Tax Question

[California]

That's a good point, that using a CPA who is known for aggressive writeoffs can put a spotlight on you.

I don't have any ambiguous issues presently where a CPA could discuss alternatives. My allocation of a fraction of property tax and insurance to farm expense, is the only area where IRS might dispute my choices, and I expect it would be impossible to win arguments over those.

Income, and expenses where I have receipts, (verifiable by photos of planting orchard trees, running the tractors etc) - are un-disputable. I should mention I worked 20 years as a State auditor reviewing issues like this to find the occasional fraudulent billings by contractors on public works projects, so I have some sense of documenting costs (and allocations) to make them pass audit scrutiny.

What I'm asking about in this thread is the issue of infrequent profitable years. I don't have any instinct for where this is going. I would like to hear of other's experience dealing with this.

 

[ponytug]

Well, nit-picking, but I would rephrase:

A CPA is well worth the cost to increase the chances of keeping the IRS at bay.

Many people do not know that the IRS evaluates not only tax payers, but also tax preparers. Why do you care?

If you employ a CPA who is aggressive about deductions and "saving the client money," it can backfire big time. The IRS looks for a pattern where a particular CPA's clients are more likely than not to be audited and owe money. They have the data and can easily determine that. Then, they target that same CPA's clients for increased audits. That client might be you, even if you are unsuspecting. They figure if the CPA was aggressive with other clients, they are likely with aggressive advice for you.

Then there are the unresolved questions in the tax code which even CPA's do not know how to advise about. When I sold my company there was a HUGE decision to do X or Y method of tax treatment. It made a great deal of difference in tax owed. The CPA said there was no guidance and no precedent. I said well, why not go the route with least tax owed? She said: "you may become the first court case and first precedent to be established." Yikes.

These sort of "wobblers" happen all the time. I just finished a corp tax return earlier this month. Once again it had a "wobbler." Because there is a pending decision on treatment of investment tax credit in certain situations. The choices for me were a) file an extension and hope the decision comes in before the extension is due, b) agree to take depreciation in little chunks over 5 years, or c) take it all in the first year and hope that is how the decision comes down.

It wasn't a huge amount of money. So I elected to take it over 5 years and just get it done and over with. And not incur CPA fees to have to go back and touch it again.

Sorry to be a bit long winded but the tax code is a mess.

That happened to some acquaintances in a big way. They all used the same accountant who was known for saving clients lots of money, aka "aggressive" behavior. The story that I heard was that the accountant had a client that was jailed over some Federal non-tax criminality, and that triggered audits for, as far as I could tell, all of the clients, with bills for owed taxes, interest, and penalties. The IRS interest rate is pretty darn high.

Sometimes, it pays to tread lightly...

 

[LD1]

Short answer is that there is no "set rule" for profitability. People often cite "3 outta 5 years".....or 4 outta 7, or once every three. I have heard alot....but its not black and white.

You can actually show a loss for 7 years straight if you want and not even be a blip on the IRS radar. The more important question is what is causing the "loss".

If the loss is re-investment in the business....or equipment depreciation....then you arent "technically" loosing money.

For example....if you gross $20k.....have $10k worth of expenses like fuel, maintenance, insurance, etc. And $15k worth of depreciation for equipment and facilities.....you are showing a $5k loss for taxes.....but you are ACTUALLY making $10k.

I agree with others that a CPA is well worth the money spent. Your just another ignorant american trying to navigate a complicated tax code....so you hire a CERTIFIED professional. Let them shoulder the burden. Let them back you if you are audited. Most respectable CPA's wont do anything to put you OR THEMSELVES in jeopardy.

If you are OUT of depreciations......the only remaining question is WHY are you loosing money. I guess I simply dont understand how you are structured with your contractor and yourself. Is he making a profit? Is this your land and all YOUR risk?

If its your land, your facilities, etc.....he should be paying YOU at least enough to cover your costs. Running a backhoe.....with no depreciation left, should be very profitable per hour as long as no breakdowns.

Just having a hard time wrapping my head around what arrangement you have with the contractor and who pays who for what. Like you mention shipping too.

Just seems to me that you should be in charge of all the farm(orchard) finances...and you PAY the contractor for his work. Not the other way around.

 

[California]

The more important question is what is causing the "loss".

If the loss is re-investment in the business....or equipment depreciation....then you aren't "technically" losing money.

All good questions.

I don't see anything for a CPA to analyze. Contractor is paying me per ton of apples that he takes to the processing plant. I've asked the plant what they are paying and he's not making a huge margin. My costs are simple direct costs - property tax, liability insurance, and fire insurance on the barns. Plus direct operating costs of the tractors - fuel & oil, replacing hydraulic hoses on the backhoe. Specialty shop tools, chain saw replacement etc are expensed in the year purchased. There's nothing to depreciate.

Everything was depreciated over the first decade I owned the place. At that time, I rented the guest cabin to students of the nearby college, to restore my savings I had paid Sis to buy out her half of the inheritance. A lot of the tractor and implement expense was immediately written off as Sec 179 depreciation, for landscape maintenance to make the cabin attractive. Cabin rental income covered much of the equipment cost. Barns and the rental were depreciated per IRS tables, 7 years as I recall.

After that phase of my life - our home in town, the orchard, and the equipment, are all owned without debt and nothing remained on the depreciation tables. We resumed using the guest cabin as a bunkhouse for family visits.

The reality of the situation is that growing apples is a declining industry here, similar to manufacturing departing the Rust Belt. Now we are down to one processing plant buying apples and they are closing after this year's harvest. The traditional varieties I have are 100% for applesauce, juice, and other cooked products, not the uniform size and appearance you see in the supermarket, so that isn't an option.

Basically I'm letting the contractor make a living so I can have a comfortable and pretty environment as our second home. Most everyone else around here has torn out orchards and put in Pinoit Noir vineyards but I won't, it wouldn't be interesting to wander around in a vineyard. (The contractor operates more vineyards than orchards, for several customers. He says he needs both due to unpredictable grape harvest).

As the apple industry dies it looks like I may be forced into considering the orchard a money-losing hobby - but I'm trying to put that off as long as possible. I just turned 80. I have no interest in converting to grapes or renting out a portion for legal dope growing, I don't need to maximize income.

So again, I would like to hear the experiences of others who farm but only occasionally report a profit.

 

[ponytug]

I know farmers who haven't made a "profit" in thirty years, but have continually invested in and upgraded their operations through strategic purchases in rich years, and postponed, or taken loss in poor ones. At the end of the day, they have created a much larger operation, capable of producing much higher revenue streams, and they will gain the value not as annual income so much as gains on the eventual sale.

I wonder whether you could do organic dried apples, or the cider path yourself. Doesn't @ericm979 make cider?

All the best,

Peter

 

[ultrarunner]

My brother restarting a Christmas Tree Farm had a lot of expenses... the IRS visited the farm and surveyed the operation and reviewed expenses...

Evidently Agent saw enough.. .

It can be 7 years for a profitable year from seedlings to mature saleable Christmas Trees when all goes right.

The agent did notice a trend every year of smaller than the year before loss which was good enough and it's solidly in the black now.

 

[California]

Bah. We got back out to the ranch and found my old Win7 HP laptop I leave here now has 4 dead keys. Can't write my usual long-winded replies on this pia phone. . Ebay keyboard is claimed to arrive Sunday - we shall see.

Anyhow - those two posts answer my concern over long gaps between profitable years. Sounds like I should just continue to include the schedule F {farm} so long as I have 1099 income, regardless whether I can show net profit.

As for improvements to improve resale value, that worked very well when I renovated a 4plex and a house for resale. Profit on that, in effect, put me through grad school and bought us our nice home in town.

But in this declining apple orchard business, it would be hard to be persuasive that improvements would be more profitable than what all my neighbors have done, replace with vineyards. Like across the canyon in one of my photos above.

Thanks everyone for the replies. They have given me a lot to think about.

 

[LD1]

I am no tax professional. But I question why the contractor is giving you a 1099?

1099's are for services in excess of $600. Not for goods or materials. If he is buying apples off of you, why is he issuing a 1099?

If he spends more than $600 in fuel for his equipment to harvest and transport the apples, is he issuing the gas station a 1099?

You are selling a product....shouldnt be a 1099 involved as far as I know

 

[Oaktree]

Basically I'm letting the contractor make a living so I can have a comfortable and pretty environment as our second home. Most everyone else around here has torn out orchards and put in Pinoit Noir vineyards but I won't, it wouldn't be interesting to wander around in a vineyard. (The contractor operates more vineyards than orchards, for several customers. He says he needs both due to unpredictable grape harvest).

As the apple industry dies it looks like I may be forced into considering the orchard a money-losing hobby - but I'm trying to put that off as long as possible. I just turned 80. I have no interest in converting to grapes or renting out a portion for legal dope growing, I don't need to maximize income.

I'm not an accountant, nor do I play one on tv, but it looks to me like you're more in that situation now of the orchard being a money-losing hobby, especially since you use the property as a vacation home. The days of convincing the IRS that this is a viable business may be over. Seems to be in the same situation as someone who owns some fields on a vacation property and lets someone hay it, yet consider themselves a farmer.
Once the processor closes, what does your contractor plan to do with the apples?

 

[fishheadbob]

I worked for Social Security in a rural are. I probably saw hundreds of farmers tax returns; we used to joke around the office that those guys should have lost the farm 30 years previously because they most never showed any profit. A CPA explained to me that a Schedule F is only part of a farmers tax return. One example was that any cow sold went on a 1099 (dairy cows). Looking harder at their tax returns I could see that they sometimes did make money, but the cows were a capital gain, which Social Security didn't look at, and doesn't impose the self employment tax on. Nobody had ever heard of the IRS bothering those guys.
When I started my last Christmas tree farm my assessor told me that farmers in NY get an ag exemption on land used for agricultural production. All you gotta do is show sales averaging $10,000. or higher per year. She also said that since Christmas trees take 8 years to be salable, the $10,000. requirement is waived. This is NY, the OP is in California, but both are high tax states with a lot of agricultural breaks.