Farm owners reporting on Schedule F typically incur some expenditures that represent a mix of business and personal use. While no specific rules exist for making the computation between the business portion and personal portion, all allocations should be done in a reasonable manner. We have provided the following checklist to assist in identifying areas where personal adjustment may be required:
- Personal consumption of raised products. Expenses attributable to the production of livestock or vegetables for personal consumption by the taxpayer and family should be removed from farm operating expenses. Many practitioners will record a single amount in Schedule F “other income” to represent the estimated cost of personally consumed items describing the amount as “personal consumption.”
- Interest expense. The interest expense allocable to the personal residence should be removed from farm operating expenses, to the extent mortgage or construction acquisition debt traces partially to the residence. Qualified residence interest expense is deductible on Schedule A.
- Real estate taxes. The portion of real estate taxes allocable to the personal residence should be removed from Schedule F and reported to Schedule A.
- Insurance. The insurance premiums on the personal residence property coverage are not deductible. Also, premiums for life and disability income policies are not deductible.
- Telephone and utilities. The basic local telephone service and related taxes with respect to the first telephone line to a residence are not deductible. Similarly, the portion of electricity and other household utilities for the personal areas of the home (versus an office area) are not deductible.
- Professional fees. Legal fees associated with personal matters, such as will or divorce, are not deductible. Similarly, the portion of accounting fees related to the personal portion of the tax return must be claimed as a miscellaneous itemized deduction subject to the 2% floor. However, the portion of tax preparation fees reasonably allocable to the farming business are deductible on Schedule F.
- Vehicle expenses. The business portion of vehicle use is deductible, but the personal portion is not. In general, the business use portion of a vehicle is to be substantiated by mileage records or other contemporaneous documentation. However, an automatic 75% qualified business use may be claimed in case of a vehicle used during most of a normal business day directly in connection with business of farming. In this case, no substantiation is required.