Farming and Ranching: Production Exemption
Do you operate a farm or ranch that produces farm and ranch goods you'll sell? Or are you a custom farmer or rancher that performs qualifying activities for a farmer or rancher? If so, you might qualify for the production exemption.
If you qualify for the production exemption, you can buy some equipment and supplies without paying sales or use tax. The production exemption includes special rules for farmers and ranchers.
The exemption doesn't include materials used to make real property improvements such as large grain bins, silos, barns, fences, or utility roads.
To be eligible for the production exemption, your business must:
- Engage in a qualifying farming or ranching activity. This includes:
- Raising stock, poultry, or fish
- Growing crops
- Operating a dairy
- Raising animals for fur
- Operating a fruit farm, truck farm, or orchard
- Operating a ranch or range
- Be primarily devoted to farming or ranching. One way many businesses satisfy this requirement is that they devote the majority of their business operations to qualifying farming or ranching activities. Example: Spending more than 50% of the business's working time and activities producing farm and ranch goods for sale.
- Own the goods you produce
- Sell the goods you produce. Either your business or someone else must sell your goods at retail.
- Report your business' profit or loss on an income tax return.
- Be a custom farming or ranching operation. Your business performs a qualifying farming or ranching activity for a farmer or rancher and receives money or other compensation for the work. Examples:
- Spraying fields
- Branding livestock
- Shearing sheep
- Breeding livestock
- The exemption doesn't include:
- Improving real property
- Clearing land
A custom farmer or rancher doesn't have to own the goods that are produced or the land that is worked as long as the goods produced are sold.
Separately operated business segment
A separately operated business segment can also qualify. It can be a division, branch, or even a cost center. You must keep separate accounting records for the business segment to qualify as a separately operated business segment. This includes recording income, expenses, wages, and assets of the business segment separately. You must also have employees dedicated to operating the separate business segment.
Your business devotes 40% of its business operations to farming and 60% hauling cattle for hire. Farming is an exempt activity, but hauling cattle for hire isn't. Because your business doesn't spend the majority of its business activities farming, you don't qualify for the farming and ranching exemption. Your farming activities might qualify for an exemption if you make them a separate operation.
The farming and ranching exemption is only for businesses that devote the majority of their business operations to qualifying farming and ranching activities trying to make a profit. Operations that aren't eligible for the exemption include:
- Hobby farms or ranches
- Farming or ranching for personal use of the goods raised
- Businesses that only show or race horses
- Businesses that only breed horses to race or show