tax issues

[fishman]

I have a lake management business for which I deduct a portion of my tractor. The tractor is on a 7 year depreciation schedule and the percentage the tractor is used for work is the percentage of the purchase price and interest I deduct. I was audited after my third year of business/filing taxes. Thing is, they audited the first year of my business. Luckily I had enough sense to keep all of my records together in one place. The auditor was most interested in my reciepts for business related expenses and my vehicle/mileage deduction. They didn't question my tractor deduction at all, which was something I was concerned about.

I think one of the reasons I was audited was that I hadn't shown a profit in three years. My business is fairly equipment intensive, and making a profit was on the horizon, but I wasn't quite there yet. You can bet I made a profit in my 4th year of business though!

The extra expenses/losses were charged against my other income and did reduce my tax burden. However, I wouldn't recommend doing this forever. My auditor was friendly, and it was still a stressful experience.

I certainly would think twice about depreciating the entire tractor purchase. It would seem to me that it would be difficult to prove that the tractor was used 100% for business and never for anything else (helping a friend, etc.)

Bottom line, read the code a lot (I did, still messed up) and/or hire a cpa.

 

[randy41]

Section 179 is the way I went. It's also called the suv deduction. I use my tractor for making and maintaining trails and firelanes on my land. I was able to deduct the entire amount two years ago. here is a link to some information.

Section 179 Tax Deductions

this was audited by the IRS?

you can put anything freakin thing you want to on your tax return and as long as the math is accurate and you dont get audited you will never hear a word from the IRS.

 

[Alan L.]

the size of your farm has nothing to do with it. you can write-off your money losing enterprise against your other taxable income dollar for dollar. you can deduct any expenses incurred in your business. there are rules to differentiate between calling a business a hobby or a real business. in almost 40 years of being a CPA i have never seen this imposed on farmers. if you are investing money and trying to sell your products and can show that you spend time trying to make the business work (farm and business are interchangeable in this discussion) the IRS would be hard pressed to show that you are just a hobbyist.
the specifics as to depreciation and what expenses can be written off can be found in the IRS publication Farmers Tax Guide. you dont have to be a rocket scientist to read and understand it. that and other publications are available online at irs.gov.
i repeat my advice to find a local CPA to discuss this with. Not a local tax preparer. and discuss with the CPA who would do your acual tax return to be sure that they follow through with their advice. CPA's have different ways of looking at things.

Of course there is no set rule on the size of a farm as to whether its a hobby or not, but if you raise a hay crop on your 5.5 acres expecting total revenues of maybe $300 and probably no cash profit going in, and you write off your tractor under section 179 against your salary, the loss will most likely be disallowed if you are examined. Ditto on cows. Its not a question of hobby loss, its a question of "ordinary and necessary".

If you layed it out to me in this fashion, I'd tell you forget it. I wouldn't prepare your return if you insisted. That same acreage might support quite a nice orchard, tree farm, or vinyard however, with a profit motive. As someone pointed out on another thread, its takes years to develop these, and you can write off alot of expenses in the meantime. There might also be some animals you could raise and hope for a profit, but probably not cattle.

I've seen horse boarding businesses with less than 2 acres. They use more than one tractor just for cleaning out the stalls. Horses produce LOTS of fertilizer. Small acreage might be enough for raising horses also, but some of the horse people would have to chime in on this one.

Bottom line is, if you are buying equipment that has a significant personal component, and you try to shoe horn the cost into a token business, its unlikely to fly.

 

[oceaneering]

I understand what you mean. don't try to use a business that cant reasonably support or justify having a tractor. I'm not trying to use a fictional business to shield taxable income. I'm just trying to figure out what are some reasonable, legal ways of reducing taxable income. I,ve allways just used a standard deduction and was in the market for a tractor and through conversation put 2 &2 together. Also looking into itemizing it seems there is only so many things That seems realistic that I will qualify for, mainly mortgage intrest. No donations and no major medical. Im healthy and I don't make enough money to donate. I'm not adopting and I havent given refuge to displaced hurricane victims. My non reimbursed job related exspenses are minimal. No educational intrest payments (obviously not for accounting school). And the list goes on of things that I cant deduct for or am not intitled to a credit for. If I can start a valid business (probably in some form of construction or other specialized labor type field) Then there seems to be a whole lot of deductions that I can now take advantage of. I am assuming that I will have a large amount of exspenses for equipment and such in the begining and probably a minimal amount of business income. I'm definitley going to try to pick a business that will be profitable. I look forward to the day that I have to start worrying about paying too many taxes from the big bucks my business will make.
Also for all you accountants out there can you use your cell phone as your business phone and still recieve and make personal calls on it and write off your monthly bill.
I have about $10,000 -$20,000 worth of tools.( nail guns, saws, enclosed trailer), you know construction tools. Once I start up a business can I depreciate the worth of these tools against my income my business made in exchange for the use of these tools. If so is it replacement cost since I wouldn't have reciepts for all of them- replacement cost 20,000. or value of used tools with no reciepts worth maybe 10,000.
I pose the same question for my vehicle that I bought this year and am making payments on. If I start something up soon or more likely next year can I depreciate my truck note if I mainly use it for getting to and from for business reasons.
I will definitely be getting with a cpa when I get In from Offshore in about three weeks. Until then I 've been enjoying the insight and the corspondence. So please continue to share your wisdom.
Thanks, Oceaneering.

 

[randy41]

theres a big difference between 10 and 20 k. most businesses write off small tools as purchased...not as a 179 deduction but an ordinary operating expense. if you dont have receipts then theres no way to prove the cost of the tools to you.
just an observation on free message board advice....you get what you pay for.

 

[AlanB]

All this stuff aside, what you were told pretty much first is what I would go with. Go find a local CPA not a preparer or book keeping service and establish a good relationship.

When we started our Lawn care business, we did not..... We used a local book keeper...... AFTER the Audit...... we established a great relationship with a CPA.

We did the same with the lawn care business losses offsetting some of my income.

Anyway, all the discussion here aside, A good CPA can save you worlds of hassle and problems and will be a valuable part of any successful business team.

Also do not forget your Ag extension agent (or similar government resource) and there are several programs out there as what qualifies as a "Farm" and "Farming"

Also rememeber that the IRS does not always know their own rules either. And right wrong or confused, they are right when they are sitting on the other side of the table threatening to take your assets.

As someone else here mentioned as well. Save every darn reciept. Period!

It was ludicrous at our inquisition... uhhh, I mean Audit... EVERY RECIEPT was looked through for the year.

Maybe I could have went one door further down and would have gotten a cursory glance, but the guy that did ours was THOROUGH,,, and had we not had all those reciepts, logs and records, we would have been in trouble.

 

[CharlieTR]

Not a CPA here but the rules are fairly straight forward.
To take full advantage of the deductions it is the same with any business.
You must make a profit 3 out of the first five years. Same as any large corp.
You pick the first starting year, maybe ten years of land ownership, whatever. You must be able to prove that profit is your intent. It's very easy to see when it is not the intent. Do you or any business actually have to make the 3/5 goal? No, there is always a reason profits can't be made. Thousands of people clam deductions for farm stuff because they think farmer get something special. Not true. Don't want to risk an audit? Look into Hobby farming deductions. That hobby rule says grow crops, sell them for $3000, you are entitled to deduct $3000.

Go to IRS site and get the .PDF file that explains this, don't remember the document. Then ask your CPA.

 

[Wesdor]

Not a CPA here but the rules are fairly straight forward.
To take full advantage of the deductions it is the same with any business.
You must make a profit 3 out of the first five years. Same as any large corp.


Go to IRS site and get the .PDF file that explains this, don't remember the document. Then ask your CPA.

That is a new one on me. My attorney has done our taxes for more than 25 years and he and I had this discussion last year. He told me that he has some farmers who have never shown a profit to the IRS in decades.

Now the difference between them and this situation is that they have no outside job. However, when I brought up the 3 out of 5 year rule, he told me that was not true.

Now I wonder who to believe.

 

[CharlieTR]

I understand the concern about this.
That is why my first recommendation was to read to IRS doc first.
You could take a poll and 9 of 10 would repeat your statement regarding conversation with CPA. I have the PDF on home PC I will post it tonite and quote chapter/verse. The regarding the outside job; it would be easy to prove profit intent with no other source of income. So they would not have anything to worry about. The intent and proving it is not a hobby is what counts.
Actually making profit does not matter.

 

[oceaneering]

theres a big difference between 10 and 20 k. most businesses write off small tools as purchased...not as a 179 deduction but an ordinary operating expense. if you dont have receipts then theres no way to prove the cost of the tools to you.
just an observation on free message board advice....you get what you pay for.

Randy I was thinking that a lot of tools would have an estimated worth. like I have a few nail guns ranging in price from 180.00 to 350.00. Air compressors, miter saws, tabel saws, power tools, hand tools all of these things could be matched up with a new comparable item and a replacement price given. Since all of my tools are mine the're used. I couldn't sell them for lowes prices but a $25hammer is worth $25 dollars to me no matter the age. a few hand tools have been passed down to me from my father.
Basically what i,m saying is I,ve bought stuff over the years with anticipation of eventually starting a business. I bought an enclosed trailer last year to make a bunch of my tools mobile when i did start a business. bought it from a friend for 2000.00. never got a reciept yet, i'm sure i can. I bought a used table saw for 400.00 last year from a guy who was moving, no reciept, and he moved. I,ve definitely incurred exspenses in tools, some of it I can prove, some of it I can't. What do you think.