Tips for tackling taxes

JUNEAU, Wis. — As 2023 draws to a close, it is likely that Christmas is not the only thing on a farmer’s mind. Income taxes might rank up there with decorating, buying presents and taking care of other holiday to-dos.

“Accountants and tax preparers really want you to come in this time of year to talk about what the year looks like and recap it,” said Katie Wantoch, farm management professor of practice at the University of Wisconsin-Madison Division of Extension, Agriculture Institute.

In a Professional Dairy Producers Dairy Signal Nov. 28 titled “Know Your Numbers for Profit and Production,” Wantoch shared tips for keeping sound records and preparing taxes.

“I always encourage farmers to look at their taxes prior to year-end,” Wantoch said. “There are so many decisions you can make that can change your tax situation that can only be done in that last month of whatever your tax year is.”

Keeping accurate records can make tax preparation less stressful. When it comes to recordkeeping, Wantoch said to keep it simple but be diligent and consistent. Farms often use one of three financial recordkeeping methods — paper, electronic or outsourcing. Software programs for small business, like Quicken and QuickBooks, can be adapted for agricultural enterprises, or arm-specific programs like CenterPoint, Farm Biz, PcMars, Ultra Farm Accounting and others can be used.

“These vary by cost and complexity,” Wantoch said. “When people ask me which pro-gram is best, I tell them to seek the advice of agriculture professionals like your tax preparer or accountant. They’re the ones who will hopefully be assisting you and may be providing training, data entry or account reconciliation and are crucial in helping you select a financial accounting software program.”

The taxes a farmer will pay are determined by the type of business entity structure they are engaged in — sole proprietorship, partnership or corporation. Individual farmers need to file the IRS Form 1040 known as the U.S. individual income tax return. The income section on page one has separate lines to report categories of income like wages and salaries, interest, dividends, refunds, distributions from a retirement plan, unemployment and social security benefits.

For other income sources, Wantoch said a specific form or schedule which may include both revenue and expenses will need to be filed with Form 1040. An individual’s net income from operating a business is reported on Schedule C while net income from a farm business is reported on Schedule F.

“If you’re a sole member of an LLC, you could use the Schedule F,” Wantoch said. “Your accountant will be able to distinguish that for you.”

IRS Form 1040 details net income — gross income minus above-the-line deductions/expenses — from the schedules. The full amount of income received should be reported on Schedule F, including any form of payment that may be used. Expenses, or costs to operate a business, are deductible from income. Only deduct business expenses, not personal expenses.

Social security or FICA and Medicare taxes need to be withheld from employee wages and the withheld amount matched and sent in full to the IRS. Wantoch said employees who work set hours and have a true employer/employee relationship and are provided reasonable wages or other compensation can have these labor expenses deducted on Schedule F as a farm expense. 

“These wages should be included in that person’s income, and they would file their own tax return,” Wantoch said.

In the case of an independent contractor, taxes are not withheld. An independent contractor is a person who sets their own hours and is paid for the job they do. Wantoch said this would be filed on Form 1099 Miscellaneous.

“Seek the advice of a tax preparer or accountant to make sure you’re abiding by farm labor laws,” she said.

A farmer who is a sole owner is considered self-employed and is not allowed to pay him-self or herself a tax-deductible wage. The owner is required to pay self-employment tax on their share of the farm’s net earnings of $400 or more, which is their contribution to Social Security and Medicare. This tax is calculated and reported on Form 1040 Schedule SE.

“Because this is paid on all farm business earnings, it can often be a fairly large expense and even larger than your federal income taxes,” Wantoch said. “This is where I suggest you work with a tax professional to develop a plan to calculate your self-employment tax liability and determine the best strategy to potentially minimize this tax.”

For a dairy farm with a value-added business, income and expenses may be reported on Schedule C to report business activity other than farming.

“Any processing of a commodity that was raised on the farm beyond the stage required to make it marketable as a commodity is considered a non-farming business,” Wantoch said. “For example, if you raise and sell apples, income and expenses for growing the apples would be reported on Schedule F, but if you decide to process the apples into apple bread, cobbler or cider, the income from these processed items would then be listed on Schedule C.”

Another example would be work that might not be related to one’s farm. This would include someone who operates a custom fieldwork business. Income and expenses from this business would also be reported on Schedule C.

Form 4562 is used to report depreciation and amortization — an expense that requires its own form for income tax purposes.

“You cannot include expenses on your Schedule F of the cost of purchasing assets that will be used over time,” Wantoch said. “Instead, the cost of that asset is spread out over multiple years. Depreciation expenses do allow a portion of the cost to be deducted each year on your Schedule F or Schedule C depending on how that asset is related to your business.”

Wantoch said most types of tangible properties such as buildings, machinery, equipment, vehicles, certain types of livestock, and furniture that might be used in a business can be depreciated. However, these assets need to have a useful life that extends substantially beyond one year. Adequate details about the cost and date placed in service and the method of depreciation used should be included on Form 4562.

The gain or loss from sale of assets, such as the sale of business property, are to be reported on Form 4797.

“You should not be reporting proceeds from selling or exchanging of assets used in your business that were reported in Schedule F,” Wantoch said. “There are some exceptions, but when business assets like equipment are sold, any gain or loss from that sale has special tax treatment and will be reported on Form 4797.”

 Assets used in farming like livestock, machinery and property such as land and improvements on that land like buildings, fences, tile lines and grain bins — all of those generating a gain or loss from their sale is computed by subtracting the basis amount or depreciation of that asset from its sale proceeds.

Wantoch said that handing in taxes with no knowledge of the details enclosed is not wise.

“Your name is on it; therefore, you need to know if it’s right,” Wantoch said. “Your tax preparer or accountant is preparing it for you, but you are the one submitting the income tax, and you are liable should there be any issues.”