Question for the hobby farmers?

If a farm shows no income from the farm, are they still allowed to deduct tractors,machinery and other consumables for the farm from their income taxes?

Maybe each state is different. I don't know how this works??

I am defining a hobby farm as, where no income is generated from the farm.

Gary

Gary, if there is no income from the farm, or not enough to show a profit, no matter how small, in a set number of years, you cannot claim deductions for farm expenses. Therefore the term "hobby" farm. at least that is how my accountant explained it to me. HTH JohnG

I went through this last year with the nice people from the IRS (full blown, come sit down with you at the farm for a couple of days audit). Expenses for the farm can always be deducted from income on the farm. Tax is on profit. My photography business/hobby is like that. There are different rules than for a business or farm but it is deductable up to the level of income. The real key is that if it is a not for profit venture then expenses cant be deducted from other income, like the job in town.

If you make a profit 3 years out of 5 you are assumed to be a for profit venture and a schedule F loss can be used to offset other income. If you show a schedule F loss more than that you can still be considered for profit BUT, the burden is on you to meet the criteria. You can have a loss for 20 or 30 years straight as long as you meet the burden of proof under their criteria.

States may have different rules for state taxes but by in large most states follow the US tax code in these kinds of determinations. For what its worth, I dont recommend getting the full blown tax audit but it was a real learning experience. Glad to have learned what I did, glad its over, and hope to not do it again.

Hi Gary, I do not consider myself to be a hobby farmer, but with that being said I have not been able to show a profit since I started this venture. I wish I had to pay a million a year in taxes that would mean that I am making serious money. My wife has a good income that we actually live on, my profit or income has gone into grain bins, equiment, drain tileing and of coarse fuel. Hopefully next year will be a break over year that I can put some money in the bank. Trust me I am looking forward to that. This venture has been like walking a tight rope, I am not really trying to do this for me as much as my grand sons. As times get harder I am afraid that good jobs will be hard to find, the farm can and will teach them a work ethic that you can not find in the city, and can if its their choosing provide them a future. So as you can see this is not a tax write off for me, but I guess you can call it a quest.

You may not show a profit but you do show income.

Not a hobby farm in my eyes if you show income.

I have had those loss years as well.

Gary

You can have a million dollars in income and still be a hobby farm in the eyes of the IRS if your expences exceed your income.
You need to have a profit to be a bussiness.

I knew a school teacher who was hobby farming and trying to write it off. He had to meet the burden of showing a profit now and then. One year he was even including his kids county fair premiums to try to come up with some farm income so he wouldn't be showing a loss.

kyhayman gave my understanding of it. When you say "no income" do you mean "no profit" or "no revenue"? I have a few thousand per year in sales (hay and CRP) and I show a small profit on the Schedule F to keep the IRS happy.

Not income taxes, but the Connecticut has several thresholds for eligibility for various farm "perks."

Simplified:
-- $2,500 in gross sales gets you Farm Plates for motor vehicles and eligibility for a Sales & Use Tax Exempt Permit for purchases related to the farm.
-- $15,000 in revenue or expenses gets an property tax exemption for $100,000 of machinery and $100,000 of buildings if the town adopts an ordinance to grant such exemptions.
-- Farm land is assessed at a lower rate, and you need some revenue to claim it, however no specific dollar amount is attached to the eligibility. You file a form listing the properties and the gross farm revenue with the local assessor and they make the determination of eligibility. My guess is if you're over $2,500 it shouldn't be an issue what so ever, if you're under $2,500 the assessor can argue with you whether it's a commercial farm or a hobby use.

It does get rather complicated because first, you have to define "income". Fruit, vegetables, and other produce grown in a small garden, even if only for your own use, technically is "income" in the eyes of the IRS, but if a person does declare garden produce as income, then I would think a person could deduct the cost of machinery and labor needed to produce that income, even if no actual sales take place. I'm sure I do not understand the whole thing. The tax laws are purposely written so they can be "interpreted".

I heaard ramblings that '08 tax returns are gonna have the highest # of audits in a few dozen year. Targeting ag, small businesses, and people with farms and other small businesses. Dont know how true it to be.

On the Federal level,you are allowed to deduct expenses/losses up to the amount of the filers total earned income. This can include income from farm related sales of crops and livestock, custom work done for others, your own off farm job as well as your Wifes off farm job if filing status is married filing jointly. With continued losses I would guess that the odds of an audit go up so record keeping is essential. It is perfectly legitimate to have losses year after year while aquiring machinery and building up a farm and making other improvements. The ''Hobby Farm'' determination is rather dated as it was orignally intended to prevent the idle rich from offsetting their trust fund royalties on normal maintenance of estates and pleasure horse farms. Schedule F losses actually lower your adjusted gross income which lowers your total tax bill much more than simple deduction. My home state, Louisiana, taxes the citizens based on the filers federal adjusted gross income so the farm losses help lower state taxes in that manner. Most strip mall tax preparing businesses will not be very up to date on schedule ''F'' or very interested in getting the maximum deductions available to part time farmers because there may be an audit and they do not make money attending audits for free, therefore they tell people they cannot take deduductions they are due. Most WORKING, TAX PAYING PEOPLE are leery of the IRS to the point that they fail to get all the deductions due them and consequently pay more tax than they owe,year after year, falsely believing that the beast can be appeased. It really comes down to whom you believe is the most qualified to spend your money, you or the federal goverment

You can only have 'loss' years if you truely are running the farm as a business and trying to make a profit.

If you show a farm profit 3 of 5 years, no one bothers you.

It is common for a business to lose money the first 5 or so years until you get established, and the big capitol purchases get paid down. So you rarely get bothered at the beiginning.

But if you continue to show losses, they start to wonder if you are just sheltering your other income by investing it in these perpetual farm losses..... Then it is up to you you are trying to run the farm as a business & working to make a profit. Bad weather, expansion costs, etc can be shown to prevent you from making a profit. But, it is up to you to prove this is a for profit buisness venture. If you buy a $45,000 tractor for a 5 acre corn plot, think you are in trouble. There needs to be resaonable expectation of profit from the venture.

--->Paul

That may be what you have been told by a tax preparer but what you have stated is not the law, the law is you can lose money every year if you have other earned income to offset against. I can buy a $45,000 tractor for a 5 acre corn patch if I want to and take the section 179 deduction or depreciate it out, if I was audited I would have to prove that I bought the tractor, planted the corn and sold or used the corn myself. You check a box and sign your name on the schedule ''F'' stating that your capital is at risk and you are an active farm operator. The reasonable expectation of profit is left up to yourself and perhaps your banker, the IRS is not going to make that determination.

Dave, What did you find out with that snowblower? Did covering the hole make a difference?

In Maine, there are NO breaks of any kind unless you can show a farm-related profit.

My little patch truly is a "hobby" farm. I raise my critters because I enjoy it, I damn sure ain't making any money at it.

In fact, when I was using my tractor and equipment to make a buck or two on the side, I had to pay an annual personal property tax on it. Between personal property taxes, self-employment taxes and insurance, it wasn't worth my time to fool with it, so I quit.

And they wonder why the economy is going to Helen A. Handbasket...

As far as somebody with "no income from the farm",legally to buy things tax exempt,you have to sign a form for the IRS at every store or supplier where you buy the tax exempt items. It contains your SSN and has to be on file at that store or supplier. The local hardware store for instance,if you ask for one of those forms and the owner questions whether or not you really are a farmer,she asks to see a copy of your Schedule F tax form to prove it. No proof,no form.

(quoted from post at 13:45:36 01/03/09) As far as somebody with "no income from the farm",legally to buy things tax exempt,you have to sign a form for the IRS at every store or supplier where you buy the tax exempt items. It contains your SSN and has to be on file at that store or supplier. The local hardware store for instance,if you ask for one of those forms and the owner questions whether or not you really are a farmer,she asks to see a copy of your Schedule F tax form to prove it. No proof,no form.

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I have been to stores with my neighbor, they just asked for his tax number. Never asked for any proof.

If you buy a bag of seed potatoes in Maine you have to pay a sale tax.Vegetable seeds and plants are taxable.Fertilizer used to grow vegetables used to be exempt, no more.You have to file schedule F with the irs to get a farm exemption.Several years ago the tax hogs pulled the tax exempt status from small businesses grossing under 10 grand per year.Many businesses lost their ability to buy from wholesalers who insist on seeing your sales tax exemption number.I have a retail tax number now.Anything I put into inventory I pay a 5% tax on and cant get a refund until the item is sold.I use a lot of small items that are hard to track so I buy very little from Maine companies.I gave up selling many items to avoid the extra sales tax crap.Maine hired 11 new people in the sales tax division.This is to snoop on small dealers who might use a screw or nut with out paying the sales tax.I understand there are only 8 food inspectors in the whole state.