Tax Deductions/Small Farm Business Ideas

[mark02tj]

I think that you could be over complicating things as well as opening yourself up to some IRS scrutiny if you start claiming "farm expenses" when you're not farming.

I'm 99% sure that you can deduct the real estate taxes on the land whether you live there or not. So, that takes care of half of your question.

With regards to the mortgage interest on the land, there's a couple of ways to approach it. You could build a "vacation home" there. The home could be as simple as a trailer as long as it has sleeping and bathroom facilities. Potentially, you could build an outhouse and claim that as the toilet facilities. But, you are allowed to claim mortgage interest expenses on a second home - so the trick is trying to classify the land as housing a second/vacation home.

You could also potentially take the interest (and real estate taxes) as "investment expenses" if your intention is hold the land for a while and then sell if for a profit. There are limitations on this, but, depending on your state tax structure, it could be more advantageous to you to do this on a Schedule E rather than to take the expenses on a Schedule A. In Ohio, your Ohio Taxable Income is computed by starting with your Federal Adjusted Gross Income (AGI). Your AGI is increased/reduced by the amounts on Schedule E, but Schedule A (itemized deductions) come into play later on in your Federal return, so they do you no good for reducing your Ohio income. I don't remember what state the OP is in, but if his state calculates taxable income in a similar manner, he might want to look at this.

Regardless, the OP really NEEDS to talk to a QUALIFIED TAX ADVISOR! This doesn't mean talking to the person at the local H&R Block office - this means talking to a good CPA that focuses primarily on taxes or an Enrolled Agent.

As far as keeping bees goes... there' a LOT more to this than most people realize. I've been keeping bees for about 5 years and have sunk way too much money into it. I've thought about coming up with some way to "write this off", but that opens up a whole can of worms. And, just putting a couple of hives on 100 acres and calling it a "bee farm" probably ain't gonna cut it with the IRS.

 

[two_bit_score]

Hello all, I had a few questions about tax deductions and/or declaring a business. I recently bought 100 acres those use as a recreational property, hunting and riding ATVs. The property taxes are very minimal, so that's not much of an issue. But I got to thinking about whether it would be possible to use the land to start some kind of farm business to use for annual tax deductions at the end of the year. Our annual household income is somewhat high and we itemize our deductions at the end of the year, but I'm always looking at ways maybe we can get some extra breaks, incentives, or deductions and thought maybe this land purchase could help us. Since it is only land, we can't claim any interest like we do with our home mortgage (and the interest isn't exactly low on the land). The land is all wooded except for a small 2 acre spot that is somewhat open but has a lot of cedar trees growing. Livestock would not be practical. I've been reading about beekeeping or Christmas tree farming, but I'm curious if anyone else has any firsthand experience or suggestions. I'm not trying to cheat the system, but just trying to think of ways I can use this 100 acres to work for me instead of just being a financial liability.

I'll throw out my :2cents: first then read the thread.

Have you thought about setting it up as a tree farm or at least getting a Timber exemption?


You can probably write off a lot if it's set up as a tree farm.


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[California]

...OP really NEEDS to talk to a QUALIFIED TAX ADVISOR! This doesn't mean talking to the person at the local H&R Block office - this means talking to a good CPA that focuses primarily on taxes or an Enrolled Agent.

Two points I can add:
I went to not HR Block but a competitor and asked for an Enrolled Agent to review my final bookkeeping settling Mom's estate. Nothing fancy, I just needed assurance I wouldn't get stuck personally for something I had overlooked. That week waiting for results was completely wasted. This 'Enrolled Agent' knew less than I (with an MBA but no tax law) already knew. I pointed out one error in his analysis and when he looked up the rule I cited, he agreed. As I refused payment for his 'service' he opened up to me, the real purpose of this nationwide tax prep service is to sell high cost Refund Anticipation Loans to every client. They do your taxes, immediately loan you the calculated refund, then they make I think 29% APR until you go in (hopefully the day your refund check arrived!) and pay off the loan. If you spent part of the refund on something else they've got you, you might pay that high interest rate (or more, I recall somehow the APR could reach 100%) on the balance for a long time until you can settle with them. In other words, a nationwide scam operation.

I then went to HR Block and asked for an Enrolled Agent. They only had one who rotated among their offices in the region. She was good, she did a competent job and told me I had got it right. (and said what that other advisor had proposed may illegal and could start an audit). Summary - buyer beware when looking for tax advice.

I personally have my deductions a little below what I owe and pay the difference with my tax return. For one thing this protects me from that scam where someone claims your tax refund before you even file.

Second point: If you have business or wage (not investment) income, IRS 'Section 179' provisions can be very helpful. With several limitations, you can depreciate in the first year 100% the cost of business equipment, lowering your tax bill overall. One practical effect is if years later the hobby or business issue causes an audit, that purchase will be far in the past instead of showing as ongoing annual depreciation on the audit year's tax return.

And not emphasized enough in these replies - you actually have to sell something, with business records and everything, to cross the line from hobby to business.

Here's a strategy that worked for me: First several years after I paid sister cash to buy her half of the family orchard out of Dad's estate, I needed to restore the savings I had applied to that. So I rented out the little guest cabin that had been occupied by Dad's caregiver in his final years. Lots of gardening expense to make it presentable! A 24 hp tractor and rotary mower to knock down the weeds around it and reduce fire hazard! Then a 3-point backhoe when I needed to replace the septic leachfield serving the cabin. Since the majority of hours on this equipment was actually used to serve the rental I proportioned the cost between orchard income (paid to me by the neighbor who disked and harvested) and the much larger rental income I was getting from college students renting the cabin. Most of my early purchases were expensed immediately under that 179 rule to offset the taxable rental income. By the time I no longer needed that rental income and had to drop the depreciation on the cabin and its furnishings, it had helped pay for several pieces of fully-depreciated farm equipment.

So in summary you need to actually sell something to write off expenses against. But there are legal ways to offset expenses against income.

 

[QRTRHRS]

We have a program in PA called Clean and Green if you have more then 10 acres and they are wooded, you pay a reduced tax amount to keep them green.
We also have property enrolled in CREP, to help with erosion, it cost shared the planting of various trees, and pays us a rental for the next 10-15 years.
There is a magazine called hobby farms, not a bad magazine might give you ideas.

Clean and Green is pretty much a no-brainer. We had a farm in PA that we bought from someone that would squeeze a nickle until the buffalo grunted yet never put it in Clean N' Green.

Unless the laws have changed, to remove the land from the program, you would have to pay the back tax difference for seven years? Regardless of the new buyers intentions, be it to continue farming or development, likely they would still pay a resonable price.

As for the op, don't forget to discuss establishing the property as an LLC with your tax professional. Lawyer fees for drawing up an LLC used to be about a grand. An LLC for me was far better than a small business overall. Though, at the time, PA, which was where I was set up, seemed to have an understanding of a small business or a coproration but not an LLC. They would send me letters, some threatening, which I would have to have my accountant take care of.