Farms and taxes, anyone else do it?

Discussion in 'Homesteading Questions' started by sisterpine, Sep 27, 2004.

  1. sisterpine

    sisterpine Goshen Farm Supporter

    May 9, 2004
    Zone 8a, AZ
    Hi from Montana; I have 40 acres which i am developing slowly into a farm. Just asked a tax attorney if my new dry well of 6 grand is deductable. Was advised it will have to be added to capital cost of second well when i drill. I was planning on waiting to file taxes as a farm until I was closer to showing a profit and was advised to go ahead and do it now . Was told it is not so much about profit as it is about farming. Are you working at learning to farm, are you making decisions based on future farm profits etc. Anyone here recently started doing taxes based on a small farm I would love to hear about how it went and how you did it the first couple of years. Kathleen
  2. uncle Will in In.

    uncle Will in In. Well-Known Member Supporter

    May 11, 2002
    It is unlikely that there will ever be a profit when all allowable deductions are taken. The loss can be taken off other income.

  3. Mike in Ohio

    Mike in Ohio Well-Known Member

    Oct 29, 2002

    You definately want to be doing it. We are going into our 3rd year of farming (and doing the taxes). You definately want to read the IRS publications on farming and depreciation. Keeping good records is important. If you don't show a profit 3 years out of 5 then there is no presumption that you are doing it as a business.

    Having an annual plan and reviewing that plan is really useful. It helps you manage your business and also provides a basis for showing that you are engaging in farming in a businesslike manner.

    Farms tend to throw off a lot of depreciation. This can make it difficult to show a profit for tax purposes....even if your cash flow and cash balance is good.

    What Uncle Will says is true in some circumstances. It may not be true in others.

    Hope this helps.

  4. fordy

    fordy Well-Known Member

    Sep 13, 2003
    Whiskey Flats(Ft. Worth) , Tx
    ...................Lets assume that you fully depreciate the well costs over several years . And , everything is OK with the IRS, i.e. no notices from them questioning your deductions . Then , you get a notice in the mail for an Audit . So , in you go with all your records and the fun begins . Net Result......your costs associated with the well and other so called farm expenses are Declared to be a "Hobby". This means that you can ONLY deduct your expenses UP TO the Amount of your INcome for any given year . Conclusion: you will have to recapture the excess expenses , of which depreciation is BIG part , and pay tax on that amount . You can entrap yourself and not know ....or....understand the Problem until it's TOO late . So , I'd be very sure I understood all the Implications of my action(s)....fordy.... :eek: :)
  5. Ravenlost

    Ravenlost Well-Known Member Supporter

    Jul 20, 2004
    We talked to my sister, an accountant, about filing as a farm next year and she told us we don't have to show a profit...we just have to eventually show some income from the farm.
  6. rambler

    rambler Well-Known Member Supporter

    Jan 20, 2004

    I've farmed for a living for 20 years.

    Yes, you want to file.

    You either need your sole living to come from farming:

    Or, you need to show a profit from the farm portion of your income 2 out of 5 years.

    You can lose money, a lot, on farming the other years. But, with long-term deductions, be _SURE_ you can gain more income than you are spending at least some years, or you will set yourself up for the trap others mentioned.

    You must show a profit on farming now & then or it will be deemed a hobby & you will only be allowed to deduct what you make at it.

    In a start-up case, you likely will lose money for several years. That is normal for all businesses. You will hve a lot of long-term expenses too. These will be spread out over the following years.

    Be sure you can project some type of profit over these expenses somewhere down the road.

  7. sisterpine

    sisterpine Goshen Farm Supporter

    May 9, 2004
    Zone 8a, AZ
    Thank your for all the advice! I guess i will go ahead and file my little farm as a farm and for the first time in my life i will let someone else do the taxes! I have the irs farm publications and will read them again to make sure all is proper and stuff. Thanks again, it is a scary thought as i have just finished paying off the irs for a tiny mistake i made in 1997 that cost me ten grand including interest and penalties!
  8. poorme

    poorme Well-Known Member

    May 12, 2003
    i got this from my resident tax expert:

    Under the "hobby loss" rule a taxpayer can deduct expenses only to the
    extent of income form an activity if he or she is not in the activity "for
    profit." The statutes presume a taxpayer is in the activity for profit if
    the activity has a profit in 3 out 5 years (2 out of 7 for horse
    activities). If a taxpayer does not meet the rest for the presumption to
    apply, he or she can still show that he or she entered the activity with a
    profit motive.

    A full time farmer has no trouble proving the profit motive in most cases
    because there is no other source of income. Taxpayers have trouble showing
    profit when the activity is racing cars, raising horses or other activities
    that could be recreation--especially if the activity is part-time and there
    is a lot of income from employment or investments.

    If the hobby loss rule applies, income is reported on line 21 of Form 1040
    and expenses (up to an amount equal to income) are reported as an itemized
    deduction on Schedule A (Form 1040).

    See page 34 of the 2003 Farmers Tax Guide, IRS Publication 225
  9. Jena

    Jena Well-Known Member

    Aug 13, 2003
    We never show a profit from farming and there is no way they would ever declare it a hobby.

    It depends on your intent, the amount you have invested, how much you work at it, etc. They do consider all those factors in determining if something if a hobby or not.

    It is not simple cut and dried income deal.