Knowing what you're allowed to claim as farm tax deductions at your small farm or homestead can save you some pain when filling out tax forms.
PHOTO: FOTOLIA/JOHN KWAN
In my first-time-farmer dealings with the IRS last year, I learned a rather startling fact: Seasoned agriculturalists and new back-to-the-landers alike frequently pay more income tax than they should. There's a good chance that you're making the same mistake, too . . . so here's a few ideas that may legally save you some money when you "pay up" to Uncle Whiskers this year.
To claim deductions for a farm you have to be able to prove your intention to make a profit. No subsistence farmers allowed. But even if you make no money on your place, you can still claim deductions if it looks like you're trying to—or are getting ready to—make a profit. Repairs, maintenance of buildings and tools, cost of fertilizers and lime, land clearing, preparation for planting, erosion control: Money spent for any of these expenses may be deducted.
You may also depreciate (over a number of years) new buildings, equipment, and livestock. The portion of car or truck expenses attributable to farm work is depreciable.
If your agricultural operation is close to the subsistence level, it probably won't pay you to claim that the $50.00 worth of vegetables you sold last summer qualifies your undertaking for IRS tax filing as a business. But if you spent $400 on a plow, $200 on livestock, $500 on repairs to the barn roof and $60.00 on manure for the field . . . it might well pay you to claim your farm as a business so that you can take advantage of the deductions. The big professional farmers know all about this . . . and if you're just getting started and are operating on a small scale, there's no reason why you, too, should not deduct everything that is reasonable. Just don't try to claim your dogs as livestock!
OK. Suppose you work your place for two years with friends and then have to split for the city to earn some additional money. All of a sudden (after two years of floating free) you have heavy income taxes to deal with. One way to ease that burden is to do your splitting in June, so that the tax is divided between two years. If you do have to earn all your bread in one fiscal year, however, you can average the income over a five-year period.
Another situation: Having established residence at your farm, commune or country place, you leave to work at a job that you know is going to be temporary (because you're just doing it to get together a couple of mortgage payments). For a temporary* job away from home, all living expenses and all travel costs are completely deductible. That really helps take the sting out of those periods of exile. Food, rent, laundry, tolls, gas . . . take 'err all off !
When a group of people buys a house there is a great tax advantage if one or two individuals have the deed and officially rent to the others (the ideological hassle of this can be somewhat alleviated by deeding the land in common). Property held for rental can be depreciated. So can all improvements, furniture and landscaping (known as capital expenditures. Maintenance, utilities, insurance and repairs are deductible for that portion of the house that is being "rented" to the non-owners. If six people share a place owned by one unmarried member of the group, 5/6 of the annual depreciation and expenses may be claimed by the owner, who must report the rent received as income.
If you're the sole support of a friend, you may claim an exemption . . . and if someone supports you (save a starving artist), they can claim you as an exemption.
If you self crafts produced in your house or cabin, remember that it's a business address as well as your residence . . . and a percentage of all maintenance, insurance, repairs and utilities may be claimed as business expenses. A certain amount of the initial cost of the building, as well as improvements, may be depreciated each year.
Major tools (loom, kiln, lathe, darkroom or whatever) can be depreciated too. Small tools are fully deductible the first year. Bear in mind, however, that—even if you sell very little of your home enterprise's production—you must report the income you do receive if you want the tax advantage of your business expenses.
If you expect to have any of the above deductions accepted by the IRS, of course, you must plan them in advance and document them with accurate records. You have to be able to prove you spent $50.00 on tolls getting up to the farm on weekends of the month you worked in the city. You have to have receipts, contracting agreements, itemized bills and such: But, good news: Even if you blew it and filed your tax all wrong last year, you can still file an amended form this time around to take advantage of deductions you didn't know you had coming!
Try to figure out everything for yourself, with the aid of a paperback tax manual for the current year. Then have your return checked by a competent accountant. The IRS people can also be helpful.
Don't go to someone who'll laugh at you for calling your five acres a farm. If you're making taxable income, you have the right to all the legal deductions that bigger operators get.
And don't be put off by the jargon. Learning how to express your lifestyle to the IRS is like learning to tune your car from a manual. You spend some time learning the right names for all the parts . . . then you handle the pieces and begin pulling them apart. When you've got it all together again you take it down to a good mechanic and see how well you did. Next time it's a cinch.
*Usually "temporary" is construed to mean less than a year.