Am I suppose to claim our farm for tax purposes?

Discussion in 'Homesteading Questions' started by tobo6, Dec 17, 2003.

  1. tobo6

    tobo6 Well-Known Member

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    Everytime I go into the feed store the owner says "save that receipt for your taxes". This year was our first real year living here and putting the farm together so we have had a lot expenses and purchases. Dh works full time off the farm and I stay home with the kids and keep the farm running. We haven't made very much off the farm this year (under $500) but I'm really trying and coming up with new ways to expand. Do you have to make thousands of dollars to claim being a farm?

    Even if we can't, what are some of the things you can let your tax preparer know about. From what I understand any fencing, building materials for barns can be deducted. Can feed and animal purchases?

    Another thing that worries me is that we get a nice sum back every year and never have to pay. IF I was able to claim being a farm would this hurt us or does it help us? How about when we actually do make a profit on the farm, does that hurt you tax wise?

    I realize that it might be hard to advise me not knowing all the gritty detail but any advice would be helpful.:)

    mljjranch
     
  2. Ken Scharabok

    Ken Scharabok In Remembrance

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    Call the IRS forms center and have them send you a copy of Schedule F: Farming and the booklet which goes along with it.

    Also check into how you are considered to be for property taxes. If you can qualify as an agricultural endeavor, your property taxes may be significantly lower than if you are rated as residential.

    If you go with a schedule F, be careful on how you spread the cost between farming and non-farming. For example, unless you had a dedicated farm office in the house, you likely cannot claim and expenses for such. You may be able to claim some vehicle expenses. For example, through your receipts you can document you purchased from feed store on X number of days during the year. It is Y miles to the feedstore so you figure 2Y there. X times 2Y times the mileage rate allowed might be deducted as a farm expense.

    For most farmers, the biggest deduction is depreciation of bujildings and equipments. Most farms show a paper loss for this reason alone.

    I suspect with sales of only $500 per year, it will be difficult to claim yourself as a farm. Also, the paperwork involved may not be worth it if you already get back all of the federal taxes you paid during the year.

    Ken S. in WC TN
     

  3. Mike in Ohio

    Mike in Ohio Well-Known Member

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    Good answer Ken. Only reason I could see doing it even if they get money back is that it can be a tax carry forward. Depends on how much is on the table.

    mljjranch, another option might be to do a schedule C (Sole Proprietorship).

    I'd spend a few dollars and speak with a tax accountant. Not just about current year taxes/issues but to develop a gameplan.

    As usual, just my 2 cents.

    Mike
     
  4. Ross

    Ross Moderator Staff Member Supporter

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    For a first year having low revenue and high expenses is pretty common, farming isn't a high profit kind of business normally. Certainly spend a few dollars to set up a some kind of a plan with a pro. As with any business the gov. is looking for a reasonable expectation of profitability. If you plan to make a profit in the future then of coarse you should be claiming your expenses, fencing, feed, vetting, everything related. Like Ken said try to contain yourself on some of the ify stuff, like home offices and excessive vehicle expenses. If this farm is just to provide food for yourselves then I would doubt you "should" qualify as a farmer for tax purposes but again a tax expert can advise you better than me!!
     
  5. blhmabbott

    blhmabbott We're gettin' there!

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  6. unioncreek

    unioncreek Well-Known Member Supporter

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    I don't claim my income from the livestock, eggs, etc that I sell. You need to be able to prove that you are making it a serious business venture. You also need to show a profit 3 years out of 5 or the IRS will consider it a hobby and you can't claim any expenses and will have to pay taxes on the income. I run a small internet business and finally went to an accountant because I rarely made any money once you figure out all the related expenses. The accountant told me that unless I was making quite a bit more then it was not worth it.

    Bob
     
  7. Also check into your local and state codes. Some states have minimum acre codes and minimum numbers of “hooves” if that is what you are farming. You are also supposed to produce something agricultural (4 acres of pumpkins, 200 head of cattle, 3000 bushels of apples, 5000 hay bales etc) and turn around and sell them to somebody. Raising a couple of chickens or a victory garden that you eat yourself will not qualify you as a farm. Once you are registered as a farm, be prepared to have an annual inspection to be sure you are farming according to what ever the local definition of farming is (usually acres and number of animals).
    Some states offer reduced tax rates on property taxes if you are an agriculture enterprise but if you sell your land for anything other than farming you will need to payback the difference between the reduce rate and normal residential rate (5 years back pay). Farms are also supposed to show a profit every now and again, I think it was 2 times in 7 years or 1 in 5 last time I checked.
    As far as deductions go, everything that goes into producing your “product” (equipment, feed, fencing, buildings etc.) can be deducted. Larger items like buildings or equipment is usually expensed down (deducted over a number of years based on its estimated lifespan). Once fully depreciated the deductions stop till you buy another piece of equipment or build another outbuilding. In general, you will pay quarterly tax payments based on last years tax bill.
    For tax purposes, the farm needs to thought of as a separate entity. Your personal taxes have nothing to do with the farm taxes unless the farm is paying you a wage for your services. You really need to keep separate books, one for you, one for the farm. Keep extensive ledges and write and date all expenses and income. Don’t mix farm with personal. Should you ever need to defend yourself, the ledgers will be your best (only) defense.
    Before you really get involved with this you might want to sit down with a competent tax attorney or accountant. Have all you ducks in a row and tell them what it is you want to do or want to achieve by becoming a farm. If you decide to go for it, you can retain this person to help you with your books and tax forms. You will need to pay them for their services but hiring professional help early on can save you from many headaches down the road.
     
  8. Jena

    Jena Well-Known Member

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    I farm commercially and very rarely show a profit. That is ok with the IRS. The problem comes if they decide that what you are doing is a hobby and not a business. You need to be able to show that you are trying to make a profit and that this is not a hobby.

    If I raised one steer a year, they aren't going to buy that as a farm expense, especially if that steer ends up in my freezer! If I raise five a year and sell the extras, I think they would. You need to grow and sell some kind of produce, even if you don't make a profit on it.

    My biggest expenses are depreciation, followed by my farm mortgage and feed. My farm loss almost equaled our wages last year, thus resulting in a near zero taxable income. That is the usual scenario come tax time.

    If the IRS determines that you are engaged in a hobby, not a farm, they can take back all the deductions you claimed in previous years. Don't claim farm expense unless you are serious about growing and selling agricultural produce of some kind! It doesn't have to be a lot and you don't have to make a profit, but it has to be there.

    Jena
     
  9. texican

    texican Well-Known Member

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    In Texas, all purchases for farm related activities are exempt from state sales taxes. Just about anything used is exempt...feed, fuel, tractors, implements, fencing, vaccines, building materials (if going into farm related activities).

    I don't worry with saving receipts for IRS purposes, but the savings on sales taxes add up to hundreds of dollars each year.
     
  10. carlwi

    carlwi Guest

    Hello all.
    I have been runing my farm as a business for 8 years now and I hired a farm management company to help with my books and taxes. This has been the best move I have made. The tax laws changes like the wind and I do not have the time to keep up with it. As far as profit, If you make money you pay taxes on it so I always reinvest any profit into machinery, ect.. Also check out your local FSA office for programs you might be elgiable for. They are also a wealth of information.
    Seasons greetings,
    Carl
     
  11. tobo6

    tobo6 Well-Known Member

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    Excellent help all!

    Ok, my big plan will be to talk with our tax preparer. I don't do our taxes so I'll let him decide what I should do. My plans are to be able to breed animals and sell them and make a profit, but right now since we are just starting out I was shocked on how much we spent this year. (building 2 barns, fencing, ect.)

    I have gone to the IRS site and to tell you the truth its all a little overwhelming to me, lol. I do know that next year I can change our property tax to agriculture property because when the county came out after we finished building here we were adviced to change our tax status but we can't do that until between Jan.1-March 1. That will help a lot. Supposedly everything except the one acre around the house will be billed agriculture and the house and 1 acre will be taxed as a residence.

    Now if I find out that I have to have some kind of crop then this wouldn't be possible. The only thing I can think of would be hay fields but that would be for our own use and not sold.

    I'm going to go print of all the papers I need to read and see if I can make a heads up about it all. I've kept every receipt and entered them into a spreadsheet so just in case I can use them.

    Thanks again
    mljjranch
     
  12. Jena

    Jena Well-Known Member

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    You don't have to have a crop, but your hay expenses would all be deductible, if you are feeding that hay to animals that will be sold, or producing animals for sale.

    Make sure your tax preparer is familiar with farming.

    Jena
     
  13. Oxankle

    Oxankle Well-Known Member

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    Go find a tax preparer who does farm taxes for FARMERS.

    The first three years out here I used a fellow who was reccommended to me; he sounded and acted like an ignoramus, but I stayed with him until the first year was audited and I was penalized. I then found a lady who did in fact know farm taxing and she has cleaned up the mess he made and got me lots of money back.

    I am told that the IRS will not challenge anyone who is in fact producing crops/livestock for sale and shows income, even if depreciation and operating expenses result in a loss. You do have to be serious about making a profit, but of course if you plough your money back into equipment or buildings you will have a paper loss.

    In Oklahoma farm supplies, feed, etc are tax exempt and you can get farm tags for your vehicles. You have to apply for this tax exemption, get a tax exempt card and number. You can only do this if you file the Fed. farm tax forms.

    In short, spend a little money on a tax preparer who knows the business. Ask around; don't settle for someone who will cause you trouble.
    Ox