I need a tax break

[ccatfish]

I bet many of the members here at TBN treat their property as an agriculture business for tax purposes. I want such a "business" for tax purposes. Any suggestions you can give related to the types of business (tree farm, nursery, etc.) or other helpful hints would be appreciated. I can't have an animal farm, too much time.

 

[cowboydoc]

Catfish,
How much land do you have? Anything that you do has to have a significant time factor to be a legit. business or otherwise the irs classifies it as a hobby. If you ever get audited you'd better have a business plan and documentation of your hours and excellent records. If you're just looking for a writeoff but don't have the time to do all the paperwork, don't do it. I have had friends who did the same thing and got audited and it cost them thousands in back taxes and penalties. The other thing is that you have to make a profit at some point as well or you will lose your business status. You also have to be able to justify what you are doing and show your product, etc. For example you can't say that you are going to be a tree farmer and then buy 100k worth of equipment and never sell a tree. If you ever get audited another of their little tests they will put you "business" to is whether or not the operation was ran in the context of actually making money. I haven't been audited yet but I keep records of everything and every year have a new business plan to become profitable for the next year.

 

[Thomas]

ccatfish,
You don't really get a break becoming a tree farmer {least up here}and you better read the fine print,for you will be surprise of the do's and don't's. /w3tcompact/icons/frown.gif
Do you have such a thing...Under Current land Use or Conservation Act in your area...but there also cons to these acts....be careful.

Thomas..NH /w3tcompact/icons/wink.gif

 

[GrantMO]

Catfish,

Richard is correct about making a business plan, keeping records and intending to make a profit even if it is only a small one. You might want to consult an accountant. I've been told second hand that such businesses need to show a profit, even just in the black, 4 out of 7 years to legitimize business deductions. I'm planning to ask my accountant about this to see if it's true.
Another tax to consider is sales tax. In Missouri you can buy farm related items for your farm/ag operation and they are sales tax exempt.

Grant

 

[Rowski]

You may want to look at land stewartship program or something similar.

Derek

 

[ccatfish]

Thanks for the info. I do have a CPA and will be meeting with her soon to talk about this in more detail. I am aware of all the requirements of a normal business, but I have been told that agricultural businesses are covered by a completely different set of tax laws. For example, I don't think an Ag business has the same profitability requirements. I also think you can still file a 1040 without a lot of the forms required for a sole proprietorship (sp?).

In short, I am going to purchase 20-40 acres of land in a few months regardless of the tax issue, so I figure I might as well find a way to make a business out of it. I know several people that have used this approach for years with CPA oversight.

 

[heehaw]

"i need a tax break"; don't forget, tax breaks are not dollar for dollar; i have a lot of friends that have cattle for a "tax break", but they don't understand, they would have more $$$ in their pocket without the "tax break". tax folks, including cpas, don't seem willing to explain this to folks; if your in the @ 33% tax range, spend @ $10,000, you get the big tax break, and get @ $3000 back, but you still spent $7000. (these are just estimates of course). sometimes i think i would rather spend the 7k than let the govt get the 3k??? whats that ole saying about spite!!!!!
heehaw

 

[cowboydoc]

Catfish,
What you are talking about is not the same as a true business. What you can do is any hobby that you do you can take off expenses to match income BUT you cannot claim a loss with this type of business. You get the benefit of not having to pay additional taxes on the income you make but most people just do that kind of stuff under the table because there are no real tax benefits. The other option is that you are a sole propietorship and you file a schedule C.
As far as the yearly losses yes that is true but you absolutely have to have a plan in place to make money and it becomes very hard to convince them that you are a business and not a hobby. Where you don't have employees they also look very hard at how much time you spend with the business.
I have a very good accountant who used to be one of the head guys at the IRS. He knows everything to avoid an audit and we follow everything to a T. The only reason I do it is because I love the way of life. To be honest with you if I didn't love doing the horses and cattle it wouldn't even be worth what I save in taxes making it all work. I have a hired hand and spend at least 20 hours every week working at it. I don't make a dime for all that work except for the tax breaks that I get. If I worked that 20 hours at my regular job instead of at the ranch I'd be way ahead of the game.
If you do something that isn't really a business but something that you love to do and won't mind putting in the time or doing the paperwork then do. If it's just something you want to do to get a tax break, in my opinion, it's not worth it. There are much better ways to avoid taxes.
Just some thought for you.

Richard

 

[Rick572]

Hello to all,
I am new here so if I' intruding please accept my appoligy in advance, but I like to put my two cents, because I agree with everything Cowboydoc said in his post, and it matches my own experience. I operate a Pet Cemetery which provides me with a fairly good tax break and allows me to do many of the things I enjoy doing, and would probably be doing without the tax break. I'm basically retired, so can afford to dedicate
some time and labor without immediate compensation. I have been able to show a profit most years, but it certainally does not reflect time and effort expended. To me, its a labor of love and a service to my community which otherwise is not provided. I believe that most people who would get into a business with the goal of acquiring a tax break may be making a serious mistake. Kinda like having children in order to get a tax deduction. It may work, but its sure the long way around. Thanks for letting me get my $.02 in.

Rick

 

[DennisY]

cccatfish,
One thing you need to consider is if you depreciate equipment such as a tractor and other machinery over say 5 years it now has a book value of $.00 as far as the IRS is concerned. If you then sell it you now have a taxable gain of the entire proceeds. This happened to my Dad a few years ago when he became too old to use the machinery and sold it.
Since everything was in very good shape it was worth quite a bit in some cases as much as he had originally paid for it. The G.D. government gets you coming and going!

 

[richh]

Richard I have a small business logging xmas trees firewood and hay crop. We do get some type of tax break but not much. Like you say you gota love it or your better off to go back to your 9-5. I would like to know what other ways you mite have to cut/avoid tax's! /w3tcompact/icons/smile.gif
Rich

 

[ccatfish]

thanks for the replies. i already live the "way of life" several of you mention, I'm just looking to live it a little more.

after the winter we've had this year, i think a business selling firewood may be an option.

 

[Alan L.]

Farms are treated as any other business - yes there are some farm related tax rules, but two rules still apply. Number one - in order for a farm loss to be deductible the farm business must have been entered into for the purpose of making a profit. Number two - the expense that are being deducted must be ordinary and necessary.

Since cash basis farmers can deduct production expenses (to grow a crop or raise livestock) when paid and don't have to wait until the product is sold to deduct it, losses in some years are a pretty normal occurrence. Multiple year losses from the farm do not necessarily mean that the farm will be disallowed as a hobby, but showing a profit 2 out of 5 years goes a long way to proving that the farm is a real business. Ranchers incur years of losses building a herd because all of the feed and expenses are deducted up front while female offspring are retained for breeding.

The burden of proof as to the profit motive of a farm or any other business is on the taxpayer.

 

[cowboydoc]

Rich,
Do you work for yourself or someone else? How is your logging business set up? Sole prop. or are you a corporation? Email me if you want and I'll let you know everything that I do.
Richard

 

[bsauter]

I find that doing this is fairly easy. /w3tcompact/icons/smile.gif My wife and I operate a small horse farm on 10 acres. We are looking to buy 40 more acres next to us to expand. We board three horses and have two ourselves and import Dutch Warmbloods from The Netherlands every now and then for training and resale.

I write off my tractor, barns, fencing, trailers, implements, some state taxes, my truck, feed, hay, diesel fuel, vet bills etc. /w3tcompact/icons/cool.gif It has been a definite advantage doing this. 6 years ago we started this and I took a $20,000 loss in startup after writing off $10,000 in fencing and other stuff. It also helped cover capital gains that I was going to have to pay on stock market sales I did that year.

I was AUDITED by the IRS /w3tcompact/icons/frown.gif two years later of course with the initial loss. I went and represented myself with the business plan, drawings and photos, all records and receipts and when they asked for something I had it right at hand. I left the audit with a clean record, a "GOOD JOB" from the auditor and a favorable recommendation for my tax return to the auditing board. /w3tcompact/icons/shocked.gif I was told to do the same thing that I have been doing and the auditor even gave me some tips for future returns. I was later notified that my tax return would stand as is and I did not owe anything. /w3tcompact/icons/laugh.gif I can also say the IRS was very courteous and helpful to me. Not a horror story like you hear so often.

Moral of the story is that you can probably do that too! I did not and do not use and accountant. I prepare my returns on Kiplinger TaxCut software. IRS agent liked that very much! I have no special skills to do this.

You must be prepared to make a profit though so don't try and screw the Government. /w3tcompact/icons/mad.gif I have to make a profit 1 out of 5 years and I have made a profit 4 out of 6 years and don't mind paying taxes on that because I get a lot of advantages.

The best thing is called a Section 109 where you can take up to $19,000 off right away on stuff (don't know yet what it is for 2001). All my implements are this way. I just tell my wife it's a write off and I go buy it! She can't say a thing!

If you are not comfortable with doing this consult your accountant or a tax attorney. But I can tell you that I passed the ultimate test with the IRS audit and have come out ahead. I just make sure that I am on the up and up with them and keep diligent records and follow all the tax laws. I also get farm rates on insurance for my truck and house. Nice extras and lower rates.

Good luck!



Brad, Kubota L3010HST, loader, R4 tires
Pictures at http://albums.photopoint.com/j/AlbumIndex?u=179207&a=9183978

 

[cowboydoc]

Brad,
Yes you are right but you passed the ulitimate test. 1. You kept good records. 2. You had your plan. 3. You made a profit. 4. You put a significant amount of time into the operation. With all that said it's a piece of cake. How many hours would you venture to say you put into this operation a week? Also with livestock it's much easier to write off as well. If you do it right and enjoy it it's not a hassle.
Richard

 

[Alan L.]

Congratulations bsauter on getting a "good" agent. I would think any agent should have disallowed an immediate $10,000 writeoff for a fence. Its a land improvement not subject to section 179, and so is supposed to be depreciated over a period of time.

I'm prejudiced, but software doesn't make laymen tax experts. I highly recommend you let a professional handle it if there are any complications at all. There are so many subtle rules that require daily pouring over IRS and court actions that there is no way the layman could ever keep up with it. There are elections that you only have one chance to make properly that could cost a lot of money if mishandled. I would equate it to heart surgery, but fortunately nobody will die if you mess up your own return. Thats why we CPAs don't pull down the BIG bucks.

Farms are especially good for tax purposes when you think about messing around with the land and cattle and the outdoors and being able to "maybe" take some tax losses.

 

[bsauter]

Hi guys,

Richard, We probably put 20 hours a week in. Sometimes more, sometimes less.

Alan, I was allowed the fence because Section 179 specifically states that single-purpose agricultural or horticultural structures are eligible for total expense in the year it is purchased. The IRS considered the fence to be an "agricultural structure." Most storage facilities are included in this also. Before I did it they said I could take a section 179 on it and during the audit they said it was OK. After the audit during review it was allowed too. Of course, I could have depreciated it but I needed the tax break right away in that case. My barns are depreciated over time including the single purpose ag storage facility that I could have taken a S179 on.

But you are so right about having a competent accountant do this work for you. I do not take all the deductions that I can because I don't care that much. I just take the biggies and pay taxes on what I make. I am interviewing a couple accountant becasue my tax situation keeps getting more complicated every year and it is hard to keep up. I am sure that a good accountant will save more money in the long run. If we depended on the farm income to live I would have started with an accountant to milk everything I could.

Software is a great help but you still should have the tax laws available to read and understand. You are right that it does not make an expert out of a layman. Far from it.

Brad, Kubota L3010HST, loader, R4 tires
Pictures at http://albums.photopoint.com/j/AlbumIndex?u=179207&a=9183978

 

[Alan L.]

I am impressed. Sounds like you really did your homework. The rule you are referring to is supposed to equate what would otherwise be treated as real estate to equipment. Grain bins, feeders, chicken coops, silos, etc. A standard barbed wire fence to keep the cattle in the acreage really should not qualify but you can bet that I will thoroughly research it next time it comes up. I assume there was something special about your fence and if not I congratulate you for selling it to the IRS. In your case it qualified.