J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

40.28 Farming Expenses

Certain types of expenses related to farmers enjoy special tax treatment. Here are some key rules unique to farmers:

Depreciation.

There are special recovery periods for certain farm animals and equipment, including farm buildings and agricultural structures (see IRS Publication 225).

Prepaid farm supplies.

While cash method farmers usually can deduct expenses in the year they are paid, prepaid farm supplies must be deducted ratably over the period in which they are used. However, there is a special exception that allows them to be deducted in the year of payment if they do not exceed 50% of other deductible farm expenses (including depreciation and amortization); any prepaid expenses in excess of this limit are deductible in the following year.

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Caution

Farming Losses Cannot Be Used as a Tax Shelter

There is a limit on how much of certain subsidies can be used to offset nonfarm income on Schedule F. The limit is the greater of $300,000 ($150,000 for married persons filing separately) or the net farm income received over the past five years.

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Livestock feed.

While the cost of feed usually is deductible in the year it is consumed, it can be deducted in the year of payment if:

1. The expense is a payment for the purchase of food (and not a deposit).

2. The prepayment has a business, and not merely a tax avoidance, ...