Farm Equip Tax Issues

[wasabi]

Being knee deep in tax season, I thought it would be a good time to skate ahead of the puck a bit by posing the question of how to make our upcoming (soon) tractor and implements purchase legitimately tax deductible.

To my horror, my CPA quickly opined that our wasabi and trout farming endeavor would likely be interpreted as a "hobby". I said nothing, but knew right away the right thing to do would be to ask friends at TBN for more considered perspectives. Surely you farming pros can point us in the right direction. We're absolutely serious about making this a going concern (intend to make a profit), even if it is fun at times.

So, really, whatsupwitdis?

Caveat Note: any thoughts exchanged on this subject will be considered as discussions only, and will not be construed as tax advice!

 

[stmiller2]

You might want to check IRS publication 225 available at http://www.irs.gov/pub/irs-pdf/p225.pdf.


IRC Section 183 is relevant for determining whether the operation is a hobby or for profit.

If you pass muster as being for-profit, you may qualify for Section 179 expensing of equipment.

 

[Chuck52]

You have any sales tax issues? In some states the sales tax is less/none for farm implements, which are actually to be used for"farming".

Chuck

 

[wasabi]

Steve, thanks for the gov link...I'll check it out. I have a vague memory that the section you refer to allows accelerated writeoff of equipment. Looks like we share the Carolinas ...is your farm in the Piedmont area or west?

Chuck, dunno yet, but I have heard if equip is for a farm, some states waive the sales tax. Can you or anyone else confirm? It would make a difference on sig purchase.

Thx, Sabi

 

[soon2b8]

The sales tax is waived in Georgia if the equpment is for "farm use". Just purchased a new Century 2045 with no sales tax.

 

[skipperbrown]

I'm a CPA, although I haven't worked in taxes for over 15 yrs. But back in the days of dinosaurs when I prepared tax returns, the rule of thumb was that the IRS expected to see a profit in 3 yrs from farming activities after which point they'd begin to investigate whether there was indeed a sincere business interest or if the 'farmer' was just wanting the gov't to help pay for his/her hobby.

The primary thing the IRS will look for is revenue/income: What sales did you have? Have you sold livestock, pulp, fish, timber, hay, corn, beans, etc. in the last 3 years? If not, will you be prepared to so in the near future? Do you lease farmland (and where exactly is that lease income reported on your return)? Is your farm/business what you do to pay the bills or do you have a 'real' job? Is farming all you do ... or is it a hobby?

Are you using your business assets for personal use: Do you mow your yard w/ your tractor? Do you use your tractor to build personal use things like a garage for your car? Do you use your tractor for landscaping your residence? Mowing your yard w/ a business asset more than once or twice a year is the kiss of death (but only if the auditor knows that tidbit).

Do you have employees? If you have employees, you have a business.

Basically, the IRS will ask you to prove you are running a business/farm. If you are legit, they will go away. I owned a tract w/ a lot of pine trees and depreciated my first tractor as equipment necessary to manage my 'pulp tree farm'. I didn't live there and the tractor was only used on my 'tree farm'. I never showed any sales (trees take a while to grow to harvest size), only losses for 3 years, and the IRS never bothered me. I sold the place after 3 years for a reasonable profit and the IRS got their chunk of the proceeds. They were happy and I was happy knowing I contributed to yet another cruise missle (not).

I think you will be ok as long as you can look the auditor in the eye and say 'I'm running a business and here is the proof.' Then be able to show him/her some proof.

If the IRS disallows your deduction, you will be responsible for the additional tax, interest, and a penalty. However, you will almost always be able to talk yourself out of the penalty if it just an honest mistake and you weren't really trying to evade taxes. Forget arguing successfully about the taxes or interest. You will pay those.

And, finally, if you are never audited, there is never a problem.

mark

 

[wasabi]

Thanks Mark. Your experienced perspective jives with what I would think would be fair and reasonable. Yes, we have a full time caretaker (employee) who helps tend the property (and help protect our stuff) when we're not there. Yes, we intend to generate sales.

My CPA mentioned something about showing a profit for at least two out of five years. I find it very hard to believe that farms in this day and age show a profit at all, much less forty percent of the years, so I was sure there must be other facets to this issue.

 

[EdKing]

I don't pay sales tax on farm equiptment in Pennsylvania. I bought my tractor, implements, and even my quad without paying sales tax. You must have a certain acreage, I think its at least 10, but I'm not sure as to the exact amount.

 

[DavidInNH]

One of the many GREAT things about living in New Hampshire is that there is NO SALES TAX ON ANYTHING! I probably shouldn't have said that so loudly - we like you guys to come visit, for a little while./w3tcompact/icons/grin.gif

Don't you just hate transplants? I used to be a Texan, so I have to brag once in a while! /w3tcompact/icons/grin.gif

 

[JoeR]

N.H. may not have sales tax, but the last I heard was N.H. has one of the highest property taxes in the U.S.

Worst thing would be to work in Boston and live in N.H. Therefore, you pay very high income tax, and property tax. /w3tcompact/icons/smile.gif

Joe R.

 

[MikePA]

Might want to check <A target="_blank" HREF=http://www.tractorbynet.com/cgi-bin/compact/showthreaded.pl?Cat=&Board=off&Number=114699&page=&view=&sb=&o=&vc=1#Post114699>this</A> thread from early March concerning equipment depreciation.

 

[DavidInNH]

The property tax rate in NH varies a great deal from town to town. If you work in Mass (I do) and live in NH, it can still be a win since the cost and valuation is so much lower. My house would cost at least twice as much near the office...

Anyway, I've travelled enough to know that there are LOTS of great places to live and a good tractor can make them even nicer.

-david

 

[ejb]

>>Worst thing would be to work in Boston and live in N.H. Therefore, you pay very high income tax, and property tax

I know several people that do that...can't quite figure out that one...go figure./w3tcompact/icons/smile.gif

 

[Alan L.]

Maybe your CPA is simply covering his butt. If you can show a true profit motive, even if you don't show a profit 2 out of 5 years, the government generally won't give you any trouble. I'm going on 26 years on public practice and I haven't lost a dollar of farm losses to the hobby loss rules. The ones that won't fly usually are so obvious that we just don't attempt it. But we have farmers that regularly lose $100K. Farmers are not our specialty - we only do a few, but we suggest trying to show a profit ever so often - not necessarily 2 years out of 5. So far so good. Sometimes you can plan for a profit year by moving revenue in and expenses out of the projected profit year.

Take a look at the activity. If you have this wonderful pond at your house and you wish to grow a bucket full of trout to sell for $200 a year, and you wish to deduct all the upkeep of the place and depreciate the tractor, forget it.

If you can show a true and reasonable endeaver to make profit, then you should be OK.

The Section 179 deduction only applies if you make a profit - it can't throw you into a loss. And, the new tax law grants a special 30% bonus depreciation for the year of acquisition, for assets placed in service after 9/10/01. The 179 deduction comes first, then the 30% on whats left.

This new bonus depreciation applies to any business - not just farms. Ditto on the section 179, which allows for the first $24K of equipment to be deducted in the year of acquisition.

If you are thinking about a vehicle, forget about 179 because 280F limits it. UNLESS you buy a vehicle with a gross vehicle weight of 6000 pounds or more. This would be a 3/4 ton pickup, a Suburban, Excursion, Expedition, etc. Again, this is only an issue in a profitable business or farm.

I wouldn't hesitate to report the loss on the trout business if there is a profit motive.

 

[wasabi]

Mike in PA, Thanks for the link...great thread on the same topic...If I had any idea I was duplicating last month's discussion, I wouldn't have bothered, but now that it is off and running.....

Alan L. Thanks for the professional confirmation, reinforcing my belief that fair is fair. We will claim the deductions allowable, because we will operate Bearpen as a business....and it will also be fun.

 

[stmiller2]

Listed below are some factors used by the IRS in order to determine whether an operation is a hobby or a business. I lifted these from http://www.irs.gov/individuals/display/0,,i1=1&genericId=6977,00.html#IRC183.


IRC section 183(d) provides for a presumption that the activity is carried on for a profit if it produces a profit in at lease 3 out of the last 5 consecutive tax years (2 out of the last 7 years if the activity is breeding, training, showing or racing horses.) If the taxpayer is just starting out in the activity, he or she may elect under IRC section 183(e) to postpone the determination of whether the presumption applies to the activity until the close of the 4th (or 6th) year after his or her first year engaged in the activity. In that case, the taxpayer files a Form 5213 which automatically extends the statute of limitation for all relevant years until the close of the presumption period.
In determining whether a farming activity is carried on for profit, all the facts in regard to the activity are taken into account. No one factor alone is decisive. Publication 225 provides guidance to taxpayers who are analyzing their situation. Among the factors listed:

Is the farm operated in a businesslike manner?

Does the time and effort spent on farming indicate an intent to make it profitable?

Is there a dependence on income from farming for livelihood?

Are losses due to circumstances beyond control? Are the losses normal in the start-up phase of farming?

Are methods of operation changed in an attempt to improve profitability?

Are profits from farming made in any year and in what amounts?

Does the taxpayer, or advisors, have the knowledge needed to carry on the farming activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

Is the farming activity carried on for personal pleasure or recreation?
Look at the following court cases where the disallowance of expenses for not-for-profit activities was upheld:

Hendricks, Daniel E, et ux. v. Commissioner, 32 F.3d 94 (4th Cir 1994), 74 AFTR2d Par. 94-5281
surgeon with cattle operation

Westbrook, Billie R, et ux. v. Commissioner, 68 F.3d 868 (5th Cir 1995), 76 AFTR2d Par. 95-5623
veterinarian with embryo transplant, cattle and miniature horse operation

DeMendoza, Mario G, III v. Commissioner, T.C. Memo. 1994-314
lawyer with polo ponies

Borsody, Frank J, et ux. v. Commissioner, T.C. Memo. 1993-534 aff'd per curiam, US-CT-APP-4 [96-2 USTC _50,415], 78 AFTR2d Par. 96-5260
horse breeding/training

Lujan, Arthur G, et ux. v. Commissioner, T.C. Memo. 1992-417
retired with small cattle operation.

PS: Sabi, my farm is north of Charlotte.

 

[Redman59]

Thanks for all the info. This confirms what my tax folks have been saying. Last year was my first year in the business, and I cleared a small profit from my corn and tobacco. I have almost convinced my CFO that we need the tractor with FEL to keep the place up and repair barns and roads to keep accessible for the farmer who does most of the planting/harvesting. I am also thinking of raising goats and having my neighbor keep an eye on them during the week.

Of course once I lay out the big bucks for the tractor, This will wipe out my profits for a few years.

My tax folks also said something about proving you worked at least 500 hours per year on the business.
Redman

 

[wasabi]

I used to have an accountant in Indiana who referred to such vagaries as the "gray area" of tax law. I guess this qualifies as such.

Thx for the insights and links!

Sabi