The farming industry has represented a vibrant part of our country since its founding, and it continues to thrive today-from big time commercial farmers to little moms and pops who have capitalized on the rising demand for locally grown food by turning the farmers' market into a viable livelihood. In an effort to support this age-old industry, especially in times of recession, the government provides a host of special tax incentives for farmers. However, navigating the complex IRS tax code associated with these incentives can be tall order. This represents an opportunity for CPAs, enrolled agents and other tax professionals who are in a position to offer tax assistance to taxpayers working in the farming industry. This is why, over the past several year, tax tips for farmers have been gradually included in Tax CPE-the tax continuing education courses required of any registered tax agent to maintain their professional certification. Professionals looking to tap this market can do so by digesting the following tips and then communicating to them their farming clients.
IRS Publication 225 Any tax professionals looking to develop a further understanding of the tax incentives for farming should first download and read IRS Publication 225 - Farmer's Tax Guide. It was co-authored by the IRS and farm extension specialists, and explains in plain language the complicated tax rules that apply to most farmers. Business vs. Hobby Farming There are significant financial differences between the classification of a farm as a business versus its classification as a hobby. When the farm does not constitute the taxpayer's sole or primary business, the related deductions are significantly limited. When a farm is the primary business, dozens of tax incentives are instantly available. Again, Publication 225 explains the criteria for classifying a farm as a business, most notably, (a) demonstrating intent to make a profit and (b) succeeding in making the farm a profitable venture in three years of a five-year period.
Standard deduction Standard deduction amounts are based on a taxpayer's filing status and are impacted by yearly inflation adjustments. For 2010, the standard deduction amounts are as follows: Single: $5,700 Married Filing Jointly: $11,400 Head of Household: $8,400 Married Filing Separately: $5,700 Qualifying Widow/Widower: $11,400 Different standard deductions for Different Taxpayers
The standard deduction amounts are contingent upon a number of variables including an individual's: filing status; age (whether they're 65 or older); ability to see (e.g, they're blind); dependency status If any of these conditions apply, then the Standard Deduction Worksheet-on the back of Form 1040EZ, or in the 1040A or 1040 instructions-should be used. The standard deduction amount also depends on whether a taxpayer intends to claim the additional SD for the following: a loss from a disaster declared a federal disaster state or local sales or excise tax paid in 2010 on a new vehicle purchased before 2010 To claim these additional amounts, a Schedule L must be filed.
Resale Deductions The vast majority of farmers buy livestock, equipment and other items for the sole purpose of resell them. The IRS does permit the deduction of these expenses, along with charges for transporting livestock and farm equipment.
You may be able to minimize taxes through electing a status as an S Corporation. Talk to your CPA to see if this option is right for you, and to file documents in a timely fashion to protect the tax advantages.
The S election allows you to report the corporation's profit on your personal tax return. Depending on your personal tax bracket and the company's profits (or losses), good planning could make a difference in your total tax bill. As a shareholder in an S Corporation, you draw a reasonable salary for which you pay Social Security and Medicare taxes. You're entitled to also take a stockholder distribution, which is not subject to the payroll taxes. If done correctly, you can save up to 15.3% (combined rate for Social Security and Medicare taxes) on the amount of the distribution. Be aware that there are limitations on the amount of distribution allowed before triggering other tax implications. This is why you need the help of a tax professional.
A primary reason to incorporate is to remove the risk of loss due to financial obligations or lawsuit from the personal assets of the shareholders. To accomplish that goal, though, you must walk, talk, look, and smell like a corporation. That means you must file all corporate paperwork in a timely fashion, conduct formal meetings of your stockholders and board of directors, and keep minutes of actions taken. Follow these guidelines, and then if a problem arises, you've taken the steps to prove a true corporate existence. It's not difficult to form a corporation yourself these days. Go online to your state's website to look for the name you want, check to see if it's available, complete the application, pay the fee, and you'll have a corporation within minutes. But what you do next determines the benefits to you. Talk to your CPA and get all the information you need before you set up the corporation. Planning the tax benefits is unique to each individual, so don't make decisions based on what you learn at a cocktail party.
IRS Publication 225 Any tax professionals looking to develop a further understanding of the tax incentives for farming should first download and read IRS Publication 225 - Farmer's Tax Guide. It was co-authored by the IRS and farm extension specialists, and explains in plain language the complicated tax rules that apply to most farmers. Business vs. Hobby Farming There are significant financial differences between the classification of a farm as a business versus its classification as a hobby. When the farm does not constitute the taxpayer's sole or primary business, the related deductions are significantly limited. When a farm is the primary business, dozens of tax incentives are instantly available. Again, Publication 225 explains the criteria for classifying a farm as a business, most notably, (a) demonstrating intent to make a profit and (b) succeeding in making the farm a profitable venture in three years of a five-year period.
Standard deduction Standard deduction amounts are based on a taxpayer's filing status and are impacted by yearly inflation adjustments. For 2010, the standard deduction amounts are as follows: Single: $5,700 Married Filing Jointly: $11,400 Head of Household: $8,400 Married Filing Separately: $5,700 Qualifying Widow/Widower: $11,400 Different standard deductions for Different Taxpayers
The standard deduction amounts are contingent upon a number of variables including an individual's: filing status; age (whether they're 65 or older); ability to see (e.g, they're blind); dependency status If any of these conditions apply, then the Standard Deduction Worksheet-on the back of Form 1040EZ, or in the 1040A or 1040 instructions-should be used. The standard deduction amount also depends on whether a taxpayer intends to claim the additional SD for the following: a loss from a disaster declared a federal disaster state or local sales or excise tax paid in 2010 on a new vehicle purchased before 2010 To claim these additional amounts, a Schedule L must be filed.
Resale Deductions The vast majority of farmers buy livestock, equipment and other items for the sole purpose of resell them. The IRS does permit the deduction of these expenses, along with charges for transporting livestock and farm equipment.
You may be able to minimize taxes through electing a status as an S Corporation. Talk to your CPA to see if this option is right for you, and to file documents in a timely fashion to protect the tax advantages.
The S election allows you to report the corporation's profit on your personal tax return. Depending on your personal tax bracket and the company's profits (or losses), good planning could make a difference in your total tax bill. As a shareholder in an S Corporation, you draw a reasonable salary for which you pay Social Security and Medicare taxes. You're entitled to also take a stockholder distribution, which is not subject to the payroll taxes. If done correctly, you can save up to 15.3% (combined rate for Social Security and Medicare taxes) on the amount of the distribution. Be aware that there are limitations on the amount of distribution allowed before triggering other tax implications. This is why you need the help of a tax professional.
A primary reason to incorporate is to remove the risk of loss due to financial obligations or lawsuit from the personal assets of the shareholders. To accomplish that goal, though, you must walk, talk, look, and smell like a corporation. That means you must file all corporate paperwork in a timely fashion, conduct formal meetings of your stockholders and board of directors, and keep minutes of actions taken. Follow these guidelines, and then if a problem arises, you've taken the steps to prove a true corporate existence. It's not difficult to form a corporation yourself these days. Go online to your state's website to look for the name you want, check to see if it's available, complete the application, pay the fee, and you'll have a corporation within minutes. But what you do next determines the benefits to you. Talk to your CPA and get all the information you need before you set up the corporation. Planning the tax benefits is unique to each individual, so don't make decisions based on what you learn at a cocktail party.
About the Author:
Harris Smith is a writer on personal finance education. Her article tackles the pros and cons of home equity line of credit . We offer no-obligation Debt Consolidation quotes for Americans struggling to pay bills.