HUDSON FALLS, N.Y. — In the federal government’s eyes, a farmer is anyone who generates more than $1,000 of farm income and can show that they’re legitimately trying to operate in a businesslike manner.
This could involve a variety of things such as good record keeping, opening a business checking account, going to classes and taking online courses to improve business methods, filing a Doing Business As form, and being at least partially dependent on farm income for your family.
By doing such things, people may complete Schedule F, 1040 tax forms, which allows them to take money-saving deductions and develop a sound tax management strategy.
Cornell Cooperative Extension agents Sandy Buxton and Steve Hadcock discussed these and other issues during a recent Part Time Farmer Tax School at Washington County Extension offices in Hudson Falls.
“Record keeping is important for a variety of reasons,” Buxton said. “First, it shows that you’re not a hobby farm. But more important, you can’t manage what you can’t measure. Good financial and production records are critical.”
She and Hadcock briefly outlined several electronic tools for keeping records such as Veggie Compass, a project developed at the University of Wisconsin-Madison, designed to help farmers with financial decision-making; AgSquared, an online financial record keeping system; and Intuit QuickBooks, an accounting software package geared toward small- and medium-sized businesses.
Simply stuffing paper receipts in a shoebox is no longer acceptable. Aside from being inefficient and inaccurate, it’s also costly because the farm’s accountant or tax preparer will have to spend time sorting through them, most likely for a considerable fee.
In New York, farms of at least 7 acres that generate $10,000, or those on 5 acres that generate $50,000, are eligible for special agricultural value assessments, which may result in significant real property tax savings.
Some small businesses, such as a beginning maple producer, may not generate enough income to qualify for an ag value assessment. But they should still complete Schedule F tax forms, Buxton said.
“Hopefully you’re going to grow,” she said.
For a small fresh produce operation, properly filed tax forms might help when trying to obtain crop insurance or document claims. Essentially, they show the farm’s history.
In addition, Schedule F forms show all the farm’s income and expenses, allowing the owner to save money by depreciating new vehicles and deducting expenses such as mileage and supplies.
Schedule F income must be reported for farm products raised for sale or purchased for resale.
Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport or dairy go on a different form (4797).
“Most things, if you’re in general farming, are going to go on Schedule F,” Buxton said. “There are differences. You have to pay attention.”
Income is considered any money received from cultivating, operating or managing a farm for gain or profit, either as owner or tenant. This may involve dairy, poultry, fish, fruit, a truck farm or operating a plantation, ranch, range, orchard or grove.
It also includes less traditional crops such as firewood, mushrooms, herbal plants and cut flowers.
“It’s all about trying to make a profit, whether or not you actually do,” Buxton said.
With regard to expenses, any ordinary and necessary cost of operating a farm for profit is a deductible business expense. Ordinary means what most farmers do, and necessary means what is useful and helpful in farming.
Examples of deductible expenses include feed, fuel and fertilizer along with professional fees such as tax preparation. They do not include land and buildings, or the entire cost of new vehicle and machinery purchases.
But a portion of vehicle and machinery expenses may be deducted each year through depreciation.
“The IRS says how fast you can depreciate things,” Hadcock said.
Class participants also learned about other tax benefits farms can use such as a New York state farmers’ school tax rebate. Operations where two-thirds of their income is from farming may qualify to receive 100 percent of school taxes back on the first 350 acres owned, and 50 percent on additional acreage.
To be eligible, farmers must own the land and be engaged in farm production, whether or not the farm makes a profit. Retired farmers may not qualify for a full refund.
“This is key,” Buxton said. “You have to participate.”