I'm a CPA with a practice that primarily does tax and accounting work for horse people and farms, perhaps I can give you some pointers.
The first question I would ask, is do you have a written business plan? Why is this important? If you are audited you need to be able to prove that this is a for profit venture. I've seen an audit end up in tax court for lack of a written business plan. I always advise my clients to not get to hung up with the verbal part of the business plan (it is necessary but it isn't the proof in the pudding), and pay attention to the numbers. In fact, I tell them to start with the numbers because if the numbers don't support a profit motive, they can stop right there.
Do you conduct business like a business? Strange question, isn't it? But there are certain things a business venture does that a hobby venture wouldn't concern itself with doing. Do you maintain a separate business banking account? Do you issue 1099 slips to individuals and businesses you hired? Do you maintain proper accounting records? Do you change your business direction based on results? Do you record your personal use of eggs, chickens etc? If you can answer yes to all or most of these questions you are going in the right direction, if you can't, you're not! Here's a link to an article I wrote many years ago discussing the differences between a hobby and a business:
Are Your Horses Tax Deductible (You can substitute farm for horse).
You ask if it is worth it to claim the deduction? If you were my client I'd ask the question a different way: Are you or aren't you in business? If you consider yourself in business, than you should prepare a Schedule F and all other related schedules.
What happens if you don't make a profit in 5 years? You are referring to the safe harbor rule. This the safe harbor rule: " It allows a presumption that the taxpayer is engaged in for profit if in 3 of 5 consecutive years (2 of 7 in the case of breeding, training, showing or racing of horses), the activity is profitable"
What this means is if you realize a profit 3 of 5 years you WILL be considered a business but it does not mean that if you don't realize a profit in 3 of 5 years that you WON'T be considered a business -other mitigating factors will determine that
You mentioned it might be a while before you show a profit because you need to build a barn and replace a truck -these are both capital items with the barn being depreciated over 20 years, the impact on the bottom line would probably not be very large.
We plan on making a profit, but what happens if you dont within the 5 years your supposed to? Do you have to pay the IRS back? Maybe. LOL. If you don't make a profit your deduction for farm losses is not automatically disallowed. If the IRS audits you, you may find that they apply all the factors previously discussed and rule that you are a hobby and not a farm. If that were the case your deduction for the years under audit would be disallowed, the IRS would recalculate your income without the deduction and if a balance due resulted, you'd have to pay that to the IRS plus interest and penalties.
My recommendation is to get professional help. Don't go to H&R block, find someone who specializes in farms especially small farms. Have them prepare your taxes at least for the first year. The cost may be much less than you'd expect. In my business an average federal return with farm schedules is prepared for about $225-$300. Keep in mind having well organized records minimizes your fee. The person you choose doesn't have to be local -I myself prepare returns for clients across the country.
As for doing your return with Turbo Tax -yes you can opt that route but I wouldn't recommend it. The software is good but it can only prepare a return as accurate as the information that goes into it. I have reviewed many client Turbo Tax prepared returns and very few have had no errors. This is because
the program can't replace years of expertise, it can't ask you questions specific to YOUR business, the questions are generic.
I hope this long winded answer helps you make an informed decision.
