Utility expenses are generally ordinary and necessary business expenses for a farmer. These expenses typically include gas, electricity, water, telephone, and other utilities required to operate the farm. Because farmers may only deduct those expenses directly related to the business, they must allocate the cost of utilities between those for business and those for personal use. This allocation can be made using “any reasonable method.” Farmers report business utility expenses on Line 30, Schedule F.
While it is best to have separate meters, some utilities are singly delivered, such as the phone landline. The base rate of a single phone line to the farmhouse may not be deducted. Charges for business calls on that line or charges for a second, business line are deductible. Likewise, cell phone charges for calls relating to the business are deductible, as is the charge for a cell phone used exclusively for the business. If the cell phone used in the farm business is part of a family cell phone plan, the farmer must allocate and deduct only the portion of charges attributable to the farm business calls.
Example 1. Billy operates a farm and has a landline which goes to his farm home. The base rate is $15 per month, and he averages a phone bill of $150 per month of which $75 is for business calls. Billy can deduct $900 [$75 x 12] of his phone chages against his farm income. He reports this expense on Line 30, Schedule F.
Example 2. Jose and Rosa operate a diverse crop and livestock farm. They use propane to heat their house and the livestock barns, however, there are unique propane tanks for each building and the billing is separated between the home and the farm. They have a single meter each for water and electricity which runs to the house and to the farm buildings and livestock water tanks. Based on the utility companies estimates, Jose and Rosa allocated $100 a month for personal electricity and $75 per month for water. The remaining balance is allocated to farm utilities. This year they paid $6,000 for electricity and $4,500 for water. Therefore, $4,800 of the electricity bill is for the farm business [$6,000 - $1,200] and $3,600 is for watering livestock. [$4,500 - $900] Jose reports and deducts $8,400 as allowable farm utility expenses on Line 30, Schedule F.
The Center for Agricultural Law and Taxation is a partner of the National Agricultural Law Center (NALC) at the University of Arkansas System Division of Agriculture, which serves as the nation’s leading source of agricultural and food law research and information. This material is provided as part of that partnership and is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.