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The excess farm loss deduction limitation

published in McAfee & Taft AgLINC | December 1, 2010

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.

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