Most large farm owners in the Sacramento Valley know about agriculture-related tax breaks such as the California partial sales and use tax exemption for farm equipment, machinery, and diesel fuel used in producing and harvesting agricultural products. Smaller farmers in Placer and Amador Counties can take advantage of these tax breaks too. Maybe you already do.
But what if you run a small-scale farming business that doesn’t use machinery or diesel fuel, but instead relies on solar power? Tax breaks like these might not apply. Or maybe you don’t consider yourself a farmer at all and think you aren’t entitled to any agricultural-related tax breaks.
You might be mistaken.
Not only will you be missing out on invaluable tax breaks, you might get into a dispute with the IRS over whether growing heirloom varieties of grapes is a business or a hobby and what income you need to report.
Turn to a Roseville Accounting Firm That Specializes in Agribusiness
Our tax professionals have an in-depth understanding of the federal and state of California farming tax code and we specialize in small agribusinesses just like yours—from wineries to flower farms, fruit and nut orchards to horse breeders and livestock ranchers all over the Sacramento Valley.
We make it our job to stay current on tax laws affecting agricultural-related businesses—large and small. And we work with you all year long and make sure you understand how every decision you make about your farm affects your tax situation.
Consider the following hypothetical scenarios and how these taxpayers are able to take advantage of three different tax breaks:
Property Tax Breaks
Scenario: As a nature lover, there’s nothing better than observing the wildlife roam around your 100-acre property. Or is there? What if you created a “backyard” wildlife habitat and conservation area, planted heirloom varieties of fruit trees in orchard form for the wildlife and turned it into a property tax break?
California, like every other state, offers property tax breaks for agricultural land. Specifically, farmers are able to take 20 to 75 percent off their property tax bill if they agree not to develop their land for ten years and do so with at least 100 acres. This is known as the Local Option Farmland and Open Space Program (Williamson Act).
In addition, under California state law, fruit and nut-bearing trees or grapevines planted in orchard or vineyard form until harvested, are growing crops exempt from taxation. Fruit and nut trees are exempt until four years after the season in which they were planted. Grapevines are exempt until three years after the season in which they were planted.
Income Tax Breaks
Scenario: You’ve bought a weekend home in Placer County and started growing lavender in the acreage adjacent to your home. You offer tours and sell bunches of lavender, lavender scented soaps, and candles that you’ve made at the Roseville farmer’s market–and realize that you’re making money. Your hobby is now considered a business.
Scenario: You operate a farm stand in front of your house where you sell the fruits and vegetables that you’ve grown on your property. You’re not making a large profit yet, but the extra income comes in handy.
Farms classified as a business, rather than a hobby fare better under federal and state tax codes. For example, if farming is a hobby for you, then you are only able to deduct expenses related to that hobby, and you can’t claim a tax loss. If your farming activities are classified as a business, you can take advantage of many more deductions and tax breaks.
There are nine criteria for establishing a farm as a business including operating your farm in a businesslike manner, losses are due to circumstances beyond your control, and you depend on income from farming for your livelihood. But you have to keep good records.
The IRS is not going to take your word for it. If you need help setting up a system to keep track of hours worked, expenses, and sales, call Cook CPA Group at 916-724-1665
Green Tax Breaks
Scenario: You planted a grove of olive trees and built a small outbuilding housing the equipment you need to cure the olives and press them to make olive oil, which is sold to local grocers. You install solar panels on the roof that provide enough electricity to power your operations—and your home.
You could qualify for a federal tax credit equal to 30 percent of the cost of qualified expenditures for a system that serves your home as long as it is used as a residence. The tax credit expires at the end of 2016. You may be eligible for tax breaks available through the State of California as well.
Scenario: Ten years ago you retired and relocated to a property you purchased in the San Joaquin Valley in order to pursue your lifelong dream of breeding racehorses. For the first five years, it was touch and go, but for the last two years, you’ve made enough money to provide almost all of your income. Now you’re looking for a tax break, so you’ve decided to donate a conservation easement to the charitable land trust whose land abuts yours.
Donating a conservation easement allows you to conserve land, maintain private property rights, and in many cases realize significant federal tax benefits. In 2015, the federal deduction is limited to 30 percent of your adjusted gross income over a period of six years.
If you haven’t filed your 2014 tax return yet, but donated land to a charitable trust, you may be able to take an enhanced deduction of 50 percent of AGI in any given year.
Call the Roseville tax accountants of the Cook CPA Group today at 916-724-1665 for more information about agricultural-related tax breaks. We’re here to help.