Tax Deductions/Small Farm Business Ideas

[Olympus]

Hello all, I had a few questions about tax deductions and/or declaring a business. I recently bought 100 acres those use as a recreational property, hunting and riding ATVs. The property taxes are very minimal, so that's not much of an issue. But I got to thinking about whether it would be possible to use the land to start some kind of farm business to use for annual tax deductions at the end of the year. Our annual household income is somewhat high and we itemize our deductions at the end of the year, but I'm always looking at ways maybe we can get some extra breaks, incentives, or deductions and thought maybe this land purchase could help us. Since it is only land, we can't claim any interest like we do with our home mortgage (and the interest isn't exactly low on the land). The land is all wooded except for a small 2 acre spot that is somewhat open but has a lot of cedar trees growing. Livestock would not be practical. I've been reading about beekeeping or Christmas tree farming, but I'm curious if anyone else has any firsthand experience or suggestions. I'm not trying to cheat the system, but just trying to think of ways I can use this 100 acres to work for me instead of just being a financial liability.

 

[teejk01]

If you truly want to do something with the expectation of making money (and paying taxes) then you are allowed to do that. Google "hobby loss" rules to get an idea of where people have gotten tripped up (normally because they really didn't ever have a profit motive and were looking to get a tax benefit from what otherwise would be a non-deductible personal expenditure).

 

[ovrszd]

Fellow Missourian,

Do you work your own taxes or do you pay a service to prepare them for you? If you pay someone you need to go talk to them now about this. If you do your own, you need to start educating yourself using the IRS website.

I think you also should visit your County FSA office and introduce yourself. Between them and the County Soil Conservation Service office you can get ideas for things to do to the property.

Regardless, you should start filing a Schedule F with your taxes. It is used to track any incomes or expenses related to the property that are tax deductible. For example, you can deduct the taxes and insurance. You can deduct depreciation on any fences you have. You can deduct any maintenance costs such as fuel for your tractor, a portion of the expense of operating your truck, etc.

This will probably turn into an information overload with many examples of "how it should be done". Sit back and enjoy the offerings.

Congrats on your land purchase. They ain't making anymore land you know.

 

[Olympus]

Fellow Missourian,

Do you work your own taxes or do you pay a service to prepare them for you? If you pay someone you need to go talk to them now about this. If you do your own, you need to start educating yourself using the IRS website.

I think you also should visit your County FSA office and introduce yourself. Between them and the County Soil Conservation Service office you can get ideas for things to do to the property.

Regardless, you should start filing a Schedule F with your taxes. It is used to track any incomes or expenses related to the property that are tax deductible. For example, you can deduct the taxes and insurance. You can deduct depreciation on any fences you have. You can deduct any maintenance costs such as fuel for your tractor, a portion of the expense of operating your truck, etc.

This will probably turn into an information overload with many examples of "how it should be done". Sit back and enjoy the offerings.

Congrats on your land purchase. They ain't making anymore land you know.

We have always done our taxes ourselves, but maybe we should start using a professional.

Right now, there is no income related to the 100 acres. We only pay property taxes and make our payment to the lender with interest.

 

[NorTracNY]

I can address the idea of beekeeping. It's not insignificant work if you're looking to turn a profit. There are also significant capital investments. If you have never been a beekeeper, you're better off working for someone that's in the business or just doing it as a hobby.

 

[roadhunter]

Beyond tax issues I'd recommend a visit to the local USDA office. There are so many programs available to landowners it will make your head spin.

At the end of the day what do you want to do with the property? Host boy scout camping trips, hunt club, sell saw logs, grow organic vegetables, raise llamas, pumpkin patch, build a campground RV park, etc. Once you decide that then you can look at options as far as tax benefits, insurance costs, etc...

 

[mddorange]

One big gotcha that the IRS gets most "hobby" farmers with is that you have to report a "profit" in 3 out of 5 years or you are not considered a "real" farmer but a "hobby" farmer.

Quote from IRS: "An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses)."

 

[Olympus]

One big gotcha that the IRS gets most "hobby" farmers with is that you have to report a "profit" in 3 out of 5 years or you are not considered a "real" farmer but a "hobby" farmer.

Quote from IRS: "An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses)."

I guess my question to that would be how can that be possible with say a Christmas tree farm? It takes 6 to 10 years to grow a mature tree, so that's 6 to 10 years before a profit is even possible.

 

[jeff9366]

Have you established and fully funded IRAs for yourself and your spouse?

If you have a 401-K at work, have you maxed out contributions?

IRA/401-K retirement accounts will likely defer taxes better than anything suggested so far.


Have you made a long term financial plan with the goal not to take Social Security until age 70, so your spouse has a fat survivor's benefit, should your die first?

 

[ovrszd]

We have always done our taxes ourselves, but maybe we should start using a professional.

Right now, there is no income related to the 100 acres. We only pay property taxes and make our payment to the lender with interest.

I do my own taxes as well.

I still think you need to go to the FSA or SCS office and visit. Making sure the land is reported and categorized. For me this would be the first step to declaring it a "farm".

Study up on the Farm tax laws. Take advantage of every legal deduction you can. That's what they are there for. EVERYONE pays the least amount of taxes they can. My 170 acres rarely shows a profit.