Thanks for the all the info guys! Very intresting.
I live in Kentucky just for reference.
The suggestion to talk with a CPA is a good one. And maybe the local extension agent.
My intrest is to make some spending money. I work full time but would like to have some extra cash and the enjoyment of raising a "cash crop". As some have mentioned it maybe better to leave the IRS out of it. I wouldn't make a tremendous amount of money. I'd be lucky if it was a thousand dollars.... of course even that has to be posted on the 'ol tax return. Nothing is ever simple is it?!
Lot of info here, some of it is not accurate.
1. You have to declare all income on your fed income taxes. Regardless of where how you earn it. Whether you choose to obey that legal requirement is a personal decision--if you get audited and it's discovered, expect to pay back taxes, interest, and penalties. Plus a possibility of criminal action if they decide you deliberately and knowingly failed to declare income.
2. You can offset any income you have from expenses incurred to create that income. So if you have $100 from farm income and $75 in DIRECT expenses to generate that income, you only have a profit of $25. If you have $100 in farm income and $125 in DIRECT expenses to generate it, you have a loss of $25.
3. What the IRS is concerned about is, basically, using an unprofitable business to generate paper losses that offset income from other sources. In other words, suppose you have ordinary income from your job of $1000. But you can show a loss on your farm operations of $600. This can lower your overall taxable income from your job to $400. People used to do this all the time until they tightened up the tax code.
4. No business is ever required to be profitable by the IRS. What they care about is taxable income. They can disallow deductions based on a lack of taxable income by deciding your business isn't a REAL business, but just a hobby. The costs of having a hobby aren't deductible. If you consistently run at a loss year after year and use that loss to offset other taxable income, be prepared to hear from the gov't at some point This is basically the loophole they are trying to close.
5. Your business is a sole proprietorship unless you set it up differently. There are potentially issues with a SP; you should consider setting up a corporation to encapsulate your farm business activities. You can create a S Corp or an LLC; the tax returns on an LLC are much cheaper to do annually than on an S Corp. It's quite inexpensive to get these set up using one of the online services out there. Having a corporation shields your personal assets from any liability associated with the business. This is VERY important
6. You should get a local CPA who KNOWS small farm business issues to help you set up your business. This way you can transfer any assets (like equipment) into the ownership of the farm for taxable purposes. The biggest problem a lot of small business owners get into from an accounting/legal point of view is mingling their "personal" world with their "business" world. Among other problems, that's a condition that can quickly get the IRS to declare your business a hobby, not a business. Once they make that declaration, you're toast.
7. To avoid these problems, treat your business like a business. give it a name, it gets a master business license from the state, it pays taxes, it has its own bank account, keep careful records of all activities, etc. One of the standards IRS has for status determination is the duck theory: if it walks like a duck, quacks like a duck, it is a duck. If it looks like a business, quacks like a business, it probably is a business. Again, even if you have a corporation but you don't clearly separate it from your personal life, you can lose the shield of protection the corporation offers you. Likewise I believe if you act in a fraudulent manner inside the business you can lose the shield.
hope this helps
