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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Farm Expenses

Ordinary and necessary business expenses related to farming generally are deductible. The timing of the deduction is determined by your method of accounting (cash or accrual). However, in addition to the types of expenses claimed by non-farm businesses, farmers may be able to claim deductions for expenses unique to farming activities and in ways more favorable than general tax rules would allow.

Prepaid Farm Supplies

If you are on the cash method of accounting, expenses generally are deductible when paid. However, if you prepay farm supplies, they must be deducted ratably over the period during which they will be used unless you qualify for an exception to this prepayment rule.

Prepaid farm supplies include:

  • Feed, seed, fertilizer, and similar farming supplies not consumed during the year (other than what is on hand at the end of the year but would have been consumed had it not been for fire, storm, flood, drought, disease, or other casualty).
  • Poultry bought for use in your farm business that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry.
  • Poultry bought for resale and not resold during the year.

Prepaid farm expenses are deductible to the extent they do not exceed 50% of other deductible farm expenses in the year (including depreciation and amortization). Any prepaid expenses in excess of this limit are deductible in the following year.

Example ...

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