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Old 08/27/10, 01:07 PM
Old Mission's Avatar  
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Anyone claim farm on taxes?

We are trying to research wether its worth it to start claiming our hobby
farm for tax purposes. Wether its worth the trouble or not?!?! We dont make
very much in ways of profit, well after expenses we make no profit at this
point really but we are just really getting started, we have a lot of start up
expenses, equipment, fences, fixing buildings, ect. Tried to make a appt with a tax advisor and we were not worth their time apparently.
What are the ins and outs and advantages and disadvantages of claiming your farm on taxes. Do you really get any good write offs for expenses? Is it worth
the trouble? Every time we buy supplies the store asks if we are farm tax
exempt, what is this? How do you get to do this and is it worth it?


Stephanie

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  #2  
Old 08/27/10, 01:59 PM
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tax exempt is something you set up with the individual stores (or chains). There are certain items (feed, feeders, waterers, medications, etc.) that are not taxed if you use them for "for profit" farming purposes. Not pet animals but stuff you try to sell to others. It's kind of a "your word" that you fit the definition. When you check out after you set it up with the store, you tell the clerk "tax exempt" if they don't ASK (which they should), and then whatever items are on the "tax exempt" list are not taxed.

We have a "hobby" farm, but I try to make a profit on eggs, chickens, rabbits, etc. So we were able to set up with local stores. I THINK (don't hold me to this) that farm vehicles are also included. (repairs, parts, etc.)

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Old 08/27/10, 02:21 PM
 
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Check with your local USDA/FSA office about their requirements for being a "farm". They should know the proceedure. You may have to also go to your local tax assement office. For IRS purposes, a farm has to have $1,000 of sales in a year. And you have to show a profit a certain numbers of years. IIRC, 3 yrs out of 5, tho that may have changed.

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Old 08/27/10, 03:17 PM
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To take the farm deductions, you need to have a business plan and be following that plan with the intention of making income.

This was according to my CPA.

For my goats, it just wasn't worth it.

You can *not* claim deductions for a hobby farm. The word HOBBY means that it's a hobby, not an income producer.
http://www.ehow.com/how_2183916_hobb...by-income.html

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Last edited by Alice In TX/MO; 08/27/10 at 03:19 PM.
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  #5  
Old 08/27/10, 04:25 PM
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Read the IRS regs for schedule F.

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  #6  
Old 08/27/10, 04:53 PM
 
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The absolute first thing, you want to do, is stop calling it a "hobby".

Yes, it is can be worth it.

The IRS wants you to report extra income, but wants to poopoo the idea, of deducting expenses used to make that income?

I don't think so!

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  #7  
Old 08/27/10, 05:04 PM
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We registered as a farm with the USDA Farm Service Agency. We declare our income and deduct our expenses. It is worth it for us.

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Old 08/27/10, 05:37 PM
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Try the tax advisor again. Not everything written here is correct. Better to be safe than sorry.

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  #9  
Old 08/27/10, 05:38 PM
 
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For the last 10 years we have used a CPA who specializes in farms. She has really helped us to increase profits and stay legal.
Two years ago we were selected for a "random" audit by the IRS. It was a very thorough audit that lasted for 3 days. Not only were all of our personal, rental, and farm financial records minutely examined, but our farm and was personally inspected by an IRS Agent.
We even did inventories on two of our holding pens, which involved counting hundreds of animals. The agent was very professional and not threatening or adversarial in any way.
Long story short, we had to pay a little over $400.00 for a couple of business deductions that were disallowed. No fines or interest. The good thing is we are now certified by the IRS as a farm business.
My advice is to keep every record in an organized file system for at least 7 years. Hire a good accountant, and don't even think about hiding any income.

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Old 08/27/10, 05:46 PM
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We do, but I don't know a lot about it. My sister is an accountant and she does our taxes.

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  #11  
Old 08/27/10, 09:18 PM
Brian w
 
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I think people are confusing state laws vs national laws or just leaving them out when talking about it. sales tax is a state and local issue. so is vehicles to a degree. business loss and expenses are usually deductible for irs but not always and many other things go talk to a tax lawyer or just hit up a local small farmer near you in your county first. but read them laws yourself or pay a bookkeeper! a bookkeeper that is certified helps with penalty if they are wrong just talking to a lawyer does not. personal exp

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  #12  
Old 08/27/10, 10:06 PM
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Quote:
Every time we buy supplies the store asks if we are farm tax
exempt,
what is this? How do you get to do this and is it worth it?
In NC, that means you don't pay sales tax at all on a lot of things and a reduced rate on other things.

You have to apply for an examption number from the state, and prove to them you're an actual farm

Then you also have forms to fill out at each store where you will use the exemption

You can usually get a lower property tax rate too
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  #13  
Old 08/28/10, 07:53 AM
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We file a schedule 'F' with our tax filing.

We have never 'registered' with anyone.

We list all of our farming expenses [fuel, feed, seed, tools, etc] and we claim any sells.

We have never shown an end profit. The IRS used to require that you show a profit every 3 years then every 5 years; but that went away. Even then what we did was we would skip every third year.

Your 'plan' does not need to be written. We have beehives, we 'plan' to sell honey, there is nothing written saying that we plan to sell honey. But it seems rather obvious.

The same goes for our goats, sheep, hogs, chickens, and fruit orchards.

This is how we file our taxes with the Federal IRS. States usually just take a copy of your federal 1040 and add their own page into it.

We have done this in California, Washington, Ct, and now Maine. Each of these states has been pretty much the same. Do your 1040 first, then the state forms start with the numbers taken from the 1040.

We have been through IRS audits; three times over the years. In each case our schedule 'F' never raised any concerns.

We file schedule 'C's, 'E's and 'F's and we have since 1985 [or so].

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  #14  
Old 08/28/10, 09:10 AM
 
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Carefully read the directions and try filling out the 1040 schedule F form as a "what if" practice. It's a decade since I did it but for 3 years we filed. Two years no profit, just deductions of my getting going expenses, and last year a taxable profit since we moved and sold off the stock. Had we not moved it might have been 12 years (if ever) before we paid more in taxes than we had saved in taxes with our deductions, and 5 years before we even paid any taxes.

Back then if you had an expectation and intent to make a profit some day you were supposedly okay- my neighbor had a huge flock of goats (and two fulltime jobs between him and his wife) and claimed they had not yet in 20 years paid any taxes, just deducted the costs of building barns and hopefully not the costs of fishing cabins (but probably the cost of digging the fishing pond, er stock tank).

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Old 08/28/10, 05:58 PM
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Quote:
Originally Posted by Old Mission View Post
We are trying to research wether its worth it to start claiming our hobby farm for tax purposes. Wether its worth the trouble or not?!?!
If it is a hobby it is not applicable to Sch.F. The USDA considers you a farm if you can produce $1,000 of product. The IRS considers you a hobby if you don't make a profit in enough time or show intent. If you want to claim to be a farm they want you to show intent to make a profit and to do it time-to-time. Any net positive is a profit. It doesn't have to be huge.

Quote:
Tried to make a appt with a tax advisor and we were not worth their time apparently.
Much better to read the tax code and do your own taxes so you understand it. It isn't rocket science. The IRS is there to help you. There are instructions with the forms and they have a to call in help line.

Quote:
Is it worth the trouble?
Yes, but then we are a farm. Almost all of our income comes from our farming. Most of our gross income are expenses like winter hay, fencing, trucking, etc. These get applied against our income from our farm on Sch.F. The net comes forward on to page 1 of Sch.1040. Sch.F is only two pages and is not hard to do at all.

Additionally since we are a farm they tax our land at its real value rather than the absurd over priced "Pave-it-and-build-condos-on-every-square-foot" price that house lots are priced at. The tax assessment system is fraud since people are not required to pay annual taxes on their savings equity, IRA, 401K, etc. We shouldn't be required to pay tax on our land either - in fact, our land benefits the community by being a view, filtering the air, sucking up carbon, etc. To get the farm tax rate one needs, in most states, to earn more than 50% of one's income from farming that land.

Quote:
Every time we buy supplies the store asks if we are farm tax exempt, what is this?
That is different. They're asking about sales tax. Sales tax only applies at the consumption level of a product. If the product is being moved up through the chain then sales tax does not apply. There is some variance state to state.

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  #16  
Old 09/06/10, 08:36 PM
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Okay, I'm intrigued now, too, as I've been researching the start-up costs of actually setting up the property on my parents' "farm" to properly.. er... "farm" it. You see, we've had a "hobby farm" for years... when I was growing up, my parents raised and showed AKC Kuvasz, and I got into showing ARBA rabbits for a while - but, they were just hobbies - we never made any money off of them, just enjoyed showing them. Back in the fall of 2008, we picked up a few backyard goats, and have just been breeding them for personal milk and meat production. We've got a small paddock/field/whatever-you-want-to-call-it of woven wire we had leftover from kennels back in the day, that we used to contain our goats, but it's really too small if we actually wanted to expand. There is some pasture that currently just has two strands of electrified wire on it for our two horses, but obviously that's not going to hold goats or our livestock guarding dog.

Well, I got married this past spring, and my husband and I have talked some with each other and to a lesser extent, with my parents (though in my teenage years I talked about it with them more often) of actually farming their land... and our interest lies in doing this with goats. Actually looking to produce and sell locally for meat, et cetera.

To do this properly, we would need to make the jump from just keeping them in the backyard as a hobby and, basically, eating all of our own costs, and actually invest in making the pastureland usable for the goats, et cetera. I just sat down and calculated all of that out... and the investment to properly set up that pastureland with goat/dog-secure fencing, in such a way that we could rotate and utilize it properly, would come in at about $3600, without taking into account the extra cost of a charger to handle that amount of fencing, and wooden corner bracing posts... anyway, that's a pretty big chunk for us. Pretty much all of our savings. We don't even own this land, let alone live on it - though that would likely change if we decided to pursue this...

Basically, what I'm wondering is the following, to start with:

  • If we were to invest our savings into properly setting all of this up, obviously we're not going to have any kind of profit during our first year... how many years do you have to show a profit, if we were to try to fill out a Schedule F and deduct the start-up costs of fencing?
  • Could the purchase of a few more goats to actually get our breeding program more functional, count as a start-up cost?
  • Do things like feed count as farm costs? Are those technically, like... maintenance of stock? I have no idea what sorts of things are claimable and what aren't, when it comes to that.
  • Does the fact that we wouldn't own the land, affect whether or not we could file this? Should we speak with my parents about getting on the deed and helping pay off the remaining mortgage, since they've said before that as their only child, I'm going to end up with the property someday anyway?

I'm just trying to get all of my ducks in a row, figuring out costs and deductions and crazy stuff like that, before I present this information to my husband (and from there, with my parents) and when I did a search and discovered this thread, I thought it might be a good place to start.
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  #17  
Old 09/06/10, 08:46 PM
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Quote:
Originally Posted by CountryGoalie View Post
Okay, I'm intrigued now, ...

Well, I got married this past spring,
Congradulations !



Quote:
.,....
  • If we were to invest our savings into properly setting all of this up, obviously we're not going to have any kind of profit during our first year... how many years do you have to show a profit, if we were to try to fill out a Schedule F and deduct the start-up costs of fencing?
The concept of a set number of years was removed from the tax code.



Quote:
...
  • Could the purchase of a few more goats to actually get our breeding program more functional, count as a start-up cost?
Okay



Quote:
...
  • Do things like feed count as farm costs? Are those technically, like... maintenance of stock? I have no idea what sorts of things are claimable and what aren't, when it comes to that.
Yes.



Quote:
...
  • Does the fact that we wouldn't own the land, affect whether or not we could file this? Should we speak with my parents about getting on the deed and helping pay off the remaining mortgage, since they've said before that as their only child, I'm going to end up with the property someday anyway?
Ownership has no bearing on it.



Quote:
...
I'm just trying to get all of my ducks in a row, figuring out costs and deductions and crazy stuff like that, before I present this information to my husband (and from there, with my parents) and when I did a search and discovered this thread, I thought it might be a good place to start.
Very good then.
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  #18  
Old 09/06/10, 08:55 PM
 
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Quote:
Originally Posted by CountryGoalie View Post
  • If we were to invest our savings into properly setting all of this up, obviously we're not going to have any kind of profit during our first year... how many years do you have to show a profit, if we were to try to fill out a Schedule F and deduct the start-up costs of fencing?
Go to the IRS site and download the instructions for Schedule F, and Schedule C.

Quote:
  • Could the purchase of a few more goats to actually get our breeding program more functional, count as a start-up cost?
Yes.

Quote:
o things like feed count as farm costs? Are those technically, like... maintenance of stock? I have no idea what sorts of things are claimable and what aren't, when it comes to that.[/LIST]
Yes

Quote:
oes the fact that we wouldn't own the land, affect whether or not we could file this? Should we speak with my parents about getting on the deed and helping pay off the remaining mortgage, since they've said before that as their only child, I'm going to end up with the property someday anyway?[/LIST]
No
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  #19  
Old 09/06/10, 11:40 PM
 
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I don't know why you would need the schedule C. I'd download schedule F, instructions, and the Farmers Tax Guide, publication 225.
If you have someone do your taxes ask them how many farm taxes they do in a year. Most tax professionals do not know the farm tax rules at all, and neither do the IRS people as so few farmers are left. If done right it can reduce your taxes in most years if you have off the farm income.

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  #20  
Old 09/07/10, 12:12 AM
 
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Originally Posted by CountryGoalie View Post
Basically, what I'm wondering is the following, to start with:
  • If we were to invest our savings into properly setting all of this up, obviously we're not going to have any kind of profit during our first year... how many years do you have to show a profit, if we were to try to fill out a Schedule F and deduct the start-up costs of fencing?
  • Could the purchase of a few more goats to actually get our breeding program more functional, count as a start-up cost?
  • Do things like feed count as farm costs? Are those technically, like... maintenance of stock? I have no idea what sorts of things are claimable and what aren't, when it comes to that.
  • Does the fact that we wouldn't own the land, affect whether or not we could file this? Should we speak with my parents about getting on the deed and helping pay off the remaining mortgage, since they've said before that as their only child, I'm going to end up with the property someday anyway?
1. You need to have a business plan, a goal of being a profitable, growing business, and common expectation of being a profitable business. There are 100 different ways to prove this, we can't list them all. In the old days if you were profitable 3 out of 5 years was the _rule_. Today that likely will get you through without question at all. If you are not profitable for the first 7 years in a row; but you are saving a lot of taxes on your 'real' job by deducting your farm expenses - well then expect a visit from the auditor and you will need to explain what your plan was, and why you are not profitable. You could have had a good plan, decided to expand after 2 years, then hit weather/death loss issues that made you lose money in year 6 so you really are a business, but just didn't make any money those first 7 years. Good to go. BUT you'll likely be proving that to them........ There is no set answer to this, but a profit now & then is good to keep them from snooping around, and you should be a business with a plan to make more than you spend in a reasonable period of time.

2. I'm going to disagree with the rest on the breeding stock. That is specificly covered in the tax code, and is considered a captiol expense, like land. You need to remember what you paid for the breeding stock, and then whenever you sell them again you report the loss or gain on them. They affect your taxes, but they are _not_ directly deductable as other expenses are. Been there, done that. Sound confusing? Yup, you need a good farm-versed CPA, not any old tax person....

3. There are 3 classes of farm tax deduxtions. Long term, mid term, and short term. Feed would be a short term deduction. Spend $1000 in the year buying feed, and you deduct $1000 for that year - it is consuimed within one year.

Mid term expenses are tractors, machinery, and so forth, typically you buy them in one year, but they are used for 5-20 years. Typically you can deduct 1/7th the cost of these items for the next 7 years. There are different lengths of time, and there are ways to speed up the deduction to all in the first year, etc. But basically how it works.

Long term expenses would be tile for drainage, irrigation for watering, a building, shed, barn. permanent fencing. And so forth. These typically are 20 year or more expenses. You typically take 1/20th of a deduction of these every year for the next 20 years. There are ways to accelerate the deduction if you need to.

Now, land itself, or the breeding stock as mentioned, are considered long term investments, not expenses, and are treated differently - more like capital gains. You can take a loss, or pay an extra tax, when these are sold by you depending on if they lost or gained in value.

4. It does not matter if you own or rent the land. You're paperwork will become more complex if you do not own the land, but make improvements to it such as fencing. But not a problem, just a little different.

You will be renting the land right; it gets more & more complicated if you get to use it for free - they start wanting to include gift taxes which your relatives would end up on the hook for. Again, nothing you can't work with, but don't do it _wrong_ or you set yourself & others up for a bad deal.....

I spend 400-500 for a good farm CPA to do my taxes, and it is _well_ worth it, even on a small setup it is _wel_ worth it. Just his off the cuff comments about buying things beginning of next year, or end of this year, and so on, to play the tax avoidance game, will make back his costs.

Then there are property taxes - many states allow ag property to be taxed at lower rates than residential or development property. So you can save a lot in property taxes. Each state has _very_ different rules on this, but it _may_ save you money.

Then there are sales taxes. Many states do not charge sales tax on wholesale items. As a farm raising stuff for profit, your purchases of seed, fencing, bolts, feed, and other farm-specific items may qualify for no sales tax. This will depend on each state, all different.

For many of you, the problem is you already bought stuff in past years and _didn't_ plan this out, how to save taxes. It's hard to go back in time with the tax stuff.

Ids it worth it? No, not if you are just raising stuff for yourself to use. But it sure can be if you are planning to make more than you spend on it all in the next 10 years. If you really will be a business, even if not a big deal, if you will make profit over the years.

Yes, it is very complex, but if you break it down into simple thoughts, it can be dealt with.

--->Paul
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