Farm income and expenses are reported on schedule F. As with many of the other income/loss schedules, this may be used to offset other income. Often, farms are used as a way to take advantage of many tax breaks to minimize tax liability. However, schedule F is very complex. You should consider utilizing a tax service, such as TaxBrain.com to be sure you do not miss any deductions.
The income section of schedule F is fairly straightforward. In this section, you list all of the sources of income the farm has, including that from the sell of livestock, crops, and other sources. However, the expense section is a little more comprehensive.
It is first important to note that all expenses are not deductible on schedule F. For example, you may not claim expenses for your personal property on this schedule; you may only include property that produces farm income. You may also not claim inventory losses, personal losses, or the value of animals you raised that did not survive. The expense of items you or family used personally is also not deductible.
What is deductible are expenses actually associated with the productivity of the farm. Some examples are vehicle expenses, feed, fertilizer, depreciation, seeds and plants, supplies, and other miscellaneous expenses.
On schedule F, you calculate the difference between the income and expenses of the farm to determine what the profit or loss was. The truth of the matter is many farms and ranches have a very difficult time making a profit when you factor in all possible expenses. However, some people use this to their advantage to reduce their taxable income from other sources, such as from regular employment.
Because the profit or loss from schedule F is included on your form 1040, it is a factor in calculating your income. For this reason, should you experience a paper loss, you may actually benefit from doing so.
Example: Tom lives on a farm with his wife and children. He is primarily responsible for caring for the animals while his wife works. She is employed by the bank and makes $45,000 per year. This year, Tom had a bad year and was unable to breed as many cows and therefore did not sell as much as he usually does. After factoring in his expenses, he experienced a loss of $3,700. Because Tom and his wife file a joint tax return, Tom’s loss and his wife’s income are claimed on their taxes. Therefore, his wife’s income is reduced by $3,700, the amount of Tom’s farm losses. Therefore, their taxable income, just based on this information, was $41,300.
The above example only translates into a $555 reduction in taxes. However, that is still $555 that this couple would not have to pay. This is a very simplified example, but you can see how even a loss, in the right circumstances, can be beneficial for your tax obligation.