According to the U.S. Department of Agriculture, there are over 2 million farms in the U.S. The vast majority are small farms, which means they’re small businesses. The tax law has certain special rules for farmers and there have been several recent developments of interest to those engaged in this industry. For small business owners like me who are not engaged in farming, these developments help us understand some of the special challenges that farmers face.
When farmers are forced to sell livestock because of severe draught, they can avoid gain by replacing their stock within an extended period of four years (compared with the usual 2-year period for involuntary conversions). The IRS has released a list of affected counties throughout 43 states in the U.S. in which livestock producers are eligible for this extended replacement period.
Expensing for citrus growers
The citrus crop in Florida has experienced a one-two punch, prompting the Wall Street Journal to report that without some action, there will be no more oranges from Florida in five years. First, much of the crop has been decimated by greening disease. Then Hurricane Irma damaged much of the remaining trees. The Emergency Citrus Disease Response Act (H.R. 112) would permit growers to expense the cost of replanting citrus trees lost by reason of a casualty. This tax break would run through 2026.
Rentals of farmland
Earnings from farming by self-employed farmers—net earnings from sole proprietor activities from Schedule F of Form 1040 or partners/limited liability members from Schedule K-1 (Form 1065)—are subject to self-employment tax. The question recently before the Tax Court was whether income that a farmer received from renting out a portion of his land was farming income subject to self-employment tax. The farmer had formed an S corporation, which leased the farm from him. The S corporation was involved in a poultry operation with a Fortune 1000 company; this operation did not require any personal involvement by the farmer.
The Tax Court concluded that because there was no requirement for the farmer to participate in the activities on the rented land, this was merely a lease and the rental income was not subject to self-employment tax.
A taxpayer can take a charitable contribution to a 501(c)(3) organization of a conservation easement. Instead of the usual adjusted-gross-income limitations that apply to property donations (usually 30% of AGI, but 50% for conservation easements by most individuals), farmers and ranchers have a 100% limit. If they can’t use up their deduction in the year of the donation, the excess can be carried forward to up to 15 years.
The Tax Court recently decided who qualifies for the 100% limit. It’s not enough to be a farmer or rancher; you have to be a “qualified farmer or rancher.” This is someone who derives more than 50% of gross income from farming or ranching. The court made it clear that gain from the sale of farming property is not part of this gross income.