With the varying incomes and expenses involved in running a farm, agricultural producers have unique considerations to take into account when filing income taxes.
Karen Mercier, a partner with Mercier Tay Professional Corporation, noted flexibility in reporting optional inventory adjustments is one example.
“Farmers have the opportunity to... have some control over their net income, they can kind of even out their income by taking advantage of the ability to adjust their inventories in some cases,” she detailed.
Another feature that sets farmers and ranchers apart from other industries is they’re on cash basis accounting, as opposed to accrual accounting.
“For example, they could buy all their seed and fertilizer in December and could write that off as an expense for that year. Whereas other businesses wouldn’t be able to expense it because you’re not using it until the next year. It would be inventory, and you couldn’t write it off until you use it. But, farmers, being on a cash basis, it’s when they spend the money, that’s when they can report it as an expense,” detailed Mercier.
Keith Puetz, accountant with Farm and Business Tax Solutions Inc., added, “Farmers don’t pay taxes on their accounts receivable. It’s not an income until the day the cheque is written to you, whereas in the oil field it’s revenue when you do the work even though you might not get paid for 60 days. Another version could be farmers don’t pay tax on inventory until they sell it, but other businesses don’t work like that.”
However, when it comes to the basics of filing a return, producers can check most of the same boxes any other businesses would.
“The can claim expenses just like any other business. They can claim expenses that they incur to earn income, so basically that’s their input. They have to buy feed, fertilizer, and cattle,” Mercier said.
Puetz noted there could be a grey area when it comes to personal expenses.
“Lots of things can be on that when you get into personal utility use, personal vehicle use, and all those things. They’re supposed to keep mileage logs, and how much is business use and all that the proper way.”
Paying for any work done by teenage children is another expense that can be written off.
“If your children work on the farm, you can pay them an appropriate wage of what you would have to pay someone else to do the work. If they’re under 18, then it’s simple because just a cheque with no deductions is sufficient,” Puetz explained.
If a rancher wants to sell their land, Mercier said they could take advantage of what’s called capital gains exemption if their land qualifies, which means money received from the transaction would be exempt from taxes.
“The rules get complicated when farmers are dealing with those situations. They really need to talk to professional advisers,” she noted, adding it could result in unpleasant consequences if done incorrectly.
Similar to any other business or individual, keeping all your information in order can help when sitting down to get your taxes done.
“It’s just about being organized, and try to do your books from your receipts. Verifying them through bank statements and credit card statements. Often, people will find things that they have lost the receipt for, so proper record keeping is helpful for farms,” Puetz stressed.
Mercier encouraged farmers to have a system in place to keep track of their expenses.
“Every farmer has their own way of doing it. Just having a way to keep organized, and the more ways you can keep organized, the most cost-effective it is to get your tax returns prepared. Farmers are business owners just like someone running a liquor store, and it’s the same principles of keeping track of your revenues and your expenses.”
