Are Farmers Exempt from Federal Excise Tax?

Federal Excise Taxes are imposed on specific goods, services, and activities. For farmers, the FET generally applies to the sale or use of certain equipment, fuels, and vehicles. While many taxes exist under the FET umbrella, common categories affecting farmers include:

• Excise Tax on Heavy Trucks and Trailers (26 U.S. Code §4061(a))

• Excise Tax on Tires (26 U.S. Code §4061(a)(3))

• Retail Excise Tax on Tractors and Truck Bodies (26 U.S. Code §4061(a)(1))

• Excise Tax on Fuel (26 U.S. Code §4084)

Let’s discuss the exemptions available to farmers for these taxes in detail.

According to IRS Letter Ruling (PLR) and Technical Advice in TaxNotes, truck bodies and trailers primarily used in farming may be exempt from the federal excise tax under specific conditions.

• Vehicles and trailers that are sold or used for agricultural purposes and meet IRS-defined criteria may be excluded from the excise tax imposed

• To qualify, the vehicle must be sold to a purchaser who certifies its intended use in farming.

The exemption is governed by IRC Section 4053(1), which excludes certain truck chassis and bodies from tax when used for farming purposes.

Farms use large quantities of fuel, and under IRC Section 6420, farmers may be eligible for a credit or refund for federal excise taxes paid on gasoline used on a farm for farming purposes.

• Gasoline and diesel fuel used on farms for farming operations (e.g., tractors, harvesters, irrigation pumps) is generally exempt.

• The IRS requires accurate documentation and Form 4136 (Credit for Federal Tax Paid on Fuels) to claim these credits.

The IRS defines a farmer based on the type and amount of income generated from agricultural activities. According to the USDA and Farmers.gov Guide:

• A farmer is someone who cultivates, operates, or manages a farm for profit.

• The IRS generally considers someone a farmer if two-thirds of their gross income comes from farming.

Proper classification as a farmer is essential to qualify for any FET exemptions.

To claim exemptions and avoid penalties, meticulous record keeping is vital:

• Keep receipts and invoices showing fuel purchases and their use.

• Maintain signed exemption certificates for equipment and vehicle purchases.

• Track usage logs for vehicles and machinery to prove farming-related activity.

• Save all IRS forms, specially Form 4136 and exemption-related documents.

Good recordkeeping supports audit-proof compliance and smoother tax filing.

• Understand Farm Tax Classes: The IRS uses different income categories and accounting rules based on your farm's classification (cash vs. accrual method).

• Rural Tax Education: Use the Rural Tax Education site for practical guides and IRS-aligned resources tailored for agricultural producers.

• Use IRS Forms Properly: Familiarize yourself with IRS forms relevant to FET credits like Form 4136 and ensure timely filing.

• Stay Updated: Tax rules for agricultural activities change periodically. Refer to IRS Publication 225 each year.

• Seek Professional Help: Tax professionals familiar with farm taxation can help ensure you maximize your exemptions and remain compliant.

Conclusion

Not all farming activities are free from Federal Excise Taxes, but many farmers can get special exemptions, especially when it comes to using vehicles and fuel. Understanding the specific FET categories and utilizing the available credits can lead to substantial tax savings. 

Proper classification, thorough documentation, and awareness of IRS requirements are key to claiming exemptions. By staying informed and organized, farmers can reduce their tax burdens and reinvest in their operations. Always consult with a CPA for guidance if you need assistance.