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CAUTION

This rule doesn’t apply to the purchase of commodity futures contracts.

Publication 225 (2025) Chapter 4 Farm Business Expenses 21

the date of transfer is different from its fair market value. Any gain or loss has the same character the exchanged property had in your hands. For more information, see chapter 8.

Child as an employee. You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. Include these wages in the child’s income. The child may have to file an income tax return. These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Wages paid to minor children become subject to social security and Medicare taxes in the month the dependent child turns 18 years of age. For more information, see Family Employees in chapter 13.

Employment Credits

Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit (Form 5884).

Repairs and Maintenance

You can deduct most expenses for the repair and maintenance of your farm property. Common items of repair and maintenance are repainting, sealing cracks or replacing broken windows on a farm building, and routine maintenance of trucks, tractors, and other farm machinery. However, expenses for improvements to depreciable property are generally capital expenditures. Amounts are paid for improvements if they are for the betterment of your property, are for a restoration of your property, such as the replacement of major components and substantial structural parts, or if your expenditures adapt your property to a new or different use. For example, if you replace a few shingles on the barn roof, these expenses are generally deductible as repairs and maintenance. If you replace (not repair) the entire barn roof with a new roof, then this expense is generally a capital expenditure. For more information, see Capital Ex- penses, later.

Under certain conditions, you can elect to capitalize amounts paid for repair and maintenance. See Regulations section 1.263(a)-3(n) for more information.

Interest

There may be a limit on the amount you can deduct as farming business interest paid or accrued during the tax year related to your farming business, such as for farm mortgages and other farm obligations. However, a small business taxpayer is not subject to the business interest expense limitation and is not required to file Form 8990. A small business taxpayer is a taxpayer that is not a tax shelter (as defined in section 448(d)(3)) and has average annual gross receipts of $31 million or less for the 3 prior tax years under the gross receipts test of section 448(c). Gross receipts include the aggregate gross receipts from all persons treated as a single employer, such as a controlled group of corporations, commonly controlled partnerships or proprietorships, and affiliated service groups.

The gross receipts test of section 448(c) applies only to corporations and partnerships, but for purposes of the business interest limitation the gross receipts test applies to individuals as if they were corporations or partnerships. Thus, any individual with a farming trade or business operating as a sole proprietorship is subject to the gross receipts test.

Certain businesses subject to the business interest expense limitation may elect out of the limitation. Certain farming businesses and specified agricultural or horticultural cooperatives (as defined in section 199A(g)(4)) qualify to make an election not to limit business interest expenses. This is an irrevocable election. If you make this election, you are required to use the alternative depreciation system (ADS),

discussed later in chapter 7, to depreciate any farming property with a recovery period of 10 years or more. Also, you are not entitled to the special depreciation allowance for that property. For an individual with more than one qualifying business, the election is made with respect to each business. If you are required to limit your business interest expense, the amount you cannot deduct for the tax year is generally carried forward to the next tax year. However, there are special rules for partnership treatment of disallowed business interest. See the Instructions for Form 8990 for more information.

Subject to the preceding rules, and assuming other limitations do not apply, you can deduct as a farm business expense interest paid or accrued during the tax year related to your farming business, such as for farm mortgages and other farm obligations.

Cash method. If you use the cash method of accounting, you can generally deduct interest paid during the tax year. You can’t deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. You can, however, deduct the interest when you start making payments on the new loan. For more information, see Cash Method in chapter 2.

Example. You have a term debt payment due to your local bank November 1 that consists of $15,000 of principal and $5,000 of interest. Your checking account does not contain enough funds to make the term debt payment, so you advance $20,000 from your line of credit at the same bank. The interest portion of the term debt payment is not deductible until the line of credit is repaid.

Prepaid interest. Under the cash method, you generally can’t deduct any interest paid before the year it is due. Interest paid in advance may be deducted only in the tax year in which it is due.

Accrual method. If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. However, you can’t deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. For more information, see Accrual Method in chapter 2.

Allocation of interest. If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Allocate the interest to the following categories.

• Trade or business interest.

• Passive activity interest.

• Investment interest.

• Portfolio interest.

• Personal interest.

You generally allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disbursements to specific uses.

The easiest way to trace disburse-

TIP ments to specific uses is to keep the

proceeds of a particular loan separate from any other funds.

TIP

A Form W-2 should be issued to the child employee.

The fact that your child spends the wages to buy clothes or other necessities you normally furnish doesn’t prevent you from deducting your child’s wages as a farm expense.

The amount of wages paid to the child