About Part Time
Farm Income Tax Deductions
To the Internal Revenue Service, it does not matter whether you run your farm as a full-time or part time operation, you are still in business to make money. A farm, like any business, has various expenses to keep the farm running. These expenses are deductible against any income the farm will produce, to help reduce your taxable income and tax liability.
What is Deductible?
If you need something to help the farm run, the cost of the item is most likely a deductible expense. The Internal Revenue Service deems any expense that is normal in the farm industry and is necessary to keep the farm running, to be deductible against gross profits of the farm. They look at what is reasonable as a basis for determining whether to allow a deduction. If it is common in the industry and you can justify the expense, it is deductible.
What is Not Deductible?
Farmers, especially part-time farmers, tend to live on their farms. Due to this, their personal utility costs, including electricity, water, telephone, and possibly insurance, become intermixed with the utility and insurance costs of the business. The IRS realizes this problem and requires that you develop some method of allocation that will enable you to subtract all your personal expenses from the business, as these expenses are not tax deductions against farm income. They do not require a specific method for you to use, however.
Allocation Method
Separating personal expenses from the business is not a difficult task. One acceptable method the part-time farmer can use includes totaling the square footage of all the buildings on the farm and separately totaling the square footage for personal use only. Divide the square footage for personal use by the total farm use square footage to arrive at a personal use percentage. You simply multiply this percentage by all the farm expenses that lend themselves to co-mingling with personal use. Reduce your deductible expenses for the farm by the results of this equation to allocate your personal costs.
Accounting Requirements
Farmers, like any business, must keep accurate records to substantiate their tax deductions. The IRS places no requirement of a specific method of record-keeping on the part-time farmer. You will however need to substantiate any deductions with sufficient evidence of the claim. To do this, your proof of expenses must be in writing.
This is really easier than it sounds, because most of the expenses you incur will already be in writing. Receipts and vendor statements are all in writing when you receive them. Those that are not in writing such as vehicle mileage, just require you to keep a hand written log to record your business use.
Organize all your substantiation in a manner to help you produce your tax returns and you will have met this in writing requirement.
1040 Schedule F
All farmers, whether full or part-time, use Form 1040 schedule F to report their deductible expenses to the IRS. The net profits you produce will flow from this form to your personal 1040 tax return. The profit is taxable on this form along with any other income sources you may have. You can find details for filling out your Form 1040 Schedule F in Publication 225. These forms are available from any local IRS office or its website.
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