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Don’t Forget the Domestic Production Deduction

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December 18th, 2009

8120-007-03_cropOne 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:

  • Let’s assume your gross farm income is $750,000, your gross farm expenses are $475,000 and your W-2 wages are $75,000.  This means that the Domestic Production deduction would be equal to ($750,000-$475,000) times 6% or $16,500.  If your W-2 wages were less than $33,000, the deduction would be limited to 50% of your W-2 wages.

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.

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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2 Comments

  • December 23, 2009 at 8:37 am

    Roth & Company, P.C.

    Got farm income? Maybe you have a Section 199 deduction….

    The Section 199 deduction can be a cash-free writeoff for those with manufacturing or farm income. Paul Neiffer explains how……

  • April 16, 2012 at 2:27 am

    Tim Hershberger

    Just a note regarding paying children a reasonable wage. You may have already discovered that “minor” children wages do not qualify for the wage test. FYI

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