According to a 2018 analysis by the U.S. Department of Agriculture, half of all American family farms reported that they lose money each year, and if they do have any positive income, it often comes from financial activities that are off the farm. While many farms are of course truly struggling, the Internal Revenue Service (IRS) has been increasingly concerned that some of these claimed losses are not legitimate. Unfortunately—alleged abuses by a few impact everyone: in the form of changes in the tax law and rumored increased enforcement relating to farming income and deductions.
In 2017, changes in the tax law capped how much money could be claimed as a loss. As the IRS explained, the law meant that “’net operating loss deduction,’ (NOL)… cannot exceed 80 percent of the taxable income of the taxpayer computed without regard to any NOL deduction (80- percent limitation).”
That same year, the IRS was also considering tougher enforcement of Schedule F claims, as it began a pilot program to increase auditing of farming losses. According to an internal memo, the IRS was going to be taking harder looks at Schedule F expenses, such as:
- Whether deductions are truly ordinary and necessary business expenses
- Whether mortgage interest is properly attributable to the real property used in farming
- Whether the maintenance and equipment expenses did not add to the property’s value or appreciably prolong its life
There is, however, some potentially good news for farmers carrying losses: As of July 1, 2021, the CARES Act suspended the 80% limitation for years with net operating losses beginning on December 31, 2017, and were deducted in taxable years beginning December 31, 2020. Additionally, the CARES Act also allows for a five-year carryback for losses arising during the Covid timeframe.
While these most recent changes will hopefully aid farmers, these changes also underscore just how important it is to confer with qualified tax counsel regarding the ever-changing and complicated tax laws relating to farming.
Rod Atherton, JD
Attorney
Email Rod Atherton
(314) 454-9100
