Income from sheep
farming is taxable
Agricultural land usually
receives favorable tax treatment
Download from IRS
Do you qualify as a "farm"?
Is your farm profitable?
Youth do not have to pay
sales tax on their projects
Write off your expenses
Buildings can be depreciated
Equipment can be depreciated
Depreciate breeding stock
Farmers must pay
Paying taxes means
you're making a profit.
There can be numerous tax advantages to raising sheep or engaging
in similar farming activities. Every state offers some type of tax incentive
to protect land from development. Farmers are usually exempt from
sales tax on items purchased for use in their farm business. Expenses
associated with the farm enterprise can be written off against
Real Estate Transfer Taxes
A realty transfer tax is a state and local tax assessed on real
property when ownership of the property is exchanged between
parties. All types of real property, including residential,
commercial, and agricultural, are subject to the realty transfer
Some states wave the agricultural transfer tax if the purchaser
of the land signs a "declaration of intent" specifying
that the land will remain in agricultural use for at least five
consecutive tax years. Loss of the use assessment during the
5 year period would result in the tax liability, plus penalty,
Agricultural Land Tax Assessment
If land is "actively" used for agricultural purposes,
its value is assessed according to its current use and not according
to its current market value. Thus, agricultural producers pay
lower property taxes. Requirements for agricultural land assessment
(and enforcement of those regulations) vary by state and county.
Factors which determine eligibility have to do with the numbers
of acres in active farming, gross income from the land, and
percent of income from farming -- and different combinations
of those factors. For example, in Maryland, for land to be considered
agricultural use, it should consist of least three (3) acres
and the farming operation should generate a minimum gross income
Sales and Use Tax Exemption
There are agricultural exemptions for sales and use tax. Sales
tax is waived for purchases and rentals of farm equipment, livestock,
feed, bedding and supplies used in the production of agricultural
The raising of livestock by members of youth organizations,
such as 4-H, for agricultural educational purposes also qualifies
for a sales tax exemption. To qualify for an agricultural sales
and use tax exemption, it may be necessary to apply with a state
agency. In other states, all that's necessary is a signed statement
with the vendor.
Farming "For Profit"
To qualify for favorable tax treatment as a farmer or sheep
producer, you must establish that you are in business to make
a profit. A farming operation is assumed to be "for profit"
if it has reported a profit in three (3) of the last five (5)
tax years, including the current year (IRS code, section 183).
If you fail the three years of profit test, you may still qualify
as a "for profit" enterprise if your intention is
to make a profit.
test determine if an operation qualifies as
"per profit" after failing the initial "for
- You operate your farm in a businesslike
manner. (As manager, do you have a business plan, have
you set goals, do you keep records?)
- The time and effort you spend on farming
indicate that you intend to make a profit. (Do you spend
sufficient time and energy on attaining that goal?)
- You depend on income from farming
for livelihood. (Here, full-time farmers have an advantage,
but the income issue relates more to the farmer's need
for deductions than his or her dependence on farm income.
Farmers having off-farm jobs to supplement their income
depend on their farm income, too.
- Your losses are due to circumstances
beyond your control or are normal in the start-up phase
- You change your methods of operation.
(You could begin to winter calves rather than sell them
in the fall or finish cattle to slaughter weights; the
income could be delayed several months.)
- You and your advisers have the knowledge
to carry on the farming activity as a successful business.
(Attending continuing education classes can offset perceived
weaknesses in this area.)
- You made a profit in similar activities
in the past.
- You made a profit farming in other
years and can document how much you made.
- You can expect to make a future profit
from appreciation of the assets used in the farming
No single factor indicates whether an activity is carried on for profit or not. All factors are considered.
Like other forms of agricultural production, sheep raising can
be a tax write-off. Expenses from the sheep enterprise may be
deducted from your tax return to offset ordinary income. Expenses
that can be deducted on your taxes include feed, veterinary costs,
bedding, breeding fees, ram replacement, land and equipment rental,
hired labor, custom work, supplies, marketing and transportation
costs, memberships, education, and depreciation. It is necessary
to file a schedule F in order to deduct expenses from a sheep
Depreciation is a cost of doing business. It is the depletion
of capital assets. The value of goat breeding stock may be deducted
utilizing two different methods of depreciation. The straight
line method deducts 20% of the animal's value per year, while
the accelerated method allows a more rapid rate of depreciation.
However, you cannot depreciate breeding animals that you raised,
because the costs associated with raising them are deducted
as expense items: feed, medicine, etc. Buildings, fencing and
equipment may also be depreciated. The rate of depreciation
depends upon the useful life of the asset, which varies from
three (3) to forty (40) years.
The Section 179 deduction allows you to deduct the full cost of a qualifying asset
in the year it was placed into service rather than to depreciate it out
over several years. There are caps to the total amount written off and limits to the total amount of equipment purchased.
If you make a profit on your sheep enterprise, you have
to pay income taxes and self-employment taxes on the income
unless it is offset by losses in another business.
If you are in the trade or business of farming, you must complete
and file schedule F, "Profit or Loss from Farming,"
along with IRS Form 1040. Schedule F is very similar to Schedule
C for small business owners. For income tax purposes, farmers
may use either a cash or accrual method of accounting. Income
averaging is a method of reducing the annual tax burden.
Self-employment tax (SE tax) is a social security and Medicare
tax primarily for individuals who work for themselves. It is
similar to the social security and Medicare taxes withheld from
the pay of most wage earners. You usually have to pay SE tax
if you are self-employed. You are usually self-employed if you
operate your own farm on land you either own or rent.
The self-employment tax rate is 15.3%. The rate consists of
two parts: 12.4% for social security (old-age, survivors, and
disability insurance) and 2.9% for Medicare (hospital insurance).
You must pay SE tax and file Schedule SE (Form 1040) if your
net earnings from self-employment were $400 or more.
Record keeping is an important aspect of taxes and the primary reason farm records are kept. There are many suitable record keeping systems. Ideally, the farm has a separate check book. A business checking account provides a good record of income and expenses. Transactions can be entered into a journal or ledgers.
Nowadays, most transactions are recorded electronically. There are many suitable programs. Quicken and Quickbooks are especially popular among farmers. Supporting documents need to be stored in a safe place. In generaly, these documents must be kept for at least three years from when the tax return was filed. Most farmers do not file their own taxes; they have an accountant.
Hobby (not-for-profit farming)
If you raise sheep with no intention of making a profit, it is a hobby. Any income from a hobby farm is reported on the first page of IRS form 1040 under "other income," not on a schedule F. Expenses of a hobby can only be deducted on schedule A, itemized deductions. Hobby losses cannot be used to offset unrelated income.
4-H and FFA Projects
If an individual participates in a 4-H Club or FFA project, any
net income received from sales or prizes related to the project
may be subject to income tax. Net income should be reported on
the appropriate IRS form. If the project is primarily for educational
purposes and not profit, the net income is not subject to self-employment
Taxes are complicated and the tax code is constantly changing.
Farmers should consult with tax accountants for the most up-to-date
information on farm taxation and reporting.
Consult an accountant or refer to IRS
publication 225 Farmer's Tax Guide for answers to your tax
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