Farm deduction on taxes??

[Zookeeper]

I am trying to muddle through the instructions for taking a deduction on my taxes for a farm loss...anyone have experience with this?

Basically, we grow pigs (only 2 litters last year) so that we can have the fresh pork...and we sell all but a couple of the pigs to offset our expenses of raising our meat. Our expenses for last year WAY outweigh our profits, since it was our first year.

Any idea if we are too small-time to use a farm deduction, or what the nitty-gritty requirements are that I would have to meet?

It did say you can't deduct any expenses that went towards anything your family used. Well, we "used" 2 pigs, and sold 15...not sure how to figure this.

[okiemom]

I really recomend using a tax guy that is very knowledgeable about farm deductions. Ours has a farm as well and has been wonderful is telling us what to deduct and what we can't. They can deduct things that we didn't even know about. It also give some buffering if there is ever an audit. The cost of the tax guy is deductiable too so we just use them.

I believe you can deduct all you sell and you might be able to deduct up to 10% for mortality. What you eat is not counted.

[rambler]

Are you claiming the income from your sales as farm income? In your situation, a lot of folks tend to just do cash sales & forget about income or expense. Depends how big you plan to get. That is not to the regulations - I'm not trying to advise you to cheat on your taxes.

I will assume you have other regular income - a paycheck.

This puts your small farm operation into a 'hobby' class. You need to make money 2-3 years out of 5 in order to make full use of all your farm expenses. If you lose more money than you make for a longer time, the IRS will consider your operation just a hobby, and limit how much you can deduct.

That would be the start of it all. Can do more detail if it pays.....

--->Paul

PS - I agree with the other person who posted at the same time - $250 spent on a good accountant will make you a lot of tax money on this. They might charge even more if they have to hold your hand through the first year, but will have you set up on a good path. You do know under some conditions you need farm tax paid by March 1st, so you may not have much time....

Long term expenses get depreciated over time - 3,5,7,20 years. Repairs & consumables come out in the year spent. But there is a lot of 'play room' with the long term deductables, depending on how it helps you the most.

If you plan to expand your farming, I would really suggest a good CPA who knows farming. They will deduct things like your newspaper, which you use to follow market prices, and so forth. As well as keep you away from that 'hobby' classificasion which will make things tough on you.....

--->Paul

[okiemom]

Also, The rules do state like mentioned earlier that there is to be "profit" out of so many years.... but, There are only a very,very few that can do that. In the eyes of the gov't a "profit" is selling anything in hte year that you produced, nevermind it took you $25,000 to produce $2,500 worth of product.

We started w/ 13ac. and started small to see if we could do the farm thing. We found we liked it and liked the tax benifits. There is no way to make a true profit on 13 ac. We were in the hole by several thousand dollars. We sold $1000 worth of goats, rabbits.... The tax man was thrilled. we made a profit. Very strange.

We run the farm like a business and keep great track of the money. Keeping records and treating it like a true business will keep the IRS off your back.

Ag is very strange in it's ideas of profit. I really couldn't get my hear around it until I/we talked to the tax guy. The taxguy really needs to be an Ag. tax guy. No one else will understand.

[veggrower]

Abolutely get a cpa with experience in farms. Their fee is also deductible.

Sales=revenue Revenue-expenses-depreciation=profit/loss

[hunter63]

Don't overlook property taxes, ours got changed to residential/recreational, much higher tax rate, but since most of it was registered with the USDA with a "farm number", they did lower the rate to "crop land".
This took some doing, but was worth it.

I also asked about "farm discount" on my tractor, which boils down to not paying state sales tax, but since I didn't have an "income from it", didn't count, but the dealer did reduce the price of the tractor.

[uncle Will in In.]

Without a tax person to guide you and prepare your taxes you are better off to forget about your hogs. Mine charges around $130 a year and we have a working farm. The things involved are much more complex than you realize.

[agmantoo]

Zookeeper
Have you qualified your place for county property tax deferrment under
agriculture status? If not, I strongly suggest that you do. This will be to your advantage in an attempt to prove that you are a legitimate farming enterprise. Receiving legal status for the farm itself would help substantiate your being a for profit farm rather than a hobby farm.

[Mike in Ohio]

There does NOT have to be a profit 2-3 years out of 5. The IRS presumes you are operating as a business if you meet that requirement. (I'm not looking at the tax guide so I'm going with the poster that said 2-3 years - I believe it is 2 years without checking).

In any event, many farms show a loss for longer periods than that because of depreciation. If you keep good records and can show that you are operating in a business like manner then the IRS presumption isn't a big issue.

Zookeeper, if you are talking 17 pigs I would recommend not trying to take a deduction for a farming loss. Just my 2 cents.

Mike

[rambler]

Mike is right, however if you turn a profit 2 or 3 years out of 5 (I get conflicting advice on which of those numbers it is....) there is no hassle - you automaticly qualify as a farm. If you show a loss for a long time, the IRS will presume you have a hobby that you are using to offset real income from the other jobs & it will be up to you to prove you really are running a business that can provide income at some point. That is more paperwork & more folks reviewing your papers. If you have 2 regular jobs in your household & this farming thing, it might take a lot of proving to the IRS....

Every state is _very_ different on real estate zoning & taxes and even sales tax. Zoo doesn't list his state, so hard to say, but there can be a lot of benifit - or none at all - from the state end of taxes as well. This alone could be worth the hassle.

Or, it might be best to just ignore the whole thing.

--->Paul

[Jenn]

I filed sched F for 3 years. You can read through all the instructions and possibly do it yourself like I did if you can usually handle your own schedule 1040. If it is tough for you to wade through lots of stuff then get an accountant. BTW I did not find any tax programs that do this properly so sadly they aren't an option.

Important issues: have good records- or you may forget an expense! Write up a business plan. Depreciate your goods- hogs you purchase are probably 3 or 5 year goods (for breeding stock) whereas building a barn or buying a tractor that is really business use would be longer. Many farmers lose money for many years- my neighbor did for decades- but I think the value of the deductions make it worth facing their scrutiny if you never declare a profit. If you farmed as a hobby you'd have to pay tax on selling your hogs even if you were really losing money each year after feeding them- you must IIRC pay tax on income from the hobby but can't claim expenses. In this case you'd be crazy to raise 17 hogs if your family only needs 2-3 a year, and it might be better to make anyone you raise a hog for just give you money for feed etc. You may just barely break even or lose for a few years but presumably unless you love losing money and raising hogs you'll change your ways if that's really the case. I lost money for 2 years (sheep chickens turkeys) but had a profit the 3d year when we moved and I sold everything. Glad I'd gotten the deductions/depreciations in prior years. Think the IRS made money on me despite my prior losses.

[Mike in Ohio]

Actually, Jenn brings up a good point. You definately want to take depreciation for structures. One of the quirks of tax law is that you will be required to add depreciation back when you sell - whether you took it or not. The key point is that you were eligible to take it.

This really raised my eyebrows when I read about it.

Mike

[ET1 SS]

I would do the Schedule 'F'.

In fact we do schedule 'F's: on our turkeys [we raised four turkeys this year], and for our dozen chickens, and our goat.

Oh and two beehives.

They are very easy to fill out.

We do all expenses using a CC. So for each year we can account for 99% of all expenses with twelve statements. It has made our accounting much easier. Paid in full each month, we pay no interest charges.

We used to be required to show a profit on each business every third year, but no longer. So we show a loss on everything, it goes as a shelter against our gross income.

[Ken Scharabok]

I haven't shown a farming profit in 15 years and haven't been questioned.

As a general rule what you will be able to deduct/depreciate will only be that used for the farming endeavor, and then for what is not used yourself.

For example, on purchased feed. You raised 17 pigs, used two and sold 15. On first glance it would appear you could only deduct 15/17 of your feed bill, but the sow counts also, so it may be more like 16/18.

If you had a large barn and only a portion of it was used for the pigs, with the rest used for non-agricultural aspects (e.g., storage), then you wouldn't be allowed to charge the entire depreciation against the hog operation.

I do my own Form F. I keep very detailed records, including receipts for gas I have to purchase other than at the local farmers' co-op where I have an account.

Basically I give myself the benefit of the doubt, but still have detailed records if every audited.

[ET1 SS]

Ken -

Very well said.

Never lie, never 'cheat'.

Read the IRS pubs yourself, they are fairly easy to understand.

So long as you keep good records your good.

We have been audited, three times. Each time they increased our 'refund'.

When an auditor asks you how you came up with a number, or why you put a number in a particular line. If you can say: "well right here in this pub, I highlighted the section that I thought I was following, and I followed the pub". Then your golden.

[ET1 SS]

We are getting a new herd of goats this coming weekend, so that my in-laws can run a schedule 'F'.

They need to start sheltering their income.

[Christiaan]

I did schedule F for the first time this year. A friend helped with TurboTax and internet access to the IRS, which has a great informative website. It was pretty easy. Just sold eggs last year, no beef. Cut an extra $400 from our taxes.

[ET1 SS]

Originally Posted by Christiaan

I did schedule F for the first time this year. A friend helped with TurboTax and internet access to the IRS, which has a great informative website. It was pretty easy. Just sold eggs last year, no beef. Cut an extra $400 from our taxes.

Well done!