Taxes and the small farm

Drew · February 02, 2008, 07:28:59 PM

I've had such good luck getting questions answered here I thought I'd give this one a shot.

We live in town and own a parcel we are developing into a farm. We plan to move to it in two to three years time. Meanwhile we go up on weekends and build the infrastructure. I've had the boundaries properly marked and done the fences. I've done the well, have an accessory building and am working on another permitted ag building. We are installing our crop irrigation system. In the next two years we will install our solar electrical system and build our small house.

We will keep our town jobs to finance the growth of our farm in the early years. I have records and would have no problem showing that this is work in the attempt to build a business, not a hobby. The point is that we won't be able to grow a crop for sale for about 3 to 4 years, but I would like to get some tax relief now to let me grow my farm.

My business plan includes only fruits and vegetables in the foreseeable future. Livestock is a stage 3+ item.

I am an IT consultant so I use a Schedule C for some of my income. Schedule F is a similar thing, but for farm businesses. I talked with my accountant about this. She can work with me on this, and she told me to ask how other people are handling this sort of thing. So here we are.

Do you run a farm business from your homestead? What was your experience during your growth years? What were the most important things you learned in that time about dealing with growth, taxes, and the IRS?

Thanks in advance for your advice!

Drew

Willy · February 02, 2008, 07:51:43 PM

I have a farm and glad I have other incomes to feed my family and pay the bills with. Seems only large farms get the checks from the goverment cause you won't make it off a small farm. I don't write off the losses cause my daughter uses them for her buisness instead. One day it may show a profet but that is a long ways off even after tring 12 years to make one. Real hard to make a living farming just ask a farmer and they will tell you. I do it to grow our own food, raise our own meat and the profets realy only pay part of this off. If I add in the 30K barn, $1,000.00s of fences, tractor, property cost, expences ect I won't live long enought to put a retirement fund in the bank but I will have great food to eat! The only way it may show a profet is when I die and leave the place to her. Then the goverment will step in and tax the works to get there share but at least the farm will be paid for on my back and hers to make the money off selling it! Mark

February 02, 2008, 08:18:42 PM

Willy is right but that is not the only reason to be in business (small) for yourself.

To start with-- Repeat after me. I am in business. I am a farmer. Great - now you are in business.

It can be called whatever you want but officially it is best if you name it after yourself. "Drew and Dan _____ farms" or some such using your real name. That makes it so you do not have to fill out fictitious business name statements. You can get a checking account with no fictitious statement that way. Use cash if you want -- keep track of it - It's legal tender. Put that big IT money into it as a loan or investment.

Now we get to the part where you see the value of owning your own business. Business is a tool you use to keep money in your pocket that would otherwise be paid out in taxes. About 30 to 40% of your income can be recovered by investing in your own business. If you make a profit invest it back. You do not have to make a profit in 5 years even really-- you just need to intend to. Who knows - you may have to restructure in 4 and 1/2 and lose money for a while longer.

Officially you are intending to work toward making a living. That is why you are investing your time and money into the farm isn't it? Great... and you have a computer set up in your current Pacifica residence don't you -- of course you do -- that is the office for your operations and it is able to be deducted also. Your computer is deductible also -- you need it for taking care of Quickbooks - or Quicken for your tax purposes. You might want to use Turbotax. I find that many accountants think that they are an extension of the IRS and fail to take all of the deductions you are entitled to. They don't want to deal with audits so generally through a lot of your money away. Pay a bonus and Turbotax will represent you at the IRS. Haven't tried that one yet. You may make a mistake on the taxes -- not your fault -- you are doing your own and I'm sure they will forgive you and allow you to correct it.

As soon as you step out the door you are on your way to work. No commute unpaid for you. Groggy eyed and the coffee still hasn't kicked in, but you are officially working. That makes the vehicle and all expenses or mileage deductible also. Business is expensive. Need a 4 wheeler , Honda etc, to get around the farm? deduct it - it's legitimate since you repeated after me. Deduct those trenching shovels and blisters too. From now on nearly everything in your life is deductible. I know you can do it-- otherwise you wouldn't have repeated after me.

You make a few bucks and spend it on a tractor of which all costs associated - even looking - planning -- hauling -- etc are deductible - not just the cost. So you didn't make the extra $40000 this year - you spent it on a tractor -- but you didn't give it to the gov. They paid for a good portion of the tractor.

So business is not a great big money making concern sometimes. Sometimes it is just a little whore you use to keep money in your pocket rather than giving it to your traitorous uncle, Sam, you know -- the one who is sending all of the IT jobs to India? hmm

Willy · February 02, 2008, 08:32:46 PM

Quote from: glenn kangiser on February 02, 2008, 08:18:42 PM
Willy is right but that is not the only reason to be in business (small) for yourself.

To start with-- Repeat after me. I am in business. I am a farmer. Great - now you are in business.

It can be called whatever you want but officially it is best if you name it after yourself. "Drew and Dan _____ farms" or some such using your real name. That makes it so you do not have to fill out fictitious business name statements. You can get a checking account with no fictitious statement that way. Use cash if you want -- keep track of it - It's legal tender. Put that big IT money into it as a loan or investment.

Now we get to the part where you see the value of owning your own business. Business is a tool you use to keep money in your pocket that would otherwise be paid out in taxes. About 30 to 40% of your income can be recovered by investing in your own business. If you make a profit invest it back. You do not have to make a profit in 5 years even really-- you just need to intend to. Who knows - you may have to restructure in 4 and 1/2 and lose money for a while longer.

Officially you are intending to work toward making a living. That is why you are investing your time and money into the farm isn't it? Great... and you have a computer set up in your current Pacifica residence don't you -- of course you do -- that is the office for your operations. As soon as you step out the door you are on your way to work. No commute unpaid for you. Groggy eyed and the coffee still hasn't kicked in, but you are officially working. That makes the vehicle and all expenses or mileage deductible also. Business is expensive.

You make a few bucks and spend it on a tractor of which all costs associated - even looking - planning -- hauling -- etc are deductible - not just the cost. So you didn't make the extra $40000 this year - you spent it on a tractor -- but you didn't give it to the gov. They paid for a good portion of the tractor.

So business is not a great big money making concern sometimes. Sometimes it is just a little whore you use to keep money in your pocket rather than giving it to your traitorous uncle, Sam, you know -- the one who is sending all of the IT jobs to India? hmm

Great way of putting it! Yes you can use 90+% of the money you make before taxes paying for things you need to make it work. It will save you a ton of taxes also cause your not using your pay check to buy stuff with. After you deduct what you paid out to run the buisness with that is your income and I bet it will be barly enought to survive if that is all you had. I hope you understood what I just said. Been doing this for around 21 years and it does work even tho my tax accountant has tons of papers to fill out to make it work this way. Have good books to show where it went and that is realy all you need to do. No red flags like flying to hawaii to have lunch over what tractor to buy!! I have 3 legal buisnesses going on here and they all barley make it but that is the way it should be. Mark

glenn kangiser · February 02, 2008, 08:41:42 PM

Note that I am not a financial adviser, but have been self employed since 1974 and because I am too arrogant, conceited and opinionated I will never be able to hold down a real job.

February 02, 2008, 08:44:23 PM

For us it made sense to leave the realm of sole proprietorships and schedule C and incorporate under business names with separate tax ID's. I'm not certain that's what Glenn or Mark Willy have done. We own land & building under one name, lease it to the other, pay wages, benefits, from that... After 20+ years it's still hard for us to show much of a corporate profit. We should probably give up and quit altogether.

glenn kangiser · February 02, 2008, 09:07:51 PM

I didn't go the corporate route because in most dealings with small business the banks etc. want personal guarantees for loans and such so no real benefit for us and easier paperwork it seems to me. I'm not much of a meeting type guy -- even once a year.

Records -- yeah -- I keep em -- several years in boxes and bags -- to be dumped on the IRS floor and copied if the agent wants a copy but nothing will be left over night there and I'm sure I will have plenty of time to sort through the piles while sitting in the chair in their office. Hopefully they will have someone to keep an eye on the grandkids I have to watch for the day so they don't get into and on all the desks, garbage . papers etc. and make a real nuisance of themselves while I'm trying to find what they want. I have a hard time doing two things at once.

Willy · February 02, 2008, 09:33:58 PM

Quote from: MountainDon on February 02, 2008, 08:44:23 PM
For us it made sense to leave the realm of sole proprietorships and schedule C and incorporate under business names with separate tax ID's. I'm not certain that's what Glenn or Mark Willy have done. We own land & building under one name, lease it to the other, pay wages, benefits, from that... After 20+ years it's still hard for us to show much of a corporate profit. We should probably give up and quit altogether.

One is Corp and the other 2 are Companys. We also rent buildings and space we own to one which is pretty much our income out of the deal. I haven't had a paycheck for so many years I don't know what they look like now. My credit rating is allmost 850 so the banks like me. Now they know we can pay what we borrow even tho the profet is small. We are in the same boat hard to make a profet, in fact it is hard to not to show a profet. Either way I do not work for a boss other than myself. My wife is the books person and fills out all the forms. My spelling is not good enought to do that but I have a good head for the money making end. It takes both to make it work and we are partners in life forever. I will do this for another 6 years than I will officaly retire and get my goverment check! Mark

Drew · February 02, 2008, 09:43:03 PM

Five replies in an hour. Yep, I came to the right place. Thanks guys!

I'm familiar with the concept of reinvesting my profits, deducting a home office, keeping a business license, and things like that since I do it for my sole proprietorship I lovingly call Hogan Systems. For that I file a Schedule C and show a profit a minimum of 2 years out of 5. If I open a separate business for my farm, I need to treat it in the same way I do my IT work.

Consulting is relatively easy. You work, invoice, get paid, pay taxes. You put a computer into service for amortization to do your work pretty much when you get the work. You bill, get paid, and pay taxes all in the same year. That's a service industry. The thing with farming is that you need to invest for a time before the profit comes. Sometimes it doesn't, but that is another subject. My issue is with staying cool with the IRS while I am building my business on a cash basis instead of taking a higher risk route with borrowed money and a sink-or-swim business plan (In IT we call that "Testing in Production" and it's as smart as operating on your own heart.).

I see folks near my farm with three or four steers in their front yard and I know they work in town. They are passing through losses from their "residential farm" to offset their off-farm income. That is what I am talking about. I am not looking to pull a fast one, but to legitimately let my start-up costs offset my off-farm income to reduce my risk and improve my chances of eventually earning a profit.

February 02, 2008, 09:55:11 PM

Don't rush to be the first filer either -- maybe get an extension. Most audits are chosen from the on time filers. The profit does not really have to be shown in the 5 years is my understanding. You only have to try to make the profit. I'm sure you would if you could. Life is tough but you never stop trying.

MountainDon · February 02, 2008, 09:55:35 PM

Farming does have some special rules all to itself. What I recall is that you need to make the intention to make a profit clear and up front. You don't have to make money right off, if ever. But you have to want to. One of my neighbors in the mountains has his land registered as a tree farm. He's trying to grow Christmas tress in one area. Costs him a bundle.

You need to hear from someone well versed in the farm tax stuff. Maybe we have some around here... not sure.

glenn kangiser · February 02, 2008, 09:58:05 PM

All I have farmed was 5 acres of almonds -- never made a profit but expensed as necessary. I would look through the TurboTax help for information on farm taxes if it was me.

ScottA · February 02, 2008, 10:23:34 PM

We had a cattle ranch for many years. Not the same as a farm but pretty close as far as the IRS is concerned. I heard some pretty good advice from the others so far. One thing I'll add is we had to be careful to keep records that showed what our plans where as far how we intended to make a profit. This can be a simple spread sheet listing estimated costs and projected earnings based on current market prices. If you're farming you'd list seed, fertilizer, fuel, labor etc. then project what you might make based on a crop estimate and current prices. Prices always go down at harvest time so you never make what you hoped.

The IRS has this thing about what they call hobby farms. If you're not careful they might try to declare your operation a hobby so actualy making a profit from time to time is a good idea. We never made much but we did manage to pay the taxes and upkeep on our land and other earnings from the profits.

MountainDon · February 02, 2008, 10:34:53 PM

a link or two that may be of interest...

http://www.wvu.edu/~agexten/farmman2/taxes/IRStest.htm

http://www.progressivefarmer.com/tabid/1157/Default.aspx

http://www.meocpa.com/hobby.html

http://www.motherearthnews.com/Do-It-Yourself/1981-03-01/Hobby-Farming-and-the-IRS.aspx

http://www.unclefed.com/AuthorsRow/Newland/hobbylosses.html

February 03, 2008, 12:52:20 AM

Thanks MD. According to these articles interpretations of Section 183 (And I intend to hit the IRS website on the subject as well) I appear to be doing things right. That obsessive compulsion to plan and record is a real asset here.

okie-guy · February 03, 2008, 10:32:32 AM

We own a 240 acr. farm and have cow calf operation. We have never made a profit and probably never will. The benefits of growing your own food, geting away and living the rural life apeals to me. This is not my primary source of income. I have 13 year old son and my accountant who also runs cattle sugested that I put my son on the payroll at about 9 years old. This way he has earned income. I opened a Roth IRA for him and he pays a low tax rate yearly and I get a tax deduction. All his income ($3000) goes into the Roth. He can take money out of the Roth penalty free for educatin or first time home buyer. If he doesn't need it for that then he can be a millionaire when he turns 62. Most kids don't have the advantage of earned income. If it looks like I'm going to make money some year, I'll dig a pond or add a well or something that will add value that I will recover at a later date and then lose money that year. This is how I do it and it seems to work out OK. There is no way I could live off this farms income.

Drew · December 14, 2008, 07:27:32 PM

I've been spending the day going through my receipts for the last year or so for the farm...

"Oroville Ace Hardware, pipe dope. Aww, I remember how funny I felt working with that stuff... Oroville HD, shovels. Wrists were never the same. Good times. Good times."

Glenn, your comment about accountants being an extension of the IRS is pretty close. The Old Man told me that there was some legislation passed that in essence made accountants financially responsible for errors or misinterpretations on their clients' returns. It then became economically beneficial for them to leave money on the table (Their clients', not theirs) in order to minimize their own risk. I have to hand it to the government. That was pretty clever.

My wife, as conservative as she is, has been telling me, "Smart and handsome husband, perhaps this would be the year to file the Schedule F. You have worked so hard and kept such good records. It's what Joel Salatin would want you do do."

Actually, it was more on the lines of, "Man up, you p**** and deduct this stuff! No one in their right mind digs a freakin' 600' trench for a HOBBY! You. Have. No. COWS! No ATV! No mobile home and no house! You are the monk of farmers! File!"

So I am breaking up with my accountant this year and doing my taxes myself for the family, consulting practice, and the farm. Y'all will visit me in prison after I'm blamed for causing the economic downturn, right?

Anyway, I've been having fun doing the math on this stuff, I have to say. I get to figure out what I can call an expense and what I have to depreciate as a capital expense, but I imagine that Turbo Tax will help with that. I imagine that I'll have to hold off on doing anything with my work in progress straw bale field shed until I complete it in 2009, then put it in service and begin depreciating it. However, I think I can begin depreciating the tools I bought to build it right away.

Stay warm,
Drew

glenn kangiser · December 14, 2008, 07:52:49 PM

Use an accrual basis accounting system rather than cash Drew and it leaves more room to play as you adjust and get your figures corrected. 179 deductions can help a lot. Be sure to lose enough to get all of you and your wife's withholding back.

No inventory is necessary. Use the same each year . On accrual you add in expenses owed at the end of the year as well as a cost of goods sold usually and billed out income not yet received. Everyone is paid up at the end of the year but you owe everything to the world.... great.... it's all good.

The numbers are there - you just need to find them all and use them. You are in business - home office-- every time you step out of the door you are on your way to a business expense - check the mail - check the weather-talk to a supplier etc. Yes - you are an animal constantly working and expensing 24/7. Have a home office at each place so you will be like you love to be -- working every waking moment, every time you step out of any door. Don't take a crap before you punch the clock. Company craps are always more expensive than ones done on your own nickel.

Maybe it would be good to pay the Turbo-tax prepaid support offer at the end just in case.

ALWAYS go for the extension. No need to be among the first selected for audit. Most are selected for harassment from first filers.

Just ideas of things to look for --- no guarantees...

OH BOY, prison....free food.... see you there... be there or be square....