Net Operating Losses for Farmers

If you are a farmer who had a loss from the operation of your business, you might be eligible for favorable tax treatment of that loss. Generally, a taxpayer is entitled to carry back a net operating loss to the two tax years before the loss year and to deduct it from the income of those years. In that way, the taxpayer may get a refund of all or part of the income taxes paid in those prior years. If the net operating loss is not used up in the carry-back period, the taxpayer is permitted to carry it forward for the next 20 years.

However, farming losses qualify for longer carryback periods. The carry-back period for a farming loss is five years instead of the two years available to most types of businesses. A farming loss is defined as the lesser of: (1) the amount of a taxpayer’s net operating loss for the tax year if only income and deductions attributable to the taxpayer’s farming business were taken into account; or (2) the amount of the net operating loss for the tax year. The carry-forward period for farmers remains the same. If the loss was before 1996, however, the carry-forward period is 15 years.

The term “farming business” is defined in the Internal Revenue Code as the trade or business of farming, and it includes the operation of a nursery or sod farm and the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees other than evergreen trees which are more than six years old when severed.

A taxpayer can choose to treat a farming loss as if it were not a farming loss. If this election is made, the loss is subject to the general two-year carry-back period.

Whether a farmer elects the five-year or two-year carry-back period, he or she refigures all deductions, credits, and tax for each of the years to which the net operating loss was carried back. If the refigured tax is less than the tax originally paid, the taxpayer can get a refund by filing an amended tax year for the applicable year(s).