Taxation

Farm taxation rules are detailed, complex and subject to frequent change.  The general information that follows is not a substitute for consulting with a qualified attorney and/or tax professional. 

This chapter is organized by the type of tax for which the direct farm business may be liable, such as income, self-employment and employment, sales, excise, and property taxes.  Because each direct farm business requires its own particular tax analysis, a thorough discussion of tax liability is beyond the scope of this website.  The tax sections of the site provide basic information on types of taxes, forms and sources of additional information, but it is important to contact a professional for more detailed information.   

Section 1: Requirements at Setup

Federal Registration Requirements.  A direct farm business may need to obtain a federal employer identification number (EIN) to identify the business entity.  If the answer to any of the following questions is yes,[1] the operation needs an EIN:

  • Does the business have employees?
  • Is the business operated as a corporation or a partnership?
  • Does the business file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
  • Does the business withhold taxes on income, other than wages, paid to a non-resident alien?
  • Does the business have a Keogh plan?
  • Is the business involved with any of the following types of organizations?
    • Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
    • Estates
    • Real estate mortgage investment conduits
    • Non-profit organizations
    • Farmers' cooperatives
    • Plan administrators

Illinois Registration RequirementsAll persons, including all types of business entities, that sell tangible personal property (e.g. food) to consumers must register with the Illinois Department of Revenue before conducting business or hiring any employees in Illinois (86 IAC 130.701).  Registration can be done online through the Illinois Business Gateway, in person, or via mail.  The owner must display the registration in a prominent location at the business site.

If a business hires any employees, it must register the business with the Illinois Department of Employment Security (IDES).  The Labor and Employment section of this website covers other labor and employment requirements in greater detail.

Taxation of Business Income

Federal Taxation (26 U.S.C. Subtitle A)

As noted above, a thorough discussion of the intricacies of business tax is beyond the scope of this Guide.  This is particularly true of business income taxes, in which complex rules specific to each type of entity, base income and any deductions and/or credits depend upon the operations of the particular business.

An excellent place to start any research is Publication 225: Farmer’s Tax Guide.  The guide, published by the IRS, is available through the IRS Agricultural Tax Center website.  The guide covers tax issues specific to farming, including records, accounting methods, income and expenses, expenses associated with soil and water conservation, asset basis, depreciation/depletion/amortization, gains and losses, disposition of property, installment sales, casualties/theft/condemnation, self-employment tax, employment tax, excise tax, estimated taxes, filing a return, and where to get help.  In addition, the website www.ruraltax.org covers a wide range of tax issues relevant to farmers and direct farm businesses, including who is a “farmer” for tax purposes, filing dates and estimated tax payments, self-employment taxes, and others. 

For information and publications on the taxation of each type of business entity, as well as necessary forms, go to the online IRS A-Z Index for Businesses.

Sole Proprietorships

Sole proprietorships file taxes along with the owners’ income tax using Form 1040.  The IRS considers a sole proprietor as self-employed, and also liable for self-employment tax, estimated taxes, social security and Medicare taxes, income tax withholding (if the business has employees), and federal unemployment tax (FUTA).  These taxes are imposed on all employers and discussed in detail in Section 4, below.

Partnerships

Partnerships file Form 1065 to report earnings, but do not pay taxes.  Rather, the tax liability “passes through,” meaning that each partner pays taxes on her share of the partnership’s earnings as part of her personal income taxes.  Accordingly, a partner who owns a 70% share in the business would pay taxes on 70% of the partnership’s earnings.  Each partner must pay taxes on their share of partnership’s earnings, even if no distribution is made.  For instance, if the partnership reinvests all of the earnings in expanding the business, partners would still pay taxes on their share of the undistributed earnings.  Similarly, partnership losses pass through to individuals and are deductible by the individual up to the partner's basis in the partnership. 

Corporations 

Corporations pay taxes on their profits (and can deduct a certain amount of their losses).  Generally, the corporation must make estimated tax payments throughout the year (using form 1120-W).  At the end of the year it makes a final calculation and reports its taxes using Form 1120.  

As noted in the introduction, shareholders must pay taxes on the corporate profits distributed to shareholders.  Corporations may distribute profits in several ways, such as dividend payments, increased stock ownership, changes in types of stock, etc.  The IRS considers all of these distributions as taxable income.  Of course, if shareholders work for the corporation, a common situation in small corporations, the shareholder/employee must pay individual income taxes on their wages/salary.  

S corporations

S corporations, except in limited circumstances, do not pay taxes.  Instead, earnings and losses pass through to the shareholders, who pay taxes on these earnings based on their individual income level.  The earnings are allocated on a per share, per day basis, with shareholders liable for taxes on these earnings even if there is no cash distribution.  An S corporation reports earnings and losses on Form 1120S.

Limited Liability Companies (LLC)

Owners of an LLC may elect to organize as a sole proprietorship (as an entity to be disregarded as separate from its owner, or "disregarded entity"), partnership, or corporation.  If the LLC has one owner, the IRS automatically will treat the LLC as a sole proprietorship unless the LLC elects treatment as a corporation.  Similarly, if the LLC has two or more owners, the IRS automatically will treat the LLC as a partnership unless it elects otherwise.  The LLC may elect corporate status using Form 8832.  Sole proprietorships or partnerships do not have to file Form 8832 unless they wish to be treated as a corporation.

Single-member/owner sole proprietorship LLCs file an individual tax return (1040, Schedule C, E or F).  Multiple-member/owner LLCs file a partnership return (Form 1065).  LLCs electing corporate treatment file a corporate return (1120 or 1120S). 

Cooperatives

Subchapter T of the Internal Revenue Code governs federal taxation of cooperatives.  A cooperative, as a non-profit, typically is not taxed, as any earnings pass through to individual patrons of the cooperative.  The cooperative reports profits on Form 1120-C and patrons report income on form 1099-patr.  For a primer on the federal taxation of cooperatives, the USDA Rural Development maintains a website that contains many publications related to the taxation of cooperatives, including Cooperative Information Report 23, The Tax Treatment of Cooperatives, published by the USDA Rural Development program.  IRS Publication 225: Farm Income also touches on cooperative reporting of taxes.

State Taxation  

In addition to federal income taxes, the direct farm business is subject to Illinois business income taxes. The Illinois Income Tax Act (35 ILCS 5) and Title 86 of the Illinois Administrative Code govern income taxation for Illinois direct farm businesses. 

Illinois bases its taxes on the federal tax structures, although there may be some variations in taxable income based on differences in allowable deductions and credits.  A major difference between Illinois and federal taxes is the Personal Property Tax Replacement Tax (“replacement tax”).  In 1970, Illinois amended its constitution to abolish local personal property taxes on businesses.  In 1979, the legislature enacted the “replacement tax” to allow the state to collect taxes and distribute money to localities to replace the lost personal property revenue.  Corporations, S corporations, LLCs, partnerships, trusts, and public utilities pay the replacement tax.  The tax rate varies according to type of business entity.

Corporations

Corporations in Illinois pay an income tax as well as the replacement tax.  The replacement tax on corporations is 2.5%.  Corporations file form IL-1120.

S corporations do not pay the Illinois income tax, which is paid by the shareholders.  If the S corporation has non-resident shareholders, the S corporation must make a pass-through entity tax payment on their behalf and notify the shareholder of the amount of the payment.  An S corporation must also pay the replacement tax, which is 1.5%.  S corporations must file form IL-1120-ST.

Partnerships

Partnerships also pay the 1.5% replacement tax and make the pass-through entity payment.  To pay the replacement tax, a partnership must file form IL-1065.  Like at the federal level, partnerships do not pay an income tax.  Instead, their income passes through to the partners pro-rata, with the partners reporting the income on their personal tax returns.

Cooperatives

Cooperatives are treated as corporations under the Illinois tax code (86 IAC 100.9750(b)).  The code does not differentiate between cooperatives organized under the general Cooperative Act (805 ILCS 310) and the Agricultural Cooperative Act (805 ILCS 315).  Although considered a nonprofit if organized under the Agricultural Cooperative Act, the Illinois Department of Revenue treats the cooperative as a for-profit entity subject to many of the same taxes as other businesses.

Employment and Self Employment Taxes 

This section provides brief summaries of the taxes employers must withhold.  For more comprehensive information, see IRS Publication 15: Employers Tax Guide, which contains instructions on the intricacies of withholding federal taxes from employees' wages. Publication 51: The Agricultural Employer's Tax Guide, covers common issues that arise in the agricultural context such as social security numbers (which prove an employee is authorized to work in the United States) versus individual taxpayer identification numbers (which look similar to SSNs, but are given to aliens who are notauthorized to work in United States). Federal laws governing employment taxation are in Subtitle C of Title 26 of the U.S. Code, with implementing regulations in Part 31 of Title 26 of the Code of Federal Regulations.  The Illinois income tax provision is located at 35 ILCS 5, with the implementing regulations in 86 IAC Part 100.

If the Direct Farm Business Has Employees

Employers are responsible for withholding and submitting federal and state employment taxes on behalf of their employees.  Federal employment taxes to be withheld include the Federal Income Tax and Social Security/Medicare (FICA) Taxes; employers must also withhold Illinois income tax.

A direct farm business must register with the Illinois Department of Employment Security within 30 days of starting operation if it hires any employees, including corporate officers.  This can be done electronically or by mail using Illinois form UI-1. Forms are available here.   

Employee Income Taxes

Withholding federal income taxes from employees entails obtaining a W-4 form from each employee that indicates what withholding allowances they qualify for and what class (e.g. single or married) they fall into.  The employer uses this information to calculate the employee's tax rate using the IRS’s withholding tables, which are available in IRS Publication 15-T.  The IRS bases withholdings on base pay, as well as supplemental wages (such as overtime pay) and fringe benefits (for instance, providing farm employees fresh produce or other farm products to satisfy their weekly grocery needs).  The IRS excludes some fringe benefits, such as the de minimis exception that covers small benefit for which it would be inconvenient and unreasonable to keep an accounting (for instance, allowing employees to occasionally take home small quantities of produce).  If an employee is a non-resident alien, the employee must register as single (even if married) and the employer must adjust the calculation of the taxable income for each pay period.  Some employees may qualify for an exemption from income tax withholding if they did not owe taxes in the previous year and do not expect to owe taxes the next year.  Such employees should indicate this on their W-4.  Employers must report and remit taxes either bi-weekly or monthly, depending on tax liabilities from previous years.  Which form to use (941, 944 or 8901) depends on the amount of taxes deposited.

If an employer must withhold federal taxes, they will also most likely have to withhold Illinois income taxes.  Employees must fill out form IL-W-4 for employers to determine which exemptions the employee qualifies for.  Even if an employee is exempt from federal withholding, the employer may still have to withhold Illinois income taxes.  For example, employers must withhold Illinois income taxes when the work is “localized” (i.e. occurs mostly) in Illinois, unless the employee is a resident of Iowa, Kentucky, Michigan, or Wisconsin.  If the employee is a non-resident of Illinois, the employer probably also needs to withhold income taxes for the employee’s resident state.  The Illinois Department of Revenue (IDOR) publishes some guides for employers on state income tax withholding, including Publication 130: Who Is Required to Withhold Illinois Income Tax and Publication 131: Withholding Income Tax Filing and Payment Requirements.  As at the federal level, employers calculate withholdings  using tables published in Booklet IL-700T, Withholding Income Tax Tables.  The IDOR uses the amount of taxes paid in previous years to determine how and when a business reports and pays the withholding taxes in the current year.

Social Security and Medicare Taxes

Social Security and Medicare taxes pay for employees’ benefits upon retirement.  These taxes are known collectively as Federal Insurance Contributions Act taxes, or "FICA" taxes.  Social Security and Medicare taxes have different rates, and the Social Security Tax has a wage base cap—a maximum limit on the wages subject to the Social Security tax.  The employee pays the tax from his/her wages, and the employer makes a matching payment.  Form 943 is used to file income taxes and FICA taxes withheld for farm workers.  Employers deposit these taxes on a weekly or monthly basis, depending on the total taxes reported for a two year lookback period (e.g., the lookback period for 2010 extends to 2008).

Unemployment Insurance Taxes

Almost every employer pays unemployment taxes.  Although an employer must pay both federal and state unemployment insurance taxes, paying the Illinois unemployment taxes may allow an employer to receive credit towards some of the federal unemployment tax.  The Federal Unemployment Tax Act (26 U.S.C. § 3301 et seq.) and the Illinois Unemployment Insurance Act (820 ILCS 405) govern whether agricultural operations must pay an unemployment insurance tax on cash wages paid to employees. 

An agricultural operation is considered an employer subject to the Federal and State Acts if: (a) during any calendar quarter in the calendar year or preceding calendar year the operation paid wages of $20,000 or more for agricultural labor, or (b) the farmer employs 10 or more individual employees for some portion of a day during each of 20 different calendar weeks (26 U.S.C. § 3306(c)(5); 820 ILCS § 405/211.4(1)).

The federal tax is paid using Form 940, with deposits generally required quarterly.  For 2008 and 2009, the rate was 6.2% of the first $7,000 paid to each employee, but there is a credit of up to 5.4% for paying state unemployment taxes.  Publication 51: Agricultural Employer’s Tax Guide describes federal unemployment taxes. 

An Illinois employer subject to the tax must pay quarterly contributions on its taxable payroll for the entire year that the employer is subject to the tax and for the entire following year.  So if a farm pays less than $20,000 in wages for the first three quarters, then pays over $20,000 during the fourth quarter, it becomes covered by the act and must pay taxes on the payrolls from all four quarters.  The Illinois Department of Employment Security (IDES) should send all liable employers form UI-3/40 every quarter to report.  If IDES neglects to send the form, it is the responsibility of the employer to obtain the form and pay on time.  The Illinois Department of Employment Security has published a brochure titled Fast Facts For Employers that has a section on unemployment insurance.  For more detailed information, see the IDES’s employer website.

Farmers Who Are Self-Employed

The self-employment tax is a Social Security and Medicare tax paid by persons who work for themselves.  Farmers who operate a direct farm business as a sole proprietor or member of a partnership, or who are otherwise in business for themselves, are "self-employed" and must pay self-employment tax on earnings of $400 or more.  The self-employment tax rate for 2009 is 15.3% on the first $106,800, and 2.9% on any additional income.  Income subject to the Social Security Tax is capped, and 50% of the self-employment tax due is deductible from total income on Form 1040.  Individuals must report self-employment taxes on Schedule SE.  The IRS's Farmer's Tax Guide provides additional details regarding the self-employment tax rules.

Sales and Services Taxes

Direct farm businesses that sell food and/or other goods to customers are responsible for collecting state and local sales and services taxes (as discussed below).  Direct farm businesses that purchase goods may be responsible for paying sales tax, but in some instances the purchases will be exempt. 

State Taxation  

In addition to federal income taxes, the direct farm business is subject to Illinois business income taxes. The Illinois Income Tax Act (35 ILCS 5) and Title 86 of the Illinois Administrative Code govern income taxation for Illinois direct farm businesses. 

Illinois bases its taxes on the federal tax structures, although there may be some variations in taxable income based on differences in allowable deductions and credits.  A major difference between Illinois and federal taxes is the Personal Property Tax Replacement Tax (“replacement tax”).  In 1970, Illinois amended its constitution to abolish local personal property taxes on businesses.  In 1979, the legislature enacted the “replacement tax” to allow the state to collect taxes and distribute money to localities to replace the lost personal property revenue.  Corporations, S corporations, LLCs, partnerships, trusts, and public utilities pay the replacement tax.  The tax rate varies according to type of business entity.

Corporations

Corporations in Illinois pay an income tax as well as the replacement tax.  The replacement tax on corporations is 2.5%.  Corporations file form IL-1120.

S corporations do not pay the Illinois income tax, which is paid by the shareholders.  If the S corporation has non-resident shareholders, the S corporation must make a pass-through entity tax payment on their behalf and notify the shareholder of the amount of the payment.  An S corporation must also pay the replacement tax, which is 1.5%.  S corporations must file form IL-1120-ST.

Partnerships

Partnerships also pay the 1.5% replacement tax and make the pass-through entity payment.  To pay the replacement tax, a partnership must file form IL-1065.  Like at the federal level, partnerships do not pay an income tax.  Instead, their income passes through to the partners pro-rata, with the partners reporting the income on their personal tax returns.

Cooperatives

Cooperatives are treated as corporations under the Illinois tax code (86 IAC 100.9750(b)).  The code does not differentiate between cooperatives organized under the general Cooperative Act (805 ILCS 310) and the Agricultural Cooperative Act (805 ILCS 315).  Although considered a nonprofit if organized under the Agricultural Cooperative Act, the Illinois Department of Revenue treats the cooperative as a for-profit entity subject to many of the same taxes as other businesses.

  1.  Employment and Self Employment Taxes 

This section provides brief summaries of the taxes employers must withhold.  For more comprehensive information, see IRS Publication 15: Employers Tax Guide, which contains instructions on the intricacies of withholding federal taxes from employees' wages.  Publication 51: The Agricultural Employer's Tax Guide, covers common issues that arise in the agricultural context, such as social security numbers (which prove an employee is authorized to work in the United States) versus individual taxpayer identification numbers (which look similar to SSNs, but are given to aliens who are not authorized to work in United States).  Federal laws governing employment taxation are in Subtitle C of Title 26 of the U.S. Code, and implementing regulations are in Part 31 of Title 26 of the Code of Federal Regulations.  The Illinois income tax provision is located at 35 ILCS 5, and the implementing regulations are in 86 IAC Part 100.

If the Direct Farm Business Has Employees

Employers are responsible for withholding and submitting federal and state employment taxes on behalf of their employees.  Employers must withhold federal employment taxes, including the Federal Income Tax and Social Security/Medicare (FICA) taxes, as well as Illinois income tax.    

A direct farm business must register with the Illinois Department of Employment Security within 30 days of starting operation if it hires any employees, including corporate officers.  This can be done electronically or by mail using Illinois form UI-1.  Forms are available on the Illinois Department of Employment Security’s website.   

Employee Income Taxes

Withholding federal income taxes from employees entails obtaining a W-4 form from each employee that indicates what withholding allowances they qualify for and what class (e.g., single or married) they fall into.  The employer uses this information to calculate the employee’s tax rate using the IRS’s withholding tables, which are available in IRS Publication 15-T.  The IRS bases withholdings on base pay, as well as supplemental wages (such as overtime pay) and fringe benefits (for instance, providing farm employees fresh produce or other farm products to satisfy their weekly grocery needs).  The IRS excludes some fringe benefits, such as the de minimis exception that covers small benefits for which it would be inconvenient and unreasonable to have to keep an accounting of (for instance, allowing employees to occasionally take home small quantities of produce).  If an employee is a non-resident alien, the employee must register as single (even if married) and the employer must adjust the calculation of the taxable income for each pay period.  Some employees may qualify for an exemption from income tax withholding if they did not owe taxes in the previous year and do not expect to owe taxes the next year.  Such employees should indicate this on their W-4.  Employers must report and remit taxes either bi-weekly or monthly, depending on tax liabilities from previous years.  Which form to use (941, 944 or 8901) depends on the amount of taxes deposited.

If an employer must withhold federal taxes, they will also most likely have to withhold Illinois income taxes.  Employees must fill out form IL-W-4 for employers to determine which exemptions the employee qualifies for.  Even if an employee is exempt from federal withholding, the employer may still have to withhold Illinois income taxes.  For example, employers must withhold Illinois income taxes when the work is “localized” (i.e. occurs mostly) in Illinois, unless the employee is a resident of Iowa, Kentucky, Michigan, or Wisconsin.  If the employee is not a resident of Illinois, the employer probably also needs to withhold income taxes for the employee’s resident state.  As at the federal level, employers calculate withholdings using tables published in Booklet IL-700T, Withholding Income Tax Tables.  The IDOR uses the amount of taxes paid in previous years to determine how and when a business reports and pays the withholding taxes in the current year.

Social Security and Medicare Taxes

Social Security and Medicare taxes pay for employees’ benefits upon retirement.  These taxes are known collectively as Federal Insurance Contributions Act taxes, or "FICA" taxes.  Social Security and Medicare taxes have different rates, and the Social Security Tax has a wage base cap—a maximum limit on the wages subject to the Social Security tax.  The employee pays the tax from his/her wages, and the employer makes a matching payment.  Form 943 is used to file income taxes and FICA taxes withheld for farm workers.  Employers deposit these taxes on a weekly or monthly basis, depending on the total taxes reported for a two year lookback period (e.g., the lookback period for 2010 extends to 2008).

Unemployment Insurance Taxes

Almost every employer pays unemployment taxes.  Although an employer must pay both federal and state unemployment insurance taxes, paying the Illinois unemployment taxes may allow an employer to receive credit towards some of the federal unemployment tax.  The Federal Unemployment Tax Act (26 U.S.C. § 3301 et seq.) and the Illinois Unemployment Insurance Act (820 ILCS 405) govern whether agricultural operations must pay an unemployment insurance tax on cash wages paid to employees. 

An agricultural operation is considered an employer subject to the Federal and State Acts if: (a) during any calendar quarter in the calendar year or preceding calendar year the operation paid wages of $20,000 or more for agricultural labor, or (b) the farmer employs 10 or more individual employees for some portion of a day during each of 20 different calendar weeks (26 U.S.C. § 3306(c)(5); 820 ILCS § 405/211.4(1)).

The federal tax is paid using Form 940, with deposits generally required quarterly.  For 2008 and 2009, the rate was 6.2% of the first $7,000 paid to each employee, but there is a credit of up to 5.4% for paying state unemployment taxes.  Publication 51: Agricultural Employer’s Tax Guide describes federal unemployment taxes. 

An Illinois employer subject to the tax must pay quarterly contributions on its taxable payroll for the entire year that the employer is subject to the tax and for the entire following year.  So if a farm pays less than $20,000 in wages for the first three quarters, then pays more than $20,000 during the fourth quarter, it becomes covered by the Act and must pay taxes on the payrolls from all four quarters.  The Illinois Department of Employment Security (IDES) should send all liable employers form UI-3/40 every quarter to report.  If IDES neglects to send the form, it is the responsibility of the employer to obtain the form and pay on time.  The Illinois Department of Employment Security has published a brochure titled Fast Facts For Employers that has a section on unemployment insurance.  For more detailed information, see the IDES’s employer website.

Farmers Who Are Self-Employed

Many farmers are self-employed.  The self-employment tax is a Social Security and Medicare tax paid by persons who work for themselves.  Farmers carrying on the direct farm business as a sole proprietor or member of a partnership, or who are otherwise in business for themselves, are "self-employed" and must pay self-employment tax if their earnings are $400 or more.  The self-employment tax rate for 2009 is 15.3% on the first $106,800, and 2.9% on any additional income.  Income subject to the Social Security Tax is capped, and 50% of the self-employment tax due is deductible from total income on Form 1040.  Individuals must report self-employment taxes on Schedule SE.  The IRS's Farmer's Tax Guide provides additional details regarding the self-employment tax rules.

  1.  Sales and Services Taxes

Direct farm businesses that sell food and/or other goods to customers are responsible for collecting state and local sales and services taxes (as discussed below).  Direct farm businesses that purchase goods may be responsible for paying sales tax, but in some instances the purchases will be exempt.

Sales Tax 

Sales tax is levied on a business's receipts from the sale of tangible personal property to purchasers for use or consumption.  Sales tax is actually a combination of occupation taxes imposed on a business's receipts from the sale of goods used or consumed by consumers, and use taxes imposed on consumers that purchase items for personal use or consumption from a business.  Sellers owe occupation taxes, but they reimburse themselves by collecting a use tax from the consumer (86 IAC § 130.101(d)). 

The Retailers' Occupation Use Tax Act (35 ILCS 120) and regulations (86 IAC part 130) govern occupation taxation.  The Use Tax Act (35 ILCS 105) and regulations (86 IAC part 150) outline use tax rules.

Who Pays?

Persons engaged in the business of selling tangible personal property in Illinois to purchasers for use or consumption must pay retailers' occupation taxes (86 IAC § 130.101).  This includes agricultural producers (86 IAC 130.1905), agricultural cooperatives (86 IAC § 130.1945), nurserymen (86 IAC § 130.1965(c)), hatcheries (86 IAC § 130.1970), sellers of feed and breeding livestock (86 IAC § 130.2100), and vendors of meals (including restaurants and boarding houses) (86 IAC § 130.2145).  If a direct farm business operates a "place of public amusement" (e.g., a pumpkin patch) and, auxiliary to the operation of that business, sells refreshments, beverages, or other tangible personal property to purchasers for use or consumption, occupation taxes would apply to those sales, but the tax would not apply to the admission fee to the pumpkin patch (80 IAC § 130.2030(a)).

If the direct farm business sells an item to a purchaser for resale (e.g. to a restaurant or grocery store), the transaction is exempt from occupation taxes (86 IAC § 130.120(c)).  In a resale situation, the seller should obtain a certificate of resale from the purchaser to demonstrate that the transaction is indeed exempt (86 IAC § 130.1405).  In addition, the regulations exempt some items from the occupation/use tax altogether (86 IAC §§ 130.120, 130.305-.351) (see purchases for the farm, below) and certain food items have a lower tax rate (see computation, below).

Computing the Sales Tax

Retailers compute their tax liability by applying the effective tax rate to the gross receipts from the sale (86 IAC § 130.101(a)(1) and (b)).  The term "gross receipts" includes all consideration (payments) received by the seller, except trades in personal property (86 IAC § 130.401).   

The state tax rate is 6.25% on general merchandise (86 IAC § 130.101), and 1% on certain food purchases explained below (86 IAC § 130.310).  Local governments (townships, counties, cities) may charge additional taxes on sales.  Accordingly, the direct farm business should contact localities to determine what additional rates may apply.  The Department of Revenue’s website also has a tax rate finder to determine rates by location.

The tax rate for food is based on whether it is intended for consumption on or off the premises.  Food for human consumption off the premises, and not for immediate consumption, has a 1% tax rate (86 IAC § 130.310).  The general 6.25% rate applies to all other food.  The regulations define food as "any solid, liquid, powder or item intended by the seller primarily for human internal consumption, whether simple, compound or mixed, including foods such as condiments, spices, seasonings, vitamins, bottled water and ice.”  This definition is important in the case, for example, of a pumpkin patch that sells pie pumpkins and gourds.  The pie pumpkin, if not intended for consumption on the premises, qualifies for the 1% tax rate. The gourd, if not edible, is taxed at the 6.25% rate.

The regulation also establishes standards for determining whether food is intended for consumption on or off the premises (86 IAC §130.310).  According to the regulations, restaurants, concession stands, snack shops, and other establishments that sell food primarily (more than 50%) in individualized servings are deemed to sell food for immediate consumption, and have a 6.25% tax rate.  In contrast, the regulations assess a 1% rate to delicatessens, bakeries, markets and dairies that sell food primarily (more than 50%) in quantities greater than individual-sized servings.  However, if the facility provides an area for  consumption of food on the premises, the higher tax rate will apply to that food unless there is a separate system utilized to calculate sales of food for consumption on the premises and the area where food is sold for on-premises consumption has a physical partition from the other areas.  Regardless of partitions, the 6.25% rate applies to all sales of hot foods.

Soft drinks sales, including carbonated water, are subject to the higher 6.25% rate regardless of where consumed.  Milk, coffee, tea, non-carbonated water, or fruit or vegetable drinks containing 50% or more juice are not soft drinks, and therefore, if not consumed on premises, qualify for the reduced 1% rate.  Alcohol is always subject to the higher rate.

The retailer should provide the customer with a receipt showing details of the transaction (86 IAC § 150.601).  A separate item on the receipt should state the use tax (86 IAC § 150.401(b)).  If it does not, the Department of Revenue will assume that the retailer did not collect the tax unless a sign is visible indicating that the sales price includes the tax (86 IAC § 150.401(c)).  It is unlawful to represent to a customer that seller will absorb the sales tax, or that the seller will not add it to the sales price (86 IAC § 150.515).  The regulations provide for methods of calculating tax on sales of items subject to differing tax rates (86 IAC § 150.525).

Paying the Sales Tax  

On the twentieth day of every calendar month, a business must file a sales tax return for the preceding month with the Department of Revenue (86 IAC § 130.510(a)).  This can be done for free on the IDOR website if certain conditions are met.  Some businesses can also file over the phone (telefile); the instructions are available online.  The Department of Revenue may authorize quarterly filings if the average monthly sales tax liability does not exceed $200 (86 IAC § 130.502), or annually if the average monthly liability does not exceed $50 (86 IAC § 130.510).  The tax is due at the time of filing (86 IAC § 130.525).  In addition, the Department may require weekly payments if sales tax liability exceeds certain amounts.  Businesses must file returns for every reporting period, even if no tax is collected (86 IAC § 130.545).  The returns must contain or be verified by a written declaration that the filing is made under penalty of perjury (86 IAC § 130.560).

The retailer can deduct, as an allowance for collecting the tax, 1.75% of the use tax collected, or $5.00 per calendar year, whichever is greater (86 IAC § 150.905).  Retailers cannot claim the deduction if the tax is paid late.

Retailers also must keep records to verify sales (86 IAC §§ 130.801-.825; 150.1305).  On a very general level, the records need to be precise enough to enable an IDOR accounting of what taxes the business should have collected.  For instance, cash register tapes from each day would satisfy the requirement.  For the most part, these records need to be kept for at least three years unless IDOR authorizes earlier destruction.

Service Tax 

The service tax is very similar to a sales tax, but applies to personal property sold incident to a service (35 ICLS § 110, 115; 86 IAC Part 140).  For instance, when a mechanic sells a car part to a customer in order to make a repair on the car, the service tax applies.  The tax is applied to the sold personal property, and does not apply to the full cost of the service (e.g. labor).  The regulations assess the service tax as applied to food at the same rates as for sales tax, so the difference should be immaterial for most direct farm businesses (86 IAC 140.26). 

Purchases for the Farm 

When a direct farm business purchases items from another business that are related to farm production, the purchase is exempt from the sales (use) tax (35 ILCS § 105/3-5).  These include: farm chemicals; certain farm machinery and equipment and replacement parts (greenhouse structures such as horticultural polyhouses or hoop houses qualify as machinery or equipment, as well as lighting and mesh tables for the greenhouse, and carts protecting the plants during shipment); and precision farming equipment such as computers and GPS devices.  Farm production includes raising livestock, crops for human and livestock consumption, production of seed stock for purposes of providing a food product or for propagation of feed grains for animal consumption, animal husbandry, floriculture, viticulture, aquaculture, and horticulture (35 ILCS § 105/3-35; 86 IAC §§ 130.120 and 130.1955).

When a direct farm business purchases farm machinery or equipment primarily for the purpose of farm production incident to the purchase of service, the goods are exempt from the 6.25% service occupation/use tax (35 ILCS §§ 110/3-5, 115/3-5).  The regulations’ definition of  “farm machinery” is the same as the one used for the occupation/use tax, above.  The sale of farm chemicals incident to a spraying service is exempt from the service use tax (86 IAC § 140.125(m)).   

Hotel Operators Occupation Tax 

Illinois charges a tax to all hotel operators, including inns, motels, rooming houses, etc. (35 ILCS § 145). Therefore, it would apply to an agritourism operations running a bed and breakfast or a guest ranch where customers stay on a farm and learn about the farm’s operations.  The tax is 5% of 94% of the occupation rate (what the guest pays to stay at the farm).  The rate includes the monetary value of services, so if “guests” pay for their stay by working on the farm, the monetary value of the labor is subject to the tax.  The tax rate for permanent residents (anyone who stays for more than 30 consecutive days) is 1% of 94% of the occupation rate (86 IAC §§ 480.101, 480.105).  Localities often charge a similar tax, so direct farm businesses wishing to rent living quarters should also check with local government.

Excise Taxes

An excise tax is a tax levied on the purchase of a specific good.  The most common excise tax that a direct farm business may encounter is the motor fuel excise tax. 

Under both federal and Illinois statutes, certain uses of fuel, such as farm use, are nontaxable.  The user, therefore, may be able to seek a credit or refund of the excise tax paid for fuel.  Credits or refunds are available for many types of fuel.

Federal Fuel Excise Taxes 

The Internal Revenue Code (26 U.S.C. §§ 4081 and 4041) and regulations (26 C.F.R. §§ 48.6420-1 and 48.4041-9) govern federal fuel taxation.  IRS Publication 510: Excise Taxes and IRS Publication 225: Farmer’s Tax Guide explain fuel excise taxes as well as which uses of fuel qualify for tax credits and refunds.  Fuel used on a farm for farming purposes and fuel used for off-highway business purposes are exempt from excise taxes.  Farmers may claim the tax as a credit at the end of the year or obtain quarterly refunds of the tax, depending on how the fuel was used.  To substantiate claims, the IRS requires businesses to keep certain records, such as the name and address of the person who sold the fuel.

The term "farm" includes operations such as livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards, as well as greenhouses used primarily for raising agricultural or horticultural commodities.  "Farming purposes" include cultivating crops, raising livestock or other animals, operating and maintaining the farm and its equipment, handling and storing raw commodities, and caring for trees if they are a minor part of the overall farm operation. Fuel used for aerial spraying also qualifies for an exemption, including fuel used to travel from the airfield to the farm.  Non-farm uses that are subject to the excise tax include fuel used off the farm such as on the highway for transportation of livestock, feed, crops or equipment; fuel used in processing, packaging, freezing, or canning operations; and fuel used in processing crude maple sap for syrup or sugar.  Taxes paid for fuel used on the farm may be claimed as a tax credit at the end of the year by using Form 4136. 

The IRS also exempts fuel used off-highway in a trade, business, or income producing activity.  This exemption does not apply to fuel used in a highway vehicle registered or required to be registered for use on public highways, including boats.  Nontaxable uses in this category include: fuels used in stationary machines such as generators, compressors, power saws and similar equipment; fuels used for cleaning purposes; and fuel for forklift trucks, bulldozers, and earthmovers.  Some fuels that would not otherwise qualify for the farming exemption may qualify for this exemption - fuel used to boil sap into syrup, for example.  A business can recoup excise taxes on fuel used off highway for business purposes either by claiming a credit (using Form 4136) or a refund.  Taxpayers use Form 8849 and Schedule 1 (which details the federal excise tax rates) to claim a refund of excise taxes paid on fuel used off-highway for business purposes.  Taxpayers that pay over $750 in excise taxes in one quarter can claim a refund at the end of a quarter, rather than waiting until the end of the year.  Claims not exceeding $750 in one quarter can carry over to the next quarter.

Illinois Fuel Excise Taxes

The Motor Fuel Tax Law (35 ILCS § 505) and accompanying regulations (86 IAC Part 500) govern fuel taxation in Illinois.  Any person who uses motor fuel for purposes other than operating a motor vehicle on a public highway can seek a refund of the state excise tax on fuel (35 ILCS § 505/13).  Refunds are available to farmers for gasoline (taxed at 19 cents/gallon) and un-dyed diesel fuel (taxed at 21 1/2 cents/gallon).  Form RMTF-11-A is the form used to make an Illinois motor fuel tax refund claim.  Purchasers must retain proof of taxes paid.

Property Taxes

Direct farm businesses must pay local property taxes each year on real property owned by the business.  If a farmer leases land from an owner who is otherwise exempt from paying property taxes (e.g., a governmental entity), the farmer must nonetheless pay property taxes on the rented land.

The Illinois Property Tax Code (35 ILCS § 200) governs property taxation in Illinois.  Typically, the assessment on real property is 33 1/3% of fair market value, and is calculated in two-year cycles. However, farmland has a different assessment formula based on the "agricultural economic value" or "use value."  Computation of this value is complex, but in sum, the value is based on statewide studies of land use under average management, soil productivity (a rating assigned to each soil type based on its ability to produce crops), and net income of farms in the state. 

The Director of IDOR then converts the use value into the equalized assessed value, depending on the type of farmland.  Equalized assessed values for croplands[2]are 1/3 of the agricultural economic value.  Permanent pasture is asessed at 1/3 of the assessment rate of the land if planted in crops.  Other farmland is 1/6 of the crop assessment rate.  Wasteland has no assessed value unless it contributes to the productivity of the farm.

The county assessor notes each of the farm's land use categories and takes the equalized assessed value for each soil productivity index to arrive at the farm's total assessed value.  Department of Revenue regulations specify farmland assessment review procedures (86 IAC 110.165).

In order to qualify for farmland assessment levels, the property must meet the legal definition of "farm" for the previous two years.  The Code defines "farm" as:

Any property used solely for the growing and harvesting of crops; for the feeding, breeding and management of livestock; for dairying or for any other agricultural or horticultural use or combination thereof; including, but not limited to, hay, grain, fruit, truck or vegetable crops, floriculture, mushroom growing, plant or tree nurseries, orchards, forestry, sod farming and greenhouses; and the keeping, raising and feeding of livestock or poultry, including dairying, poultry, swine, sheep, beef cattle, ponies or horses, fur farming, bees, fish and wildlife farming.

The term "farm" does not include property primarily used for residential purposes, even though some farm products may be grown or farm animals bred or fed on the property incidental to its primary residential use.  The assessment value for farm dwellings and parcels of property on which farm dwellings are immediately situated is 33 1/3% of fair market value (rather than the agricultural economic value) (35 ILCS 200/10-145).

Improvements, which include buildings such as on-farm retail stores or processing facilities for value added products, are assessed as part of the farm when such buildings contribute in whole or in part to the operation of the farm.  Their assessment value is 33 1/3% of the value of the building's contribution to the farm's productivity, which is usually similar the building’s fair market value (35 ILCS 200/10-140).

 Have you...?

  • Obtained an Employer Identification Number from the Internal Revenue Service?
  • Registered with the Illinois Department of Revenue?
  • Obtained the necessary forms and established proper taxing procedures for your business entity?
  • Obtained the appropriate forms and established good record keeping procedures for:
    • income, Medicare and social security tax withholdings?
    • collection and remission? Don’t forget about local sales taxes on top of the state’s!
    • fuel excise tax reimbursements and credits?
  • Looked up your land's assessed value and calculated your current property taxes and how changed land uses could alter the tax value?

Key Contact Information

U.S. Internal Revenue Service (general help):

          Ph: 1-800-829-1040 (assistance for individuals)

          Ph: 1-800-829-4933 (assistance for businesses)

          To find a local Taxpayer Assistance Center (which offer face-to-face tax assistance), visit http://www.irs.gov/localcontacts/index.html (zipcode search)

Illinois Department of Revenue, Central Registration Division (business registration)

          Ph: 217-785-3707

          email: rev.int-reg@illinois.gov       

 

[1] These questions are from the IRS’s website

[2] The definition of "crop" appears to include both the growing of commodity crops and specialty crops, although the soil productivity index used in calculating the agricultural use value only includes calculations for commodity crops.  The statute (35 ILCS 200/10-25) defines "crop" as the definition set by the U.S. Census Bureau (which would now be by the Department of Agriculture's National Agricultural Statistics Service (NASS), the agency that conducts the agricultural census every 5 years).  NASS classifies crop production using the North American Industry Classification System (NAICS), which includes under "crops" the growing of specialty crops.