Businesses that qualify for the exemption
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.
Businesses that don’t qualify for the exemption
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