One of the deductions available to farmers that I see missed on tax returns (and I must admit I have missed it until I review the return) is the deduction for Domestic Production Activities. This can be one of the most complicated tax deductions of all times for larger businesses, but for farmers who follow the simplified method, it is not too hard to calculate.
In brief, you take your total farm income (excluding certain items such as interest income, etc.) and you subtract your farm expenses. This net income from domestic farm activities is then multiplied by a certain percentage. For 2009, this percentage is 6% and for 2010 and thereafter, it will be 9%.
There is an overall limit on the deduction which is the amount of W-2 wages that you paid during the year times 50%. I will give you an example here:
This deduction does not reduce your self-employment income.
For those farmers who are sole proprietorship’s, you may not qualify for the deduction if you do not have any employees or minimal employee expense. This is another good reason to pay reasonable wages to your children if they work on the farm. I have a couple posts on why this makes sense, but if you can maximize your Domestic Production Activities deduction by paying them wages, this is another reason to do it.