Monday, April 15 is around the corner, which means it’s time to prepare your taxes for the last calendar year. Unlike other career paths, a farmer’s filing might require a bit more finesse, especially with so many changes being implemented in 2018.
While I’m by no means a tax professional, here’s what farmers can expect this tax season:
Prove Your Profitability
First, the IRS will expect you to show that your farm is a professional one, rather than a hobby. So, you’ll start by defining what it is you grow or raise for profit on your land, whether it’s livestock, fish, grain or crops. Next, you’ll have to prove your farm turned a profit for three of the last five years — in two of the last seven years if you breed horses — so that you can claim it as a business. Otherwise, the IRS sees it as a hobby, and you can’t claim any of your expenses.
To do so, you’ll have to rely on the records you kept from the last year detailing your business expenses. On a farm, you’ll likely have a record of payments made for labor, equipment, maintenance, seeding, etc. If you have trouble gathering all the paperwork, be diligent in 2019 about organizing your records to make next year’s tax season a breeze.
Find Property Tax Reductions
In many states, you can claim a deduction just because you own land officially deemed as a farm. Every state’s requirements differ, and some are extremely lax on what constitutes a tax-deductible piece of agricultural property.
In New Jersey, for example, if your land measures five acres or more and has made $500 in profits in a calendar year, it’s tax-deductible. In California, alternatively, there’s a sliding scale — bigger properties receive more of a tax break than smaller ones.
Know Your Personal and Professional Deductions
Another must-do as tax season approaches — learn the deductions for which you qualify. Personally speaking, the government has introduced a full slate of new deductions that could save you money, regardless of whether or not you’re a farmer. For instance, you can no longer claim a child as a dependent for an overall tax reduction. Instead, an increase in the standard deduction may cover the amount you’d typically receive when claiming a child on your taxes.
You can claim further deductions based on your business spending, of course. For starters, any loans taken out in 2018 will garner some sort of tax break. Labor costs can slash the amount of money owed. And, the IRS offers a pretty powerful tool if your farm is extra profitable one year and moderately profitable the next — you can claim your taxes on the average of the previous three years’ profits plus this year’s to lower the amount you owe overall.
Remember Your Losses
Insurance payments typically fall under the category of a tax deduction — the amount you pay for crop, flood or fire coverage, for instance, can serve to lower the amount of taxes you owe. But, if you make an insurance claim and receive money, you might have to count that in the taxable income bracket.
Think about it — bad weather can ruin a season’s worth of crops, but your insurance claim bails you out with the income you need to get by. You then have to report that you received this payout so you’re taxed accurately. Otherwise, you can factor losses into your tax deduction column.
What Farmers Can Expect this Tax Season
The fact you’re thinking ahead and planning for tax season means you’re halfway there. The above information — and perhaps the help of tax software or an accounting professional — will help you through to the finish line. With detailed records and knowledge of your rights, you should manage planning for tax season now, pay seamlessly and shift your focus back to the farm.
But if you’re feeling a little lost (and nobody can blame you), make sure you seek out professional advice on your taxes. While I’ve done my research, this advice can’t substitute an expert’s recommendations. It’s worth a little extra security to help you figure out what farmers can expect this tax season.