Do you use farm income to help with taxes?

Turkish

5 year old buck +
Are there ways to leverage the fact that a property produces regular income, albeit small in relation to its value, for further benefit? For example, I’ve read much about timber tax. Landowners can deduct expenditures related to management, maybe even including cost of visiting the property, if viewed as an actual timber business. The problem is that timber harvests may be so infrequent for a small landowner that it illegitimizes his claim as a “business.” Does that change if a landowner has 40 acres of tillable with a yearly income? Can I magically begin being viewed as a real business with real expenses that I can then deduct?

And, yes, I know free accounting advice is worth less than you pay for it. I’m not looking for you to give me free accounting advice but rather guide me on specific things to ask my accountant about. Give me enough knowledge to start that conversation. Or enough to know I’m way off base. Tia
 
*I’ve heard of people setting up timber properties under a schedule f on their taxes. I think you have to be careful with that unless it is an operating timber farm. I believe the rule is it has to turn a profit 1 out of every 5 years to be considered a legitimate business but I’ve also heard of people showing loses on timber properties for 10 plus years. Obviously timber runs on a much longer cycle than crops so it’s a grey area maybe. I’ve also heard of people not being comfortable with that arrangement!
Crops are a lot more legitimate. I don’t know what you can get away with for write offs as someone who just cash rents some field. Maybe someone with some experience can shed some light on that.
 
I own a business and wanted to set our farm up as business to write off farm expenses against AG rental income. When I discussed with my attorney/account, they said I would need to set the property up a LLC to establish a legitimate on gong business that shows financial activity.

I think I understand what you are trying to do; however, you have to have revenue to write expenses off against to reduce taxes on profits. If you don't have revenue, then what are you writing expenses off against? Best to talk to your accountant as there are also costs to operate the business such a quarterly tax filling's, year end accounting to submit tax filing, etc.
 
Talk with your accountant. I think some will set you up to get some deductions, others will tell you it's a hobby and not worth the audit risk. Personally I would try to make enough income off it to pay for expenses.
 
I have crp income on my property which counts as active farm income, I take a large loss every couple of years and deduct a lot of equipment and my shed.


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I have used CRP income,timber harvest,crops,hay all for extra income.I use the timber harvest history to keep timber in crop rating as it lowers taxes.Some states you have to have a forestry plan.I don't have near the CRP that I used to but this years payment paid for a mortgage payment for a month. This bean crop sucked due to drought but I will still make enough with insurance and on years of double crop I will make apx 8 months of payments.The Land podcast gives some really good examples of how people pay for their farms.Such as I bought a triplex a year before farm came up for sale and the income off it would also make farm and insurance payments.I combined the rental and farm mortgages together. I would say establish crop history anyway you can,even selling firewood can help in some states
 
Timber land probably not worth trying to deduct on your taxes. Tillable should be profitable and you can write off the taxes and maybe a few other things perhaps some mileage but probably not worth the hassle of an audit trying to claim things against it unless your actively working the farm in some fashion. We used to run cattle, bail hay 1/2 dozen tractors esc… we wrote off all sorts of things. We have sold the cattle and most of equipment and simply lease out the ground now 150 acres row crop 80 acres hay ground 560 acres pasture. I do actively build fence and spray brush so we still write off mileage, diesel, herbicides anything connected to farms. I also lease out a good portion of it for hunting leases around 630 acres and write off all my habitat improvements but this isn’t really a small hobby farm scenario. I’m pretty busy with land management
 
I would definitely do it within an LLC or S-Corp and do everything 100% according to the letter of the law. Once you go down that path you will see that the law is actually quite generous as long as you keep records and fill out the necessary paperwork.
 
Are there ways to leverage the fact that a property produces regular income, albeit small in relation to its value, for further benefit? For example, I’ve read much about timber tax. Landowners can deduct expenditures related to management, maybe even including cost of visiting the property, if viewed as an actual timber business. The problem is that timber harvests may be so infrequent for a small landowner that it illegitimizes his claim as a “business.” Does that change if a landowner has 40 acres of tillable with a yearly income? Can I magically begin being viewed as a real business with real expenses that I can then deduct?

And, yes, I know free accounting advice is worth less than you pay for it. I’m not looking for you to give me free accounting advice but rather guide me on specific things to ask my accountant about. Give me enough knowledge to start that conversation. Or enough to know I’m way off base. Tia

We have a pine farm and run it as a business. We formed an LLC. Profits and losses are passed through to the owners through a K1. Yes, you can, and we do, deduct expenses related to maintaining the property. We have a forest stewardship program in place written by a forester that includes practices that benefit Wildlife. We also participate in USDA programs to do cost sharing.

The following is general information and I'm no accounting expert by any stretch:

You can deduct business expenses in any business. The problem when it comes to taxes is the question, is it a business or hobby? Well, generally, the difference is profit. If a small business is generating losses year after year, eventually, the IRS decides that is is really not a business, it is a hobby and then disallows all those expenses you wrote off in previous years. A tax person can tell you how long you can show losses before the IRS takes action.

That is where timber comes in. There are different cycles and approaches for timber rotation that are common practice in the industry. Some may use fairly short cycles, clear-cut, and harvest pines and replant every 10 or 15 years for pulp. Or you may have a commercial thinning (given you have enough acreage to interest a logging company) after 10 or 15 years and then wait longer and clear-cut for pole timber. Or you may have a second thinning and wait even longer to sell pines as saw-logs.

Timber prices fluctuate over time and strategies may change over time as well. The bottom lines is that in a business like this is not uncommon to show losses for many years before the cumulative profits exceed the cumulative losses. It is just the nature of the business that growing trees takes decades. I think the IRS gives more grace to businesses where the nature of the business takes a long time to become profitable.

Irrespective of the timeframe, a business has to be profitable or the IRS will declare it a hobby and there will be tax consequences.

Keep in mind that a single business can have many aspects. So, one could have tillable ground that you plant and sell crops from or that you lease to someone. They could also have a couple hundred acres of pines that they manage. The IRS does not care how large your profit is, just that you have a profitable business. You don't have to maximize profit. For example in our case, we are striving for a balance between timber profit and wildlife benefit. There are many standard practices that reduce profit. For example, it is a common, and considered best, practice to leave a riparian buffer around creeks that is not harvested for the purposes of improving water quality. There are many other conservation practices that are encouraged that benefit wildlife. By putting a forest stewardship plan in place that documents and defines the way we manage or timber, we are able to legitimately deduct expenses associated with these wildlife beneficial practices. But, one again, in the long-run, not to exceed profits.

Thanks,

Jack
 
I have used CRP income,timber harvest,crops,hay all for extra income.I use the timber harvest history to keep timber in crop rating as it lowers taxes.Some states you have to have a forestry plan.I don't have near the CRP that I used to but this years payment paid for a mortgage payment for a month. This bean crop sucked due to drought but I will still make enough with insurance and on years of double crop I will make apx 8 months of payments.The Land podcast gives some really good examples of how people pay for their farms.Such as I bought a triplex a year before farm came up for sale and the income off it would also make farm and insurance payments.I combined the rental and farm mortgages together. I would say establish crop history anyway you can,even selling firewood can help in some states
Thanks for the info. I don’t need money to pay for the farm. I’m looking for other benefits of ownership and for things that may guide me on how smartest to diversify my holdings. What I’m thinking is: “Strictly from the standpoint of achieving maximum possible (although small) NPV from my rec land investments, should I be focusing on one type of property over another; are there hidden benefits I’m not aware of.” I already have some pure timberland and it provides none of the type of benefit I asked about, even though I will harvest some timber if I own it long enough.
 
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