Hobby Farming for Non-Farmer?

Heath · Nov 25, 2003

Do any of you claim any farm related tax benefits(deductions) for farm related activities when farming is not your primary occupation? I live on about 6 acres and would like to plant a few things, mainly to see how well I can get small crops like pumpkins or grapes to grow. Is there any way I can use any losses that I may incur in this activity as tax deductible? What expenses can I include in the calculation of these losses?
I know that addressing the US Tax Code in this forum is a little unrealistic, but I'd love to hear from anyone that has done this type of thing and has any advice to offer.
Thanks
Heath

MDNick · Nov 25, 2003

Heath,

While my knowledge is limited, I believe you have to show genuine farm income of a reasonable amount to claim anything. A hobby farm will not likely produce the necessary income, though it may. To deduct any losses or expenses, a real effort at making something has to be shown. My dad gets a tremendous discount on property taxes with the farm, but then he has a real farm. It really does not matter what your primary occupation is, Dad's is certainly not farming. Sorry all I have is more or less bad news, but the discounts out there tend to be oriented for people that are really farming and have assumed a good deal of risk and expense to do so.

Nick

Heath · Nov 25, 2003

Thanks for the reply. I know that there are deductions for losses that result from a hobby, such as restoring old cars, but I don't know enough about the specifics.
I'll have to research it more I guess.
Thanks again.

cowboydoc · Nov 25, 2003

As a hobby the only thing you can deduct are expenses that offset the income FROM the hobby. For instance if you spend $10,000 restoring a car and then sell the care for $9000 you can only claim a $9000 in expenses. The extra $1000 cannot go towards offsetting your primary income if you are a hobby.

On 6 acres and just trying to see what would grow probably no way you would hold up to scrutiny. The first thing you are going to be held to is how a business similiar to the one you are trying to do does business. You have to show that you are trying to make a profit and not operate at a loss.

In order to do this you have to have a pretty detailed business plan and keep extremely good records. If you buy a $40,000 tractor for 6 acres you better be able to show why a $40k tractor was needed. If you are ever audited you will have to show that you tryed to operate the business to become profitable. If you can't do that you will be classified as a hobby and held to those standards as outlined above.

Bob_Skurka · Nov 25, 2003

It is possible to farm a 6 acre parcel and turn a profit. But that would be with a small specialized farm or a market farm. I don't do it, but I have some people near me who do. I also know of a small lavender farmer who is a TBN'r on the forums, don't know if he makes a profit. But the size of the parcel is not the issue, nor is the size of the tractor, the issue is the effort via your investment in cropping your land. Just to see if it will grow doesn't float with the IRS. On the other hand, if you go out and contract grow organic or specialty veggies, sprouts, edible flower blossoms, etc for a few dozen gourmet restaurants . . . or if you load up a truck and sell your porduce at the neighboring town's "farmers market" . . . of if you otherwise market your crops, then you'd likely pass muster. If you are like me and you have a few acres in corn one year and soybean the next, and someone else does the farming, then you might get a break on your property tax, but you won't get a break on your equipment.

OkeeDon · Nov 25, 2003

I don't know exactly how it applies to farming, because there are many rules specific to farming, but there are two basic tests to see if what you are doing is a business or a hobby. The first is to show a profit in 3 out of 5 years. Of course, while you get to deduct the expenses, you also have to declare the profit, so that doesn't help you. I would say your losses in the other 2 years have to be commensurate with the activity or they may be disallowed.

The second way is to make a real effort to produce a profit. There are detailed rules about how much time you have to be atively involved in the business, and rules about how you hold yourself out to be in business -- advertising, a business location, or contracts with buyers, etc. Bascially, in order to consistently deduct losses, you have to show that you made a serious effort to make a profit.

I am not an accountant or tax lawyer, and you shouldn't pay attention to anything I say unless you check it out with a tax professional.