Federal Tax and Business Structure for Microgreens Growers

The IRS decides whether you are farming by looking at the activity and the profit motive, not at acreage, an outdoor field, or a state farm registration. A greenhouse counts. That one fact puts most microgreens growers on Schedule F rather than Schedule C, and it changes which rules apply to your losses, your equipment and your records.

This page covers the federal layer only and stays inside what the IRS and FDA actually publish. It is general information, not tax, legal or accounting advice. Facts change outcomes here, so confirm your own situation with a CPA, an enrolled agent or a tax attorney who can review your real numbers and your state.

Is an indoor microgreens operation a farm to the IRS?

Yes, it can be, and this is the question everything else hangs on.

Publication 225 says a person is in the business of farming if they cultivate, operate or manage a farm for profit, as owner or tenant. The same publication says a farm includes truck farms, nurseries and orchards, and structures such as greenhouses used primarily to raise agricultural or horticultural commodities. Nothing in that description requires soil acreage, outdoor production or a conventional row crop layout.

That matters because most microgreens production happens in a spare room, a shipping container or a basement rack system. Microgreens are crops, and a rack under lights can be where those crops are raised.

What the definition does require is the part growers skip. The operation has to be conducted to make a profit rather than for personal recreation, and it has to actually grow the crop rather than resell somebody else's finished product. A recreational grower is not a farm business merely because plants are involved. The quoted "for profit" condition is the legal hinge, and it is the thing you prove with records rather than with a label.

In an indoor operation, the evidence that supports a genuine farm business tends to be the same paperwork you would keep anyway: crop plans, harvest logs, seed and media invoices, buyer invoices, production records, and some trace of your pricing and marketing decisions. That is the material the IRS would look at to see whether the activity being carried on is a business.

Schedule F or Schedule C

Once you land on the farm side of that line, the reporting form follows.

A farmer reports income and expenses from farming on Schedule F (Form 1040), Profit or Loss From Farming. Publication 225 says individuals, trusts, partnerships, S corporations, LLCs taxed as partnerships and single member domestic LLC owners engaged in farming report regular farm income there. Crops raised for sale, including produce, are Schedule F income, and the Schedule F instructions describe the schedule as covering income from cultivating, operating or managing a farm for gain or profit.

Schedule C is for a separate nonfarm sole proprietor trade or business. In a microgreens context that would be something like paid growing consultancy, retail sales of purchased supplies, or a service business that does not itself cultivate the crop. The IRS sole proprietorship page lists Schedule C for ordinary business income, while Schedule F is the specialized farm return.

Both routes can create self employment tax consequences. The difference is that farm reporting also connects to farmer specific rules, including Schedule J farm income averaging, the farm optional methods, and the farm loss rules. Whether any of those help you is a facts question for your own adviser, not something a page can answer.

Does a microgreens grower need an EIN?

An EIN is generally required when you hire employees, operate as a partnership or corporation, pay federal excise taxes, change business structure or ownership, or administer certain trusts or retirement plans. That list comes from the IRS EIN guidance, which also says to form your state law LLC, partnership or corporation first and then apply for the EIN. The order is deliberate, because the EIN attaches to the entity you actually formed.

A sole proprietor with no employees, no excise tax filing duty and no Keogh plan is not required to obtain an EIN for federal purposes, and may use the owner's social security number as the taxpayer identification number. That is not a ban on having one. A bank, a customer or a state tax agency may ask for an EIN, and a sole proprietor can obtain one from the IRS at no cost.

Single member LLCs are the case that confuses people most. For a disregarded single member LLC with no employees and no excise tax liability, federal income tax reporting generally uses the owner's SSN or EIN. If the LLC has employees or excise tax duties, the LLC needs and uses its own EIN. Both points come from the IRS single member LLC guidance and the IRS information return instructions.

Worth saying plainly: an EIN is a taxpayer identifier. It is not a license, a permit, or a food safety credential.

Business structures, as the IRS describes them

The IRS does not recommend a structure and neither will this page. Here is what the federal sources say each one does.

Two details are worth pulling out of that table.

A husband and wife farm can sometimes elect qualified joint venture treatment instead of filing as a partnership, per Publication 225. Whether it fits a particular couple's facts is one for an adviser.

The LLC row is the one that generates the most confusion. An LLC is a legal structure, not a federal tax classification, and the classification is what determines the federal income tax return. A domestic one member LLC is disregarded by default, which means the owner reports the activity; a multi member LLC defaults to partnership treatment unless it elects corporate treatment; and either can elect C or S corporation treatment if eligible. The IRS business structures page makes the point that entity form determines the federal income tax return, while the LLC itself is allowed by state statute.

Liability protection, state formation, payroll and owner compensation all sit outside federal income tax guidance and require separate legal and tax advice. That is not a hedge; it is where the actual decision usually gets made.

What forming an entity does not do

Forming an LLC, corporation, S corporation or partnership does not itself change your food safety obligations. Food rules turn on the crop, the activity, the location, the sales channel and the applicable federal, state and local food law. They do not turn on whether you elected a tax classification.

This is worth stating bluntly because "get an LLC" circulates in grower forums as though it were a permit or a regulatory shield. It is neither.

The clearest illustration is FDA's farm exemption, which turns on whether the operation satisfies the federal definition of a farm and what processing it performs. A business entity that grows, harvests, packs and labels its own raw agricultural commodities can remain a farm. A sole proprietor can become a mixed type facility by performing outside processing. Entity form decides neither result, per FDA's food facility registration guidance.

FDA food facility registration, and why farms are exempt

For a raw produce grower the key federal registration question is FDA food facility registration, and the short answer is that a farm is exempt.

Under 21 CFR 1.226(b), farms do not register. FDA defines a primary production farm as an operation under one management in one general physical location devoted to growing or harvesting crops, raising animals, or a combination of those. The definition permits farms to pack or hold raw agricultural commodities, and to package and label them, without that counting as additional manufacturing or processing. The point is set out at Question B.1.1 of the Seventh Edition of FDA's guidance.

So a microgreens farm that grows its own crop and harvests, packs or labels it as a raw agricultural commodity generally does not register with FDA just for those activities.

Registration can be required if the establishment is a farm mixed type facility, meaning one that performs both exempt farm activities and activities that require registration, such as processing beyond the farm definition. FDA's guidance specifically says a farm that packs its own raw agricultural commodities, or those of other farms, can remain exempt. Added processing is the risk point, and if you are moving toward anything that looks like processing, that is the moment to get a written answer rather than a forum answer.

Two boundaries. This is federal registration only; state and local permits are separate, and so is coverage under the FSMA Produce Safety Rule, which has its own thresholds. That rule is covered on the FDA Produce Safety Rule page.

Deducting the cost of growing

The basic federal rule is that ordinary and necessary costs of operating a farm for profit are deductible. Ordinary means common in farming. Necessary means useful and helpful. Publication 225 sets out both the rule and the categories.

For a small microgreens operation the categories commonly supported by that rule include seeds and other farm supplies, growing media, packaging, utilities attributable to the farm, rent and lease payments, hired labor and payroll costs, repairs and maintenance, business insurance, interest, taxes, marketing, delivery and vehicle costs, accounting and software, and depreciation or a Section 179 election for qualifying assets.

The category name is not what makes an expense deductible. You need a profit seeking business, a business purpose and documentation. Personal costs and an unsubstantiated home share do not become business deductions because the crops happen to be grown at home, which is a live issue for growers producing in a spare bedroom. Mixed personal and business costs get allocated reasonably and consistently.

The supply versus equipment line is where microgreens growers most often want a rule and there is not a clean one.

Section 179 can allow an election to deduct some qualifying purchased business property in the year it is placed in service, and qualifying property includes tangible personal property such as machinery and equipment, per Publication 225. Use Form 4562 when claiming depreciation or making a Section 179 election. The current Schedule F instructions identify Form 4562 for depreciation and Section 179 property placed in service during the tax year.

The honest summary is that treatment follows facts, cost, expected useful life, accounting method and the applicable depreciation and Section 179 rules, not the product name. No fixed dollar figure separating a supply from an asset is published in these sources. Year specific limits sit in the annual IRS materials, so check the current Publication 225 and Schedule F instructions, or ask your preparer.

The records the IRS expects

The IRS does not prescribe one mandatory bookkeeping product or ledger format. What it expects, per the recordkeeping discussion in Publication 225, is a system that clearly shows income and expenses, a transaction summary of gross income, expenses, deductions and credits, and support for purchases, sales, payroll and other transactions.

In practical microgreens terms that means sales invoices and point of sale exports, deposits, bank and card statements, vendor invoices and receipts, seed, media and packaging purchases, equipment invoices, mileage and delivery logs, payroll records, and a fixed asset and depreciation schedule. Electronic records are acceptable if they can be indexed, preserved, retrieved and reproduced legibly.

On how long to keep things, notice how carefully the IRS words it. Keep a return's supporting records until the applicable limitations period expires. Publication 225 deliberately states the rule that way rather than giving one number that covers every situation. Property records get kept until the limitation period for the year of taxable disposition expires, and often longer, because they still establish basis, depreciation, amortisation or replacement property basis. This is a retention rule, not a figure that adjusts.

Not for profit farming, and the first year loss

Almost every microgreens grower loses money in year one, and growers reasonably worry that a loss will get the business called a hobby.

The not for profit rule prevents deducting losses from an activity not carried on to make a profit. Publication 225 says a profitable farm may deduct ordinary and necessary Schedule F expenses, while a not for profit activity reports its income but, under current rules, cannot deduct its expenses.

A first year microgreens loss does not by itself make the business a hobby.

The presumption is met if the activity shows a profit in at least 3 of the last 5 tax years, including the current year. That is a fixed test and it does not adjust for inflation. Failing the presumption is not automatic failure either. The IRS weighs all the facts, including whether books are kept in a businesslike way, the time and effort put in, dependence on the income, whether losses are start up or due to circumstances beyond your control, changes made to improve profitability, your expertise and advisers, the profit history, and expected asset appreciation.

The practical read for a grower in year one is that the paperwork trail is the defense: a budget, your pricing, your marketing, your sales pipeline, the production changes you made, and a clear account of what caused the loss.

What federal guidance does not answer

A national federal tax page cannot answer these, and the IRS says as much. The Schedule F instructions state that farming activity may be subject to state and local taxes, business licenses and fees, and direct growers to their state and local government.

If you want a definitive answer on any of those, the correct move is to ask the agency that would enforce it and keep their written response.

Frequently Asked Questions

Q: I grow microgreens on racks in my basement. Can that really be a farm for tax purposes? A: It can be. The IRS description of a farm includes greenhouses and similar structures used primarily to raise agricultural or horticultural commodities, and there is no acreage or outdoor requirement. What it does require is that you cultivate, operate or manage the operation for profit and actually grow the crop. Your records are what demonstrate that.

Q: Do I file Schedule F or Schedule C? A: Farm income from crops you raised for sale goes on Schedule F. Schedule C is for a separate nonfarm trade or business, such as consulting or reselling purchased supplies. A grower doing both is describing two activities, and each follows what it actually is. Confirm the split with your preparer, because it affects which farmer specific rules are available to you.

Q: Do I need an EIN if it is just me and no employees? A: Generally not for federal purposes. A sole proprietor with no employees, no excise tax filing duty and no Keogh plan may use their own SSN. You can still get one at no cost, and a bank, a customer or a state agency may ask for one.

Q: Does forming an LLC mean I can skip a food permit? A: No. Entity choice sets your federal return; it does not change food safety obligations, and it does not decide FDA farm status either. Permits follow the crop, the activity, the location and the sales channel.

Q: Do I have to register my farm with FDA? A: Farms are exempt from food facility registration under 21 CFR 1.226(b), and packing, holding, packaging and labeling your own raw agricultural commodities stay inside the farm definition. Registration can come into play if you become a farm mixed type facility by processing beyond that definition.

Q: I lost money my first year. Is my business a hobby now? A: Not by itself. The profit presumption is a profit in 3 of the last 5 tax years including the current year, and failing it is not automatic failure. The IRS weighs businesslike books, time and effort, start up losses, changes made to improve profitability, and the rest of the facts.

Final thoughts

The federal picture is narrower than it first appears. A genuine, profit seeking growing operation can meet the IRS farm definition even if it runs entirely indoors, which routes the income to Schedule F. Entity choice sets the return you file and nothing about your food safety duties. Farms do not register with FDA. A first year loss is not, on its own, a hobby finding.

What this page will not do is tell you which structure to pick. The federal sources describe trade offs, not a right answer, and the right answer depends on liability exposure, state formation costs, payroll plans, owner compensation and your own numbers. Before you choose a schedule, take a first year loss, elect Section 179, depreciate a grow room, claim home business costs, hire anyone, or elect tax treatment for an LLC or corporation, put the actual facts in front of a CPA, an enrolled agent or a tax attorney. Use an attorney where liability, contracts, employment, food permits or zoning are involved. Loss deductions in particular can be restricted by the not for profit, at risk, passive activity and excess business loss rules, and that is a facts specific analysis rather than a rule of thumb.

Everything above is the federal layer. Your state adds income tax, sales tax, registration, employment and permit rules on top, and those are the ones that catch most growers out.

If something here does not match what the IRS or your own adviser told you, tell me and I will check it. A page that is wrong about a rule is worse than no page.

Sources

Every claim above traces to one of these eight. All checked 7 August 2026. This is a deliberately tight set of primary sources; a federal tax page should cite the IRS and FDA directly rather than accumulate secondary commentary.