When reporting farm income and expenses, certain taxes are deductible as farm business expenses, while others are not. The IRS allows deductions for specific taxes directly related to farm operations, but prohibits deductions for personal or federal income taxes.
Deductible Taxes on Schedule F (Form 1040)
- Real estate and personal property taxes on farm business assets such as farmland, farm buildings, equipment, and animals. These are deductible on Line 29 of Schedule F.
- Social Security and Medicare taxes paid to match amounts withheld from farm employees’ wages.
- Federal unemployment tax (FUTA).
- Federal highway use tax.
- Contributions to state unemployment insurance or disability benefit funds, if considered taxes under state law.
Nondeductible Taxes
- Federal income taxes, including self-employment tax, are not deductible as farm business expenses. However, one-half of self-employment tax is deductible as an adjustment to income on Schedule 1 (Form 1040), line 15.
- State and local income taxes are not deductible as farm business expenses. They may be itemized on Schedule A (Form 1040), subject to the $10,000 cap for tax years 2018–2025 (if married filing separately, $5,000).
- Taxes on personal-use property, such as your home or personal vehicles, are not deductible as farm expenses.
- Estate and gift taxes, or taxes for improvements like paving or sewers, are not deductible.
- State and local sales taxes on property purchased for farm use must be added to the cost basis of the asset and depreciated over time, not deducted as a separate expense.
Special Considerations
- Taxes directly tied to acquiring or improving a capital asset (such as sales tax on equipment purchase) are not deducted immediately. They are generally capitalized into the asset’s basis and recovered through depreciation.
- Employment-related taxes (such as employer payroll taxes) are deductible only when attributable to farm employees engaged in the farming operation.
- Self-employment tax is not a Schedule F expense, but a portion is deductible separately as an adjustment to income.
Source:
Publication 225 (Farm Business Expenses) Schedule F (Form 1040) Instructions
Disclaimer: Always verify details with current IRS forms, instructions, and your state’s Department of Revenue. For complex situations, consult a CPA or tax attorney.