses 5-Year Rule
One other important thing to be aware of when it comes to deducting farm expenses in the absence of income is the “farming losses 5-year rule.”
When you have a bad year as a farmer (the crops don’t come in or something catastrophic happens to the herd), it can have a devastating impact on your financial situation. If your deductions, including those related to casualty or theft, exceed your income in a given year, you may have a “Net Operating Loss” (NOL).
The IRS allows businesses with negative income in a given year to either “carryback” or “carryforward” those losses to offset either previous years’ tax bills (essentially receiving a refund for them) or future taxes (essentially prepaying them). Ordinary businesses are limited to a 2-year carryback, but farmers are allowed to carryback up to 5 years…hence the “5-year rule.”
Farm Tax Help Is One Call Away
CRS CPAs has been helping hard-working farmers navigate their taxes for over 40 years. We’ve got offices located all across West Tennessee (Jackson, Dyersburg, Paris, Brownsville, Martin, Milan) in the heart of farm country.
Schedule a call today to find out how we can serve you and help you grow a great ag operation.
PS – Want to learn more? Check out “How Your CPA Can Provide Helpful (And Valuable) Farm Tax Advice This Year.”
