Are There Tax Breaks for Farmers?
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Farmers in North Carolina, like everyone else, pay many different types of taxes. In some cases, farmers can benefit from laws that allow them to reduce certain taxes. This document will provide an overview of some of those benefits.
Note that this is neither a comprehensive treatment of applicable laws, regulations and policies, nor is it a complete list of potential benefits. This article is intended as a starting point, and farmers are urged to seek assistance and advice from a tax professional or other expert on these matters. Also note that this information is believed to be current on the date of publication, but laws and regulations are subject to change.
Through a program called Present Use Valuation, farmers have the potential to reduce their annual property tax bill. This program assigns property values to qualifying farmland based on its value as agricultural land, as opposed to more lucrative uses such as development. Thus the amount of property taxes, which is based on the assigned value of the land, is reduced (or more accurately, a portion of the tax bill is deferred, and becomes payable if or when the property is withdrawn from the program or becomes ineligible).
To qualify, parcels must be at least a certain number of acres (5 acres if used for horticulture, 10 acres if used for crops or livestock, 20 acres if used for forestry). There is also an annual income requirement of $1,000 (waived for forestland). Forestland must be managed according to a plan that addresses specific items and is written by a qualified individual. Other criteria also apply, such as periodic audits, and (with some exceptions) a four year waiting period to enroll a parcel after purchase.
While this benefit is available across the state of North Carolina, it is implemented by the tax office in each county. Thus there may be minor variations in implementation from county to county. For complete details, read this guide. The application form is available from the county tax administration office.
SALES TAX ON PURCHASES OF FARM SUPPLIES AND EQUIPMENT
Farmers who qualify are exempt from paying sales tax on certain farm supplies and equipment. To qualify, farmers must have an average annual gross income of $10,000 from farming operations for the three preceding years. Those who are new to farming may apply for “conditional” status, but there are extensive recordkeeping and reporting requirements, plus penalties for failure to meet those requirements.
This program is administered by the North Carolina Department of Revenue. An application form can be downloaded from their website.
TAX DEDUCTIONS (I.E. REDUCING TAXABLE INCOME)
As with almost any business venture, farmers may deduct certain farm related expenses from their taxable income on their federal tax return. This might include expenses such as seed, fertilizer, insurance, equipment, supplies and more. As a reminder, a deduction from taxable income may reduce the amount of income tax that has to be paid, but it’s not a dollar for dollar reduction. Here’s an overly simplified example:
Farmer Jane and her spouse had an income of $50,000 for 2020, for which they would pay $5,608 in taxes if they file a joint return. However, she bought $1,000 worth of fence posts and barbed wire, which qualifies as a deductible expense. That brings their income down to $49,000, for which they would have to pay $5,488 in taxes. The bottom line is that deducting the $1,000 farm expense saved them $120 in federal income taxes. This may also save them money on State of North Carolina income taxes, since those are calculated using “adjusted gross income” from the federal form, from which farm-related expenses have already been deducted.
Farmers use the federal tax form known as Schedule F to report deductible expenses, farm income and other farm related information. The corresponding instructions provide specifics regarding allowable deductions.
OTHER TAX BENEFITS FOR FARMERS
Off-road fuel use – North Carolina Farmers may qualify for a refund of the taxes paid on fuel used for tractors and other equipment that do not operate on public roadways. They may also have the option of purchasing “off-road diesel” on which such taxes are not charged. Note that specific provisions may come into play when a farmer who claims the tax refund ALSO claims fuel costs as a deduction against taxable income.
Exempt from charging sales tax – Farmers do not have to charge sales tax when selling raw agricultural commodities they produce on their own farm. While this is not a direct financial benefit to farmers, it does perhaps simplify recordkeeping, transactions and reporting.
Conservation easements – Farmers are widely known for their love of the land and their desire to leave a legacy. Conservation easements are a tool farmers can use to protect farmland for current and future generations. In a typical scenario, farmers sign a contract with a government agency or land trust pledging that the land will remain in farming or forestry, and never be converted to other uses (e.g. neighborhoods, shopping centers, industrial parks). Since removing the possibility of development may decrease the market value of the parcel, the corresponding loss in value can possibly be used as a tax deduction in the form of a charitable contribution. This is a complex and time-consuming process that is not widely available, but may be of interest in limited situations.
As noted above, this article is not a comprehensive treatment of the topic. Each of the possible benefits listed above has various caveats that farmers should seek to fully understand before taking action. Seeking help from a qualified expert (e.g. lawyer, tax professional, etc.) is strongly recommended.