Tax Day is right around the corner, and people from all across the country and from all walks of life are working through the complex and confusing process of filing their taxes. Like everyone else, farmers (and their tax professionals) have to work through a maze of rules and regulations to complete their returns. As Tax Day approaches, let’s take a moment to make some observations about farmers and taxes.
First, the vast majority of farms in North Carolina are sole proprietorships, partnerships, or LLCs. In fact, according to the 2012 US Census of Agriculture, just shy of 93% (46,695) of North Carolina farms are organized as sole proprietorships or partnerships. This means that most North Carolina farmers report the money they make (or lose) from farming on individual tax returns. Therefore, individual income tax policy is particularly important to farmers.
Second, farmers report their income differently than the typical taxpayer. When it comes to reporting income, most people receive a W-2 from their employer and use that information to fill out their returns. That’s about all there is to it. Farmers, like other business owners, have to report their gross income on a special form (farmers use the Schedule F) that summarize their farm income, which is then reported on the farmer’s individual return.
But arriving at a final farm income figure takes a lot of work. Farmers have to account for their income resulting from sales of livestock, crops, and any other products they raise. On top of that, farmers have to report as income things like agricultural program payments, crop insurance payments, and income from federal or state fuel tax credits. Then farmers have to subtract expenses such as vehicles and equipment maintenance and repairs, the purchase of seeds and feeds, fertilizers and chemicals, wages paid to hired labor, and veterinary care and medicines costs. Farming can be a volatile and unpredictable business, so it’s not uncommon for farmers to report little or no income from farming.
Finally, farmers have to deal the ever-changing tax code, as Congress and the North Carolina General Assembly frequently revise the law. Last year Congress made permanent several tax provisions that benefit farmers, most notably those allowing farmers to accelerate the depreciation of their farm equipment. And at the state level, the General Assembly has been working on tax reform for the past three years with the goal of lowering personal and corporate tax rates while expanding the base—the number of people who must pay certain taxes. Lowering tax rates, particularly individual taxes, is good for farmers. But expansion of the tax base presents questions for farmers because the tax code contains many exemptions, deductions, and credits that help farmers stay in business and remain profitable.
Here’s an example: before 2014, farmers were eligible for North Carolina sales tax exemptions on farm equipment and a variety of inputs like feed, seed, and fertilizer. These exemptions on business-to-business transactions help avoid the negative economic effects of tax cascading, which occurs when the components that go into making a product are taxed at various stages of the manufacturing process. When the General Assembly lowered personal income tax rates for the first time in 2013—which was good for farmers generally—it also expanded the sales tax base by establishing a new $10,000 annual gross sales threshold for farmers to remain eligible for their sales tax exemptions. As a result, some farmers lost their tax exempt status. But at NCFB’s urging, the legislature added in provisions that allowed some of these farmers to stay sales tax exempt by averaging out their annual sales over a three year period. It also created a conditional farmer status for new farmers and those close to the gross sales threshold.
Farmers aren’t unique when it comes to wrestling with the tax code. Like all taxpayers, they need certainty when it comes to tax policy, especially in the area of individual income taxes. As Congress and the General Assembly continue their work on tax policy, NCFB will be at the table representing the interests of North Carolina’s farm families.