farming and taxes... questions.

[Conservative1]

First of all, We have been here for a year and a half, 10 acres, a nice home, barn, and a shop building. We raised 4 feeder cattle this year, and are building a good herd of goats, as well as chickens. We've had 6 goats for a year. We sold all four cattle this fall, and two goats early in the year.

Now, it's tax time. I kept the receipts for all farm related expenses, i.e. feed, fencing, tools used DIRECTLY for goats and cattle, water trough, wood used to repair the barn.
We also purchased our John Deere 790, and used our Ford Ranger for farm work all year, hauling livestock, feed, hay.
The tractor was used to dig a small stock tank, move troughs, move hay from the barn to a feeder ring, and upkeep on the pastures, as well as planting trees, dragging the gravel drive, and cleaning out barn stalls.
My questions are:
* I know we can document feed, tools used DIRECTLY for livestock, and tractor depreciation. How much do you usually depreciate your equipment for tax purposes?
* can I use repairs and upkeep on the Ranger as a write off?
* Can I depreciate the truck also?
* Those of you who farm- do you hire an accountant or other pro to prepare your taxes?

Any other tax tips, information, or resources you can give me would be most appreciated. We have a tax preparer that we have used for 5 years, but this person knows almost nothing about farm deductions and farm tax code. We'd like to be prepared when we go in to take care of this unpleasant task.
BTW- we aren't looking to get out of paying our share, we just want to limit the damage legally, as prescribed by the law. I just can't seem to find a website that deals with the tax code and its limitatons or allowances for farmers.
Thanks again...
C1

 

[cowboydoc]

The tax laws are very complicated. With your limited production I highly doubt you would pass the rigorous standards to be considered a legitimate farming business by the IRS. You could pass the standards to be a hobby farmer as defined by the IRS. This allows you to only deduct expenses that are equal to your profit.

In order to be a legitimate business you first have to have a plan to become profitable. Then you have to show your hours spent and they have to be substantial as well. Your plan also has to have merit. In other words is your plan credible and reasonable. If you buy $30,000 worth of equipment to make a $1000 profit/year that won't cut it unless you can show how in the next five years you are going to turn a profit.

On your small scale I think most accountants would caution you against trying to claim a legitimate business. Most of the time they will tell you to just take any profits and pocket them. I would definitely get a meeting with a qualified farm accountant before you do this.

 

[kensfarm]

There is a maze of info & forms..

Publication 225 (2003), Farmer'sTax Guide

http://www.irs.gov/publications/p225/index.html

 

[fishman]

Cowboydoc, I agree that he should seek out some good advice from a farm accountant. However, just because he's farming on a small scale on the side, doesn't mean he's not in it for a profit and therefore is a legitimate business. There are lots of people that have more than one job or business venture /forums/images/graemlins/wink.gif

Conservative1,

I am not a certified accountant, or even close to it. But I have used Turbotax for business and home for the last two years and I have studied hard. /forums/images/graemlins/smirk.gif

But it sounds to me like you are legitimately trying to make some money from your business.

What you need to do with your larger purchases, like your tractor, is figure out what percentage you use it directly for your business. How you do this is open to interpretation, obviously. However, if you use it 40% of the time for your business, you can write off that 40% over the specified period of time, as well as 40% of the interest you pay on the loan.

As far as the truck, the easiest way to do it is to keep track of the miles you drive for business and use the standard mileage deduction. It is required that you have a mileage log to document these expenses. If you take the standard deduction, you cannot write off repairs and gas, but you can write off a percentage of your loan interest equal to the percentage of business use to personal use.

You can also use a section 179 deduction to fully deduct the portion of a major piece of equipment used for your business in one year, instead of 5 or 7. This can be useful and it can allow otherwise marginal businesses to show a profit in future years.

I've been told that the IRS expects businesses to lose money their first year or two. That's good, because my side business, which is agriculturally-related, lost money the first two years I had it. However, after the initial equipment hit, it started to make money.

I really doubt that the IRS is going to come knocking on your door if you are reasonable in your estimates and have your taxes prepared by a professional or use a well-known tax software. After saying this, I'm sure that someone will bring up a horror story or two, but again, the IRS has bigger fish to fry. Just do your best and make sure you show a profit after the first couple of years, and frequently thereafter.

Pocketing the money, in my opinion, is worse than making the attempt to do it right and doing it wrong. You could always be audited and the IRS will be very interested in where all those deposits came from in your checking account.

 

[Conservative1]

Just the information I was looking for, all of you. True, I am small scale, but we intend our goat herd to number near 40 in 2 years, if all goes according to plan. I have 5 pregnant nannies right now that look to be about to bust. Goat farming will be our emphasis, I reckon. (not really my choice, but 10 acres ain't enough for a big herd of cattle and a fruit orchard)

As for turbotax and similar products, will they cover all the bases for me? In other words, is there an area in the software for farming? I'm guessing the IRS sees farming and business as one and the same, but I just want to make sure we do this right, whatever route we choose.

I think in fact, that my best bet would be to keep trying to find a farm accountant, and go from there. One of our mentors said "a farm accountant!?!?? You ain't me, fer heaven's sake!" He runs a large cattle operation. That's the extent of info we could get out of him...
Anyway, thanks Ken, thanks Doc, thanks Fish. Much obliged.
I'll let y'all know what we go with, and what we learn, if anything groundbreaking.
C1

 

[cowboydoc]

"just because he's farming on a small scale on the side, doesn't mean he's not in it for a profit and therefore is a legitimate business."

I totally agree with you. However I can guarantee you the IRS will see it differently unless alot of specific criteria are met. I can give you numerous examples of people I know and specific IRS cases where the business has to be substantial or it is a hobby. 99% of the time a business that is not substantial is ruled a hobby. If you took losses you are in for big fines and penalties even for very small amounts. And if you think the IRS has bigger fish to fry I highly recommend that you go read about all of the cases of "legitimate" businesses that have been audited and the ruling was it was a hobby. Like I said before the big difference is going to be the potential for profit. If you're trying to expense $10k a year on $1000 worth of profit it isn't going to fly with the IRS. With only 10 acres it is also going to be difficult to show how you ever expected to cover those initial losses.

 

[Hakim]

Cowboy Doc et al,

You are right to urge caution with a financial tactic such as this with a small farm that could be perceived as a hobby, and not a business. At the same time, it IS perfectly legal and legitimate to take all allowed deductions.

The Section 179 deduction is now up to $100,000 per year. It is impossible to imagine he could use all that up with the operations he describes, at least not in the first few years. So basically, he is likely to wipe out any profits for a good while to come. He will not be able to deduct expenses in excess of his income from the farming activity. However, some categories of loss may be able to be carried forward or back (you'll need pro help to decide for sure).

IRS auditors sometimes used a "2 of 5 rule", meaning that in order to demonstrate good faith and intention to operate at a profit, they need to see a profit in 2 of 5 years. Not any speciifc amount of profit, just a profit -- even one dollar. This rule comes up more with regard to S Chapter corporation rules, where people write off millions of dollars in expenses, and protect those dedections by earning a profit in at least 2 out of 5 years.

It is true that many accountants are going to tell you to "forget about" doing the farm business thing until you are much bigger. I disagree.

Get the IRS book/guide for Farmers. And use TT or similar program and do your own. Fill it all out as best you can, and THEN take all the data to Jackson Hewett or HR Block, and let them do the final return.

Yes, it will cost maybe $400, but they will NOT file a return that is likely to be audited or earn penalties. They are much cheaper than any CPA or accountant. And their logo on the return, I believe, greatly reduces the chance of an audit.

Good luck. Let us know how this develops.

 

[fishman]

</font><font color="blue" class="small">( He will not be able to deduct expenses in excess of his income from the farming activity. )</font>

Conservative1
If you do as Hakim suggests, you shouldn't have any problem. However, if you do meet the requirements (whatever they may be) so that your farming is considered a business, you should be able to write off your expenses in excess of your farm income against any other earned income you have.

I don't have last year's "turbotax for home and business" installed on my new computer, but the box does say "industry specific advice". I have my new copy on order and should be able to address your question in a couple of weeks in nobody jumps in.

Audits are a fairly rare occurance, statistically, and if you work hard not to raise any flags, the risk is minimal. Many people would probably disagree with me, but I think if you approach it in good faith, things will work out if you are selected for an audit.

 

[_RaT_]

Hakim, EXCELLENT! Thanks... Rat

 

[Bird]

</font><font color="blue" class="small">( As for turbotax and similar products, will they cover all the bases for me? )</font>

I'm not sure about all the different versions, but I've used TurboTax Deluxe for at least 9 years, and I had the same questions you've asked when we first bought the little farm. I sold a few vegetables, a few pecans, a few rabbits, had some brief experience with 9 goats, did just a little tractor work for neighbors, etc. The first year, I called a CPA and asked some questions, then did the return myself just using the "interview" method on TurboTax. The second year, I did the return myself, then took everything to that CPA and left it with him a week to review and he said it was all OK.