Small farms are allowed to take a variety of deductions specific to the costs of farming.
Running a small farm can be quite rewarding spiritually but also quite challenging financially. Small farms operate like any other small business, and since you generally live in the same place you work when you own a farm, your tax deductions are very similar to other home-based businesses. Allowable tax deductions for small farms can change slightly from year to year and the specific regulations for each deduction can be complicated, so you may want to consult with a licensed tax adviser who specializes in small-farm business taxes.
Ordinary and Necessary
If you own a small farm, you may take tax deductions for expenses that you incur that are considered both ordinary and necessary costs of running a farm. At first glance it may sound as if every expense you have is deductible in that case, but that is not always the case. Since you also live on the property that you farm, there are specific restrictions and conditions that you must meet to claim an expense as a tax deduction.
Utilities and Services
Depending upon the type of small farm you run, many of your everyday utility bills may qualify as partial tax deductions. If your farm is supplied with water through a municipal or corporate water service for example, and you use a portion of the water for your farm animals and crops, the portion that you use can be deducted as a small-farm expense. Since you also use water for personal purposes inside your home, however, you have to estimate the percentage of your water usage that is for the farm only and deduct just that amount. The same rules apply for electricity if you must use electrical services to keep your animals warm in winter, for example, or to power a greenhouse for your crops. Personal services such as cable television are not ordinary and necessary expenses of running a farm, however, thus you cannot deduct them on your income tax return.
Prepaid Farm Expenses
Small farms have a common expense that is known as a prepaid expense. For example, when you purchase seed and fertilizer in bulk for the purpose of planting several acres at once, the IRS considers this a prepaid expense. You can claim an income tax deduction for prepaid farm expenses, as long as the claim does not exceed 50 percent of your other farm expenses for that tax year.
Other Business Expenses
Generally, small farms have many of the same general business expenses that other small businesses have. The paper, printer ink and file folders you purchase to track crop rotation, animal feed and machine maintenance are all deductible as office expenses. Gasoline and other travel-related expenses that you incur when taking your crop to the market or taking animals to the vet are also deductible. Many other individual expenses you must pay to keep your farm running are allowed to be claimed as a tax deduction. The best way to ensure you take all deductions you're allowed to is by consulting with a small-farm tax specialist.
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