Is the farm income the taxpayer’s livelihood?Īre the current losses due to special circumstances?ĭoes the taxpayer change operations to improve profitability?ĭoes the taxpayer possess the required knowledge? Is it being run in a businesslike manner with accurate books?ĭoes the time and effort show intent to make a profit? They have nine factors that they consider when deciding if a farm is a hobby: So, what can you do to convince the IRS that your farm is being run with a profit motive? In these instances, we explain to the clients that they don’t really have an active farm from the IRS’s perspective, and it would be dangerous to go writing off $50,000 in ATVs, tractors, and hunting cabins without revenue. As a result, when we ask clients what their farm revenue looks like, often they say that their neighbor harvests the 8 acres of hay off of the farm for free or that someday they will sell some trees, but there is currently no revenue. Our next thought is, “Oh man, here we go down the rabbit hole.” Why? A lot of folks in large cities would define a farm as any piece of land over 10 acres that has anything growing on it – wheat, grass, wild berries, trees. Occasionally, a tax client calls us and says, “I have a farm now, so what can I deduct for tax purposes?” They assume there must be all kinds of tax benefits stemming from the new farm. You may indeed be actively pursuing a profit, but the more you lose, the harder it gets to make that argument. If a business makes money three out of five years, the IRS presumes the business is conducted for profit, but, if you lose money three, four, or five years in a row, well … it gets squishy. If a business is not engaged in for profit, then its losses are not deductible. If a business is engaged in for the purpose of making profit, then losses from that business are deductible against other forms of income (like salaries). They have rules that govern any business they deem to be a “hobby,” including farms. It’s not a problem to be called a hobby farm, unless the IRS is calling you that. It is not a technical term, but Wikipedia defines a hobby farm as a small farm that is maintained without expectation of being a primary source of income. ![]() Since the CPA firm I work for is in a larger city, the majority of “farms” I see on tax returns could be considered hobby farms. However, it is true that there are a lot of folks in the world who could be called hobby farmers. ![]() sun.) I told him that I bought farms to make a return on investment, rather than for amusement. (Earlier that day I had been uncrushing two ends of a metal culvert at a field entrance in 95☏. Recently, I was talking to a friend from Seattle, and he referred to me as a “hobby farmer.” I assured him that I am not doing this for fun. Markets Analysis Back to Markets Analysisįirst of all, this article is not for large-scale farmers in the height of their career, but rather for some of us small-time landowners.
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