Cattle- accounting - tax issue

[beowulf]

Background: We had cattle (8-12 head) from 1986 to 2015. Sold all in 2015 due to potential/approaching fire issue. From 2015 through 2022 we leased the pasture (80 acres) to another. In 2022 I terminated that lease in anticipation of restarting our own cattle business this year. And the lessee did not quite handle his end of the deal - he was to maintain all fences.

Our new Plans: We will restart our cattle 'business' this year. We bought ten heiffers this year and will breed them in 2024. 2023 will be the first calendar year for our modest operation. I am putting together a record system for general management and tax purposes. I understand we need to be profitable 3 of 5 years or will be considered a hobby. BTW - we are doing this now, not because we anticipate we will be particularly profitable (before there was usually a modest profit in some years), but because we want to mitigate fire risk by grazing. In 2022 and in this year, we fenced off six separate pasture areas so as to rotate grazing - beginning with areas close to the house and moving outward. We will sell off as needed to match the herd size to available grazing and hopefully avoid feed expenses.

My Question: We have cattle related 'stuff' here already which we will utilize in the cattle business - water/stock tanks, fencing, etc. And in anticipation of restarting our business in 2023 we bought a lot of things we would need (posts, squeeze chute, coral panels, gates, a dozen rolls of 330' field fence, rolls of barbed wire, other fencing material, etc.). Anyway, I know I can deduct cattle related expenses I incurred in 2023 (the first year of our re-start), but can I deduct (amortize actually) the things I bought in anticipation of starting up, and/or things on-hand that I will be putting to use in the cattle operation? It is not a really big deal as I estimate the total 2022 'anticipation' expenses are under $3,500 and would mostly be amortized anyway.

I am putting all of the records in order, accessing info on line and such so all accounting will be in order, but as I do this I began to wonder about those expenses I incurred in 2022 in preparation for starting up in 2023.

Any help is appreciated. I have ordered a cattle 'accounting' book, but am sitting here today organizing our records and began to wonder about this issue.

 

[Chewwy]

Sole proprietor?

 

[beowulf]

Sole proprietor?

Yes. Just my wife and me.

 

[ponytug]

Welcome back to the Ranching business!

I would say talk to your tax person.

If you can subdivide your pastures with electric to get portions that your heifers/cows can graze in a week, you will get better weed control, and soil build up. The cows will graze the good stuff first, then the not so tasty, and then the ones that they aren't fond of. Grasses recover well being grazed down, and then left alone. Weeds tend not to. In larger paddocks, the grazing pressure on the weeds isn't as optimal. Of course, it may be extra work, unless you can arrange watering that doesn't require much change as the cows move from paddock to paddock. Often, folks do something pie shaped, with wedge shaped pastures, but it all depends on your terrain. I have seen long rectangles, each with its own water.

All the best,

Peter

 

[Torvy]

We (and my ranching cousins) set up LLC for our ag related businesses. There are significant liability advantages. If you separate your LLC assets from your personal assets, you are much more protected if someone gets hurt on your property or one of your cows gets out and causes damage, etc. Effectively, your personal assets (home, car, etc.) are not at risk. Of course, talk to an attorney and/or tax accountant for details. Typically, taxes in this case are paid via schedule C with your regular 1040 form.

I don't know what programs my cousins use for their operation (1000+ head in multiple states). I know they track everything and it is quite scientific.

 

[ROUSTABOUT]

Background: We had cattle (8-12 head) from 1986 to 2015. Sold all in 2015 due to potential/approaching fire issue. From 2015 through 2022 we leased the pasture (80 acres) to another. In 2022 I terminated that lease in anticipation of restarting our own cattle business this year. And the lessee did not quite handle his end of the deal - he was to maintain all fences.

Our new Plans: We will restart our cattle 'business' this year. We bought ten heiffers this year and will breed them in 2024. 2023 will be the first calendar year for our modest operation. I am putting together a record system for general management and tax purposes. I understand we need to be profitable 3 of 5 years or will be considered a hobby. BTW - we are doing this now, not because we anticipate we will be particularly profitable (before there was usually a modest profit in some years), but because we want to mitigate fire risk by grazing. In 2022 and in this year, we fenced off six separate pasture areas so as to rotate grazing - beginning with areas close to the house and moving outward. We will sell off as needed to match the herd size to available grazing and hopefully avoid feed expenses.

My Question: We have cattle related 'stuff' here already which we will utilize in the cattle business - water/stock tanks, fencing, etc. And in anticipation of restarting our business in 2023 we bought a lot of things we would need (posts, squeeze chute, coral panels, gates, a dozen rolls of 330' field fence, rolls of barbed wire, other fencing material, etc.). Anyway, I know I can deduct cattle related expenses I incurred in 2023 (the first year of our re-start), but can I deduct (amortize actually) the things I bought in anticipation of starting up, and/or things on-hand that I will be putting to use in the cattle operation? It is not a really big deal as I estimate the total 2022 'anticipation' expenses are under $3,500 and would mostly be amortized anyway.

I am putting all of the records in order, accessing info on line and such so all accounting will be in order, but as I do this I began to wonder about those expenses I incurred in 2022 in preparation for starting up in 2023.

Any help is appreciated. I have ordered a cattle 'accounting' book, but am sitting here today organizing our records and began to wonder about this issue.

I don't think the 3 out of 5 years applies to cattle. You can't make any money unless you operate at a loss. Any agriculture does not switch to hobby status. Notice welfare is in the farm bill.

 

[beowulf]

I don't think the 3 out of 5 years applies to cattle. You can't make any money unless you operate at a loss. Any agriculture does not switch to hobby status. Notice welfare is in the farm bill.

Roustabout, not sure about that. My brief research online found that it did apply to cattle operations, although there could be ways to avoid the rule's application in some circumstances. A list of the circumstances that could mitigate against the 'hobby' rule's application were listed.

 

[beowulf]

We (and my ranching cousins) set up LLC for our ag related businesses. There are significant liability advantages. If you separate your LLC assets from your personal assets, you are much more protected if someone gets hurt on your property or one of your cows gets out and causes damage, etc. Effectively, your personal assets (home, car, etc.) are not at risk. Of course, talk to an attorney and/or tax accountant for details. Typically, taxes in this case are paid via schedule C with your regular 1040 form.

I don't know what programs my cousins use for their operation (1000+ head in multiple states). I know they track everything and it is quite scientific.

Torvy, thanks for your advice re the LLC. I have not thought about that. We will be quite small - likely never exceeding about 15 head or so at any one time, but there is still the risk of loss and liability. I will look into that.

 

[beowulf]

Welcome back to the Ranching business!

I would say talk to your tax person.

If you can subdivide your pastures with electric to get portions that your heifers/cows can graze in a week, you will get better weed control, and soil build up. The cows will graze the good stuff first, then the not so tasty, and then the ones that they aren't fond of. Grasses recover well being grazed down, and then left alone. Weeds tend not to. In larger paddocks, the grazing pressure on the weeds isn't as optimal. Of course, it may be extra work, unless you can arrange watering that doesn't require much change as the cows move from paddock to paddock. Often, folks do something pie shaped, with wedge shaped pastures, but it all depends on your terrain. I have seen long rectangles, each with its own water.

All the best,

Peter

Peter, yeah, back in the cattle business. I don't necessarily need all the extra work but we can manage the grazing much better if we are running it than if we just lease the pastures. The lessee - understandably - had to manage his operation to make it work for him and so that meant not having cattle here at all at times. Also, he neglected his fence maintenance duties. So I designed and registered a brand, ordered the branding iron, am putting in the squeeze and so on. At 79 doing this - and managing all the fencing issues in hilly country - was not something I was excited about, but it keeps you young, and the daughter and SIL will take it all over at some point, and I guess that I kind of enjoy having cows around.

I don't have a tax person, but have done a bit of research and hopefully will know enough when the time comes to file first tax returns.

I don't think I can subdivide pastures into portions as small as would be required to gain the advantages you mention. We divided our ten head into two groups of five and put them into different pastures. The pastures are of varying sizes as dictated by terrain and opportunites for fencing and ability to provide water to the areas. One group cleaned up one pasture in about a month and then we moved some goats in. The other group were in a larger pasture and we are getting ready to put both groups together in a larger pasture. - all the time moving them from pastures that were near the house to pastures farther away. And we use goats almost exclusively in areas adjacent to the house.

Ron

 

[riptides]

LLC is the way. Whatever you purchase for the business is tax deductible. You can also tie equipment to the LLC and deduct them based on cost and or condition.

Be careful with insurance though. Have clear separations between what is personal and what is business.

 

[japody]

You don't need an LLC to deduct your operating expenses. The supplies you purchased can be deducted on IRS Schedule F. It is a very easy form to use. That's the way I have operated for many years.

 

[beowulf]

LLC is the way. Whatever you purchase for the business is tax deductible. You can also tie equipment to the LLC and deduct them based on cost and or condition.

Be careful with insurance though. Have clear separations between what is personal and what is business.

riptides, thank you for commenting. Based on your suggestion and another's here, I did a brief review online re LLC's specifically for a cattle business and that has convinced me that such is the way to go. I will start that process. I assume I can easily transfer ownership of cattle, supplies, and all else I have here that is needed or that I bought in contemplation of starting this up, and can work out everything else. The operation will be on our 90 acres here - where we live.

Your advice is much appreciated.
Ron

 

[ericm979]

I had an LLC for a consulting business. Other than limited liability (maybe, there are ways to pierce the corporate veil) there wasn't much advantage, and at the time it cost $800 something to file an LLC in CA. For the liability limits it might be more useful for you, but there are a lot of laws that are favorable for farming and ranching and I would not be surprised if some of those would reduce some potential liabilities. For the IRS you can be a sole proprietor and tax filing will be about the same. If I do it again it'll be as a sole proprietor.

Peter's recommendation on grazing sounds like Savoy's method. Since I heard about that in range management classes he's gone on to some more controversial theories but I think the basic idea of grazing small areas rotated frequently is sound. It mimics how herd ungulates grazed in pre-Columbian times or in places like the Serengetti, in herds that grazed small areas intensively and moved on. The grasses evolved to deal with that.

 

[kthompson]

I have run a small farming operation with no livestock for 20 some years. I think you will want a tax account who does other farmers work. The one I had for years kept telling me I could not do this and must do that when i finally said, how many other farm tax returns do you do? My nephew was it, smaller operation than my small one.
In South Carolina a LLC is not expensive and is do it yourself if you want to. I have a friend who is an attorney, and he said a LLC really will not totally protect as they will sue the LLC, the person or persons who own the LLC and operators, well anyone touching it.
I guess depending on the ownership of the LLC it could BUY those supplies from you as individual getting it on your business expense.
Go to YouTube and look at how people move electric fences to have the grass area grazed by moving the fence slowly.
You need to really study what all is tax deductible. The miles you drive to pick up anything for the farm. The pocketknife to open the feed. Any tool used on the farm. Any equipment used on the farm. Any repairs. Keep feed, seed, fertilizer and chemicals cost separate. Oh, shirts or jackets with company name and or Logo probably is tax deductible. Found out if you will be sales tax exempt and the requirements to be and be sure you know what is tax exempt.

Do not name the cattle if you plan to eat them.

 

[kenmac]

Roustabout, not sure about that. My brief research online found that it did apply to cattle operations, although there could be ways to avoid the rule's application in some circumstances. A list of the circumstances that could mitigate against the 'hobby' rule's application were listed.

Myself and everyone I know in cattle always take a loss. Expenses are too great to ever make a profit.

I'm on my 8th year and show zero profit. I know people that have been in the business for more than 30 yrs and never have shown a profit.

The Money I make goes right back into the farm, in fertilizer, hay equipment , tractors, fuel, feed, weed control, fencing, maintenance, etc,etc,.

With that said, I don't think you'll be able to deduct materials you purchased prior to actually starting the business. everything I buy for the farm comes out of my farm account..

We have a farmers CO-OP here and I purchase most of my products from them. they send me an invoice I pay out of my farm account. I also have a CC for my farm account I use for other items

It is said around here, that you have to have a good paying full time regular job to be able to financially support your cattle business ! LOL

Another saying for those around me asking about starting in cattle is.
''You know how to make a small fortune in the cattle business ?''
''You start with a large fortune, and pretty soon, you'll have a small fortune'' ..LOL

I tend to believe both of those sayings are true !

 

[Torvy]

Do not name the cattle if you plan to eat them.

I name them: steak, burgers, ribs, roast....mmm

 

[MAX-24-Dean]

I name them: steak, burgers, ribs, roast....mmm

We name one steer "dinner" every year.

 

[LHF2019]

Background: We had cattle (8-12 head) from 1986 to 2015. Sold all in 2015 due to potential/approaching fire issue. From 2015 through 2022 we leased the pasture (80 acres) to another. In 2022 I terminated that lease in anticipation of restarting our own cattle business this year. And the lessee did not quite handle his end of the deal - he was to maintain all fences.

Our new Plans: We will restart our cattle 'business' this year. We bought ten heiffers this year and will breed them in 2024. 2023 will be the first calendar year for our modest operation. I am putting together a record system for general management and tax purposes. I understand we need to be profitable 3 of 5 years or will be considered a hobby. BTW - we are doing this now, not because we anticipate we will be particularly profitable (before there was usually a modest profit in some years), but because we want to mitigate fire risk by grazing. In 2022 and in this year, we fenced off six separate pasture areas so as to rotate grazing - beginning with areas close to the house and moving outward. We will sell off as needed to match the herd size to available grazing and hopefully avoid feed expenses.

My Question: We have cattle related 'stuff' here already which we will utilize in the cattle business - water/stock tanks, fencing, etc. And in anticipation of restarting our business in 2023 we bought a lot of things we would need (posts, squeeze chute, coral panels, gates, a dozen rolls of 330' field fence, rolls of barbed wire, other fencing material, etc.). Anyway, I know I can deduct cattle related expenses I incurred in 2023 (the first year of our re-start), but can I deduct (amortize actually) the things I bought in anticipation of starting up, and/or things on-hand that I will be putting to use in the cattle operation? It is not a really big deal as I estimate the total 2022 'anticipation' expenses are under $3,500 and would mostly be amortized anyway.

I am putting all of the records in order, accessing info on line and such so all accounting will be in order, but as I do this I began to wonder about those expenses I incurred in 2022 in preparation for starting up in 2023.

Any help is appreciated. I have ordered a cattle 'accounting' book, but am sitting here today organizing our records and began to wonder about this issue.

I highly recommend an accountant specializing in agriculture. We looked into an LLC for our business and the pros vs cons just did not justify switching from sole proprietor. As for the supplies you purchased the year before you should have wrote them off on that year knowing you were going to be doing this. That is where an accountant would have been handy. All those costs are probably lost now.

We had a similar situation with a startup here last year. Made many purchases and it didn't pan out but still wrote it all off obviously at a loss, but because we are still attempting to get it up and running this year.

 

[riptides]

Finding a good accountant is the way. Especially for start-up costs and depreciation of equipment, both start-up and prior purchases.

If you purchased something before you set up your business, that you’re now using for your business, you can depreciate it based on the fair market value when your business begins.

IRS tax code section 179.

 

[kenmac]

We name one steer "dinner" every year.

had one named T bone . The Ones I'm taking his fall doesn't have names