The IRS and my (proposed) Tractor

[Dissolute]

Thanks for all the good input on my "4320 vs. 5303" questions.

On the cusp of some serious tractor hunting, I am now wondering if it would be worthwile to set up a business/farm for the purpose of buying and depreciating a tractor with all the equipment.

My wife and I both work for the government, and pay substantial income taxes. It would be nice to have the IRS [sort of] pay for my tractor.

As a practical matter, can I deduct depreciation only from farm income or can it be used to reduce our income my tax burden?

Are such businesses set up as sole-proprietorships or corporations?

What has worked for the forum members?

 

[NoMo]

Your best bet is to talk to a tax specialist.

First thing to think about is your land zoning. Might have to be re-zoned as agricultural vs residential. Here in OK, each county has minimum acreage requirements for ag zoning. Your state may have similar restrictions.

Second issue is running a FOR-PROFIT company (farm). You can set your business up in a variety of ways. Regardless of type, you have to make an effort to earn a profit from the sales of goods off your farm to keep your 'business' status and depreciate your equipment.

Finally, check your local & state tax laws (see tax specialist) as you may end up paying other taxes on the equipment which can offset some of the gains from depreciation. The final "savings" may not be worth the hassle of running a for-profit 'farm'.

 

[JJT]

What state do you live in?

If this is a hobby thing I doubt you will have any luck avoiding the taxes.

 

[JDFANATIC]

dissolute,

220+ replies and you're sure no one from the IRS has seen this post? If I were you, I'd jump on the first flight to the Caaman Islands or Lake Geneva . . . /forums/images/graemlins/tongue.gif

 

[ddivinia]

I say go for it. Even if you can't get ag zoning, try it out. In many places you have ot prove 5 out of the last 7 years you were in production anyway. So, the land zoning is just one piece. What do you plan on doing?

D.

 

[Dissolute]

The gentleman who owned the land before me had cows and a huge vegetable garden, before he became ill. He also kept bees and sold honey.

I'm not interested in doing anything outside the tax laws. I do know that small business owners buy cars, phones, buildings, supplies, etc. for which they have a dual purpose(business + personal use). And the professionals I know seem to pay a smaller percentage in taxes then we salaried employees do. (I will note, that small business owners gripe about taxes more than I do, but I think that is more a function of them having to pay them out of pocket rather than being deducted from a paycheck).

Surely there are small farmers who subscribe to this Board, who have worked this out or are faced with the same situation.

I live and work in the Southeastern U.S..

 

[ddivinia]

I am in the same situation. What is the tax status on the land - is it setup with the appraisal district as agriculture? I would hit up your CPA and see what they say. It sounds like a "no brainer" to me.

D.

 

[2nstonge]

Any home-based business that's losing money and is not the primary occupation of the person taking the deductions has many, many red flags for the IRS. Even if it is the primary occupation and you don't have the strict business structure, insurances(s), permits, licenses, etc, it sets off alarms at the IRS. If you set it up as a corp or LLC there are minumum reporting rules (and expenses incurred to report them)...the time and recurring expenses could easily outstrip any write-off you might gain for a tractor.

Your best bet is to meet with an accountant, lawyer and insurance agent - in the same room at the same time if you can arrange it - and open your kimono. Let 'em know what you want to do, what your short & long term goals are and hash it out. There may be a way, there may not.

-Norm

 

[Shawk]

This might be a good place for you to start...
IRS HOB

IF you plan to pursue it you really need to spend time with a tax professional. Over the net advise on something like this isn't your best bet. Good luck... /forums/images/graemlins/cool.gif

 

[Alan L.]

If you have enough acreage that you can really operate a business for profit, you can probably depreciate at least a portion of a tractor. If you have 5 acres and you plan to sell $200 a year of hay, forget it.

 

[sticky]

If you feel comfortable sitting across your kitchen table explaining it to an IRS agent, do it. If not don't.

Think about how much an audit will cost you even if you win, because you are creating a huge red flag.

 

[FortClatsop]

I had a long discussion on this topic with my uncle, a CPA, last year. I wasn't looking at a shiny new tractor but contemplating the options on used equipment, tools, new fencing etc. Mostly I thought I was headed toward some cows and wanted the tax advantages.

He said the biggest thing the IRS looks for is an up to date, detailed, and realistic business plan that shows that you will (can) make a profit in five years. You can lose your shirt between now and then, but you need to show that you CAN turn a profit then. He said that the best plans are updated a couple of times a year....and always demonstate that a profit is five years out.

Do you want to play outside on your tractor, or sit inside working on an imaginary business to justify it? In my state farm status is linked to $100 per acre of annual (food/crop)production. That doesn't mean Christmas trees or nursery products.

I think my wife consented to a tractor out of fear that I would get cows. Playing on a tractor is more fun than getting up early to feed or mend fence. If you want to tie them together, plan on a lot more work on your part. You are always happy to see your tractor, your cows are happy when you bring them something to eat.

So far I'm content watching the cows across the road from the seat of my tractor or the comfort of the recliner in front of my woodstove.

 

[Joe1]

You should not set up a business for the purpose of buying and depreciating a tractor. That's not a business, that's a non-deductible hobby loss.

You set up a business to make a profit. The depreciation is an assist from the Government to help you make the profit. Keep in mind that the depreciation is a double edged sword. As you depreciate the tractor and equipment, it's book value goes down (probably faster than the value of the tractor) When you go to sell the tractor down the road, you might incure a taxable profit since your gain or loss on the sale of the equipment is sales price minus basis ((Basis being cost less depreciation. A $25,000 tractor depreciated over the years using a $1,500 per year depreciation for ten years would have a basis of $10,000. ($25,000 - $1,500 X 10 years)) If you sell the tractor for $18,000 you would have a $3,000 taxable gain.

That's a really simplified example, but set up a farm business because you want a farm business, not as an excuse to buy some toys. As a rule of thumb you need to show a profit in 2 of 7 years, although that's not cast in stone but is a good indicator that you're in "business" to make a profit.

Although life without some stress isn't worth living, why compound your problems. IRS Auditors, particularly in farming areas, have seen it all before and know what to look for.

On the other hand, if you set up a "legitimate" business, there are many legitimate tax deductions to which you are entitled.

The advice to discuss it with your CPA is the best advice on this thread.

I'm not holding myself out as an expert, but 27+ years as an IRS Criminal Investigator putting people in prison for tax evasion (and I was good at it) gives me an IRS perspective on the subject. That's in the past, I'm retired.

Whatever you decide, enjoy your tractor.

Joe

 

[BlueRidge]

THAT is the best post on this thread. Heed the advice!


As for deductions, let me try to make it simple, since so very many otherwise intelligent people seem to go into mental vaporlock and get confused on this, even though it's really pretty simple.

Tax deductions reduce the amount of tax you pay. They DON'T put money in your pocket. If you are at a 15% tax rate, and you find a $1,000 deduction, you reduce the tax you owe by 15% of $1,000, or $150. So if you had to spend that $1,000 anyway , and you can deduct it, great. You saved $150. But if you go out and deliberately SPEND $1,000 to get that deduction, you just spent $850 that you didn't need to spend! You paid out $1,000, and got back $150 of it.

Hey, for anybody who thinks that's a good deal, I've got a better one for you. You send ME the $1,000, and I'll send you back HALF of it! That's even better! You pay out $1,000, and get back $500! I'll take as many of those deals as I can find! No limits! Any amount! As often as you want! Call now! Operators are standing by!

Taking deductions on money you were going to spend anyway reduces your tax bill. SPENDING money unnecessarily to CREATE deductions makes you poor.

Period. Well, with one exception:

You are just above the threshold of a tax bracket. Let's say, $150 over, so your tax rate is 20%. You spend $200 on a legitimate business expense, and you drop into the 15% bracket. The tax you NOW owe is $500 less than if you did not have that deduction. You NET $300. That's good, but that takes very careful accounting and planning, and you won't know if you need to do it until you have run the numbers for the year.

The only other way that tax deductions can make money is to take items that USED to be personal expenses, and 'convert' them to deductible business expenses. This can be legitimate in some circumstances, and often gotten away with in some circumstances.

Usually is just plain fraud.

I'm always amazed at how many people think the IRS doesn't see the same scams all the time. The only thing that keeps a lot of people out of serious trouble is lack of investigative and prosecution resources.