My dad told me when he first started farming in the 1970s that he was making money and was proud to pay taxes. As the world changed, he realized the only way he could continue to farm was by figuring out how not to pay income taxes. His realization was not to break the law, but to follow it strategically.
Farm bills are important to the success of us as American farmers, but arguably second in importance to the tax code. Previous congresses have passed, presidents have signed, and courts have upheld tax law that encourages farmers to reinvest farm income in their farms. Significant tax incentives discourage farmers from spending farm income on anything other than farm expenses.
The new tax bill continues a familiar theme by encouraging farmers to reinvest income in their farms to avoid taxation. When farmers reinvest in their farms, individual farmers benefit with more successful operations, rural communities benefit from more circulating dollars, farm employees benefit from more jobs, and American families benefit with more abundant food.
Already tax professionals are working overtime to help farmers understand what this new law will mean for our farming operations. Despite the added professional help for our understanding, a growing number of farmers are being left out of the conversation because they have little knowledge the tax code treats farms differently than most businesses. Many new farmers do not understand that taxes are one of the most important tools for success on their farm. New farmers doing retail agriculture, or local foods, are a group particularly uninformed about the special tax provisions offered to farmers.
I have attended farming conferences focused on new farmers for 18 years. I can count on one hand the number of times my fellow panelists and presenters have talked about Schedule F, the form used to report income and expenses related to farming. While Schedule F is obscure to the general public, it is essential to farm survival.
Unfortunately, food and agricultural professionals avoid educating new farmers about Schedule F, especially those serving the non-commodity farmers practicing alternative, sustainable, or retail agriculture.
This lack of information hinders new farmers from building lasting farming operations. If a farmer uses farm income for household or living expenses, they will slow their wealth building potential. On an hourly basis, it makes a lot more sense to work off farm for $20 an hour and pay taxes on that income than to pay taxes on the return to labor and investment from the farm.
To be fair, the incentives for farmers to have off-farm income are very high and extend beyond the tax code. For one thing, it generally takes longer than an hour to generate $20 of net income on the farm. Having someone in the household earning money away from the farm is an economically rational choice. Employer-provided health insurance is another incentive for an off-farm job.
In fact, the majority of farms in the United States use almost none of their farm income for household living. Instead, they use farm income to build wealth by investing in their farms and they use off-farm income from sources such as employment or nonfarm investments for household expenses. This tax bill, the first major income tax reform in over 30 years, continues to support the current model for American farms encouraging wealth creation while discouraging taxable farm income, which is net farm income after expenses.
The fine details of what this tax bill will mean for farmers will emerge in the coming year, but it appears this bill reinforces the need for farmers to understand and use tax provisions unique to agriculture to maintain successful farms, especially in the face of low commodity prices and tightening margins in retail agriculture.
I heeded my dad’s observations when my husband and I bought our own farm in 2005. We have not earned net income from farming, but we have built wealth by reinvesting more than 100% of our farm income back into our farm. We have hired teenagers, spent nearly a fortune at the local coop, hired contractors to put conservation structures like ponds on our farm, and paid tens of thousands of dollars in interest on loans. We have kept every receipt for gloves, tools, tractor repairs, and vet bills. We have tracked every mile driven whether it was a delivery or a trip to the bank or a visit to the county USDA office. We have also hired someone to prepare our tax returns to make sure we are both following the law and claiming every expense (deduction) congresses, presidents, and the courts have allowed us to claim.
In my nearly 20 years of advocating for those pursuing sustainable agriculture, I have seen a great need for helping new farmers understand the importance of the Schedule F to their farming operation. The new tax bill continues an economic structure that both new farmers and those who serve farmers need to be better understand.