Deductible Expenses

The ordinary and necessary costs of operating a farm for profit are deductible business expenses. “Ordinary” means what most farmers do, and “necessary” means what is useful and helpful in farming. Schedule F, Part II, lists some common farm expenses that are typically deductible. This chapter discusses many of these expenses, as well as others not listed on Schedule F.

Reimbursed expenses. If you are reimbursed in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. See Refund or reimbursement under Income From Other Sources in chapter 3.

Personal and business expenses. Some expenses you pay during the tax year may be part personal and part business. These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes.

You must allocate these mixed expenses between their business and personal parts. Generally, the personal part of these expenses isn’t deductible. The business portion of the expenses is deductible on Schedule F.

Example. You paid $3,600 for electricity during the tax year. You used ¹ /3 of the electricity for personal purposes and ² /3 for farming. Under these circumstances, you can deduct $2,400 ( ² /3 of $3,600) of your electricity expense as a farm business expense. The personal portion of electricity expense ($1,200) is not deductible.

Reasonable allocation. It isn’t always easy to determine the business and nonbusiness parts of an expense. There is no method of allocation that applies to all mixed expenses. Any reasonable allocation is acceptable. What is reasonable depends on the circumstances in each case.

587

925

936

587 Business Use of Your Home

925 Passive Activity and At-Risk Rules

936 Home Mortgage Interest Deduction

Form (and Instructions)

Sch A (Form 1040) Sch A (Form 1040) Itemized

Deductions

Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From

Farming

461

172

5213

8990

461 Limitation on Business Losses

172 Net Operating Losses (NOLs)

5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit

8990 Limitation on Business Interest Expense IRC 163(j)

463

334

463 Travel, Gift, and Car Expenses

334 Tax Guide for Small Business

20 Chapter 4 Farm Business Expenses Publication 225 (2025)

Prepaid Farm Supplies

Prepaid farm supplies include the following items if paid for during the year.

• Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought.

• Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry.

• Poultry bought for resale and not resold during the year.

Deduction limit. If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions, including depreciation and amortization expenses, except prepaid farm supplies). This limit doesn’t apply if you meet one of the exceptions described later. See chapter 2 for a discussion of the Cash Method of accounting.

If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry.

Example. During 2025, you bought fertilizer ($40,000), feed ($10,000), and seed ($5,000) for use on your farm in the following year. Your total prepaid farm supplies expense for 2025 is $55,000. Your other deductible farm expenses totaled $100,000 for 2025. Therefore, your deduction for prepaid farm supplies can’t be more than $50,000 (50% of $100,000) for 2025. The excess prepaid farm supplies expense of $5,000 ($55,000 − $50,000) is deductible in a later tax year when you use or consume the supplies. However, the deduction limit doesn’t apply if you qualify for the exceptions listed next.

Exceptions. This limit on the deduction for prepaid farm supplies expense doesn’t apply if you are a farm-related taxpayer and either of the following apply.

1. Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances.

2. Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years.

If one of the exceptions is applicable, then the 50% limit on the deduction doesn’t apply.

Payment for the purchase of feed. Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you aren’t entitled, by contract or business custom, to a refund or repurchase.

The following are some factors that show a payment is a deposit rather than for the purchase of feed.

• The absence of specific quantity terms.

• The right to a refund of any unapplied payment credit at the end of the contract.

• The seller’s treatment of the payment as a deposit.

Therefore, you can deduct more than 50% of prepaid farm supplies.

You are a farm-related taxpayer if any of the following tests apply.

1. Your main home is on a farm.

2. Your principal business is farming.

3. A member of your family meets (1) or (2).

For this purpose, your family includes your brothers and sisters, half brothers and half sisters, spouse, parents, grandparents, children, and grandchildren.

Note. Previous tax court cases have stated the 50% limitation applies to “feed, seed, fertilizer, or other similar farm supplies.” This means marketing, packaging, and other supply items not used directly in production may not be subject to the 50% limitation. Agro-Jal Farming En- terprises, Inc. et al. v. Comm., 145 T.C. No. 5 (2015).

Prepaid Livestock Feed

Whether or not the deduction limit for