If you own a farm, preparing your taxes can pose unique challenges, depending upon the events of the taxable year. For purposes of the Internal Revenue Service (IRS), a farm includes ranches, ranges, and orchards and will report income on IRS Form 1040, Schedule F. Assuming the farm is run for a profit and does not fall into the “hobby” farm loss rules, the following information will help in your tax preparation.
First, farm income includes all proceeds from cultivating a farm, operating a farm, or managing a farm. This includes gain on selling farm products, including those raised for sale or purchased for resale. Farm income also includes any insurance payments from crop damage and should be reported in the year that this income was incurred.
Second, when farms deduct ordinary and necessary business expenses, the expense must be a common and accepted expense for that type of business. If the expense is not one commonly taken for that type of farm activity, the deduction may not qualify. Similarly, deductions taken for interest paid on a loan are allowed, but it must be a loan to the business, not a personal loan.
Third, for years that expenses exceed income and a loss is taken, that loss can be carried forward to reduce taxes in future years. On the other hand, if income exceeds expenses, the farm income can be averaged over the preceding three years, potentially mitigating the taxes for that year if income from the preceding three years was substantially less.
For a farm, this information is a starting point for reducing taxes and properly meeting federal tax requirements. Further information can be obtained by contacting Vandenack Williams LLC and speaking to a tax expert.
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