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January 6, 2021

The Farmer’s Guide to Tax Preparation

Year-end farm tax season is upon us.

The end of the year and the start of a new one represents a time when farmers and ranchers begin preparing for the imminent tax season as the deadline to file taxes for small agribusiness owners is April 15th. Getting a head-start on tax preparation for your farm can result in more deductions that equal less taxable income and more savings in the coming year.

How Farm Tax Planning Will Change in 2020 and 2021

While the historic amount of federal subsidies in 2020 have provided needed relief for farmers and ranchers who were negatively impacted by COVID-19, it has inadvertently added complications to the already complicated process of farm tax preparation.

The most recent COVID-19 relief bill signed at the end of 2020 brought some clarity to deduction eligibility of small business assistance programs that have helped support many farmers during a volatile year, such as the Payment Protection Program (PPP). Earlier in May, IRS-issued guidelines stated that PPP loan forgiveness would be treated as a form of tax-exempt income. However, any approved business expenses paid with PPP funding would not be considered as expenses associated with tax-exempt income. This created understandable confusion as, although the PPP loan forgiveness would not be taxable, all expenses paid with these funds would be ineligible for deductions.  The recently passed COVID-19 relief bill reversed this position, stating that PPP-related income is, in fact, tax-free and related expenses are eligible for deductions.

Similarly, Economic Injury Disaster Loans (EIDL) Advances—loans that are forgivable for small businesses but have a $10,000 cap—would not generate taxable income and are eligible for full tax deductibility. Beyond the $10,000 cap, an EIDL loan must be repaid and carry interest with repayment but is not considered taxable income.

The Employee Retention Credit (ERC) was also expanded to include farmers who received a PPP loan in the first two quarters of 2021. However, one notable downside of the ERC credit is, unlike PPP loan forgiveness where the expenses are deductible, the employer’s total wage deduction is reduced by the amount received from the credit.  Eligibility requirements for the ERC tax credit also become more complicated as the maximum credit limit differs depending on which year they were received.

Even if you have refrained in the past, consulting a tax professional this year to ensure you’re taking advantage of the encompassing tax credit and deduction options available could benefit you and your operation. Here are a few more farm tax tips to help you work through your tax preparation checklist for 2021.

9 Year-End Tax Tips for Farm Operators

    1. Report all farming income. This includes sales of livestock, produce, grains, and other products you raised, distributions from a cooperative, agricultural conservation program payments, indemnity payments, income you received for custom hire or machine work, and gasoline or fuel tax credit or refunds. Qualified disaster relief programs, such as the ERC, are excluded from taxable farm income.
    2. Report resale of livestock. According to the IRS, if you sold livestock or items that you bought for resale, you must also report the sale when filing your taxes. Your profit or loss is the difference between your selling price and your basis in the item. The basis is typically the cost of the item, and your cost may also include other expenses such as sales tax and freight.
    3. Deduct ordinary and necessary business expenses. An ordinary expense is what is considered a common and accepted cost for your agribusiness. A necessary expense is defined as a cost that is beneficial for your operation and its growth.
    4. Deduct employee wages. Another item farmers can deduct are employee wages. You can deduct wages you paid to your operation’s full- and part-time workers, keeping in mind that you must withhold Social Security, Medicare and income taxes from their wages.
    5. Other common farm tax deductions around maintenance. These deductions include seeds and plants, veterinary costs for livestock, depreciation, chemicals, feed, fertilizers and lime, insurances (other than health), mortgage interest, and storage and warehousing. Unfortunately, not quite everything is deductible. For example, personal or living expenses that do not produce farm income, expenses of raising anything you or your family used, the value of raised animals that died, inventory losses and personal losses cannot be deducted.
    6. Consider commodity gifts. If you do not itemize or plan on giving money to your church or other charity at year-end, consider giving a commodity gift to help reduce your taxable income and self-employment tax burden.
    7. The benefit of a net operating loss. If your expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid in prior years, and you may be able to lower your tax in future years.
    8. Spread out your farm income. You 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 your taxes if your farm income is high in the current year and low in the prior three years (also known as base years).
    9. Keep your retirement plan in mind. Contributions to retirement accounts reduce taxable income for the tax year, as long as the contribution is made prior to the annual filing deadline. There are a handful of retirement and planning options for agribusiness owners and their employees that are tailored to small businesses rather than the 401Ks typically used by larger corporations.

      Visit the Internal Tax Revenue’s Publication 225, Farmer’s Tax Guide for more farm tax tips for 2020 tax filing.

      Disclaimer: This material has been prepared by AgAmerica Lending for informational purposes only and should not be relied on for tax, legal, or accounting purposes. You should consult your own tax, legal, and accounting advisers prior to filing your tax return.

Supporting a Thriving Future for American Agriculture

While no one can fully predict what 2021 will bring for those in the agricultural sector, proper tax preparation can save you money and improve your operational liquidity for the future.

As a leading nationwide land lender, AgAmerica Lending is here to provide flexible financing for farmers, ranchers, and rural landowners with low-interest rates, long amortizations, and our innovative 10-year line of credit. Through our wide spectrum of customizable finance solutions, our team of dedicated land lenders is revolutionizing agricultural finance and filling the gaps that exist within the industry to ensure American family farms are supported and successful for generations to come.

Contact us today to speak with one of our land lending experts and learn more about how we can help facilitate the long-term success of your unique operation.

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