Most agricultural business owners focus heavily on reducing farm business expenses as a means to produce more profit. But if you’re a farmer or rancher and you want to be in the black, have you considered shifting some of that focus to how you file your federal taxes? Internal Revenue Service (IRS) tax laws constantly change, and today’s tax codes may look starkly different from next calendar year’s. This abridged tax guide will help you understand US tax benefits and a few ways to maximize your tax credits this tax year.
While FarmRaise is dedicated to your small business’s financial health, consult a certified public accountant or another trusted tax professional when seeking financial or legal advice and for any tax purposes. The intention of this post is to offer you tips that could lead to farm prosperity but is not a substitute for professional advice.
As taxpayers, farmers and ranchers can benefit from both tax credits and tax deductions - but there’s a difference between the two.
A tax credit is applied to the total amount of tax that you owe or to your projected refund. This is different from a tax deduction, which is applied before your tax burden is calculated as a way to reduce your gross income. Said simply: a tax deduction can reduce your taxable farm income, whereas a tax credit can reduce your tax burden or increase your tax refund.
Farms and ranches are one of the few types of small businesses that can claim a Fuel Tax Credit. This credit is intended to reimburse qualifying small businesses for the sales tax they paid when purchasing fuel.
While this can be beneficial to your business, do take care to set yourself up for success. This tax credit is among the top twelve most abused tax credits, and the IRS closely monitors for misuse and penalizes false claims with fines or jail time. If you do incur high fuel costs during your farming or ranching seasons, talk to your accountant about how to set this tax credit up the right way.
A fuel tax credit is commonly confused with a fuel tax exemption. While they both are available for qualified producers, they have distinct differences. You can take a look at fuel tax exemption law but we’ve also summarized the legalese for you:
A fuel tax credit is a reduction in your taxes owed - meaning it will directly impact your tax return. A fuel tax exemption, however, is an exemption from paying the tax in the first place. We’ll go into detail about tax exemptions in a upcoming post.
Your state may offer special tax credits for certain farming operations or behaviors. A common state tax credit is a “beginning farmer” credit. These credits are used by states like Minnesota and Iowa to incentivize the transfer of farm property or farm assets to new or beginning farmers.
For example, the Minnesota Beginning Farmer Tax Credit program is applicable to those “who rent or sell farmland, equipment, livestock, and other agricultural assets to beginning farmers.” This program also allows beginning farmers to get up to $1,500 in tax credits for qualifying farm business management program tuition. Landowners can get up to $50,000 in tax credits for selling their land to beginning farmers. The credit can also be applied to income from cash rentals and crop-share rentals.
Other states, like Virginia, offer tax credits for the purchase of equipment or investment in best management practices. Virginia’s list of farming-focused tax credits includes:
Contact your state department of agriculture to learn more about local tax credits that you can take advantage of as a farm or ranch business and/or landowner.
Renewable energy incentives include tax credits that are intended to reduce the overall cost of adopting solar, wind and other forms of renewable energy.
One popular renewable energy tax credit is offered by the federal government. It’s called the Federal Investment Tax Credit and it can be used against 30 percent of your investment in residential solar PV system installation for systems installed between 2023 and 2032. The credit will also cover 26 percent of investment costs if you installed a system in 2020 or 2021.
Your state may also have tax credits available for installing solar, wind turbines and biomass generation facilities. It’s worth contacting your state department of agriculture or department of energy to inquire about renewable energy incentives.
The IRS offers a Research and Development (R&D) tax credit that offsets expenses associated with innovation. Your farm or ranch may qualify for the R&D tax credit if you participate in any of the following activities:
You might consider leveraging a grant or cost-share program to help defray the initial cost of implementing the R&D activity. For example, if you were going to plant cover crops for the first time, you could apply for the Environmental Quality Incentives Program (EQIP) to get cost-share for the cover crop seed and planting costs. Or, you might want to check out the Sustainable Agriculture Research and Education (SARE) Farmer-Rancher grant program to conduct an on-farm research project.
Depending on your income, you may qualify for the federal earned income tax credit. You can see whether you qualify using this assistant tool developed by the IRS.
Investing in on-farm conservation can provide a pathway towards reducing your total taxable income. That’s because conservation expenses are a deductible expense that can reduce your overall taxable income.
If you’re considering implementing a conservation project on the farm, you could pursue government funding to defray the upfront cost and then conservation expense tax deductions to reduce your tax burden at the end of the year.
Consider applying for USDA programs like EQIP to pursue projects like cover cropping, terracing, windbreaks and shelterbelts, or other practices that prevent erosion, protect water quality and improve biodiversity. These programs don’t directly provide tax credits but the expenses incurred may be eligible for deductions or depreciation on the tax return.
To claim tax credits or deductions, you’ll want to keep your financial records up-to-date with evidence for each transaction. Consider using a tracking tool like FarmRaise Tracks to neatly store all of your receipts and categorize your farm transactions. Maintaining your records throughout the year will reduce burden for you and your accountant during tax season and will help you seize tax credit opportunities that you may have otherwise missed.
In addition to tax credits, you can reduce your overall tax burden for the current year by deducting eligible expenses from your taxable farm income. Deductible farm expenses include:
Looking for more tax tips? Learn about tax forms, tax filing and tax preparation for growers with the following resources:
Taxes often feel like a massive project to take on. But if you’re planning ahead, you can implement practices that can earn you tax breaks the next time you file taxes. Whatever you do, be careful to record your farming activities, expenditures and income properly.
See how a FarmRaise Premium Plan can help you keep track of your farm finances and help you apply for the funding we mentioned in this post.
