Farm losses often go hand-in-hand with farm ownership. Figuring out how much of a farm loss is tax deductible can be as difficult as raising corn in Death Valley.
Farmers must file a Schedule F, Profit or Loss From Farming, with their annual tax returns. The amount you can deduct, however, depends on many different factors. Let’s take a closer look.
How to Calculate Farm Losses on Your Schedule F
It’s hard to give you a simple answer to the question of how much of a farm loss is deductible because there are multiple ways in which farmers can report their income and expenses from farming operations. These include:
- Crop reporting. Farmers can get approval from the Internal Revenue Service to hold off on reporting income and expenses from farming operations until the year in which crops are sold and expenses are incurred.
- Cash reporting. Farmers report harvest revenue earned from buyers and subtract their farming-related expenses in the same tax year.
- Accrual reporting. In this reporting method, farmers record their income during the year crop sales are finalized, regardless of whether they get paid for those sales in the same or a subsequent tax year. Expenses and losses are deducted in the year the liability or loss incurred, regardless of whether you paid for them in a different tax year.
Of the three reporting methods, cash-basis reporting is by far the most common method used to report farm revenue and loss. The accrual method, meanwhile, is the most complex method of reporting since it includes metrics such as expense ratios, operating profit margin ratio, return on equity and assets, and other financial benchmarks.
Calculating farm losses also involves a range of allowable deductions. Farmers can deduct ordinary expenses incurred from farming operations, including:
- Fertilizer and other chemicals
- Interest on farm loans
- Employee wages and benefits
- Veterinary expenses
- Rental fees for farm-related equipment and machinery
- Trucking and freight costs
These deductions will either reduce your overall profits or decrease the amount of your total loss.
That’s not all. Farmers often receive financial assistance from a range of federal and state programs. Direct government payments from Agriculture Risk Coverage, Price Loss Coverage, Dairy Margin Coverage, Tobacco Transition, and many other federal assistance programs must be factored into your Schedule F. If you received any disaster loss payments, you’ll have to report those on your Schedule F as well.
Farmers also may elect to report proceeds from loans under the federal Commodity Credit Corporation as income, which can affect the amount of income and losses in a given tax year.
Calculating the full extent of farm losses can be an extremely complex process that involves many different moving pieces.
Farmers should engage the services of a tax professional who is experienced with agricultural tax laws and farming tax codes to determine the best reporting method for their farming operations, as well as the full range of their allowable deductions, which will give them clearer insight into the extent of any deductible farm losses.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.