Are Farms the Last Great Tax Shelters?

Trust and Estate Administration Attorney

Dylan Dam
Attorney | Vandenack Weaver Truhlsen

Under current tax law, farms and farmers often enjoy tax benefits that are unavailable to other taxpayers. But what is a farm and who is a farmer? These are questions that have been addressed by a number of tax code provisions and regulations. However, very generally speaking, a farm is an operation that produces plants or animals to be sold, and a farmer is a person who operates a farm.

One of the biggest examples of favorable treatment for farmers is under IRC Section 183, which disallows claiming losses that exceed sells for activities that are not engaged in for profit, or hobbies. Over half of all farm operators in the United States claim something other than farming as their primary occupation. However, tax courts often seem hesitant to determine that a farming operation is a hobby. This means that those operating farms, even if farming is not their primary occupation, are able to deduct losses from the farming operation that exceed the farm’s sales for that year.

Farmers also have available to them several subsidy programs provided by the federal government. These include: price loss coverage, which provides assistance if the national market price for their crop falls below a certain level; agricultural risk coverage, which protects farmers if their crop production falls below a certain level; and marketing assistance loans, which allow farmers to use their crops as collateral for low-interest loans.

Another significant tax advantage that is available to farmers is income averaging. Income averaging has not been available to all taxpayers since 1986, however farmers are still able to average their income over a three-year period. Additionally, farmers can postpone gain for weather-related forced sales, they do not need to be determined insolvent to avoid paying tax on the discharge of indebtedness, and most farms are exempt from uniform capitalization rules, allowing them to expense items that other businesses must capitalize as inventory.

Farmers are also able to utilize deductions that are not ordinarily available to other business owners. While other business owners must capitalize improvements to land such as leveling, grading and contouring, farmers are  able to deduct those expenses (limited to 25% of gross farming income) if they are for the purpose of conservation. These improvements could include installing terraces, creating wind breaks or creating catch basins. Farmers can also deduct up to 100% of their gross income for qualified conservation contributions.

As you can see, there are many tax advantages that are available to farmers. It is important to consult with your accountant or other tax professional to see which of these or other benefits in our tax law that you may be able to utilize.