Loss on schedule F?

[Wayne02]

I get conflicting messages on this subject. For a small family farm type deal using schedule F some folks tell me that 'farming' is different from a 'real business' and it's not unusual for farms to show a loss on their schedule F year after year after year. This would be for a very small operation - ~$1500 income, no business license required etc. When I express concern about making a profit many people look at me like I'm from mars saying that few small farms really make a profit.

Somehow this just doesn't make sense to me. I'm going to check with our cpa next week but thought I'd get some input from folks on the forum as well.

I'm somewhat familiar with how the IRS treats businesses in that they expect 'intent to make a profit' and after 3 or 5 consecutive years of loss it is no longer considered a business but a hobby. I probably don't have that exactly correct but you get the picture.

Does this requirement not apply to small farms? Do you have multiple years of loss on a schedule F? My wife (who comes from a small farm family) says I'm obsessing over this too much.

Thanks

[ErinP]

I think she's right.

There's an old joke about the farmer who won the lottery. When asked what he was going to do with his millions, he said he was going to keep farming until it was gone.

[agmantoo]

You are obsessing, just do not let it appear that your are farming as a hobby. Your intent is to make a profit and go forward with that in mind and practice and you should be fine.

[ErinP]

PS: DH, wracking his brain back to Ag. Fiance, said that so long as you can show that your input costs are what take your profit (ie, a profit is put back into operation via a tractor, land, etc.) you should be fine.

On the other hand if you show a loss because you gave yourself a raise, you might raise questions.

[Cheribelle]

With my small operations, my loss didn't justify itemizing, so we took the standard deduction.

[rambler]

If you are actually a family farm and trying to make your living from the farm, you can show a lot of net losses and be ok. Typically you farm, your wife has a real job for money & health benifits. Your job - farming - gains assets while only randomly making income, and when you retire you sell the farm assets and the govt collects their taxes from you at that time - capitol gains. The farm needs to be run in a business like way, records kept, and a plan to be profitable. You might not make any money because of purchasing bigger items - tractors, buildings, field tiling, irrigation, etc. You might hit poor crop prices, poor weather, etc. But you should be a real business with real intent to gain profit or assets.


However, if you have a small hobby farm of a couple acres besides your _real_ 40 hour a week job, then you will be looked at differently. It is pretty easy for you to constantly lose money at farming this small hobby (buy new stuff, don't really try to control weeds etc, etc.) and hide your income from your real job in this 'black hole' of a pretend hobby farm. You will be looked at much more carefully if this is what you resemble.

It used to be that you had to show a profit 2 or 3 out of 5 years on such a 'hobby' sideline farm buisness. That is not longer true, but it does end up a very good benchmark - if you are worse than this you can expect a visit... If you do this well with your 'farm' then they likely will leave you alone.

In any case, if you lose money at farming, even just one year, it is possible they will come visit and ask some questions. They are going to look to see if you have a business plan, a set of records, and a plan to have this a _real_ business, that has potential to make money. They will _not_ allow you to run a small hobby as a loser to try to hide your real income from being taxed.

There is no _hard_ rule on this. If you have a 10 acre 'farm' and work 40 hours a week at a real job, you are in big trouble if you buy a $120,000 tractor and try to deduct it for your corn & souybean garm that grosses $1700 a year. As you should be!

On the other hand if you have a 50 acre 'farm' besides your real job, buy a tractor, planter, few implements, build a machine shed and spend $95,000 total the first 3 years, but have a plan to make $17,000 a year profit on your farm and likely will add on another 50 acres in 5 years making all your expenses pay off even better - your deductions are good even tho you will likely lose money for 5 years or more. You have a plan, it shows a profit potential, and looks to be a real business with real goals that can be attained.

The IRS is looking for _intent_ here. If your goal is get a hobby that saves you taxes by losing money, you gonna have trouble.

If you have a sideline job that intends to be profitable, you can use the expenses you get along the way.

What is your true intent?

If you have a hobby farm, you might wish to not take _every_ lose you can, allow a farm profit to show up on the schedule F now and then. This would satisfy your goal of balancing the small hobby income & losses, and satisfying the IRS that you are not farming _only_ to avoid paying taxes.

They won't bother much with very small numbers. Lose a few thousand, make a couple 100 every few years, and you are fine.

A long way to say, and I repeat:

What is your true intent with farming? Are you trying to run a business that will be, long-term, profitable? That's what the IRS will look at.

--->Paul

[fantasymaker]

Originally Posted by Cheribelle

With my small operations, my loss didn't justify itemizing, so we took the standard deduction.

Since when is there a standard deduction for Farms?

[ET1 SS]

Originally Posted by Cheribelle

With my small operations, my loss didn't justify itemizing, so we took the standard deduction.

The 'Standard Deduction' and filing a Schedule F; are completely different topics

You can itemize, if you wish, or not.

You can file a schedule F, if you wish, or not.

Neither of these has any connection to the other.

We file a schedule F, and some years we also itemize.

We also commonly file a schedule C and an E, also these do not have any connection to itemizing.

With all of these, if your intent is to one day hopefully show a profit; then you are a business and not a hobby.

Why does a person collect baseball cards? In the hope that one day they will be worth a lot of money and he/she will make a profit; therefore it is a business.

[marvella]

i've been filing as a small farm for 4 years now. i declare any profit from the farm (not much), record my expenses (which so far ends up as a loss, albeit small.) but i also report the income i get from a rental. i also declare my entire 40hr/wk income.

the way I have it figured i look like i am being obsessively honest about any money that comes in, no matter how small.

if there is a flaw in this, i'd like to hear it because i've wondered.

[rambler]

Originally Posted by marvella

i've been filing as a small farm for 4 years now. i declare any profit from the farm (not much), record my expenses (which so far ends up as a loss, albeit small.) but i also report the income i get from a rental. i also declare my entire 40hr/wk income.

the way I have it figured i look like i am being obsessively honest about any money that comes in, no matter how small.

if there is a flaw in this, i'd like to hear it because i've wondered.

That's the way to do it, good job.

The issue is, someday, possibly, the computers will say, hey, this person has never made a profit on farming, but always gets $100-5000 loss from 'farming'. Every year, for a decade now. What's up with that? Why are they losing money every single year?

And they will flag your return, and want an explination from you.

It does not mean you are wrong, only that you would need to prove that you are trying to be a profitable farm.

They actually judge you by intent, not by what the numbers say. So, it would be good to have something written down like a budget that will get your farm operation to turn a profit someday. Weather, ecconomy, or whatever can cause that plan to derail, but you will have the 'intent' to make money from the farm.

You're doing it right. One extra step would be to have a written plan for how the farm will, someday, become a profitable thing on it's current path.

--->Paul

[Linebacker]

I show a profit on my schedlue F, because all I claim is the row crop land rental I get every year. It is the only part of my farm that actually makes a profit. Maybe I should file all the losses from the rest of my farm (animals, machinery, building upkeeps etc.). This thread has gotten me thinking. That's about the time I usually mess up! LOL
Brad

[marvella]

Originally Posted by rambler

That's the way to do it, good job.

The issue is, someday, possibly, the computers will say, hey, this person has never made a profit on farming, but always gets $100-5000 loss from 'farming'. Every year, for a decade now. What's up with that? Why are they losing money every single year?

And they will flag your return, and want an explination from you.

It does not mean you are wrong, only that you would need to prove that you are trying to be a profitable farm.

They actually judge you by intent, not by what the numbers say. So, it would be good to have something written down like a budget that will get your farm operation to turn a profit someday. Weather, ecconomy, or whatever can cause that plan to derail, but you will have the 'intent' to make money from the farm.

You're doing it right. One extra step would be to have a written plan for how the farm will, someday, become a profitable thing on it's current path.

--->Paul

thank you. each year i say it's going to be the last time i file as a farm because the numbers are pretty small and it's a pretty big aggravation. but i save receipts anyway, just in case.

[rambler]

Originally Posted by Linebacker

I show a profit on my schedlue F, because all I claim is the row crop land rental I get every year. It is the only part of my farm that actually makes a profit. Maybe I should file all the losses from the rest of my farm (animals, machinery, building upkeeps etc.). This thread has gotten me thinking. That's about the time I usually mess up! LOL
Brad

I assume you get a cash rent, you don't sell any of your animals, and your machinery is for mowing lawn, or your own use garden, or moving snow, etc.

Then you are doing it correctly. You are not really part of the farm, you are collecting rent.

If you are on a crop share, where you get some of the crop, then you are materially participating in management (you get the crop, you may pay for some of the weed control & fertilizer, and you decide how your part of the crop is sold....) and then you are 'actually' farming, so you could deduct a bit of those expenses you mention. Not all, but - a bit.

Sounds complicated and goofy, i know, but it's a business deal, if you are part of the business you can deduct your expenses, if you are on the sidelines you can't.

--->Paul

[Linebacker]

Rambler,
It is a cash rent. I sell a few birds but not on a scale of making a true profit. The bulk are for the family freezer with the extras being sold. Thanks for the reply.
Brad

[rambler]

I should point out I'm just a simple dirt farmer, so my opinion on tax law is just general conversation, no way should anyone rely on me for real tax issues. Just conversation.

--->Paul

[Linebacker]

Originally Posted by rambler

I should point out I'm just a simple dirt farmer, so my opinion on tax law is just general conversation, no way should anyone rely on me for real tax issues. Just conversation.

--->Paul

If people would take the time to sit and listen to more simple dirt farmers, this world would be a whole lot smarter!

Brad

I sent the IRS a letter asking that I be taken off their mailing list.

[foxtrapper]

Originally Posted by Wayne02

I'm somewhat familiar with how the IRS treats businesses in that they expect 'intent to make a profit' and after 3 or 5 consecutive years of loss it is no longer considered a business but a hobby. I probably don't have that exactly correct but you get the picture.

You've got things rather turned around. The IRS generically assumes a venture that is making a profit 3 out of 5 year is *not* a hobby. This is not a guarantee of no audits, or that the IRS is obligated to such a decision. It's merely a simple filter. Any business that makes a profit 3 out of 5 years is generally assumed to be run in a business like manner, and is not a hobby.

There is no requirement to make a profit 3 out of 5 years. That's worth repeating. There is NO requirement to make a profit 3 out of 5 years.

If you have a business that does not make a profit 3 out of 5 years, you need to keep records sufficient to demonstrate that the business is being run in a business like manner, with the intent to make a profit. This applies to farms as well.

Should you be audited (and the chances increase by not making a profit 3 out of 5 years), and your records show the business to be run properly, and the losses to be real, you will not have any problems continuing the business venture with a loss. Should your records be in poor shape, or show the business venture to be poorly run, then it make be declared a hobby. In which case losses are restricted to the maximum of profit (zero net profit).

[Wayne02]

Thanks for the replies. I talked with my cpa and she pretty much confirmed what has been said in this thread with regard to intent and such.

Her short answer was that yes, I am obsessing too much over the subject and that farms will not be as consistent as 'businesses' in other venues due to the variables of weather and what not.

Her long answer was that on paper my inputs looked to match the income generating output and were not in any way out of line. Meaning I didn't purchase a big John Deere combine for use in harvesting an 8 acre hayfield.

Rambler makes a good point about having some sort of sales/budget plan written down, even if it is simple. I need to have balance sheets, income statements etc for my regular business but it never occurred to me to do this for the farm when we started a couple of years ago. Probably because it would be absurdly short and simple, as in half a page long type deal. But never the less, that would be a good document to file away each year with the tax documents just to have on hand if needed in the future.