There is a provision in the Income Tax Code that disallows certain farm losses that are in excess of $300,000 (or the aggregate farm income for the last 5 years). This excess amount is not allowed in the current year, but is carried forward and allowed as a deduction in the next tax year (assuming you still meet the requirement in that year).
This provision only applies if the farmer is receiving any direct or counter cyclical payments under Title I of the 2008 Farm Bill (as extended last year). The proposed 2013 farm bills by both the Senate and Congress eliminates these payments, so there is a strong chance that after passage of this farm bill and full implementation that this provision will no longer apply.
We have seen several of our clients that were unable to fully deduct their current farm loss even though they had received less than $5,000 in direct payments. The farmer does not lose this deduction, but simply carries it forward.
Also, with the drought last year, any expenses that are a direct result of the drought are not included in the calculations for this limitation.
We will keep you posted if this provision no longer applies.
Paul Neiffer, CPA
Tags: excess farm loss