Farm Tax Exemptions: What You Really Need To Know

Oct 18, 2023 | Farm Business

Several months ago, we wrote about a new Tennessee Farm Tax Exemption that allows farmers and ranchers in our state to shop tax-free (the same way a church, school, or other nonprofit organization would.)

Even though our offices are located in 6 locations across West Tennessee (hello Jackson, Dyersburg, Paris, Brownsville, Martin, and Milan), we also have many clients who run ag operations in other parts of the country. We are thankful that we can serve them remotely through the magic of the internet in the same way we take care of folks in our area.

Many of those farmers and ranchers outside our state may be wondering how to qualify for a farm tax exemption themselves. If that’s you, this post is here to help. 

what qualifies as a farm for tax purposes

How to Qualify For Farm Tax Exemption

The IRS has carved out a provision that allows many farming operations to enjoy being tax-free if they meet certain requirements for exemption

In order to qualify, they state that “the primary purpose of exempt agricultural and horticultural organizations under Internal Revenue Code section 501(c)(5) must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products.”

Many farms and ranches are partially open to the public in addition to conducting traditional farming, harvesting, and livestock activities in order to create products that are sold commercially. In those circumstances, they may generate revenue from entry fees (i.e. admission tickets to a petting zoo or annual pumpkin festival) or donations to help operate an educational component of the farm that teaches student groups about agriculture.

The IRS says that when those kinds of activities (or something similar) are “directed toward improving marketing or other business conditions in one or more lines of business, rather than improving production techniques or bettering the conditions of persons engaged in agriculture” you may be able to qualify for an exemption.

Ag operations that qualify may be able to become a 501(c)6 or the more familiar 501(c)3 organization for tax purposes.

What Qualifies As A Farm For Tax Purposes?

First, in order to become a tax-exempt farming operation, you must first make sure that you are actually considered a farm by the IRS. Here is their definition:

“Agricultural and horticultural organizations promote the interests of persons engaged in raising livestock, harvesting crops or aquatic resources, cultivating useful or ornamental plants or similar pursuits.”  

These are examples of the kinds of activities agricultural and horticultural entities are involved in:

  • cultivating land
  • preparing the soil
  • planting seeds
  • raising and harvesting crops
  • dealing with aquatic resources (fishing, etc.)

Ranchers are farmers too, only their day-to-day activities include:

  • rearing livestock
  • feeding and managing livestock (domestic animals such as sheep, cattle, and hogs as well as those raised purely for their pelts or wool)
  • all of the above if they are also growing feed for their animals

According to the IRS, “The primary purpose of exempt agricultural and horticultural organizations under Internal Revenue Code section 501(c)(5) must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products.” If that describes your ag operation, you may be able to qualify as a nonprofit. 

All of the official IRS details and definitions can be found in their “Publication 225, Farmer’s Tax Guide.” It’s an overwhelming document, so be sure to check with your CPA. They should know how your farm can be classified and help you with any specific questions you may have.

(For more information, be sure to read a post we did a while back on “9 Questions to Help You Know Whether or Not You’re A Farmer to the IRS.”

Minimum Acreage For Farm Tax

There is no minimum acreage required in order for your property to be considered a farm. The IRS focuses instead on things like whether or not you operate your farm in a businesslike manner, the time and effort you spend on farming indicate you intend to make it profitable, and how much you depend on income from farming for your livelihood.

Farm Equipment Tax Exemption

While you may be unable to avoid paying taxes on the initial purchase of farm vehicles or equipment, car and truck expenses can be used as an “ordinary and necessary expense” of a farming business.

Section 179 of the Internal Revenue Code (IRC) spells out several ways that ag operations can deduct significant amounts of money from their taxes for farm vehicles depending on how much of their use is personal or business-related. See the post we did on “How to Save on Your Farm Taxes By Knowing What Vehicles Are Eligible For Section 179” for details.

Farm Tax Deductions

No discussion of farms and taxes would be complete without reminding you that all farming operations can benefit greatly from a significant amount of deductions at tax time. Here are just a few examples:

  • Prepaid Farm Supplies
  • Livestock Feed
  • Labor Costs
  • Repairs and Maintenance
  • Breeding Fees
  • Fertilizer

You can find a full list with detailed explanations in this post: “17 Agriculture Tax Deductions That Can Help Your Farm Keep More Cash.”

The accounting and business advisory firm, Sensiba, also lists a few farm tax deductions and planning strategies that you might not automatically think of:

  • Farm Income Averaging – letting you spread reported income out over a 3-year period
  • Deferred Milk Payment Contracts – useful for dairy producers who could benefit from being paid in an upcoming year
  • Self-rentals – where your farmland is a separate entity and you rent the use of it back to yourself so you can benefit from a rent expense deduction
farm tax accountant

Trust An Experienced Farm Tax Accountant

Want the best farm tax breaks? Then you deserve the advice of an experienced farm tax accountant. 

Keeping up with ever-changing tax laws and all of the ways your farm fits into them is complicated and can be overwhelming. It doesn’t have to be that way, though. 

A good CPA who understands farming and what it takes to run a successful ag operation can walk with you through it.

Fortunately, our team at CRS CPAs has over 40 years of experience helping farmers and ranchers just like you run and grow great farms. To learn more about how we can serve you too, schedule a call today.

Need more reasons to check us out? Take a look at these posts before you call.

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