10 Key Tax Tips for Farmers and Ranchers

For your clients who are farmers and ranchers, tax advice and issues are going to be exclusive to their work.

For tax purposes, farms include ranches, ranges and orchards. While some may raise cattle, poultry or fish, others grow fruits or vegetables, and all will report their farm income on Schedule F, Profit or Loss from Farming. If your clients own a farm or ranch, here are 10 tax tips:

1. Crop insurance. Insurance payments from crop damage count as income. Generally, these payments should be reported in the year your clients get them. 
2. Sale of items purchased for resale. If your clients sold livestock or items that they bought for resale, they must report the sale. Their profit or loss is the difference between the selling price and their basis in the item. Basis is usually the cost of the item, and the cost may also include other expenses, such as sales tax and freight.
3. Weather-related sales. Bad weather, such as a drought or flood, may force your clients to sell more livestock than they normally would in a year. If so, they may defer tax on the gain from the sale of the extra animals.
4. Farm expenses. Farmers can deduct ordinary and necessary expenses they paid for their business. An ordinary expense is a common and accepted cost for that type of business. 
5. Employee wages. Your client can deduct wages they paid to their farm’s full- and part-time workers. They must withhold Social Security, Medicare and income taxes from their wages.
6. Loan repayment. Your clients can only deduct the interest they paid on a loan if the loan is used for your farming business. They can’t deduct interest you paid on a personal loan.
7. Net operating losses. If your clients expenses are more than income for the year, they may have a net operating loss. They can carry that loss over to other years and deduct it. They may get a refund of part or all of the income tax they paid in prior years. They may also be able to lower their tax in future years.
8. Farm income averaging. Your clients may be able to average some or all of the current year’s farm income by spreading it out over the past three years. This may cut their taxes if the farm income is high in the current year and low in the prior three years.
9. Tax credit or refund. Your clients may be able to claim a tax credit or refund of excise taxes they paid on fuel used on your farm for farming purposes.
10. Farmers Tax Guide. For more details on this topic, see Publication 225, Farmer’s Tax Guide. You can get it on IRS.gov/forms anytime. You can order it on IRS.gov/orderforms to have it mailed to you.