hillbillycwo
Well-known member
Nova, Did that auditor tell you what a "working farm" looks like? That seems like it could be fairly subjective and his opinion would carry alot of weight.
IRS question
- Thread starter cross_7
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TexasBred
Well-known member
As long as you report ALL income there is no tax evasion. But if the operation is declared a hobby by IRS they will disallow all deductions and recalculate tax liability along with interest. MY CPA has always said that if you're not certain whether something is deductible or not...take it....all they can do it say it is not and compute the nex tax liability. "Evasion" is knowingly failing to report income.Jogeephus":2u2aag9s said:
Running Arrow Bill
Well-known member
First of all, IANAL (I am not a Lawyer) or a CPA. Given that, our operation uses a CPA Firm that is conversant in Agricultural issues. "Bookkeepers" and related are not sufficient when push comes to shove.
Any agricultural operation NEEDS a detailed Business Plan! That is another subject. IMO, an agricultural business venture needs to show that it is TRYING to make a profit. This includes regular advertising in the media, including regular advs in livestock association journals and other publications. It also should include business cards, ranch signage, vehicle signage, and "official looking" invoicing for any sales. Keeping records using a crayon on the back of a used envelope and/or dealing with "cash" without a paper trail can/will come back to bite you in the A$$.
It can also help to set up ones business as a LLC and keep records separate from one's personal stuff. Given this, even if you are running the business as a "sole proprietorship", you still need separate and detailed records and bank account for the business.
The bottom line is document, document, document and keep business stuff separate from personal stuff. One also needs a serious effort to TRY to make a profit (even if you don't) and to run the operation as a "business" and definitely NOT use it as a tax write-off, absentee owner "investment" thingy.
JMHO...
Any agricultural operation NEEDS a detailed Business Plan! That is another subject. IMO, an agricultural business venture needs to show that it is TRYING to make a profit. This includes regular advertising in the media, including regular advs in livestock association journals and other publications. It also should include business cards, ranch signage, vehicle signage, and "official looking" invoicing for any sales. Keeping records using a crayon on the back of a used envelope and/or dealing with "cash" without a paper trail can/will come back to bite you in the A$$.
It can also help to set up ones business as a LLC and keep records separate from one's personal stuff. Given this, even if you are running the business as a "sole proprietorship", you still need separate and detailed records and bank account for the business.
The bottom line is document, document, document and keep business stuff separate from personal stuff. One also needs a serious effort to TRY to make a profit (even if you don't) and to run the operation as a "business" and definitely NOT use it as a tax write-off, absentee owner "investment" thingy.
JMHO...
cross_7
Well-known member
i don't know where to begin.
we sold our place at home but kept the house.
we bought this place not so much as business venture but we wanted it.
now i don't expect it to turn a profit but i do expect it to pay for it's self.
i need some help sorting things out.
it has a modest house on it that we don't utilize, but i spent a few nights a week there so i have heating, cooling, satellite tv, internet, insurance, taxes and so on.
should i charge this to the ranch expenses and is it legal ?
it will never show a profit while we have a land payment. once the land is paid for then we should begin to get a return.
up til now we have had enough expenses, upgrades and so on we haven't had a problem with taxes.(small problem)
current situation we have spent as much on this place as we are going to.
now for tax purposes you can't deduct the land payments so when you show "x" many dollars for cattle sold and "x" many dollars in expenses, interest & etc.
it's shows a profit and we get taxed like a colonist, which makes it that much harder to make the land payment.
what are my options ?
we sold our place at home but kept the house.
we bought this place not so much as business venture but we wanted it.
now i don't expect it to turn a profit but i do expect it to pay for it's self.
i need some help sorting things out.
it has a modest house on it that we don't utilize, but i spent a few nights a week there so i have heating, cooling, satellite tv, internet, insurance, taxes and so on.
should i charge this to the ranch expenses and is it legal ?
it will never show a profit while we have a land payment. once the land is paid for then we should begin to get a return.
up til now we have had enough expenses, upgrades and so on we haven't had a problem with taxes.(small problem)
current situation we have spent as much on this place as we are going to.
now for tax purposes you can't deduct the land payments so when you show "x" many dollars for cattle sold and "x" many dollars in expenses, interest & etc.
it's shows a profit and we get taxed like a colonist, which makes it that much harder to make the land payment.
what are my options ?
1982vett
Well-known member
No you can't charge housing expenses (second residence or main residence) to the farm/ranch....
Here is a link to the Pub. 225 Farmer Tax Guide....don't read anymore into it or take anything away from it....
http://www.irs.gov/pub/irs-pdf/p225.pdf
Here is a link to the Pub. 225 Farmer Tax Guide....don't read anymore into it or take anything away from it....
http://www.irs.gov/pub/irs-pdf/p225.pdf
LazyARanch":q3dlffzk said:
It's the worst.
Goodlife
Well-known member
I want to make sure I understand and perhaps this will be new to some others as well. So even though this is a statement, I am posing it more as a question for confirmation. If it is wrong, I'm certain it will be corrected.
You cannot use the cost of land purchased to offset profits since land is considered an asset. You therefore cannot depreciate it either since it does not theoretically go down in value or wear out. If you lease land you can deduct the rent payments. Taxes, interest, upkeep and improvements etc... can be deducted. Structures such as buildings and equipment with a life of greater than 1 year such as tractors are generally depreciated over time (5 years?).
You cannot use the cost of land purchased to offset profits since land is considered an asset. You therefore cannot depreciate it either since it does not theoretically go down in value or wear out. If you lease land you can deduct the rent payments. Taxes, interest, upkeep and improvements etc... can be deducted. Structures such as buildings and equipment with a life of greater than 1 year such as tractors are generally depreciated over time (5 years?).
gimpyrancher
Well-known member
This is the way it was described to me.
You buy 40 acres of flat land. You build a 5 bedroom 6 bath mansion with all the modern electronics. You drive 2 cadillac "pick-ups." You have it fenced with 2 strands of barbed wire. You have one cow and a family garden. Your land is really less than it was before the house was built. The soil is also no better. Probably won't be viewed as a farm.
You buy 40 acres of overgrown rolling land. You build a modest home. You drive a 2 yo and a seven 7 yo vehicle. You have it perimeter fenced with 5 strands of barbed wire. You have a small herd of goats clearing your property. It'll take a couple of years to clear the land. You keep the kids that are born. You start cross fencing. You have a family garden. You build some covered housing for animals. you have a growing flock of chickens in moveable coups. Your land value is improving. You probably have a farm.
I've looked into this because I have EFU tax benefits that I'd hate to loose. I absolutely plan on making a profit but am not expecting to make a million. I expect to live out my years with work that I love and work that benefits the land. As long as my places is improving in ways that are identifiable, I believe I will have a farm. :2cents:
You buy 40 acres of flat land. You build a 5 bedroom 6 bath mansion with all the modern electronics. You drive 2 cadillac "pick-ups." You have it fenced with 2 strands of barbed wire. You have one cow and a family garden. Your land is really less than it was before the house was built. The soil is also no better. Probably won't be viewed as a farm.
You buy 40 acres of overgrown rolling land. You build a modest home. You drive a 2 yo and a seven 7 yo vehicle. You have it perimeter fenced with 5 strands of barbed wire. You have a small herd of goats clearing your property. It'll take a couple of years to clear the land. You keep the kids that are born. You start cross fencing. You have a family garden. You build some covered housing for animals. you have a growing flock of chickens in moveable coups. Your land value is improving. You probably have a farm.
I've looked into this because I have EFU tax benefits that I'd hate to loose. I absolutely plan on making a profit but am not expecting to make a million. I expect to live out my years with work that I love and work that benefits the land. As long as my places is improving in ways that are identifiable, I believe I will have a farm. :2cents:
gimpyrancher
Well-known member
Cross,
Does the house have to be a house or could it be a farm office? :cboy:
Does the house have to be a house or could it be a farm office? :cboy:
cross_7
Well-known member
Goodlife":2cu9xnpu said:
kind of along the my lines of thought do i somehow lease the land to the ranch so i can deduct the lease cost ?
Jogeephus
Well-known member
A simple way to look at it is this. You invested in a second home and some real estate and you happen to run cattle on the land. Get a checkbook for the farm and keep up with all your expenses that you spent on taking care of the cattle and any expenses that were or can be directly contributed to the cattle. Anything left over is profit and you will be taxed on that. The after tax money can be spent on fixing up the house and the things pertaining to you. Now if you rent the house out and it generates income then that's another ballgame altogether. Just don't mix your funds or you are likely to get in trouble.
Keep in mind that a nuclear plant is not going to make money either for several years but it can and will. Your cattle investment and deductibles need to stay in line with what is reasonable for the size operation you have. Ie, if someone had 10 acres and bought a four wheeler and claimed it as a farm expense would be viewed differently than someone buying two four wheelers with two thousand acres. As long as its reasonable you shouldn't have any trouble but there are some people who work for the IRS who lack this. I had the mispleasure of meeting one several years ago but thankfully the federal judge agreed this man was an idiot and ruled in our favor. It was an expensive headache but 100% deductible. :lol2:
Keep in mind that a nuclear plant is not going to make money either for several years but it can and will. Your cattle investment and deductibles need to stay in line with what is reasonable for the size operation you have. Ie, if someone had 10 acres and bought a four wheeler and claimed it as a farm expense would be viewed differently than someone buying two four wheelers with two thousand acres. As long as its reasonable you shouldn't have any trouble but there are some people who work for the IRS who lack this. I had the mispleasure of meeting one several years ago but thankfully the federal judge agreed this man was an idiot and ruled in our favor. It was an expensive headache but 100% deductible. :lol2:
Mid South Guy
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They way I understand it is, if the house is your primary residence or secondary residence it is not deductable. If you have an area or room in your residence that is used exclusively as a farm office, you can take a "office in home" deduction. Either the actual costs of maintaing that area or a pro rated share of the total home expenses based on sq. footage. If the house is one that you provide soley to an employee as part of their compensation, then it is fully deductable including interest. This is what my accountant told me anyway. If the tax man comes calling his rear end will be sitting in the chair in front of me.
cross_7
Well-known member
what if i create a llc and lease the land to the ranch so i can deduct the rent ?
but i guess i would be taxed on the income from the lease so i'm right back where i started.
the problem is due to the land payments i'm losing money(a little), but i can't deduct the land payments as an expense so i have to pay taxes on the calves that are sold.
so the reality is i'm losing quite a bit after taxes.
has to be a better way.
but i guess i would be taxed on the income from the lease so i'm right back where i started.
the problem is due to the land payments i'm losing money(a little), but i can't deduct the land payments as an expense so i have to pay taxes on the calves that are sold.
so the reality is i'm losing quite a bit after taxes.
has to be a better way.
agmantoo
Well-known member
Turn the house into a rental and depreciate it. The house can carry a lot of expenses that are tax deductions. On the remaining land apply for local property tax relief/deferment as farm land. Doing so the county has substantiated that you have a farm by doing so with the tax deferment. If your state has a sales tax reduction for certain farm items apply for that also. If you have any wooded land contact the forestry department in your farm area and get a forestry plan drawn up. Do anything you can to prove you are not in the effort for hobby. I personally would not put the house as an office as that write off will IMO throw a flag up immediately.
Jogeephus
Well-known member
agmantoo":15ydrne8 said:
I agree. Been a lot of abuse by people doing this and it does raise a flag. Renting the house out would be a good idea.
cross_7":15ydrne8 said:
Welcome to Merica. You are not losing as much money as it may seem cause you are putting the money in an investment - your land. You are building wealth and hopefully the land prices and other things you have bought with after tax money will appreciate. Appreciation is a key point. Many feel they are beating the system when they buy stuff to avoid taxes. Most of this stuff will depreciate in value so if you don't need it and its not going to add significantly to your bottom line its foolish to buy it.
BTW - most successful cattle operations I know of are composed of several complimentary businesses. They don't rely soley on cattle sales to pay the bills. Secret is finding the combination that works for you.
1982vett
Well-known member
Mid South Guy":109l6nmi said:
Now your talking Schedule A not Schedule F....
1982vett
Well-known member
Then technically you have to pay yourself "market rate rent" and fill out Schedule E.... BUT....agmantoo":1mpurp0s said:
Instructions for line 2...Schedule E Rents and Royalties
If you rented out a dwelling unit that you also used for personal purposes during the year, you may not be able to deduct all the expenses for the rental part. "Dwelling unit" (unit) means a house, apartment, condominium, or similar property
Living in it would definitly be personal purposes....
Cross, the only way I could figure out how to pierce this rule is to just not sale stock for a couple of years and then unload in the third year for an overstated income in that third year. You make a profit in that third year and it satisfies the IRS limitations as a genuine business. However, you have to carry the herd through lean times and have a place big enough to expand during those years. Loss carry forwards are still limited to cumulative gross income so you can't go silly on expenses. Your accountant and my accountant went the the same school, and has advised me of the same thing.
