Tax Time

[Anonymous-0]

I got a call from my Tax Lady today. She advised me that I had declared a loss on my farm too many years in a row (8) and if I was smart I should show some profit this year to keep IRS from declaring me a HOBBY FARM. I said this is not the year for that , The big drought and High Cost of fuel, and a major breakdown, and all that stuff had definitely made me loose $. She says "don't push your luck". She said that if they decided I was only a Hobby farm, It would be hard to get my deductions back again. I took her advise. Guess I won't be getting any extra money back this year. As she said, "Better safe than sorry". Did I do the right thing?

 

[Pooh Bear]

My understanding is that you have to show a profit
at least 2 out of every 5 years or else the IRS
will declare it a hobby and not a business.
This was told to me by a real smart H&R Block guy.

So if you have showed a loss for the last 3 years
then you need to show a little profit this time.

Pooh Bear

 

[jose bagge]

now, my tax guy said " a profit within the first 3 years".
I came within 2 grand this year on year 3, and it is what it is.

any tax guys out there capable of giving us the REAL scoop on this?

 

[Walt Davies]

I'm at 12 years so far without any profit due to all the stuff i buy that keeps my cost more than i make and so far they haven't said a word to me.
My ex SIL was caught after only 3 years and declared a hobby farm he has 3000 acres i have 37 I think its all depends on how good you do the taxes if they don't pull it for a mistake then it will go right though.
Walt
PS I have always used Quicken and TurboTax.

 

[paul]

You need to be running a business, and operate it with the goal of turning a profit. If it is your only job, it is pretty easy to gain assets but rarely turn a profit - big enough to be a real business, appreciating value that they can get capital gains from some day, working on a business......

As a 2nd job, the govt feels you are running a hobby, not trying to make money. They do not want you taking your salery & using it as a tax shelter to buy a bunch of cool farm tools & bit of land & have a money hole of a tax shelter.

2 out of 5 years profit & you are good to go, no questions asked. Normal farming there, your buisness is gaining like a real business should.

Less than that, and hummmm, you leave yourself open for them to question your intentent. It will be up to you to prove to them that you intend to be profitable, and why you are not for these years.

If you have good business records; bad weather, expansion eatring profits, crop failure, long-term livestock or specialty crop investment (mushrooms, ginseng, etc.) has prevented you from being profitable but the potential, intent, and goal is to turn a profit - then you will be ok'ed to carry on.

The problem is you will be under the microscope at that point, and do you really want that with the IRS? You need to prove yourself to the satisfaction of the fellow auditing you.....

This is the best explination I have heard on the net from pretty good tax folks willing to share.

--->Paul

 

[dave guest]

Had same thing with real estate rental property. She is giving you good advice. Audit might take ten years before they leave you alone. Passed up legitimate deductions to keep the peace. What you want is a normal looking return. Ask your tax lady about shifting items from one year to another. That is OK. Or used to be.

 

[Anonymous-0]

I don't agree with your tax lady. If you aren't doing anything foolish and actually working towards a profit; ie, such as not buying a $200,000 combine to do 50 acres, the IRS may audit, but with a good tax accountant there should be no problem. The IRS "requirement" for someone to show at least one year's profit for each 5 years crop farming, or one in 7 years with breeding stock isn't a law, just IRS's "rule of thumb". The key is that you must be attempting to make a profit. Personally I haven't shown a profit for over 12 years in the actual farming endeavor, however do realize this doesn't include the income off the leased-out ground which the accountant considers a separate enterprise. Although I'm coming real close, since about everything is depreciated and recent farm prices and yields have really been outstanding. What does draw the IRS's attention are high income individuals which purchase a few acres and have some "breeding stock" (usually horses) and then show huge depreciations to offset their high off-farm income. A couple year's of this type action will draw the IRS attention like bee's to honey. Another red light for the IRS are household expense deductions for a "home office". I know this is danger zone and don't consider the hassle worth it for these "penny-ante" deductions. One area that you need to pay attention. Since I have a long loss record, the accountant had a question about actual worth of the equipment owned/purchased. It would be real bad if an audit did come around and the equipment I owned/purchased was worth only a small fraction compared to what was written off. Note: the accountant I use has only been audited once in 30 years, and did win that audit case.