Tax deductions on farm returns

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    Farmers possess a unique set of skills that are becoming rare in today’s modernized society. While the number of family farms has been declining over the years, there are many farmers who have income and need to prepare an appropriate tax return.

    Preparing returns for farmers requires some skill as farmers may deduct real estate and personal property taxes on business assets, expenses including depreciation on farm equipment, livestock, etc.

    In a recent webinar, instructor Brad Messner, MBA, EA, discussed income for farmers, deductions farmers can take, the difference between hobby and commercial farming, income averaging, and more.

    Below you will find some of the most popular webinar questions and their answers. If you decide to participate in on-demand version of this webinaryou will get access to the full recording and the entire list of questions and answers.

    Q: When buying property used in agriculture, can any buildings or fences be depreciated?

    A: Yes, you will need to make an allocation of the purchase price to determine the basis, and then you can depreciate the building, fence, etc.

    Q: Can you include the physical maintenance of the animals in the veterinary costs?

    A: If the physical maintenance is for animal welfare, then yes. Presumably this would be included in the veterinary costs on Schedule F.

    Q: If a taxpayer did not use income averaging in the previous year, can you amend the return to include Schedule J (Form 1040) on the return? Income averaging for farmers and fishermen?

    A: Yes, a taxpayer can elect to file a late or amended tax return if the statute of limitations for filing a credit or refund claim has not expired. [Reg §1.1301-1(c)(1)].

    Q: Will the rental activity be reported on Form 4835, Farm rental income and expensesclaim qualified business income deduction (QBID)?

    A: As long as the activity rises to the level of a trade or business under §162, it will. Court-tested trade or business (Groetzinger) means that the existence of a trade or business had to be determined on the facts of each case and that its existence had to be determined depending on whether the taxpayer’s participation in that activity was regular and going concern, and whether the primary purpose of the business is profit or gain. Both of these factors must be present for a trade or business to exist. It is important to note that the final QBID regulations refer to these two Grotzinger tests.

    To know more about income from farming, you can see our webinar on demand. NATP members can attend for free, depending on their membership level! If you are not a NATP member and would like to join ours completely free 30-day trialvisit natptax.com/explore.

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