Farm Expenses Do not deduct the following:
- Personal or living expenses (such as taxes, insurance, or repairs on your home) that do not produce farm income.
- Expenses of raising anything you or your family used.
- The value of animals you raised that died. Inventory losses.
- Personal losses.
If you were repaid for any part of an expense, you must subtract the amount you were repaid from the deduction.
Capitalizing costs of property.
If you produced real or tangible personal property or acquired property for resale, certain expenses must be included in inventory costs or capitalized. These expenses include the direct costs of the property and the share of any indirect costs allocable to that property. However, these rules generally do not apply to expenses of:
- Producing any plant that has a preproductive period of 2 years or less,
- Raising animals, or
- Replanting certain crops if they were lost or damaged by reason of freezing temperatures, disease, drought, pests, or casualty.
Election to deduct certain preproductive period expenses.
If the preproductive period of any plant you produce is more than 2 years, you can elect to currently deduct the expenses rather than capitalize them. But you cannot make this election for the costs of planting or growing citrus or almond groves incurred before the end of the fourth tax year beginning with the tax year you planted them in their permanent grove. You are treated as having made the election by deducting the preproductive period expenses in the first tax year for which you can make this election and by applying the special rules, discussed later.
If you make the election to deduct preproductive expenses for plants:
- Any gain you realize when disposing of the plants is ordinary income up to the amount of the preproductive expenses you deducted, and
- The alternative depreciation rules apply to property placed in service in any tax year your election is in effect. For details, see Uniform Capitalization Rules in chapter 6 of Pub. 225.
Prepaid farm supplies. In most cases, if you use the cash method of accounting and your prepaid farm supplies are more than 50% of your other deductible farm expenses, your deduction for those supplies may be limited. Prepaid farm supplies include expenses for feed, seed, fertilizer, and similar farm supplies not used or consumed during the year.