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Farm income, like most forms of earnings, is subject to taxes. The Internal Revenue Service not only defines what types of activities are covered within the broad definition of farming, but also lists what types of expenses can be deducted from farm income for tax purposes. Whether you own or manage a farm, understanding the tax code can result in substantial tax savings.
Deducting Electric Bills for Farm Expenses
As a broad rule, you can deduct all ordinary costs associated with operating a farm. The IRS defines ordinary costs as those that are common and accepted in the farming business. Those costs include the portion of electricity used in farming. If your home and farm electric bills are on one meter, the IRS wants you to calculate how much you used for home purposes, and subtract that from your total electric costs. Your deductible farm expenses can include the electric costs needed to run the farm. If you're not exactly sure what your home use is, the IRS says it's fine to estimate that use, as long as what you're estimating seems reasonable. According to the IRS, any reasonable allocation is acceptable.
As an example, if your electric bill for the year is $4,000 and you estimate that 75 percent of the electrical supply is used by the farm, for example, your farm tax deductions total $3,000.
The Internal Revenue Service considers you a farmer if you cultivate, operate or manage a farm for profit. You can own the property or rent the land as well as the equipment you use. Farming activities include raising livestock, producing dairy, poultry, fish, fruit and operating truck farms. Plantations, ranches, ranges and orchards are also considered farms for income tax purposes.
What About Farm Loss?
If your expenses, including electricity, exceed your farm income, you can register a net loss for the tax year. If you had net taxable income for past years and paid taxes, you can retroactively apply your current year's loss to the past two years and receive a tax refund. You can also deduct the current year's loss from future years, and reduce your tax bills for the future. Therefore, you should take any possible farm tax credit for each tax year, even if the farm will surely register a loss for the present year and you will have no tax liability anyway. A greater loss for the current year can mean immediate refunds or lower tax bills in the future.
Changes For 2018
Farmers doing their 2018 taxes can only carry back losses two years, as stated above. Farmers are also limited to offsetting 80 percent of their taxable income with a net operating loss. But if you're deducting losses from past years on your 2018 tax return, you can still offset all of the losses from those years. There have been changes in deduction rules for 2018. You can get the latest changes and forms you'll need here.
What About 2017?
If you're still doing your 2017 taxes, you can offset 100 percent of losses from 2017 and years past. If you registered a loss in 2017, you can retroactively apply your current year's loss to the past five years and receive a tax refund, unlike the past two years in 2018. The IRS has some helpful hints for 2017 and 2018 in Publication 225, Farmer's Tax Guide.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.