Hakim used the 2 or 5 rule as an example, and Cowboydoc referred to "substantial", and both are correct. I'm not an accountant, but I have been running my own small businesses for years, and have never turned a profit for tax purposes.
There are two ways to meet to rule regarding a hobby business, One, as Hakim says, is to meet the 2 of 5 rule (I have also seen more frequent references to a 3 of 5 rule, which I believe is more accurate). The other is to be able to show a substantial effort to make a profit. If it is clear that your intent is to make a profit, the IRS will not penalize you for being a lousy businessman.
The key, as Cowboydoc says, is the word "substantial". I've seen definitions in the IRS rulings which indicate that if you put in a substantial amount of investment, put in a substantial amount of time, and behave in all ways as if you intend to make a profit, you're good to go. As Cowboydoc says, the investment must be relative to the profit you intend to make. It would be difficult to write off a 150 horsepower tractor and a semi truck for 10 acres and 40 goats, but a compact tractor and a Ford Ranger are reasonable and relative.
The substantial amount of time is probably in the neighborhood of 30 hours per week or more. And the intent can be shown with a business bank account, a separate business phone line, brochures and other advertising, participation in shows, etc.
Bottom line, if you're putting in a few hours a week doing something you might do whether you made a profit or not, you'll be limited to writing off expenses against income. But, if you are making a sincere and substantial (relative to the business circumstances) effort to turn a profit, you can take off all expenses and declare a loss every year.
In my case, we owned a commercial property of appropriate size for the business, I put in a minimum of 70 hours per week, I had three other employees, I bought tools and maintained at least $50K in inventory, I advertised and ran a web site, and there was absolutely no doubt that I was substantially involved in trying to make a profit. I had plenty of customers and a fairly substantial gross income (over $300K per year). At the same time, there are so many opportunities to take legitimate write offs and expenses that it was easy to show a small loss at the end of the year, and take the Schedule K loss against my wife's income. In fact, I never took all the deductions allowed to me, just to be on the safe side and to provide a cushion against any honest mistakes I might have made. When you are audited, the IRS has an obligation to give you credit for things you missed, as well as try to milk you dry.
I had an IRS-registered CPA prepare the taxes for several years, but then took over on my own with Turbo Tax once it became apparent that I was meeting all the tests, taking only legitimate deductions and not raising any flags with the IRS. I was never audited.
I'm sure there are special rules for farm income, but if anything, they will be more lenient because the USG tends to support farmers.
Here's a link to an article about hobby businesses: hobby business tax rules
There are two ways to meet to rule regarding a hobby business, One, as Hakim says, is to meet the 2 of 5 rule (I have also seen more frequent references to a 3 of 5 rule, which I believe is more accurate). The other is to be able to show a substantial effort to make a profit. If it is clear that your intent is to make a profit, the IRS will not penalize you for being a lousy businessman.
The key, as Cowboydoc says, is the word "substantial". I've seen definitions in the IRS rulings which indicate that if you put in a substantial amount of investment, put in a substantial amount of time, and behave in all ways as if you intend to make a profit, you're good to go. As Cowboydoc says, the investment must be relative to the profit you intend to make. It would be difficult to write off a 150 horsepower tractor and a semi truck for 10 acres and 40 goats, but a compact tractor and a Ford Ranger are reasonable and relative.
The substantial amount of time is probably in the neighborhood of 30 hours per week or more. And the intent can be shown with a business bank account, a separate business phone line, brochures and other advertising, participation in shows, etc.
Bottom line, if you're putting in a few hours a week doing something you might do whether you made a profit or not, you'll be limited to writing off expenses against income. But, if you are making a sincere and substantial (relative to the business circumstances) effort to turn a profit, you can take off all expenses and declare a loss every year.
In my case, we owned a commercial property of appropriate size for the business, I put in a minimum of 70 hours per week, I had three other employees, I bought tools and maintained at least $50K in inventory, I advertised and ran a web site, and there was absolutely no doubt that I was substantially involved in trying to make a profit. I had plenty of customers and a fairly substantial gross income (over $300K per year). At the same time, there are so many opportunities to take legitimate write offs and expenses that it was easy to show a small loss at the end of the year, and take the Schedule K loss against my wife's income. In fact, I never took all the deductions allowed to me, just to be on the safe side and to provide a cushion against any honest mistakes I might have made. When you are audited, the IRS has an obligation to give you credit for things you missed, as well as try to milk you dry.
I had an IRS-registered CPA prepare the taxes for several years, but then took over on my own with Turbo Tax once it became apparent that I was meeting all the tests, taking only legitimate deductions and not raising any flags with the IRS. I was never audited.
I'm sure there are special rules for farm income, but if anything, they will be more lenient because the USG tends to support farmers.
Here's a link to an article about hobby businesses: hobby business tax rules