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New tax deduction plows money back into farmers’ pockets
WEST LAFAYETTE, Ind. — A new federal tax deduction rewards farmers for doing what they do every day.

The partial income tax write-off applies to farming activities tied directly to growing crops and raising livestock, said George Patrick, a Purdue University agricultural economist.

“Some farmers are going to find that they are eligible for a new domestic production deduction,” Patrick said.

“The deduction would be limited to 3 percent of the farmer’s net income from crops, livestock or livestock products grown here in the United States,” he added.

The deduction increases to 6 percent for the 2007 tax year and 9 percent for the 2010 tax year, Patrick said.

Farming activities that qualify for the domestic production deduction include such things as cultivating soil, grain storage and handling, aquaculture and agricultural product processing.

“If farmers don’t hire labor and have not paid W-2 wages, then they don’t qualify,” Patrick said. “Doing custom work for the neighbor would not qualify, either.”

For many farmers, their qualified production activity income will be equal to the sum of net income they report on Form 1040 Schedule F and the net gain from the sale of raised livestock reported on Form 4797, Patrick said.

The new deduction is intended to boost economic activity and get around a controversial trade decision.

“Congress had passed some rules letting people who were exporting products exclude that from income, and the World Trade Organization said that that was an illegal export subsidy,” Patrick said. “So Congress came up with this domestic production deduction to try to stimulate employment here in the United States and give taxpayers a little bit of a break for certain types of production.”

Another significant tax change increases the amount allowed under the Section 179 expensing deduction, Patrick said.

“Section 179 expensing used to be limited to $25,000 per year, and now it’s $100,000 indexed for inflation,” he said. “That can give a farmer a tremendous amount of flexibility in terms of tax management. Normally, a farmer is making capital investments each year that would qualify for the Section 179. They can elect differing amounts depending on what would make sense for their particular tax situation.”

A more detailed explanation of farm-related tax changes is available in Purdue Extension publication 359, “Income Tax Management for Farmers in 2005,” by Patrick. The paper is available online at

Published in the December 7, 2005 issue of Farm World.