Farms and Ranches That Qualify for Production Exemption

To be eligible for the production exemption, your business must:

• Be actively producing 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.

OR

• 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:
  • Harvesting
  • Spraying fields
  • Planting
  • 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.