Federal Income Tax

Schedule C or F

When you sell livestock, produce, grains, or other products, the entire amount you receive and the costs associated with its purchase and production should be reported on a Schedule F income tax form.

If your business activities were non-agricultural, they must be reported on a Schedule C.  An example of non-agricultural business would be a produce retailer who purchased wholesale and sold retail and did not grow anything.  If your farm has a sub-enterprise like a gift shop, restaurant, or bed & breakfast then the income and costs associated with that activity would have to be reported on a Schedule C.

It is generally advantageous to report farm income and expenses on a Schedule F because farms are allowed to use cash accounting and most other businesses are required to use accrual accounting.  In cash accounting you report the income and expenses as they are actually received or paid, whereas in accrual accounting you report the income and expenses at the time they occur.

Example: you spend $5,000 in 2016 to fill the fuel tanks at your farm and at the end of the year the tanks still have $3,000 of fuel in them.  In cash accounting, you report a $5,000 expense on your 2016 income tax return and in accrual accounting you can only report a $2,000 expense.  If you did not have the cash to pay the $5,000 bill, you will not be able to report any expense on your tax return using the cash method but you would still be able to report a $2,000 expense on your income taxes using the accrual method if you did not pay the bill.

Depreciation

Depreciation is the depleted value of an asset with an expected useful life of more than one year.

Example:  you purchase a tractor for $50,000.  You cannot report a $50,000 tractor expense on your tax return; you must spread that $50,000 cost over 5, 7, or 10 years.

The number of years that you must take to depreciate an asset and how you can claim in those years (e.g. straight line, accelerated, section 179, etc.) depends on the asset class of the property in question and the characteristics of the farm.

If the asset is not held for more than one year, it cannot be depreciated. Buildings can be depreciated but land cannot. The only instance when land can be depreciated is if it is logged or mined and it can be proven that the asset value has been depleted. IRS Publication 225 Farmers Tax Guide (see below) goes into detail on how to depreciate common farm property. Pub 225 specifies that “Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account.  Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis.”