Tax implications for starting an orchard

[SilverbackMP]

Hello all, this is my first post and someone may be able to answer my questions.

I am buying 45 acres in north central Missouri. I am 12 years away from retirement (military). I am hoping to have a U-Pick Orchard and Berry farm on this land after I retire.

I may cash rent it for the next few years. After that, I would like to make capital improvements such as a pond (for irrigation), pole barn(s), irrigation, etc. Also I would like to start installing an 8' deer fence over the course of a few years (expensive). Obviously I will need a CUT and maybe also a full sized Utility. After the pond, irrigation, and fencing is installed (5 years from now?), I would start planting semi drawf pear trees (about 5-7 years to become productive). The drawf apple trees would go in a couple of years later.

I have financing for 80% of the land value but would like to make the improvements via a cash basis spread out over the course of years. I would also like to deduct the loan interest expense.

Now I am in a pickle. Because it takes a while for a new orchard to be productive and because I want to spread captial improvements and expenses of a number of years, I will not meet the IRS requirement for showing a profit 2 out of 5 years. This will eventually be a FOR PROFIT full time business and the only source of income other than military retirement. Does anybody know if there is an exception for the 2 out of 5 years profit IRS guidlines? I would think there would be for ventures that take a long time for ROI to mature but am not sure.

I will consult a tax advisor at some point but I thought some of you may have actual experience that you can share.

Thanks

Silver

 

[ToadHill]

I know that the IRS wants to see a profit in 2 out of 5 years but it isn't a hard and fast rule if you can prove that this is in fact an honest effort to have a profitable business. The time it takes for an orchard to come into production will commonly require more than 5 years to realize a profit.

By the way when you look to purchase your trees look at bare root trees, they cost a lot less and in my experience they come into production just as fast as B&B.

 

[SilverbackMP]

I will definitely go bare root and only a couple of acres in purchased pregrafted trees. I plan on buying rootstock and field grafting the remainder.

I figure about 12-15 acres in trees, 8-10 acres in berries, 2-3 acres in vegatables, 5 acres for pond and buffer, 1-2 acres used up by Pine Tree Buffers (there is a saw mill north of the property), 5 acres for pig pasture (feed bill will be cheap--ugly fruit and vegetables--some asian pears will keep along time), 3-4 acres for house and assorted out buildings. 3-5 acres unusable wooded draws.

I may also have a rabbitry and sell to Felprez as well; break even on the rabitts and gather all of that black gold for free. However, rabbitts would be a pain in the butt because they would keep you tied to the property every day with a commercial sized operation.

 

[EddieWalker]

It's an interesting way to make a living. Are there other places where people come and pick their own fruit? Is there a large city close by with potential clients? The old joke about farming, and how to make a million dollars at it is to start with 2 million dollars has allot of truth to it. You are talking about a significant investment to get the land ready along with purchasing plants and materials. Will you be competing with fruit stands along the road? Is your location easy to find and does it have good access? Will you have to provide bathroom facilities? Are there parking lot regulations? Insurance? Liability?

Getting people out there to pay you to pick their own fruit is going to take some creative marketing. It makes me think of the Christmas Tree farms that you go and cut down your own tree. While some of those make a fair profit, I've also heard that they are really having to make it into a family fun event with hay rides, free cider and somebody on hand to actually cut down the tree for them, haul it and load it.

A good business plan will take into account all the expenses that you will incur in creating the orchard. Then you will have to predict sales, expenses and profits based on real world examples. While you have the time until you retire, I would be working on that business plan. I spent a few years on mine before buying my land to create an RV Park. It's a long term build that I'm slowly working towards, but what was really important was finding out what other owners or parks are doing right and what they have told me they did wrong. I wouldn't worry about taxes or what the IRS will say until you actually start making a profit. If it takes ten years, then that's what it takes. They can't tax you on money you are not making.

Good luck,
Eddie

 

[dmccarty]

For Federal taxes I'm not sure you should worry about the taxes so much. But a good CPA/Tax lawyer familiar with farming would be the person to ask.

You might want to check with your state/county tax office about your property tax. In NC you can have your land assessed at a lower rate if the property is used for timber or farming. It can be a big savings. It took some work on my part to do this for our land but since we had timbered part of the place and replanted we just needed to gather paperwork.

My guess is that here in NC if I was planting an orchard that was large enough to support a commercial operation I would be able to get the tax valuation. But the tax office would know for sure.

On my drive to work I think they started planting an orchard last week. They have a open pasture that was in good shape. They marked multiple lines with flagging and then dropped lines of dirt about 15-20 feet apart. The dirt was about two feet tall and 6 feet wide. Then they went it in with a skid steer with an auger and planted trees. Can't tell what they are but its going to be interesting to see what happens.

Later,
Dan

 

[SilverbackMP]

It's an interesting way to make a living. Are there other places where people come and pick their own fruit? Is there a large city close by with potential clients? The old joke about farming, and how to make a million dollars at it is to start with 2 million dollars has allot of truth to it. You are talking about a significant investment to get the land ready along with purchasing plants and materials. Will you be competing with fruit stands along the road? Is your location easy to find and does it have good access? Will you have to provide bathroom facilities? Are there parking lot regulations? Insurance? Liability?

Getting people out there to pay you to pick their own fruit is going to take some creative marketing. It makes me think of the Christmas Tree farms that you go and cut down your own tree. While some of those make a fair profit, I've also heard that they are really having to make it into a family fun event with hay rides, free cider and somebody on hand to actually cut down the tree for them, haul it and load it.

A good business plan will take into account all the expenses that you will incur in creating the orchard. Then you will have to predict sales, expenses and profits based on real world examples. While you have the time until you retire, I would be working on that business plan. I spent a few years on mine before buying my land to create an RV Park. It's a long term build that I'm slowly working towards, but what was really important was finding out what other owners or parks are doing right and what they have told me they did wrong. I wouldn't worry about taxes or what the IRS will say until you actually start making a profit. If it takes ten years, then that's what it takes. They can't tax you on money you are not making.

Good luck,
Eddie

I've thought about every single thing you've listed but do not necessarily have the answers; my business plan is currently in my head and I haven't yet formalized much of it on paper (or powerpoint, excel, and word). I do have management experience with a degree in management and have spent the eight years on active duty managing 40 to 270 military police Soldiers (and another six before that in the guard). Trust me, I know about the 2 million to 1 million farmer joke; I come from a long line of row crop farmers (skipped a generation with my parents--however they are "homesteaders" for lack of a better term). Most of my grandmothers remaining land is fallow in CRP.

This would be in the rural central north Missouri area but it does have access to a black top and close to a state highway. There is one apple orchard in the area and a major Pecan and Buffalo (and Gamma Grass) producer (Shepard Farms) in the area who sales "on the farm." In fact, he is featured in a bunch of the University of MO alternative farm publications. He is able to draw folks from Kansas City and St Louis (2 hours each way) as well as from Columbia (130,000 pop in town--bunch more outside city limits). He has pretty much spent an entire lifetime building up to where he is now (I believe he started in the late 1970s or very early 80s).

I would try to raise/sell everything that DOES NOT compete with the other two producers. In fact, it would be good to team up with them and have 3 or more farms producing different items and we could have joint advertising as a sort of "destination" day trip for the city folks.

My immediate concern is with capital improvements and equipment. I will start sooner rather than latter IF I can deduct expenses and depreciation. I would hold off on improvement and equipment if that will get me in a bind with the IRS and if they view me as a "hobby farmer."

If this is the case, it goes to show you how tax policy can have an effect on spending and stimulating the economy.

I'm not worried about property tax; property tax in Missouri is so low that we don't have Ag exemptions in rural areas; a $150,000 house may be $3-400 and a 100 acres may be $200.00 or so a year if it is in trees for recreational land or crop land--it really doesn't matter. Missouri has personal property tax (vehicles, etc) to make up the difference.

Thanks for any input.

Silver

 

[dooleysm]

This sounds like something Eddie isn't familiar with, or maybe it was just a rhetorical question. The 'you pick it' places are fairly common around southern Indiana. You can go and pay to pick about any kind of fruit or vegetable you want within about 2 hours of my house. Melons, tree fruits, strawberries, green beans, grapes, whatever you want.

Do they not have these kinds of places in other parts of the country?

 

[SilverbackMP]

Update--found a new land down the road from the 45 acres. It is 80 acres--all pasture/marginal row crop gound.

Also regarding zoning, permits, etc--there are none--thats the beautiful thing about rural MO.

 

[boxygen]

We also have U-pick farms, mostly for fruit here in Maine. I always assumed everywhere else was the same, maybe not.

Interesting topic though, I will be following it. I have plans (dreams) of operating a small christmas tree farm someday and have given the same things some preliminary thought. Starting from scratch, you will have all cost and no income for probably 6-8 years in an orchard/tree farm situation. Im hoping that someone with some experience chimes in to share their knowledge. My girlfriend's dad owns a CPA firm and I've been meaning to ask him about the topic and how it would all work. Its a few years down the road, thats why I havent gotten serious about asking questions yet.

Regardless, I hope you are very sucessful in your farming career, meaning, you break even

 

[Chuck52]

I'm one of those folks just outside of Columbia. I wish you success and might be a future customer, though I'm doing my best to grow my own fruit and nuts! Along those lines, I see that Shepard Farm is concentrating on pecans, hicans, and maybe black walnuts. I've got several pecans going, along with hazelnuts, Carpathian (English) walnuts and heartnuts. You might want to look into the latter two nuts as a part of your plan. The Carpathian walnuts grow very well here in mid-Missery, as do the heartnuts, and both should produce much earlier than pecans. I know you aren't planning to do pecans, which are slow to produce, but these other nuts can get productive in the time frame you are proposing. Hazelnuts are another possibility. I think these nut crops might also involve much less work than the fruit trees, and it is possible you could work a deal with the Shepard folks about shelling/processing them. Blueberries are another possible crop, along with the various bramble berries. There used to be a pick-your-own blueberry, blackberry and raspberry place near Fayette, which is south of your prospective location. It seemed to do pretty well, but folded after a few years.....I heard it was a personal problem rather than financial, however.

Chuck