TAX BREAK FOR CATTLE

[backhoeboogie]

I think that's the problem i'm a little too honest. i keep everything(receipts) in case the irs does come a callin. Last year i figured i was getting to much back, didn't want to raise any flags. so i reduced my expenses by 50% Thanks for the info. will use :cowboy:

The fact is you were not honest (with yourself).

One year I was in the red and hesitant to declare all of my mileage. What was I thinking?

 

[RICHARDL]

YOUR PROLLY RIGHT. this year i'm going all the way. next year will be my year to lay off. But from what i've been hearing they (IRS) doesn't nearly audit as much as they(IRS) use to. even though there is that fear. of OH NO!!! :cowboy:

 

[novatech]

You must spent a minimum of 500 hrs. per year working on the farm to not make you a hobby farmer. I was just audited. Not only do they go over the books but they ask several casual questions that you may think are not relevant. In my case they even wanted a ride out to the farm where I spent several hours educating him on how I was attempting to make a profit. I even saw him counting the cows at one point.

 

[RICHARDL]

THAT'S 12.5 WEEKS A YEAR. YEA I BELIVE I DO. i spend at least on average 2 hours per day messing with the cattle, fences, feed. so 2 X7(days a week) = 14 hrs per week X 52 weeks a year= 728 hrs. they won't have to ride he can walk. :cowboy:

 

[T-Bro]

This is good info.
Someone should sticky this thread.

 

[cypressfarms]

Claiming the green 4 wheeler for the farm won't work.

Who told you that??? IF you use the ATV to check the cows, ride the fences, herd up the cows, refill the mineral feeders, feed, collect eggs, pull calves (as something to jack against NOT moving), yes you can certainly depreciate it like a tractor or a purchased horse (if the horse were used similarly). The danger (like declaring a loss every year or mammoth losses) is that (according to some people) it is a red flag that makes it more likely the IRS will come visit you. It would certainly help if in your records you kept photographic evidence of how the vehicle is used and in a perfect record keeping world you kept a daily log of hours used and for what purpose. Now if the thing is half personal use (riding the roads, racing, hunting trips, camping outings, etc) only deduct the 50% of it that is used for the farm.

http://www.agriculture.com/ag/story.jht ... 685884.xml

Brandon, Yep you can claim anything on your return, but like you mentioned - some things throw red flags up. A green 4 wheeler throws a red flag, for instance. I have a red mule. Red, because I don't take it hunting, ever. My dad's accountant pleaded with him to get a red 4 wheeler instead of a green one, simply for the fact that it would be so much easier to explain if questions arrise regarding it's percentage of farm use. Anyone who ever looked in the back of my mule would have no doubt as to it's use :nod:

 

[HerefordSire]

Red'uns higher on insurance than green'uns?

 

[Triple G01]

Do not hesitate to try to get all the taxes you paid in, as the result of your off farm job, back in the form of a non-interest bearing refund (they (we) are making money off of your money without having to pay you interest). Anything you shell out for generating income for your farm can be deducted against all income produced by the farm, if any. Watch for 5 years in a row of showing losses (red flag?). This amount is then consolidated in the 1040 from and deducted from your job income. In the initial years, the idea is to have enough expenses to receive 100% of your paid in taxes from your job. This increases cash flow. However, always be honest, and NEVER attempt to deduct any expense you are not worthy of and NEVER hide any income you produced. What will eventually happen, is the IRS (us) will get half of everything you are worth when you die if over a threshhold amount. Therefore, they (we) are willing to help you get established and make them (us) money.

HerefordSire,

Can you and others expound on your above statement(s)? We (Father, Brother, myself - all have full-time off-the-farm jobs) have a small outfit (~ 15 servicable cows/heifers) that we're growing each year (started with 5 bred cows back in 2006). I maintain the books and believe in recording every expense incurred. We have recorded a loss come tax time each year. Since there is a land payment involved (therfore an interest deduction), I don't see us actually turning a profit for a couple of more years (and that's assuming prices turn north some time in the near future) (the land is the only debt we have...we pay up front for everything else...up 'til now, we've kept all of our heifers, sell the bulls and take that $ to increase the herd). When will the IRS start getting grumpy a/b repeated losses on your tax returns? Outside the 2/5 Hobby farming clause, what are the expectations (as far as the IRS is concerned) for a farm that is "starting up?"

 

[HerefordSire]

How is you business entity legally organized, such as LLC, C corp, or S corp, partnership, or sole proprietor?

 

[Triple G01]

How is you business entity legally organized, such as LLC, C corp, or S corp, partnership, or sole proprietor?

I hate to admit it, but I'm guessing sole proprietor. Since we all have separate jobs outside the farm, I keep the books, tally everything at the end of the year and make a copy for my father and brother. Everything is divided by 3 and we go our separate ways to have our tax returns prepared. Make sense?

 

[HerefordSire]

How is you business entity legally organized, such as LLC, C corp, or S corp, partnership, or sole proprietor?

I hate to admit it, but I'm guessing sole proprietor. Since we all have separate jobs outside the farm, I keep the books, tally everything at the end of the year and make a copy for my father and brother. Everything is divided by 3 and we go our separate ways to have our tax returns prepared. Make sense?

Is the land in your name such that you are making payments?

 

[Triple G01]

How is you business entity legally organized, such as LLC, C corp, or S corp, partnership, or sole proprietor?

I hate to admit it, but I'm guessing sole proprietor. Since we all have separate jobs outside the farm, I keep the books, tally everything at the end of the year and make a copy for my father and brother. Everything is divided by 3 and we go our separate ways to have our tax returns prepared. Make sense?

Is the land in your name such that you are making payments?

Yes.

 

[HerefordSire]

Triple....

I think you could run into legal equity issues between family members the way it is set up now (as in disagreeing amongst members). For example, do your other family members make rent payments to you for their portion of the land (please don't answer this)? This could become tedious and overwhelming to keep straight. You might want to consider creating a sub-chapter S corporation or a limited liability company. The profit or loss flows through to the individual. You can do this online and the turn around time is reasonable. Establish a business license and checking account and run all the finances through the company. The percentages of ownership can be determined up front. I am not positive, but I think you could do this for this last tax year even though the year has ended.

One alternative, would be to always have to seperate and pro-rate every single item between each member. This could be a nightmare.

Generally, I wouldn't think the IRS spends allot of resources on small people. The software programs are the catchers. Therefore, if you have a computer, grab Intuit's accounting software for farmers and ranchers. This software program should catch most, if not all, IRS red flags. Did I miss a question or do you have any others?.

 

[Triple G01]

Triple....

I think you could run into legal equity issues between family members the way it is set up now (as in disagreeing amongst members). For example, do your other family members make rent payments to you for their portion of the land (please don't answer this)? This could become tedious and overwhelming to keep straight. You might want to consider creating a sub-chapter S corporation or a limited liability company. The profit or loss flows through to the individual. You can do this online and the turn around time is reasonable. Establish a business license and checking account and run all the finances through the company. The percentages of ownership can be determined up front. I am not positive, but I think you could do this for this last tax year even though the year has ended.

One alternative, would be to always have to seperate and pro-rate every single item between each member. This could be a nightmare.

Generally, I wouldn't think the IRS spends allot of resources on small people. The software programs are the catchers. Therefore, if you have a computer, grab Intuit's accounting software for farmers and ranchers. This software program should catch most, if not all, IRS red flags. Did I miss a question or do you have any others?.

I answered your question hastily. What if my brother (and his wife) and I share (50/50) the land payment? What if we run cattle on "our" acreage plus the adjoining land my parents own? Does this relieve any of the issues you raise above?

I've long considered setting up a separate checking account, but have been hesitant due to the limited cash flow.

 

[HerefordSire]

When I wrote the Intuit accounting software for farmers and ranchers, I forgot to mention Intuit Turbo Tax also. If you have low cash flow, at least grab Turbo Tax ($49?). It should catch all the IRS red flags.

Until you establish your combined entity, it appears you will have to resort to prorating all financial items shared between your family members based upon documents or implied communications. You will probably want to file jointly, if married, and claim your dependents, if any. Record you salary and fill out your portion of your farm profit and loss schedule. This profit or loss number is consolidated on your 1040 form and then subtracted from your outside employment income. Work in your standard deduction or itemized deductions thereafter.

I think the key concept in all my words directed to you....is "get Turbo Tax" software program from Intuit so you are protected from red flags. The spirit of the law is the main thing to abide by. As long as you are honest and use Turbo Tax, I wouldn't worry about showing a loss for 20 years unless Turbo Tax warns you.

 

[RICHARDL]

I've been using H&R with no problems it has all the farming things in there too. and it warns you of mistakes & red flags. And if you keep get the upgrades it keeps all of your previous years info. :cowboy:

 

[Triple G01]

When I wrote the Intuit accounting software for farmers and ranchers, I forgot to mention Intuit Turbo Tax also. If you have low cash flow, at least grab Turbo Tax ($49?). It should catch all the IRS red flags.

Until you establish your combined entity, it appears you will have to resort to prorating all financial items shared between your family members based upon documents or implied communications. You will probably want to file jointly, if married, and claim your dependents, if any. Record you salary and fill out your portion of your farm profit and loss schedule. This profit or loss number is consolidated on your 1040 form and then subtracted from your outside employment income. Work in your standard deduction or itemized deductions thereafter.

I think the key concept in all my words directed to you....is "get Turbo Tax" software program from Intuit so you are protected from red flags. The spirit of the law is the main thing to abide by. As long as you are honest and use Turbo Tax, I wouldn't worry about showing a loss for 20 years unless Turbo Tax warns you.

Hereford,

You've been most generous with your advice/recommendations. Many thanks. I have the tax lady at my local Farm Bureau prepare my taxes (I gather all of my documentation...W-2, deductions, farm income/expense, etc.) and leave the rest to her. I trust her to do the right thing, but she isn't a CPA or lawyer, so the burden (basically) would fall back on me. In the end, I want to exact a profit as soon as possible (with regards to our farming operation), but there is a time factor involved to do so. During that "growing" time, I believe it is my right and obligation to submit all expenses (and income). I don't intend for you to repeat yourself, but am I asking for trouble if a loss is recorded year after year (and is there any consideration by the government with respect to starting up)?

 

[HerefordSire]

Let me see what I can find out in 24 hours.

 

[HerefordSire]

Let me see what I can find out in 24 hours.

Triple....

In my opinion, the document behind the link at the bottom of this email should be thoroughly studied. What I have posted is not all the information used that an examiner makes a decision on. It appears to me that there is allot of judgement in making a decision like this and IRS employees usually don't have a high salary (good benefits though) if you know what I mean. Let me know if this is exactly what you are looking for. If it isn't, allow me to find the correct documentation. Good Luck!

HISTORY OF LOSSES

The examiner needs to obtain information regarding the taxpayer's history of the
activity under consideration. During the pre-examination analysis, the examiner
could gain such information from a MACS 3-year printout or from Information
Data Retrieval System (IDRS). The examiner should defer to whichever method
is most readily available and recommended in the examiner's district.

The examiner needs to review the history and determine if the activity is
generating any profits in any years at all. If the taxpayer has received any profits
on an occasional basis, the examiner should determine if the overall history of
losses exceeds the occasional profits.

IRC section 183(d) addresses the presumption that if an activity's gross income
exceeds attributable deductions for 3 or more of the taxable years in a period of 5
consecutive taxable years, then the activity is presumed to be engaged in for
profit, regardless of whether the activity is engaged in for profit. For the purpose
of this text, cattle operations fall under this presumption. Activities that pertain to
the breeding, training, or showing of horses should observe a profit in 2 or more
of the taxable years in a period of 7 consecutive taxable years.

Aside from the presumption stated in IRC section 183(d), Treasury Regulation
section 1.183-2(b)(6) addresses the taxpayer's history of losses with respect to the
activity and provides further clarification. Unforeseen or fortuitous circumstances
can impact profitability and should be considered.

Treasury Regulation section 1.183-2(b)(7) addresses the occasional profits, if any,
that are derived from the activity. The examiner should consider whether there is
any reasonable certainty that profits could occur again or if these occasional
profits are not likely to be repeated. Insignificant, occasional profits are not
indicative of an activity engaged in for profit. However, occasional substantial
profit may be indicative of an activity engaged in for profit. The examiner should
bear in mind that no one factor is determinative.

In general, a taxpayer that has the potential for falling under the provisions of IRC
section 183 will be incurring losses that tend not to diminish with each subsequent
year. While depreciation expense may cause losses in the beginning years of the
activity's operation, eventually such losses should start to level out as the annual
depreciation expense begins to decrease. In other words, the activity's losses will
continue to remain the same even though annual depreciation should start to
decrease.

The examiner may utilize master file data in order to ascertain a loss history
during the pre-examination analysis. Copies of prior year's returns will need to be
secured for the case file. Such copies can be obtained from the taxpayer or the
taxpayer's representative. Original tax returns may become necessary should a
case go forward to the United States Tax Court. At that point, the examiner
should defer to Counsel.

(this section is continued)

WARNING...pdf download
http://www.irs.gov/pub/irs-mssp/a1farmls.pdf

 

[Triple G01]

HerefordSire,

Thanks again for your time and efforts. I am in the process of giving the link you provided the once-over. I'll be sure to hit you up with follow-up questions.

Much appreciation,
Triple G01