Knowing how to report income properly and take the deductions available often provides farmers with tax savings. Farm businesses have different IRS tax rules than other businesses, so it’s important to know the regulations as well as the advantages of certain earnings and deductions.
A good start is to get Publication 225, the Farmer’s Tax Guide, which is available through the IRS. This explains tax regulations for farmers in terms they can understand. It is also extremely helpful to seek a qualified tax adviser who can usually save you money by consulting you on all tax implications.
Here are seven things to know about farm income and deductions:
1. Business purchases — All farm equipment and farm building purchases can be fully deducted. This excludes purchases for land. Farmers can deduct interest on land loans, equipment, and buildings. You cannot deduct interest on a prospective basis, explains Ag Web.
Alert: 4 Things You'll Feel Before a Heart Attack
2. Net operating loss — Losses occur when a farmer’s expenses are more than income for the year. Losses can be carried over to other years and deducted, according to the IRS. Farmers may get a partial or full refund on paid income tax in previous years and be able to lower taxes in future years.
3. Employee wages — Farmers may deduct the wages of their full- or part-time workers, but they must withhold Social Security, Medicare, and income taxes from the employee’s earnings.
4. Refunds and credits — If you paid excise taxes for fuel necessary for the farm or farming purposes, you may claim a tax credit or refund. Credits are also possible with earned income credit, education for children, and health insurance to employees, notes Michigan State University.
Special: This Little-Known Website Can Erase $100,000 of Debt . . .
5. Commodity wages — Farmers and employees of the farm have tax savings when workers receive wages through commodities, such as grain. Spousal employees paid through commodities help cut a farmer’s net income and self-employment tax for more tax savings, Successful Farming reports.
6. Farm income averaging — You may be able to spread your current year’s farm income over the past three years and across different tax brackets that range from 10 percent to 39.6 percent, Successful Farming notes. This brings tax savings if your income is high this year and lower in the past years.
7. Crop insurance payments — Farmers who received insurance payments because of crop damage must count it as income. Payments for the current year need to be reported.
Tip: How to Retire Comfortably on $2,000
© 2022 Newsmax. All rights reserved.