Beginning in 2010, most taxpayers who receive an “applicable
subsidy” may not claim income tax deductions for “excess
farm losses” in the same year that they receive the subsidy. The
full amount of farm loss deduction is not disallowed, but is
limited to certain threshold amounts with
the balance claimed in the next tax year.
To Whom Does the Limitation Apply?
The deduction limitation applies to
all taxpayers other than C corporations
that receive a direct or counter-cyclical
payment under Title I of the 2008 Farm Bill
or a Commodity Credit Corporation loan.
Taxpayers who receive payments under
the Conservation Reserve Program (CRP) are not subject to the
limitation because those payments are made under Title II of the
2008 Farm Bill.
What is an Excess Farm Loss?: Threshold Amounts
“Excess farm losses” are the amount of farm losses that the taxpayer will be unable to claim during the tax year in which a
“subsidy” was received.
- Excess Farm Losses = Deductions for the Year – (Farm
Income for the Year + Threshold Amount).
- Threshold Amount = The greater of $300,000* OR the
Sum of Net Farming Income for the past 5 years.
For example, if a taxpayer has $100,000 of net farming income
in each of years 1 through 5, and in year 6 receives an applicable
subsidy and has gross farming income of $200,000 and farming
deductions of $750,000, the taxpayer would have the following
excess farm loss: $750,000 – ($200,000 + $500,000) = $50,000. The
taxpayer could deduct $700,000 of the farming deductions in year
6, but would be unable to deduct the remaining $50,000 in that
year. The taxpayer could deduct the remaining $50,000 during the
next tax year.
Does this Limitation Impact You?
Obviously, the impact of the deduction limitation on you
depends on the nature and history of your business as well as any
previous tax planning that may been done. Farmers and their tax
planners should be aware of these new rules so that they can make
appropriate business decisions. We encourage you to contact your
tax professional to appropriately determine the effect of these new
rules on your business and any existing tax plans.
*For married taxpayers filing separately, the $300,000 threshold value
is decreased to $150,000.