taxes?

You need to make a profit 2 years out of 7 when farming/agriculture otherwise red flags go up and your chances of an audit sky rocket. If you make a profit every third year you are covered. Make sure you keep track of your depreciation claims, they can add up quickly. It was hard for us to show a profit this last year. Hay prices went way up, horse prices went way down and we still had some mares that had not finished depreciating yet. Essentially any money you spend on material or equipment for the farm can be written off including mileage if it’s related to the work. The more you are claiming though the larger a loss you take unless you made a lot of money.

The biggest expenses can have the deduction split up over 3 years, the rest will be applied the year they were spent. Sit down and really run the numbers of what you need to buy and how much it will cost and what your production will be and a low ball estimate of your pre-tax net income from it. This will give you an idea if you will make it or not. If you will be losing money every year they call it a hobby, a business makes more money than it spends 2 out of 5 years and Ag. is 2 out of 7 years. I believe you have to keep documentation (receipts mainly) for anything you claim for 3 years.

http://ruraltax.org/

@fogish 39114 wrote:

You need to make a profit 2 years out of 7 when farming/agriculture otherwise red flags go up and your chances of an audit sky rocket. If you make a profit every third year you are covered. Make sure you keep track of your depreciation claims, they can add up quickly. It was hard for us to show a profit this last year. Hay prices went way up, horse prices went way down and we still had some mares that had not finished depreciating yet. Essentially any money you spend on material or equipment for the farm can be written off including mileage if it’s related to the work. The more you are claiming though the larger a loss you take unless you made a lot of money.

The biggest expenses can have the deduction split up over 3 years, the rest will be applied the year they were spent. Sit down and really run the numbers of what you need to buy and how much it will cost and what your production will be and a low ball estimate of your pre-tax net income from it. This will give you an idea if you will make it or not. If you will be losing money every year they call it a hobby, a business makes more money than it spends 2 out of 5 years and Ag. is 2 out of 7 years. I believe you have to keep documentation (receipts mainly) for anything you claim for 3 years.

http://ruraltax.org/

The IRS finds a loss 5 out of 7 years acceptable only if you’re a horse boarding/breeding operation. For any other type of agriculture, a loss is acceptable 2 out of 5 years. This is not to say that you won’t be allowed a loss for more years than that, but at that point, the IRS can investigate to make sure that you’re really in it to make a profit. If you have a solid business plan and practices, then you can be allowed a loss for more than that number of years.

Here’s an informative piece:

http://www.hobbyfarms.com/farm-marketing-and-management/farm-income-taxes-14991.aspx

Definitely talk to your CPA about this but as I understand it: if it is considered a hobby farm and your expenses are $10,000 and your income is $5,000 you can only deduct $5,000. So if it is considered a hobby the maximum amount you can deduct equals the amount of income (not profit but income) for that year. A farm can deduct all $10,000.

“Hobby Farms: Taxpayers who engage in an activity (such as raising horses) without an intent to make a profit can deduct the expenses of the activity only to the extent of income from the activity. Furthermore, the expenses can be deducted only as an itemized deduction that is subject to a 2% of adjusted gross income reduction, which means many taxpayers do not get the full benefit of the deduction. The purpose of this hobby loss rule is to prevent taxpayers from deducting the cost of their personal activities from their taxable income from other sources.

Cross Reference: See pages 6 and 27 of IRS Publication 225, Farmer’s Tax Guide (for 2010), for further information about the not-for-profit activity rules.

Presumption of Profit Motive: An activity is presumed to be engaged in for profit if it produces a profit (gross income exceeding deductions) in 3 of 5 consecutive tax years. Horse breeding, training, showing, or racing activities meet the presumption if they show a profit in 2 of 7 consecutive tax years. If the taxpayer meets the threshold for the presumption, the IRS has the burden of proving the lack of a profit motive.”

http://ruraltax.org/htm/small-farm-tax-guide It’s a 3.2MB PDF in chapter 4 on “page” 4.17 Tons of information in the file and on the rest of the site.