Understanding Financial Considerations

Posted on: 27 August 2014

If your dream is to move to the country and grow a lot of peaches, you are not alone. Many people are dreaming of chicken coops, small fields full of organic veggies, and a bit of land to call their own. Unfortunately, this endeavor can be expensive, but if you plan to use some of your new land as a money maker, Uncle Sam may be able to help. Here is a look at how to reduce your tax burden by claiming small farm expenses:

Intention to Profit

You can lower your tax burden by deducting farm expenses on your income tax return. In order to deduct these expenses, you need to intend to profit from your farm. In the event that you are ever audited, you need to have proof of your intention to profit.

That proof could be receipts from the farmer's market booths you booked, copies of ads looking for students to take horseback riding lessons, or any other proof that you are trying to turn a profit.

Income

The only way you can use farm expenses to offset your tax burden is if your farm is a business. Keep track of every dime you make with your farm and prepare to claim that money as business income on your taxes. During the first few years as you are getting the farm set up, you may end up spending more than you make, and during those years, you can claim a loss on your business.

Once you start posting an income, however. you can split the earnings over several years. If you posted a loss last year, you can claim some of your income retroactively, or you can wait and put it on next year's tax return.

Deductions

Even if you only make $100 selling vegetables for the year, you can still deduct all of your expenses. Keep receipts for everything from new equipment to seeds to tractor repairs. However, remember that you cannot write off your own labor. Because of this, it often makes more sense to hire a professional for specialized tasks than doing them on your own.

For instance, if you spend two days fixing your tractor, you cannot deduct that time from your earnings. Even if the lost time adversely affected your farm because you couldn't pull weeds or clean out horse stalls, you still cannot claim that time and effort. However, if you pay someone to fix your tractor, you can deduct the money you spend.

Insurance Payments

As a farmer, you have to insure more than just your home, health, and automobile. You also need to insure your business. There are many companies that insure all kinds of farmers, and there are even policies that pay out if your crops are damaged. You can deduct your insurance payments from your income, but if you make an insurance claim on your crops, you need to claim that payment as income.

For more financial advice and information, visit with a professional like John Lister Inc, PC.