What Are Deductible Business Expenses?
Kevin Burkett
Extension Associate, Clemson University
Revision by: Dr. Adam J. Kantrovich, Extension Specialist of Agribusiness, Assistant Director of Agribusiness Team, and Director of the Clemson Tax School, Clemson University
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Introduction
Farmers (and all business owners) pay income taxes based on profit, which makes it important to claim ALL legitimate business expenses to not overstate profits. However, it is illegal to deduct expenses that are not legitimate business expenses. There are some variations in what a business records in its accounting system and what ends up as a deduction on a tax return. This could be due to such things as cash vs. accrual accounting method, the farm or business gross revenue, Adjusted Gross Income (AGI) or how transactions are treated under provisions of the tax law. This article is an overview of tax deductions for the farm business.
Ordinary and Necessary
The IRS allows business owners to deduct business expenses that are ordinary and necessary. ‘Ordinary’ means that other people in the same type of business have similar types of expenses. ‘Necessary’ means that the expense is related to a ‘profit motivated’ business purpose (not personal expenses, family living expenses, or hobby expenses). Another phrase that IRS uses to describe business expenses is that they are costs of ‘carrying on a trade or business.’ It should be noted as a reminder that receipts are needed to prove a legitimate expense. A credit card statement is generally not sufficient, as it does not meet the criteria for constructive receipt. To be acceptable to the IRS, a receipt needs to list the specific items that were purchased, the date the items were purchased, the quantity purchased, and the purchase price. However, a credit card statement that specifically states the item purchased, or a receipt that lists the item in question, is sufficient. It is strongly encouraged that a business has separate bank accounts: one for the business, where all business transactions are conducted, thus simplifying recordkeeping and providing better documentation; and a second for family and personal expenses.
Capital Purchases
There are some costs that businesses have that are not fully deductible in the year they are recorded. Most of these non-deductible costs are capital purchases. That includes the cost of buying business assets, the cost of improvements, and start-up costs. For example, items such as machinery, equipment; dairy, breeding, sport, and draft livestock; and buildings are capital purchases. Costs associated with the capital purchase, such as delivery costs or the costs associated with increasing the value or useful life of the asset, would be considered a capital expense. Capital purchases are amortized, or ‘spread over’, a number of years, and are usually recovered by depreciating the asset or improvement. The depreciation length and the amount taken each month or year depends on the item, the depreciation method used, and the tax and income situation that exists. There are two main methods of depreciation: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS), which uses a longer period of time to depreciate an asset. For example, a new tractor has an IRS defined depreciation life of 5 years using GDS or 10 years using ADS. A dairy cow has an IRS defined life of 5 or 7 years, while a building may be as little as 10 years, using GDS for a single purpose building, or as long as 20 or 25 years for general purpose buildings using GDS. There are provisions, referred to as "special depreciation", which include “bonus” and section 179, that allow a business to ‘accelerate’ depreciation expenses and take additional expense earlier in the asset’s life. This does not affect how much depreciation is available, but only when and how much is taken in each particular period. Capital purchases and depreciation provide some flexibility for tax planning purposes. (See Depreciation articles on RuralTax.org that focus on depreciation and on start-up expenses.)
Mixed Business and Personal Use Expenses
Farmers pay a number of expenses that are both business and personal in nature. This is, quite often, due in part to the home being located on the farm. Frequently, bills like electricity, property tax, insurance, telephone, and similar expenses must be split between business use and personal use.
- Usually, by reviewing the bill, the farmer can determine how to ‘reasonably allocate’ the cost between business and personal use.
- Many farms have additional utility meters installed, one for the home and at least one for the farm, so the allocation of the bill does not become an issue.
- Property tax paid on the family home is not a business expense; property tax on the house must be removed from farm property taxes, as to not be deducted as a farm expense.
- All insurances should also be separated between personal and farm/business. Home insurance is typically not considered a farm business expense.
- Many farmers use cell phones for both personal and business use. Some farmers may have separate phones, but normally the same phone is used for farm and personal use. If a farmer only has one phone, they can only deduct long distance charges on that line.
Some farms claim a ‘business use of home.’ This is a very specific designation and can quickly get complicated. This is used when part of the home is exclusively used by the business. In this case, a proportion of the costs can be deducted. See IRS Publication 587, Business Use of Your Home for more information.
Some assets are used partly in the business and partly for personal use. The most common are cars, pickup trucks, and computers. These assets are called ‘Listed Property’ and have special depreciation rules, based on the proportion of business use. For more information on this topic, see IRS Publication 946, How To Depreciate Property and RuralTax.org article Depreciation: Special Rules on Pickups, SUVs, Other Autos and Listed Property.
Non-Deductible Expenses
Frequently, we think that most expenses on the farm are deductible, but there are many that are non-deductible. Below are a few to consider.
- Personal expenses are not deductible, such as groceries, clothing, home repairs, pet food, etc. However, expenses for employee uniforms, employee housing repairs, etc. are deductible.
- Principal paid on a loan is not deductible. Only the interest paid on a business loan is deductible.
- If you deduct as an expense the cost of raising livestock on the farm, when an animal dies, you cannot claim the loss as a business expense. You have already deducted the costs of raising the animal. (In fact, if you receive an insurance payment for the unforeseen, sudden death of an animal, you may have a gain or ordinary income subject to SE Tax to report.)
- If the farm suffers a loss of crops, the loss cannot be deducted since the costs of raising the crops will be deducted as a business expense. (If you receive a crop insurance payment, your farm may even show a profit, if the insurance payment income is greater than the farm expenses.)
- Expenses related to a separate business should not be co-mingled with expenses for the farm. A value-added business (that may even use farm products) would have its own revenues, expenses, and tax forms to complete (e.g., a dairy-based cheese processing business or an apple cider business using apples raised in the orchard).
Deductible Expenses
IRS Schedule F (Form 1040) Profit or Loss from Farming, lists the typical farm expenses in Part II (in alphabetical order!): Car and Truck, Chemicals, Conservation Expenses, Custom Hire, Depreciation, Employee Benefit Programs, Feed, Fertilizer and Lime, Freight and Trucking, Gasoline and Fuel, Insurance, Interest, Labor, Pension, Rent, Repairs, Seeds and Plants, Storage, Supplies, Taxes, Utilities, Veterinary Breeding and Medicine, and Other.
A good portion of the IRS Schedule F (Form 1040) Instructions and Chapter 4, Farm Business Expenses in IRS Publication 225, Farmer’s Tax Guide is devoted to explaining what types of expenses are included on each line. ‘Other’ is the catch-all; typical inclusions are accounting and tax preparation expenses, dues and fees, office expenses, subscriptions, registrations, and promotion fees. The fee you pay for tax preparation must be ‘allocated’ between the farm and personal expense, as not all of it is for the farm. Similarly, expenses shared between the farm and another owned business must be allocated properly.
Truck and car expenses for business are deductible. Keeping a journal-type record book by date to record miles driven and the purpose, for both personal and business, is required to substantiate business miles and thus the deduction. This way you can claim at least the standard mileage rate as determined at least annually by the IRS, if the vehicle used for the farm is a personal vehicle and not owned by the farm. There is a safe harbor rule available for agriculture operations where 75% of a vehicle’s use can be claimed without allocation records. This could, however, leave 25% of the deduction unused if a vehicle is used 100% for business purposes.
If a computer for farm accounting is used, it may be helpful to have a Chart of Accounts set up similar to the list of expenses found on Schedule F (Form 1040) Profit or Loss from Farming. It will make recording transactions and developing reports for income tax preparation much easier. If you need assistance, work with your tax professional or see if there is a state Cooperative Extension faculty or staff member that provides this type of assistance.
Not-For-Profit Farming
If you are not farming with the intent of making a profit, expenses are deductible down to $0 (zero), but not below; you are not allowed to show a loss for a hobby. You are expected to report all revenue from the activity. There are nine factors that may be used to determine whether the farming activity is a for-profit business versus a hobby. There is not a lone determining factor for if the farming activity is a hobby or a business. For additional information on this topic, see IRS Publication 225, Farmer’s Tax Guide, Chapter 4- Farm Business Expenses Not-for-Profit Farming, and Publication 535, Business Expenses. See also Rural Tax article Farm Losses versus Hobby Losses.
IRS Publications
IRS Publication 225, Farmers Tax Guide is very helpful for farmers who are trying to determine if certain expenses are deductible.
To access IRS forms, schedules, and publications, go to www.irs.gov and type the publication, form or schedule number or title in the search box.
Additional Topics
This fact sheet was written as part of Rural Tax Education, a national effort including Cooperative Extension programs at participating land-grant universities to provide income tax education materials to farmers, ranchers, and other agricultural producers. For a list of universities involved, other fact sheets and additional information related to agricultural income tax please see RuralTax.org.
This information is intended for educational purposes only. You are encouraged to seek the advice of your tax or legal advisor, or other authoritative sources, regarding the application of these general tax principles to your individual circumstances. Pursuant to Treasury Department (IRS) Circular 230 Regulations, any federal tax advice contained here is not intended or written to be used, and may not be used, for the purpose of avoiding tax-related penalties or promoting, marketing or recommending to another party any tax-related matters addressed herein.
USDA is an equal opportunity provider, employer, and lender. Rural Tax Education is part of the National Farm Income Tax Extension Committee. The land-grant universities involved in Rural Tax Education are affirmative action/equal opportunity institutions.
This material is based upon work supported by the U.S. Department of Agriculture, under agreement number FSA21CPT0012032. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Agriculture. In addition, any reference to specific brands or types of products or services does not constitute or imply an endorsement by the U.S. Department of Agriculture for those products or services.
Revised August 2025
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