Navigating income taxes as a farmer is a unique and complicated undertaking, and it's reasonable to worry about making a mistake. Fortunately, with a little guidance, completing your farm taxes doesn't have to be painful.
In this guide, discover the ins and outs of business taxes for farmers as well as some unique opportunities that exist in our tax laws for farms, both federally and in the state of Missouri.
No requirement sets a minimum acreage to be considered a farm for tax purposes. Instead, the IRS defines a farm by its primary activity, and whether the enterprise is carried out in a business-like manner that is reasonably expected to yield a profit, unlike a hobby (which may never be profitable but is carried out anyway). If a farm operates at a loss for three out of five years, the IRS could potentially classify it as a hobby, rendering any losses non-deductible.
In the state of Missouri, farms are exempt from sales tax on the purchase of certain agricultural equipment and products.
Agricultural and horticultural organizations often do not have to pay sales tax on farm equipment and supplies. These sales tax exemptions are not exclusions.
Sales tax exclusions mean all products in a specific category are not taxed when sold. In contrast, exemptions mean certain buyers are exempt from paying sales tax on certain goods that are typically taxed.
An agricultural organization must present a Sales and Use Tax Exemption Certificate before purchasing to avoid paying sales tax. Missouri Form 149 is the official farm tax exempt form to receive a sales tax exemption. To be treated as a sales-tax-exempt organization, your farm must fill out Form 149 and provide a copy to their vendor. Nothing is required to be filed with the Missouri Department of Revenue.
Sales and Use Tax Exemption Certificates are valid for five years.
The state of Missouri has codified twenty-eight sales tax exemptions for agricultural organizations. You can explore them on the Missouri Department of Revenue's website. Most sales tax exemptions fall into these categories:
Note that these goods must be solely used for agricultural production to qualify.
Publication 225 details the primary recordkeeping and accounting methods for businesses. These methods largely differ in terms of timing. The two primary accounting methods are:
Cash accounting deducts an expense in the year you pay for it, and includes income the year you receive it. Cash accounting is the most popular method for sole proprietors. It lets farmers deduct prepaid expenses (with certain limitations) and potentially allows them to avoid inventory reporting rules.
In contrast, the accrual accounting method notes when you earn income, and it recognizes expenses the moment you incur them (as opposed to when you actually receive/spend the money). This is a slightly less flexible system and removes the opportunity to deduct prepaid expenses.
The selection of your accounting method is an important one, as is the implementation of a record keeping system for your farm. Both topics should be addressed with care in a conversation with your accountant.
A good record keeping system, or system of accounting, involves the use of software that connects directly to your farm's bank account, reducing the data-entry required to appropriately record each income and expense transaction, and to reconcile your monthly bank statements. An accurate, timely system of accounting is the foundation for a well-prepared tax return because it allows your tax professional to focus on getting the best outcome, rather than cleaning up and compiling old records. If your farm records are still being gathered in a box or envelope until tax time, your accountant is probably not spending his or her time in the most effective way. Communicate with them soon about how to construct a better system.
Because farm income can ebb and flow year-to-year based on weather and market conditions, a special and unique section of our tax code exists to help smooth the impact of these ebbs and flows. That special section deals with "income averaging."
Income averaging represents a way to reduce your farm's tax liability in profitable years by averaging the income of your last three years and paying taxes on that rate. Essentially, income averaging allows farmers to pay taxes in the lowest income tax brackets available over a three year period. Income averaging is complex and best executed by a tax professional well versed in agricultural taxation. If you own and operate a farm, you should work with such an expert to avoid the risk of missing such an opportunity.
If you're a farmer, you know what it means to work hard. But your taxes shouldn't make things harder.
You don't have to navigate farm taxes alone. Whether you're trying to re-structure your organization, plan for the future of your farm, or simply aim to avoid missed opportunities to reduce your tax liability in a legal manner, our team can help.
At Wilson Toellner CPA, we empower farmers like you to reach their goals. Let us sort through your taxes, and free yourself to focus on your strengths.
If you're interested in what a CPA can do for you, fill out an interest form today. Once you send it in, one of our accountants will reach out to you within two business days.
Watch for future blog posts pertaining to other farm-related topics such as Missouri Ag Disasters, Qualified Business Income Deductions, and depreciation rules and concepts.
