When it comes to owning a farm, every dollar saved is integral to maintaining operations for generations to come. Are you taking advantage of the farming tax breaks available at both the federal and state level?
In this article:
- The Fuel Tax Credit and the Renewable Energy Tax Credits are federal tax credits available to farmers.
- Farmers can also take several tax deductions to reduce their tax liability by lowering their taxable income.
- States also offer tax incentives for farmers, like sales tax exemptions.
What is classified as a farm?
According to the IRS, “You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant.”
A farm includes any of the following:
- Livestock
- Dairy
- Poultry
- Fish
- Fruit
- Truck
- Plantations
- Ranches
- Ranges
- Orchards
- Groves
The key here is operating for profit. If you own a homestead simply for your own personal use (mmm… fresh-laid eggs for breakfast!), you would not qualify as being “in the business of farming.”
What federal tax credits exist for farmers?
Fuel Tax Credit
This particular federal tax credit is only available to certain types of businesses, and the good news is that agricultural businesses qualify.
The IRS explains that the Fuel Tax Credit (FTC) is a “refundable tax credit for fuel used for off-highway business and farming purposes. The credit is available only for nontaxable uses of gasoline, aviation gasoline, undyed diesel, and undyed kerosene.”
In other words, the tax you paid on purchase of any fuel used for farm purposes is reimbursed back to you.
Use Form 4136, Credit For Federal Tax Paid On Fuels to calculate your credit amount. Keep in mind that the IRS closely monitors those claiming the FTC, since it is one of the top tax credits that is most often misused or abused. Keep track of your receipts and paperwork. Working with a reputable CPA that specializes in agriculture can also ensure you properly compute this tax credit.
Renewable Energy Tax Credits
If you have invested in adding renewable energy sources to your farm, you may qualify for the Investment Tax Credit (ITC) and Production Tax Credit (PTC), which are both renewable tax credits for businesses.
Two other renewable tax credits you may qualify for are the Residential Clean Energy Credit or the Energy Efficient Home Improvement Credit. These credits are specifically for homeowners making energy-efficient upgrades to their home.
Federal Drought Relief
In areas impacted by drought and designated as eligible for federal assistance, the sales of livestock solely due to drought are not subject to income tax in the year of sale AS LONG AS the sold livestock are replaced within a specified timeframe. This is usually two years, but sometimes extended to four years depending on location and situation.
While not necessarily a tax credit (or deduction), this is an important tax-related note for any farmers and ranchers within these designated areas.
What federal tax deductions can farmers take?
While both a tax credit and tax deduction reduce your tax liability, they are applied differently. A tax credit is credited toward the amount of taxes you owe after your tax liability has been calculated, while a tax deduction reduces the amount of income that can be taxed.
Like other businesses, eligible tax deductions for farmers and agricultural businesses include:
- Interest paid on farm loans
- Rent or lease payments
- Repairs and maintenance for equipment
- Real estate and personal property taxes
- Seeds and plants
- Fertilizer and lime
- Conservation expenses
- Depreciation on equipment and improvements (fences, roads, ponds, buildings, etc.)
What state farming tax breaks exist?
Many states offer tax breaks for farmers.
Arkansas Sales Tax Exemption
Here’s a fun fact: Agriculture is one of the largest industries in Arkansas, with 42,000 farms covering 14 million acres, roughly 41% of the land in the state.
Arkansas is one of 32 states that offer sales tax exemptions for the following 6 categories:
- Machinery
- Fuel
- Chemicals
- Seed
- Animals
- Feed
The savings in sales tax adds up! Learn more about Arkansas’ agricultural tax exemptions here.
Farming Tax Breaks in Other States
Other states like Missouri, Oklahoma, Texas, and Louisiana offer tax exemptions within these main 6 categories to agricultural businesses. Arizona also has a long list of credits and exemptions available for farmers and ranchers.
Work with a CPA that knows the agricultural industry
At Landmark CPAs, we know the unique tax implications of the farming industry. And we even have partners who own farms themselves! Let’s work together to make the best financial decisions for your farm.