Tax Planning for Farmers: How to Qualify for Exemption

If you’re a farmer or agricultural business owner, you face some unique tax situations. Proper tax planning strategies can improve your financial management and maximize profitability. Learn about different kinds of tax exemptions available for farmers, how to become a tax-exempt farm and common mistakes to avoid.

Types of Farm Tax Exemptions

Several tax exemptions are available to farmers and ranchers. These exemptions can reduce your taxable income or your tax liability. There are state and federal exemptions.

Sales Tax Exemptions

The broadest ag exemption is state sales tax. Many states offer sales tax exemptions on items used directly in agricultural production. Here are some of the products that often qualify:

• Farm equipment: This category includes tractors, combines, planters, harvesters, attachments and repair parts.
• Livestock: Farms may be exempt from tax when purchasing breeding stock or animals raised for resale.
• Farm supplies: This category includes seeds, fertilizer, pesticides, herbicides and packaging materials. It also includes feed, supplements and medication for animals.
• Other items: Items such as fencing, irrigation equipment, fuel and electricity are generally also tax-exempt as long as they are used directly in agriculture.

Some states require showing a tax-exempt permit card when purchasing supplies or personal property for agricultural activities. Some permits have exclusions, such as on vehicle purchases.

Farm Equipment Exemptions

Federally, Section 179 of the tax code allows farms and ranches to deduct business expenses for depreciable assets such as equipment and vehicles. This deduction lowers the taxes due for the year when the equipment was purchased rather than depreciating it over time. This exemption is only for expenses deemed ordinary and necessary for running a business. Though mainly used for equipment, it can also cover tangible personal property, such as livestock, software, testing equipment, and single-purpose agricultural or horticultural structures, such as livestock shelters.

For the 2024 tax year, the expense deduction limits increase to $1,220,000. 

Other Tax Exemptions

Many farms can also take advantage of these exemptions:

• Property tax exemptions: Your agricultural business may also qualify for reduced property taxes or preferential assessment on farmland. What qualifies as farmland varies since property taxes are handled locally. Criteria may include a minimum acreage or specific use.
• Federal fuel excise tax exemptions: These exemptions mean farmers don’t have to pay federal excise taxes on fuel used in farming operations. To claim these exemptions as a tax credit or refund, fill out Form 4136.
• General business credits: Farmers and ranchers can deduct the costs of supplies, livestock feed, labor, repairs, maintenance, fertilizer and other ordinary business expenses.
• Credit for increasing research activities: Some small businesses may claim a payroll tax credit for increasing research activities, which reduces the employer’s share of Social Security and Medicare taxes.

How to Qualify for Farm Tax Exemption

To become a tax-exempt farm, you must apply for special permits or submit certain forms to your local taxing entity or the IRS.

State Qualifications

State laws vary and may include minimum property size or dollar amount for agricultural sales. In some states, leasing your land to a farmer or rancher is enough to qualify for property tax exemptions. However, depending on zoning laws or other property restrictions, you may not be able to sell agricultural products from a residential property even if you have a business permit.

In many states, farmers must apply for a tax-exempt permit to avoid paying sales tax on purchases for their business. For example, to qualify for an Oklahoma farm tax exemption, farmers or ranchers can apply for an agricultural exemption card from the Oklahoma Tax Commission (OTC) using the Oklahoma Taxpayer Access Point (OkTAP), the state’s online payment system. Farmers must submit relevant IRS forms and other documentation demonstrating farming or ranching for a profit and renew every three years.

Federal Qualifications

First, ensure your operation is legally a farm as defined by the IRS. Generally, a farming business raises or grows a product and sells that product without further processing or modification. Examples of qualifying farm activities include:

• Raising and harvesting crops
• Raising and managing livestock
• Raising and harvesting aquatic resources
• Cultivating useful or ornamental plants

Revenue from being open to the public, such as entry fees or donations to help run an educational program, can still count if those activities are directed toward improving marketing or other business conditions rather than just improving production or conditions for workers. However, running something like a “dude ranch” or a resort, even on farmland, wouldn’t count.

Federally, there is no minimum acreage for farm tax. Instead, the IRS is concerned with whether you operate your farm like a business, how you intend to make a profit and how much you depend on farm income for your livelihood. If less than two-thirds of your income is from farming, you may still qualify if you can prove a profit motive.

Which forms and schedules you’ll need to fill out depends on the type of business you run and which exemptions or credits you claim.

Common Mistakes

Here are some of the most common mistakes farmers make regarding ag tax exemptions:

• Claiming ineligible purchases: Ag tax-exempt purchases must be for business use. Do not claim a sales tax exemption on items for personal use or nonagricultural activities.
• Keeping inaccurate or incomplete records: Keeping accurate records is vital to tracking deductible expenses and preparing your tax return. Having your own records is also useful if you get audited.
• Converting the property to nonagricultural use: Many states include property tax recapture provisions if property previously assessed as farmland is used for other purposes. These provisions allow states to claim back taxes for the years when the property wasn’t farmland but was taxed at the agricultural rate.
• Using incorrect agricultural activity codes: Farmers must include a code on Form 1040 identifying their primary agricultural activity. Entering the wrong code affects taxpayer education programs and census information.
• Not staying updated on changes: Tax rules change continuously. For example, the special depreciation allowance dropped to 60% in 2024 and will drop again to 40% in 2025.
• Trying to do it all on your own: Farm taxes can be complicated. While the IRS offers farm tax classes and has a website dedicated to tax education for farmers and ranchers, consulting with a professional tax preparer can help take some of the weight off your shoulders.

Get Tax Help From Polston Tax

When you’re ready to invest in tax consulting, trust Polston Tax Resolution & Accounting. We’ll put together the perfect team for your business, which can include an accountant, a tax preparer, a tax attorney and a case manager. When you work with Polston Tax, you get advice from experienced professionals who understand what it takes to run a successful farm and keep up with changing laws. We offer many services to support farmers and ranchers in streamlining their operations and achieving long-term success.

Reach out online today to find out how Polston Tax can help your farm.