If you are new to farming or new to taking on the financial responsibilities, be sure to know what qualifies as “farming” and what doesn’t. You’ll also want to know what has changed in 2016.
1Defining farm activities
Farming generally includes activities normally connected to the growing, raising or harvesting of any agricultural or horticultural product.
Raising, feeding, caring for, training and management of animals on a farm are also farming activities. Participation is the “process of producing an agricultural or horticultural product and bearing substantial risk.”
These are factors in determining if an individual is a farmer. In addition, farming activities include: handling, packing, grading, or storage on a farm of any agricultural or horticultural commodity in its unmanufactured state — but only if the owner, tenant, or operator of the farm regularly produces more than half of the commodity.
Processing that is incidental to growing and harvesting is considered a farming activity and associated costs are reported on Schedule F (Form 1040). In contrast, processing of a commodity beyond the minimum to prepare it for initial sale is not a farming activity and should be reported on Schedule C (Form 1040).
“Even if producers aren’t preparing their own taxes, having a baseline understanding is important,” said Barry Ward, Ohio State Extension, leader production business management.
“We know it is difficult for a layperson to keep everything straight and keep up with all the codes. But based on records and taxes, you should be making purchasing decisions, decisions on inputs, end-of-year sales, etc; so it is an advantage if you are somewhat knowledgeable.”
3Standard mileage rate
For 2016, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 54 cents.
There is a special depreciation allowance for specified plants. You can elect to claim the special depreciation allowance for certain specified plants bearing fruits and nuts that are planted or grafted after Dec. 31, 2015.
The three-year recovery period for race horses 2 years old or younger will not apply to horses placed in service after Dec. 31, 2016.
6Maximum net earnings
The maximum net self employment earnings subject to the social security part, 12.4 percent, of the self employment tax is $118,500 for 2016, unchanged from 2015. There is no maximum limit on earnings subject to the Medicare part (2.9 percent) or, if applicable, the Additional Medicare Tax (0.9 percent).
Both paper and electronically filed 2016 Forms W-2 and W-3 must be filed with the Social Security Administration by Jan. 31, 2017. Both paper and electronically filed 2016 Forms 1099MISC that report non-employee compensation must be filed with the IRS by Jan. 31, 2017.
8Social Security and medicare
The Social Security tax rate is 6.2 percent each for the employee and employer, unchanged from 2015. The Social Security wage base limit is $118,500, unchanged from 2015. The Medicare tax rate is 1.45 percent each for the employee and employer, unchanged from 2015. There is no wage base limit for Medicare tax.
The work opportunity tax credit is now available for eligible unemployed veterans who begin work after Dec. 31, 2014, and before Jan. 1, 2020.
Qualified tax exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884C. For more information, visit IRS.gov and enter “work opportunity tax.”
Sources: Farmers’ Tax Guide 2016, www.ruraltax.org, Barry Ward, OSU Extension.
(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)
More Farming 101 columns:
- 8 reasons record keeping for taxes is essential
- 5 tips for post-harvest storage
- 7 tips for family meetings on the farm
- 4 tips for balancing your farm and family
- 4 tips for communicating on the family farm
- 4 tips for firing an employee
- 6 tips for keeping good farm help
- 4 tips for recruiting farm labor
- 5 general farm labor laws
- 4 tips for employing minors
- 4 tips for PTO safety
- 5 things young farmers should know about finances
- The farm balance sheet
- 5 items for your farm’s cash flow statement
- Personal and business records: Keep them separate
- What to include in your farm business plan
- How to approach a lender: Tips for getting a farm loan
- How to use microloans to get your farm started
- Saving for the future: 6 tips for young farmers
- How to create a farm safety kit
- 5 tips for child safety on the farm
- 4 tips for transporting livestock
- 5 ways to better understand tractor stability
- 6 farm equipment hacks
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