Tax Deductions for Farmers
Tax deductions are expenses that the Internal Revenue Service allows taxpayers to subtract from their gross income and reduce the pool of taxable income when filing a tax return. According to the IRS, "the ordinary and necessary costs of operating a farm for profit are deductible business expenses." Tax deductions can significantly reduce the amount of income taxes farmers pay.
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Labor Costs
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The cost of hiring farm workers is a tax deductible expense. This is an important deduction for farmers since farm work is often labor intensive, despite the use of heavy machinery. According to the IRS, "you can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations." Farmers may also deduct the cost of paying a child for farm labor. The IRS states that, "if a true employer-employee relationship exists, reasonable wages or other compensation paid to the child is deductible."
Depreciation
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Depreciation is the loss of value of an asset over time due to aging, use, wear and tear and market conditions. The IRS allows farmers to deduct the loss of value of various assets related to generating farming income. The IRS states that, "farmers can depreciate most types of tangible property ---- except land ---- such as buildings, machinery, equipment, vehicles, certain livestock and furniture." The asset must be owned by the farmer and used in the business or toward income-producing activities to be eligible for a depreciation deduction.
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Utilities and Energy Costs
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The cost of utilities and energy spent by farmers toward production are tax deductible. According to the IRS, expenses like gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep and repairs may be tax deductible but often such expenses are split between person use and business use. For instance, if you spent a total of $2,500 on water but $500 of the expense went toward personal use in your home, only $2,000 would be eligible for a tax deduction.
Insurance
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The cost of insurance premiums paid to run a farming business is generally tax deductible. Farming often requires insurance such as unemployment insurance for laborers, accident insurance and health insurance. The IRS says that these types of insurance, as well as "fire, storm, crop, theft, liability, and other insurance on farm business assets" are tax deductible. Losses from declared disasters such as severe floods are also tax deductible.
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References
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