IRS Publication 225, the Farmer’s Tax Guide, is the federal government’s annual tax reference for anyone in the business of farming. It translates the Internal Revenue Code into agriculture-specific guidance, covering how to report crop and livestock sales, which expenses you can deduct, how to depreciate a tractor or a barn, when to pay estimated tax, and how to handle farm employees. For 2026, two figures stand out from prior years: the Section 179 expensing limit has more than doubled to $2,560,000, and 100% bonus depreciation has been restored for qualified property.
The guide is written for sole proprietors, partnerships, and corporations engaged in farming, plus landlords with farm-rental income. It does not cover taxpayers whose farming activity is a hobby rather than a business, and the difference matters: hobby classification caps your deductions at your farm income and disallows losses against other earnings.
How Farmers Report Income
Most farms use the cash method of accounting, reporting income when the check arrives and deducting expenses when they’re paid. Farming gets a break here that other businesses don’t: farming C corporations and farming partnerships with C corporation partners can generally use cash accounting even at sizes where other businesses would be forced onto the accrual method.1Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting Some large non-family farming corporations remain subject to the accrual requirement. For 2026, the gross receipts threshold under Section 448(c) is $32 million in average annual receipts over the prior three years.2Internal Revenue Service. Rev. Proc. 2025-32
Farm gross income is broader than crop and livestock sales. It includes cooperative distributions, government program payments, and proceeds from culled animals. Livestock held for resale produces ordinary income; livestock held for breeding, dairy, or draft purposes can qualify for capital gains treatment on sale.
Two income-timing tools appear repeatedly in the guide. Crop insurance proceeds and federal crop disaster payments can be deferred to the following tax year if you can show income from the damaged crops would normally have been reported then; the election requires a statement attached to the return identifying the crops and showing the computation.3eCFR. 26 CFR 1.451-6 – Election to Include Crop Insurance Proceeds in Gross Income for the Taxable Year Following the Taxable Year of Destruction or Damage Cash-method farmers can also use deferred payment contracts to push grain or crop sale income into the next year, but the contract has to be a genuine arm’s-length agreement set up with the buyer before you have a right to payment. Asking a buyer to hold a check until January is not a valid deferral, and the IRS will treat the income as constructively received in the sale year.
What Farmers Can Deduct
Ordinary and necessary business expenses are deductible, including feed, seed, fertilizer, chemicals, farm labor wages, and repair and maintenance costs that don’t substantially extend an asset’s useful life. Vehicle expenses can be figured using actual costs or the standard mileage rate, which is 70 cents per business mile for 2026.4Internal Revenue Service. Standard Mileage Rates
Costs that produce a lasting benefit have to be capitalized instead. Land, buildings, and major equipment are the obvious cases. Livestock bought for breeding, dairy, or draft purposes must also be capitalized and recovered through depreciation; livestock bought for resale is deductible when purchased.
Self-Employed Health Insurance
Self-employed farmers with net profit on Schedule F can deduct 100% of health insurance premiums paid for themselves, a spouse, and dependents, including children under age 27. The deduction is taken on the personal return as an adjustment to income. It cannot exceed net farm profit, and it cannot be claimed for any month you were eligible for an employer-subsidized plan through a spouse or other source, even if you didn’t enroll.5Internal Revenue Service. Instructions for Form 7206
Soil and Water Conservation
Expenses for soil and water conservation work that would otherwise have to be capitalized — leveling, grading, terracing, drainage ditches, earthen dams — can be currently deducted under a special election, capped at 25% of gross farm income for the year, with any excess carrying forward under the same cap.6Office of the Law Revision Counsel. 26 USC 175 – Soil and Water Conservation Expenditures; Endangered Species Recovery Expenditures The work has to be consistent with a plan approved by the Natural Resources Conservation Service or a comparable state agency.
Fertilizer and Pre-Productive Costs
Purchased fertilizer, lime, and other soil conditioners are deductible in the year of purchase, even when the benefit spans several growing seasons, provided you don’t elect to capitalize them.
Costs to develop orchards, vineyards, and other long-term crops before they produce must generally be capitalized under the Uniform Capitalization (UNICAP) rules. Farmers whose average annual gross receipts fall below the Section 448(c) threshold can elect out of UNICAP and deduct pre-productive costs currently. The trade-off is that any property placed in service during the election period must then be depreciated using the slower Alternative Depreciation System, and the election is irrevocable without IRS consent.
Depreciating Farm Property in 2026
Capitalized farm assets are depreciated under the Modified Accelerated Cost Recovery System, which assigns each type of property a recovery period:
- 5 years for new farm machinery and equipment (tractors, combines, and similar items where original use begins with you)
- 7 years for used farm machinery, agricultural fences, and grain bins
- 10 years for single-purpose agricultural structures like poultry houses or greenhouses designed exclusively for growing
- 20 years for general-purpose farm buildings such as barns and storage structures
The new-versus-used distinction matters. New farm machinery placed in service after 2017 is in the five-year class; used equipment falls into the seven-year class.7Internal Revenue Service. Publication 225 (2025), Farmer’s Tax Guide MACRS uses a declining-balance method that front-loads deductions.
Section 179 Expensing
Instead of depreciating equipment over years, you can elect to expense the full cost of qualifying tangible property in the year it’s placed in service. For 2026, the maximum Section 179 deduction is $2,560,000. The limit phases out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000.2Internal Revenue Service. Rev. Proc. 2025-32 The deduction cannot exceed your total business income for the year, so it cannot create or increase a net operating loss. Amounts limited by the income cap carry forward.
Bonus Depreciation
Bonus depreciation is an additional first-year deduction on top of Section 179. The TCJA phase-down schedule had bonus depreciation dropping to 20% for 2026, but recent legislation restored the rate to 100% for qualified property placed in service in 2026. Bonus depreciation applies to both new and used property and is not limited by business income. You can elect out of bonus depreciation on a class-by-class basis if you prefer to spread deductions over the normal recovery period.
Together, Section 179 and bonus depreciation let most farmers write off an equipment purchase entirely in the year of purchase. Any remaining basis is recovered through standard MACRS depreciation. This benefit has a back end: when you later sell depreciable farm property on Form 4797, the portion of gain attributable to prior depreciation is recaptured as ordinary income under Section 1245.8Internal Revenue Service. About Form 4797, Sales of Business Property Only gain above total depreciation taken qualifies for capital gains treatment. The larger the upfront write-off, the larger the potential recapture at sale.
The Forms Farmers File
Schedule F (Profit or Loss From Farming) is the central form. Part I lists gross income from livestock and crop sales, cooperative distributions, and government payments. Part II lists deductible expenses and the annual depreciation allowance. The net figure flows to Form 1040. A net farm loss can offset other income, subject to the loss-limitation rules below.
Self-Employment Tax
Net profit from Schedule F is subject to self-employment tax at a combined 15.3% — 12.4% Social Security and 2.9% Medicare.9Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies to net earnings up to the annual wage base, which is $184,500 for 2026.10Social Security Administration. Contribution and Benefit Base All net earnings are subject to the 2.9% Medicare tax, and an additional 0.9% Medicare tax applies to self-employment income above $200,000 for single filers or $250,000 for married couples filing jointly.11Internal Revenue Service. Topic No. 560, Additional Medicare Tax Half of the SE tax is deductible as an adjustment to income.
Form 4835 for Non-Participating Landlords
If you own farmland and rent it out without materially participating in the farming, you report the income on Form 4835 instead of Schedule F.12Internal Revenue Service. About Form 4835, Farm Rental Income and Expenses Form 4835 income is not self-employment earnings and is not subject to the 15.3% SE tax. Material participation depends on how involved you are in day-to-day management, physical labor, and financial risk. Materially participating landlords report on Schedule F and owe SE tax.
Estimated Tax Rules Just for Farmers
Farmers who earn at least two-thirds of gross income from farming get a simplified estimated tax schedule. Instead of four quarterly payments, they have two options:13Internal Revenue Service. Topic No. 416, Farming and Fishing Income
- File and pay by March 1 and skip estimated payments entirely. If March 1 falls on a weekend or holiday, the deadline moves to the next business day.
- Make a single estimated payment by January 15 if you don’t plan to file by March 1.
The two-thirds test can be met using either the current year or the preceding year, which helps farmers coming off a bad crop year keep the benefit.14Internal Revenue Service. Farming and Fishing Income Farmers who don’t meet the threshold follow the standard quarterly rules.
Payroll Taxes If You Employ Farm Workers
Farmers file Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees) rather than the Form 941 used by other businesses. Form 943 is annual, due January 31, with a February 10 extension if you deposited all taxes on time.15Internal Revenue Service. Topic No. 760, Form 943 – Reporting and Deposit Requirements for Agricultural Employers
Agricultural wages trigger Social Security and Medicare withholding under either of two tests: $150 or more in cash wages paid to any single farmworker during the year, or $2,500 or more in total cash and noncash wages paid to all farmworkers combined. Once you’ve filed an initial Form 943, you keep filing every year until you file a final return, even in years with no wages.
Family Members on the Farm
Children under 18 working for a parent’s sole proprietorship, or for a partnership where both partners are parents, are exempt from Social Security and Medicare taxes on their wages.16Internal Revenue Service. Family Employees The exemption disappears if the business is a corporation: a child’s wages from a farm corporation are subject to all employment taxes regardless of age.
Farm Income Averaging
Farm income swings hard from year to year. Income averaging under Section 1301 lets an individual farmer spread all or part of current-year farm income over the three prior tax years, potentially pushing this year’s spike into lower brackets from earlier years.17Office of the Law Revision Counsel. 26 USC 1301 – Averaging of Farm Income You make the election on Schedule J (Form 1040), choose the “elected farm income” amount, and one-third is added to each of the three prior years’ taxable income to recalculate tax.18Internal Revenue Service. Instructions for Schedule J (Form 1040)
You don’t have to have been farming in the base years, and a filing-status change doesn’t disqualify you. Elected farm income includes crop and livestock sales and gains on the sale of farm equipment used in the business for a substantial period, but not gains from selling farmland or development rights. Only individuals qualify. Estates, trusts, and C corporations cannot use farm income averaging; partners and S corporation shareholders average their share on their personal returns.
Loss Limits and the Hobby Loss Trap
Farm losses that offset other income face three limitation regimes. The at-risk rules cap your deductible loss at the amount you’ve personally invested — cash, the basis of contributed property, and amounts borrowed for which you’re personally liable. Losses beyond that amount are suspended and carry forward until your at-risk investment grows.
The passive activity loss rules apply if you own the operation without materially participating. Passive farm losses can only offset income from other passive sources like rental properties or non-participating business interests.
Hobby loss rules draw the most scrutiny on smaller or part-time farms. If the IRS determines the activity isn’t engaged in for profit, deductions are capped at the income the activity generates. The clearest safe harbor is the profit presumption: three profitable years out of five shifts the burden of proof to the IRS.19Internal Revenue Service. Is Your Hobby a For-Profit Endeavor? The IRS also weighs whether you keep businesslike records, your expertise, the time and effort you put in, and whether losses stem from circumstances outside your control.
The Farm Fuel Tax Credit
The main farm-specific credit is the credit for federal excise tax paid on fuels used off-highway for farming — running tractors, combines, and irrigation pumps. Claim it on Form 4136 (Credit for Federal Tax Paid on Fuels).20Internal Revenue Service. Fuel Tax Credit The credit reimburses the excise tax built into the pump price of gasoline, diesel, and other fuels and applies only to fuel consumed in machinery not registered for highway use. Because a credit reduces tax owed dollar-for-dollar, it’s worth more than a deduction of the same size.