farming and the IRS

[kenojoe]

I bought my farm 3 years ago. Last year I put in $10K in fence $6k in cows $3K for corral and so on and so on. Needless to say I ran the place at a loss last year. The hay I sold in the past I now use plus had to buy some. The barn I leased I now need. My tax man is concerned that the IRS may call my place a hobby farm and deny my expenses. I will tell you this does not feel like a hobby to me! I am doing the best I can to get this place going. Can someone tell me at what point the IRS calls your blood,sweat and tears a hobby farm? Thanks

 

[Subsoil]

I would think if you've only operated at a loss for three years, you could say that you've had start up expenses and that it will take a period of several years to get the business up and running in a profitable manner. I don't think the rules say you have to make a profit, you just have to plan to make a profit.

Put the farm in a seperate checking account, get some economics fact sheets from you extension office and try to develop a plan for profit and I don't think there's anything they can say.

Does your tax man have much experience in farm returns. If not, I'd find one that does.

I know of lots of guys who have never shown a profit on their schedule F but that's not to say they won't get audited tomorrow.

 

[TXCOWBOY]

Hobby Loss is very subjective in determining. That is why it is hard to get a straight answer. My suggestion is to have good record keeping, a written business plan stating your objectives, as well as, a good accountant to echo Subsoil's comments earlier. Progress toward profitability is hard to determine unless you have written basis to compare your efforts to achieve it.

This article may help

http://www.wlj.net/editorial/121304_leg ... eaking.asp

 

[Bama]

As long as you keep improving the premises their ain't no problem. Keep records on everthing and if you do get audited, it won't be a problem. I count everthing from a nail to the gas used to go get that nail.

 

[Jake]

a good accountant

is there such a thing?

 

[cowgal]

A good one is a good friend to have in your corner. For some reason I am thinking you REALLY need to show profit by year 7 (with less loss up to that point) I am not an accountant, and I don't play one on tv, so I won't advise anything!

 

[kenojoe]

Thanks for the advice. The website TXCowboy set had some good advice also, things I hadn't thought about. I don't care much for paperwork but can see I better learn to like it. Thanks again.

 

[Crowderfarms]

Record keeping is of the utmost importance.I save and file receipts for every gallon of Diesel, Gas,tools,parts, you name it but if you do get audited, keeping things precise will make it an open and shut case. Been there done that.And yes they do pick on farmers and Ranchers....A good accountant that has agricultural tax experience and expertise is a neccesity.

 

[Farmhand]

As suggested by the others - keep records for every nail, gallon, bag, etc.
Definitely find a good ag accountant. Have read where a farm needs to show profit 2 out of 7 years to be considered a farm and not a hobby. My tax man says that if you can answer why to everything you claim then you won't have a problem.

 

[Running Arrow Bill]

We use a CPA Firm which has several accountants there--if one CPA dies, our records are still managed by the others...lol. They provide us with over 30 pages of detailed year records to back up our 1040 Tax Return--for under $750 a year.

We keep extensive records on everything, including calculated (approx.) costs on each animal from the day we get it. We calculate all direct and indirect costs fo our operation with a reference point of a 1000# A.U. per month. Also, have a computerized invoicing system, etc. I feel if you are in business then run it like a business...not records scribbled on the back of a grocery bag with a kid's crayon!

We also have a business plan ("Mission Statement" and outline of our operation and facilities--about 15 pages or so).

It doesn't cost anymore to run your business in a professional manner, creating an efficient professional image. A business is judged by its efficiency, quality of paperwork, promptness of processing transfers & registrations, etc. to the new customer. Run your business in a sloppy manner and it will eventuallay catch up with you and bite you in the butt.

If you can't do (or stand to do) the proper paperwork, advertising, marketing, record-keeping stuff--well, hire someone that will do it for you! I'm talking here abut image, efficiency, CYA, customer relations, IRS records, customer satisfaction, etc.

"If you don't know where you've been, and don't know where you're are now, then there is no way in Hades that you will ever figure out where you're going!"

 

[Farminlund]

As already stated, get an ag accountant, he will not give you the type of advice your current guy is spouting. We ran at a loss for over 20 yrs; with initial depreciation (ponds, barns, corral, etc), every bit of equipment purchased, additional land acquisition, fencing, land clearing, cattle purchases, operating expenses, & on & on - kept records of all & never once had any questions nor did my accountant. The key to hobby farming as stated by my accountant is "hired labor" - constant losses (many yrs) with lots of hired labor $$ gets the IRS upset. They apparently then see it as a tax write-off & not a business you yourself are trying to make go. I guess the classic case that the IRS goes after as a hobby farmer is the rich doctor/lawyer type that buys the farm & then hires folk to run it, buys lots of new equipment, & so on - then reduces his gross income each year by like 70K+ or something. If you are putting money into the operation as you indicated, keep good records, & are the principle worker, my experience says not to worry.

 

[Caustic Burno]

I bought my farm 3 years ago. Last year I put in $10K in fence $6k in cows $3K for corral and so on and so on. Needless to say I ran the place at a loss last year. The hay I sold in the past I now use plus had to buy some. The barn I leased I now need. My tax man is concerned that the IRS may call my place a hobby farm and deny my expenses. I will tell you this does not feel like a hobby to me! I am doing the best I can to get this place going. Can someone tell me at what point the IRS calls your blood,sweat and tears a hobby farm? Thanks

Find you a good CPA familar with Cattle and farming cause he sure sounds like he is full of hot air. Maybe AZ can help on this one I think the IRS looks at anything under 20 head with a suspect eye.

 

[Farminlund]

My accountant is has also been the county treasurer for the past 30 some years & does many small cattle operations around here. It is not uncommon for folk to be running less than 20 head in our neck of the woods. Again, he is very definative that a high ratio of hired labor to farm loss is the key to hobby farming - if you ain't puttin in the sweat, & lossing year after year, you're hobby farming!

 

[TheBullLady]

Doesn't some of this depend on how much you make on an "outside" job? I think you can use all that as a deduction, but you still have to pay on your income.

 

[Farminlund]

The farm loss reduces the adjusted gross that is made up of other incomes (ie outside jobs, dividends, interest, etc).

 

[Alan]

I bought my farm 3 years ago. Last year I put in $10K in fence $6k in cows $3K for corral and so on and so on. Needless to say I ran the place at a loss last year. The hay I sold in the past I now use plus had to buy some. The barn I leased I now need. My tax man is concerned that the IRS may call my place a hobby farm and deny my expenses. I will tell you this does not feel like a hobby to me! I am doing the best I can to get this place going. Can someone tell me at what point the IRS calls your blood,sweat and tears a hobby farm? Thanks

Did you show any income last year? I'm in the same situation, bought our place 4 years ago. last year was the first that I could show any income about 4 thousand from calves and culled cows. I spoke to my cpa this year about making it a business for tax purposes, knowing I would still have years of net loss. We have another business that supports our farm, I explained to my cpa that I did not want to turn the red eye of the IRS towards me. He told me that the IRS is pretty easy on farms because of the nature of the business, it's not the corner coffee stand that may be gone in a couple of years, with farming usally comes increased property value, so the IRS looks at farming a little different than other types of businesses. I have used my CPA/Lawyer for many years I trust his opinion and believe what he told me makes sense. But I think if you try to write your farm off as a business without having any net income your begging for trouble.

Alan

 

[Cheyenne]

I was reading IRS publication 225 as we are going to try livestock farming and I came across a part that might help. It is the part about showing a profit 2 our of 7 years or something like that. Anyway it talks about being able to file Form 5213 within 3 years of starting your operation. Apparently by filing this Form 5213 it allows you a few years to show a profit without the IRS breathing down your neck about being a hobbiest ect. I would ask your CPA's about this form. I of course am NOT an accountant and I am NOT giving any type of financial advice. I have only read 27 pages of the 112 in this publication. You can obtain a copy from the IRS website and putting in Publication 225. Hope this helps.

Good Luck

Cheyennne

 

[Subsoil]

I wonder how long it will be before the IRS declares that all commercial airlines are Hobby Operations.