Tax breaks for small farmers?

[KentT]

</font><font color="blue" class="small">(
From the doc you referenced it seems that profit is unnecessary, ever. That was my previous understanding as well. No laws (yet) against running a bad business. I'm not sure how revenue requirements are calculated, nor do I care that much... we are making ample and growing revenue now.

Regardless, the point is that to justify being a business, vs. a hobby, you need to show some rationale that it's more than a hobby... and significant, regular revenue certainly does a good job of that. )</font>

Your deductions (adjustments to gross income) may be limited to the amount of your revenue, however, if you cannot not show a profit in the 5 or 7 year window described. The IRS will consider you a "hobby farmer" and not a "part-time farmer" -- that is intentionally done so that everyone who keeps and occasionally breeds dogs, horses, etc. is NOT allowed the same tax benefits as those who actually do it for a living....

This just happened to me on a rental property -- after I wrote off more than I took in for 5 years, the IRS just "recategorized" me from active to passive management, and it cost me another couple thousand dollars in taxes...

 

[Alan L.]

SnowRidge hit the nail on the head. There is no magic revenue figure that you have to achieve. The burden of proof is on the taxpayer that the venture was entered into for a profit. There are rules of thumb such as the 2 out of 5 test, but even those aren't etched in stone. If you can show that you are in the business to make a profit then you can sustain the losses. If not, the IRS will reclassify them as hobby (nondeductible) losses.

BadDog is correct that the business does not have to be a farm.

 

[SnowRidge]

<font color="blue"> "This just happened to me on a rental property -- after I wrote off more than I took in for 5 years, the IRS just "recategorized" me from active to passive management, and it cost me another couple thousand dollars in taxes..." </font>

Not to quibble, but it sounds like you got hit with the Passive Loss Rule, which is somewhat different than the Hobby Loss Rule. I'm curious, what was their rational for calling it a passive loss. Weren't you actively managing the property? I had rental property for years; never made a dime off of it-- until I sold it. /forums/images/graemlins/grin.gif Since I actively managed it -- by the IRS definition of active -- I wasn't affected by the Passive Loss Rule. There was no requirement, at least at that time, to make any profit. It was pretty typical for debt service alone to eat 100% of any rental income, not to mention repairs, insurance, etc,

Maybe they've changed the rules since I sold, which was in the early 90s?

 

[SnowRidge]

Thanks. Yes, I'm aware of the Timber Tax site. I've been hoping to find something with more official status. No luck so far. /forums/images/graemlins/frown.gif

 

[KentT]

</font><font color="blue" class="small">( <font color="blue"> "This just happened to me on a rental property -- after I wrote off more than I took in for 5 years, the IRS just "recategorized" me from active to passive management, and it cost me another couple thousand dollars in taxes..." </font>

Not to quibble, but it sounds like you got hit with the Passive Loss Rule, which is somewhat different than the Hobby Loss Rule. I'm curious, what was their rational for calling it a passive loss. Weren't you actively managing the property? I had rental property for years; never made a dime off of it-- until I sold it. /forums/images/graemlins/grin.gif Since I actively managed it -- by the IRS definition of active -- I wasn't affected by the Passive Loss Rule. There was no requirement, at least at that time, to make any profit. It was pretty typical for debt service alone to eat 100% of any rental income, not to mention repairs, insurance, etc,

Maybe they've changed the rules since I sold, which was in the early 90s? )</font>

Yes, it was the Passive Loss Rule -- and I don't know when/if the law was changed....

 

[Alan L.]

Actually, rental activities are per se passive even if you materially participate. For those rental actvities that you actively manage there is a $25,000 loss that can be sustained, but it phases out at higher income levels.

There is an exception from rental activities always being considered passive, for taxpayers who are "real estate professionals". Of all the trades or businesses in which you materially participale, more than 50% (and at least 750 hours) have to be spent in real estate activities. This can include development and management in addition to rentals.

Each year you add up your passive income and passive losses, and also any carryovers from the prior year. If it nets to a loss it is carried over to the following year, indefinitely. The suspended losses are allocated among the activities.

With respect to a particular activity if you sell out of it, you can then deduct all of the previously suspended losses. Also, if you sell a passisve activity at a gain. the gain is considered passive income that might allow some other losses to be triggered.

Farm activities are hit hard under the passive loss rules. If you don't materially participate in a farm activity, and if it shows a loss, for alternative minimum tax purposes the loss is lost forever - there is no carrover. The AMT is the subject of a whole nother subject.

This is probably more than anyone ever wanted to know.

 

[Alan L.]

Kent, the passive loss rules have been with us since 1986.

 

[Cedarwood]

This thread has discussed tax breaks/advantageous on the front end but what happens on the back end if the business fails? Say at the five or seven year mark there are still no profits made and the business owner decides this venture will likely never turn a profit.

What are the IRS implications for closing the business on all of the items which have been depreiciated out or other tax breaks which have been taken? (e.g., tractor, equipment, property taxes? etc?) Certainly most folks would likely want to keep the tractor for "hobby" purposes after the failed business so what happens regarding IRS rules?

 

[Alan L.]

Cedarwood, if you take a Section 179 deduction on an asset and then convert it to personal use within its class life, you have to recapture the part that is in excess of what the regular depreciation would have been while it was a business asset. In this case, recapture means you report it as ordinary income.

There is also a recapture if your business use falls below 50%.

 

[rpeter]

SnowRidge:

What you maybe thinking of is reforestation. I have ten acres of “former” corn fields that I just planted 2500 hardwood seedlings on. In Pa. I will not be able to “harvest” any of my crop for at least 25 years. However, as long as those trees keep growing I have unrealized revenue and I do not need to show any profit.

You can take up to $10,000 a year in expenses. The rest you have to amortize over roughly an 8 year period. But you can take Sec. 179 deductions for any of your depreciable assets.