Small Farm Tax Guide
Download the full version of the Tax Guide here.
This chapter reviews basic farm-management concepts and how they may be affected by
tax considerations. It also illustrates how managing taxes can increase a farmer’s
after tax income. Tools and techniques discussed within this chapter illustrate management
complexity relative to farm business goals.
Farmers pay a wide variety of taxes to federal, state and local governments. This
chapter provides a brief overview of those taxes to help you understand the context
of the tax planning discussed in the following chapters.
This chapter defines farm, farming and farm income. In preparing their federal income
tax returns, farmers are required not only to report all of their income but also
to determine the income’s character so that they can apply the proper tax rates. This
chapter includes a list of special federal tax provisions for farmers. Farmers can
defer income taxes to a future year by taking advantage of tax law provisions that
give them favorable tax treatment.
Some income tax deductions have special rules for farmers. Other deductions are available
only to farmers and ranchers. This chapter is intended to help operators of farms
and ranches optimize deductions to reduce their tax liability.
A primary goal of tax management is to avoid wide fluctuations in annual income in
order to avoid swings in marginal tax rates. Farmers who use cash-basis accounting
can manage their tax liability by shifting income away from the high-income years
and deductions away from low-income years. This chapter will cover the tax rules that
impose some limits on making these shifts as well as some non-tax factors to include
in the analysis of the costs and benefits of the shifts.
This chapter explains the various ways that income is taxed and strategies for maximizing
the income that is taxed at the lowest rates. Taxable income falls into three categories:
1) Ordinary income subject to self-employment (SE) tax, 2) Ordinary income not subject
to SE tax, and 3) Gain on disposition that is taxed as long-term capital gain. By
understanding the character of income, farmers may have the opportunity to generate
income to the most favorable tax rate.
This chapter discusses additional tax law provisions that help farm producers and
ranchers manage or reduce their overall tax liability. Farmers and ranchers can use
income averaging, shifting income to another taxpayer, bunching itemized deductions,
retirement accounts and health plans to manage their income tax liability to keep
it as low as possible.
This chapter explains some of the basic rules and some planning opportunities for
taxpayers whose property is damaged destroyed or stolen, but does not provide a detailed
explanation of these complex rules.
This chapter gives basic explanation of the alternative minimum tax (AMT), some examples
of situations that cause taxpayers to become subject to AMT. And further discussion
provides some planning techniques to minimize the AMT’s impact.
This chapter discusses the use of net operating loss (NOL) rules if taxable income
for a tax year is negative. NOL’s allow taxpayers to carry business losses from the
loss year to offset taxable income in other tax years. A loss can be carried back
and/or forward. This chapter explains how to calculate, carry back or forward, and
making the optimal use of an NOL.
Farmers often face significant income tax consequences from financial distress transactions.
This chapter discusses the two most common income tax consequences from these transactions
which are the recognition of gain or loss from transfer of assets, and discharge of
This chapter provides an introduction to the issues buyers and sellers face when they
buy or sell a farm. Income tax planning is as important in buying and selling a farm
as it is in operating a farm.