Farm Equip Tax Issues

[MikePA]

Might want to check <A target="_blank" HREF=http://www.tractorbynet.com/cgi-bin/compact/showthreaded.pl?Cat=&Board=off&Number=114699&page=&view=&sb=&o=&vc=1#Post114699>this</A> thread from early March concerning equipment depreciation.

 

[DavidInNH]

The property tax rate in NH varies a great deal from town to town. If you work in Mass (I do) and live in NH, it can still be a win since the cost and valuation is so much lower. My house would cost at least twice as much near the office...

Anyway, I've travelled enough to know that there are LOTS of great places to live and a good tractor can make them even nicer.

-david

 

[ejb]

>>Worst thing would be to work in Boston and live in N.H. Therefore, you pay very high income tax, and property tax

I know several people that do that...can't quite figure out that one...go figure./w3tcompact/icons/smile.gif

 

[Alan L.]

Maybe your CPA is simply covering his butt. If you can show a true profit motive, even if you don't show a profit 2 out of 5 years, the government generally won't give you any trouble. I'm going on 26 years on public practice and I haven't lost a dollar of farm losses to the hobby loss rules. The ones that won't fly usually are so obvious that we just don't attempt it. But we have farmers that regularly lose $100K. Farmers are not our specialty - we only do a few, but we suggest trying to show a profit ever so often - not necessarily 2 years out of 5. So far so good. Sometimes you can plan for a profit year by moving revenue in and expenses out of the projected profit year.

Take a look at the activity. If you have this wonderful pond at your house and you wish to grow a bucket full of trout to sell for $200 a year, and you wish to deduct all the upkeep of the place and depreciate the tractor, forget it.

If you can show a true and reasonable endeaver to make profit, then you should be OK.

The Section 179 deduction only applies if you make a profit - it can't throw you into a loss. And, the new tax law grants a special 30% bonus depreciation for the year of acquisition, for assets placed in service after 9/10/01. The 179 deduction comes first, then the 30% on whats left.

This new bonus depreciation applies to any business - not just farms. Ditto on the section 179, which allows for the first $24K of equipment to be deducted in the year of acquisition.

If you are thinking about a vehicle, forget about 179 because 280F limits it. UNLESS you buy a vehicle with a gross vehicle weight of 6000 pounds or more. This would be a 3/4 ton pickup, a Suburban, Excursion, Expedition, etc. Again, this is only an issue in a profitable business or farm.

I wouldn't hesitate to report the loss on the trout business if there is a profit motive.

 

[wasabi]

Mike in PA, Thanks for the link...great thread on the same topic...If I had any idea I was duplicating last month's discussion, I wouldn't have bothered, but now that it is off and running.....

Alan L. Thanks for the professional confirmation, reinforcing my belief that fair is fair. We will claim the deductions allowable, because we will operate Bearpen as a business....and it will also be fun.

 

[stmiller2]

Listed below are some factors used by the IRS in order to determine whether an operation is a hobby or a business. I lifted these from http://www.irs.gov/individuals/display/0,,i1=1&genericId=6977,00.html#IRC183.


IRC section 183(d) provides for a presumption that the activity is carried on for a profit if it produces a profit in at lease 3 out of the last 5 consecutive tax years (2 out of the last 7 years if the activity is breeding, training, showing or racing horses.) If the taxpayer is just starting out in the activity, he or she may elect under IRC section 183(e) to postpone the determination of whether the presumption applies to the activity until the close of the 4th (or 6th) year after his or her first year engaged in the activity. In that case, the taxpayer files a Form 5213 which automatically extends the statute of limitation for all relevant years until the close of the presumption period.
In determining whether a farming activity is carried on for profit, all the facts in regard to the activity are taken into account. No one factor alone is decisive. Publication 225 provides guidance to taxpayers who are analyzing their situation. Among the factors listed:

Is the farm operated in a businesslike manner?

Does the time and effort spent on farming indicate an intent to make it profitable?

Is there a dependence on income from farming for livelihood?

Are losses due to circumstances beyond control? Are the losses normal in the start-up phase of farming?

Are methods of operation changed in an attempt to improve profitability?

Are profits from farming made in any year and in what amounts?

Does the taxpayer, or advisors, have the knowledge needed to carry on the farming activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

Is the farming activity carried on for personal pleasure or recreation?
Look at the following court cases where the disallowance of expenses for not-for-profit activities was upheld:

Hendricks, Daniel E, et ux. v. Commissioner, 32 F.3d 94 (4th Cir 1994), 74 AFTR2d Par. 94-5281
surgeon with cattle operation

Westbrook, Billie R, et ux. v. Commissioner, 68 F.3d 868 (5th Cir 1995), 76 AFTR2d Par. 95-5623
veterinarian with embryo transplant, cattle and miniature horse operation

DeMendoza, Mario G, III v. Commissioner, T.C. Memo. 1994-314
lawyer with polo ponies

Borsody, Frank J, et ux. v. Commissioner, T.C. Memo. 1993-534 aff'd per curiam, US-CT-APP-4 [96-2 USTC _50,415], 78 AFTR2d Par. 96-5260
horse breeding/training

Lujan, Arthur G, et ux. v. Commissioner, T.C. Memo. 1992-417
retired with small cattle operation.

PS: Sabi, my farm is north of Charlotte.

 

[Redman59]

Thanks for all the info. This confirms what my tax folks have been saying. Last year was my first year in the business, and I cleared a small profit from my corn and tobacco. I have almost convinced my CFO that we need the tractor with FEL to keep the place up and repair barns and roads to keep accessible for the farmer who does most of the planting/harvesting. I am also thinking of raising goats and having my neighbor keep an eye on them during the week.

Of course once I lay out the big bucks for the tractor, This will wipe out my profits for a few years.

My tax folks also said something about proving you worked at least 500 hours per year on the business.
Redman

 

[wasabi]

I used to have an accountant in Indiana who referred to such vagaries as the "gray area" of tax law. I guess this qualifies as such.

Thx for the insights and links!

Sabi