Illinois Agricultural Tax Considerations for Farmers

Illinois farm operations sit at the intersection of federal tax code, state statutes, and county-level property assessment — a combination that can mean the difference between a profitable year and a cash-flow crisis. This page covers the major tax categories that affect Illinois farmers, including property tax preferential assessment, state income exemptions, sales and use tax rules for agricultural inputs, and the federal provisions most relevant to Illinois operations. Knowing where each layer applies — and where they don't overlap — is foundational to sound farm economics.

Definition and scope

Agricultural tax considerations, in the Illinois context, refer to the body of statutory provisions at both the state and federal level that modify how farm income, farm property, and farm purchases are taxed relative to non-agricultural equivalents. These are not informal allowances — they are codified in statute, administered by specific agencies, and subject to change through the legislative process.

The primary instruments include:

Illinois Preferential Property Tax Assessment — governed by the Illinois Property Tax Code (35 ILCS 200), which requires farmland to be assessed based on its agricultural use value rather than its market value.
Illinois Sales Tax Exemptions — administered by the Illinois Department of Revenue (IDOR) under 35 ILCS 120, covering qualifying farm machinery, equipment, and certain production inputs.
Federal Income Tax Provisions — including Section 179 expensing, Schedule F reporting, and cash-basis accounting elections available under the Internal Revenue Code, administered by the IRS.
Illinois Income Tax Adjustments — the flat 4.95% individual income tax rate (IDOR, 2024 rate schedule) applies to farm net income with certain deductions available under the Illinois Income Tax Act (35 ILCS 5).

A scope note worth stating plainly: this page addresses Illinois-specific rules. Federal tax law, administered by the IRS, applies to Illinois farmers but is not Illinois law. County-level assessment practices vary, and disputes go through the Property Tax Appeal Board (PTAB) or the circuit court system — not through IDOR.

How it works

Farmland Property Tax

Illinois assessors are required by statute to value agricultural land using a "agricultural economic value" (AEV) formula based on average annual net farm income per acre, capitalized at a rate set by the Illinois Department of Revenue. The IDOR updates the equalized assessed value (EAV) framework annually. Because this formula ties assessed value to productivity rather than market transactions, a parcel of prime Champaign County farmland trading at $12,000 per acre in the open market may carry an assessed value substantially lower than that figure — a meaningful tax reduction for working farms. For a deeper look at how land values interact with these assessments, the Illinois farmland values page provides regional context.

Sales Tax Exemptions

Illinois exempts from the 6.25% state sales tax qualifying purchases of farm machinery and equipment, as well as "farm chemicals" and certain feed and seed inputs, when those inputs are used in agricultural production. The exemption is not automatic at the register — it generally requires the purchaser to document agricultural use. Retailers may require an Illinois Agricultural Sales Tax Exemption Certificate (Form ST-587, issued by IDOR).

Federal Schedule F and Cash Accounting

Most Illinois family farm operations file a Schedule F with their federal Form 1040. Farmers are permitted to use cash-basis accounting under IRS rules, meaning income is recognized when received and expenses when paid — a flexibility that most non-farm businesses do not have. Section 179 of the Internal Revenue Code allows immediate expensing of qualifying equipment purchases up to $1,160,000 for tax year 2023 (IRS Publication 946), a provision heavily used by Illinois operations expanding equipment fleets.

Common scenarios

Scenario 1: Purchasing a new grain dryer
A central Illinois corn operation buys a grain dryer. If properly documented, the purchase may qualify for the Illinois sales tax exemption on farm machinery under 35 ILCS 120/2-5(2), avoiding the 6.25% state rate. Federally, the same dryer may be fully expensed under Section 179 in the year of purchase.

Scenario 2: Cash rent income for a non-farming landowner
An Illinois landowner who rents ground under a cash lease but performs no material participation in farming reports that income on Schedule E, not Schedule F — which means it is not subject to self-employment tax but also does not qualify for some farm-specific provisions. The distinction matters for farm lease agreements that define the landowner's role.

Scenario 3: Beginning farmer purchasing land
The Illinois Beginning Farmer Tax Credit, administered under the Illinois Department of Commerce and Economic Opportunity, allows sellers of agricultural assets to qualifying beginning farmers to claim a state income tax credit of 5% of the sale price (35 ILCS 5/232). This creates a tangible incentive structure that affects negotiated sale prices. The beginning farmer resources page covers eligibility details.

Decision boundaries

Where the lines actually sit:

Hobby farm vs. commercial farm: The IRS applies a presumption that an activity is for profit if it shows a net profit in at least 3 of 5 consecutive years (IRS Publication 225, Farmer's Tax Guide). Operations that fail this test risk losing deductions.
Market value vs. agricultural use value: Only land actively used for farming qualifies for preferential assessment. Residential improvements on the parcel are assessed separately at market value.
Equipment lease vs. purchase: Operating leases do not qualify for Section 179 expensing; financed purchases typically do. The structure of equipment financing, covered further on the farm financing options page, directly affects available deductions.
Illinois vs. federal treatment: A deduction allowed federally may not reduce Illinois taxable income if Illinois has "decoupled" from that federal provision — Illinois has historically decoupled from bonus depreciation under IRC §168(k), meaning the full federal first-year deduction does not automatically flow through to the Illinois return.

References

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