Consider the tax advantages small farms might provide | Chubb (2024)

Before you do anything, make sure your local zoning department allows farming. These zoning requirements typically don’t apply if you’re growing food for you and your family only. But once you start selling the food you grow or the livestock you raise, you may need a special business permit and possibly approval from the health department and other regulatory agencies.

While all 50 states provide tax breaks for agricultural land, their rules may be different, depending on where you live and what you’re farming. To qualify for these tax breaks, most states require you to have a certain amount of land in use, and some require a specific amount in profits, to show that you’re actually in the small farm business.

What qualifies as a small farm for tax purposes? In the eyes of the IRS, a small farm must be actively cultivating, operating, or managing land for profit. That could include livestock, poultry, dairy, fish, vegetables, or fruit. On the other hand, a hobby farm — typically a few horses, other livestock, or crops used for leisure and enjoyment — probably won’t qualify for tax breaks.

To qualify as a true farm business, you’ll need to show your intention to make a profit, although you don’t have to actually make a profit each year. The IRS may require you to produce a business plan, profit and loss statements, verification of your bank account, daily activity logs, and financial records showing typical farm expenses and assets. These might include farm machinery purchases, operational costs, vehicle purchases and maintenance, and costs for chemicals, feed, fertilizer, pesticides, salaries, and employee benefits.

You may qualify for additional tax breaks if you’re willing to give up development rights on your land and donate a conservation easem*nt to a charitable land trust. This could permanently reduce the market value of your property and potentially allow you to claim a deduction on your tax return. You may also be able to tap tax breaks for alternative energy, like using solar panels to generate electricity for your farm. Your tax advisor can provide details on these types of opportunities and other tax breaks for farmers that might be available to you.