Let’s talk taxes

[Howboutthemdawgs]

@ksJoe and I were discussing tax options with regards to row crop ground. Thought I’d make a post about it. I’m ultra conservative with regards to taxes. I know some folks write off almost everything they do on their property if they call it a farm. My accountants interpretation is cash rent doesn’t give you the ability to write off anything. Ksjoe has seen where crop sharing gives you that green light to write off tractors and other supplies. I’d love to legally be able to write things like herbicide and tractors and diesel off. How does everyone run their taxes if they have row crop or even a “timber” farm?

 

[ksJoe]

I find the biggest challenge in working through these types of issues is identifying the correct terms to research.
The term "material interest" in a farming operation is something to be aware of.

For example:

 

[jsasker007]

Show less income=pay less taxes. That's all I got.

 

[Ben.MN/WI]

I lease out some of my cropland, have some enrolled in CRP, and plant a few acres that are used for pig food and bedding for my kid's 3-4 pig/year business. My accountant said that the equipment needed to plant, spray and maintain CRP and the cropland acreage can be a write-off. Same goes for the mileage to and from the properties to perform tasks like clearing field edges, spraying thistles, etc.

I'm not a tax expert, so I listen to the advice of my accountant who does a lot of work for farmers in our area.

 

[Brian662]

A co-worker has some tillable and his wife is an accountant. They have gone the crop sharing route with their row crops over leasing strictly for tax purposes. He loans (rents) a friend's equipment to plant, hires the co-op to spray, and then pays a custom guy to harvest. He said it works out better for them on the taxes that way.

 

[Howboutthemdawgs]

A co-worker has some tillable and his wife is an accountant. They have gone the crop sharing route with their row crops over leasing strictly for tax purposes. He loans (rents) a friend's equipment to plant, hires the co-op to spray, and then pays a custom guy to harvest. He said it works out better for them on the taxes that way.

So hrs actually working the ground. I was thinking more along the lines of my farmer doing the work and we split profit or losses. Maybe that still doesn’t check the boxes from an irs perspective on giving me material interest

 

[Brian662]

So hrs actually working the ground. I was thinking more along the lines of my farmer doing the work and we split profit or losses. Maybe that still doesn’t check the boxes from an irs perspective on giving me material interest

I'll ask him where they view the line to be drawn (accountant wife) and what exactly he does annually to get there.

 

[Brian662]

Ok, his account of how it works is crop sharing you would be eligible for write offs but he chose to go full on farm it himself.

How he is currently set up is take the maximum amount of losses every year to offset him and his wife's personal incomes. They farm the 18 acres utilizing rented equipment from friends/neighbors. He then stacks as many losses as they can find to offset income. He's been doing it 4 years and they aren't even trying to make a profit on the crop although he said he could have each year. Dirt work, fence line clearing, maintenance, out buildings, all write-offs. Disadvantages are being at the mercy of other's equipment and the timing for use, learning about selling commodities and that timing, etc.

He said before when he leased his farm land, he could only depreciate the equivalent of whatever his leased income was and it became a no brainer to go at it himself to take advantage of the losses.

Hope that helps.

 

[bwoods11]

You can write off property taxes, travel and maintenance, interest on the loan if you have one . We write off insurance, and of course buildings would be eligible for depreciation.

This has been done for over 20 years with 2 different highly rated accountants, so I’d say they know what they are doing .

Note—maintenance can be for fences, CRP mowing, field edges etc..

 

[Howboutthemdawgs]

My interest is piqued here. My accountant is very good, cpa and lawyer but she admittedly not an expert on agriculture practices. I’m afraid I’m leaving a good bit on the table. I have 2 shops, several pieces of equipment and countless hours of travel, work and maintenance that I just eat. Sounds like I need to explore some options

 

[ksJoe]

How he is currently set up is take the maximum amount of losses every year to offset him and his wife's personal incomes. They farm the 18 acres utilizing rented equipment from friends/neighbors. He then stacks as many losses as they can find to offset income. He's been doing it 4 years and they aren't even trying to make a profit on the crop although he said he could have each year. Dirt work, fence line clearing, maintenance, out buildings, all write-offs. Disadvantages are being at the mercy of other's equipment and the timing for use, learning about selling commodities and that timing, etc.

Wow! Has a knowledgeable tax professional recommended this to him?

I've been specifically avoiding doing that. Not because of audit fears, but because I don't want to be declared a "hobby farm" and lose my future deductions.

When you have farm and non-farm income, it can look like the farm exists primarily as a source of deductions. According to the IRS, it needs to make a profit in 3 out of 5 years. If it fails to make a profit in 3 out of 5 years it is my understanding the IRS is likely to ask questions about it. Its not an automatic declaration of being a "hobby farm" but its possibility. If you can show the losses are due to startup type investments, I've read they're more understanding.

Once declared a hobby farm, I think you can only deduct expenses up to each year's income. For me, I place a high value on being able to make an equipment purchase every few years and deduct it off my income. That is far more valuable to me than avoiding income tax on the little bit of farm income each year.


Sample info source

According to the IRS, a farmer needs to show a profit 3 out of 5 years, even if the profits are not large. Always showing a loss on your Schedule F, can alert the IRS that the operation may be a hobby and not a for-profit business.

I've read the IRS also considers who is helping you. If its totally DIY with no expert input, that's more suspicious. If its crop shares with an established & successful farmer, that's helpful. My impression is: no profit for 3/5 years gets their attention and then they try to decide if you're sincerely trying to make a profit.

Since we've had extreme drought, I think the IRS could cut me some slack. I'm hoping we get enough rain for my ag to start turning a profit. It won't amount to much money, but I just want it to show at least some profit, so I can hit the 3 of 5 rule, so I can deduct a skid steer purchase without jepordizing my future deductions.


I'd be very curious to hear how things work out between your friend and the IRS in a few years.

 

[Ben.MN/WI]

This is very interesting. I'm definitely not a tax expert, but I'd think there may be an issue if you make a small profit on 3/5 years and then on year 6 buy a $75k skid steer or tractor. But maybe not, I really have no idea how that works. I know that I'd like to get a new tractor and if I can take that cost away from my non-farm income somehow that would be good! I've just always assumed that is not possible, but perhaps it is and I need to look into this further.

I have some friends that are full-time farmers and I really doubt they have shown a profit 3/5 years in their life! But they were always the guys with the newest tractors, trucks and UTV's since they always said you need the write-offs. Then they slowly sold off chunks of their properties to cover their losses.

 

[b116757]

Strictly collecting row crop rent would be tough for write offs. Timber farm you would have some wiggle room you most certainly could write off herbicides, chainsaws etc anything used in crown release or thinning operations maybe even a tractor could be a legitimate write off if you’re actively managing the timber. We do both row crop rents and pasture rent and I build all fences and do quite a bit of the pasture spraying so I’ve generally have plenty of write offs. Pasture renting lends itself more heavily to write offs than cash rent row crop but row crop pays better so I’m not suggesting swapping row crop for pasture. Any ground I have that’s unsuitable for row crop is pastured. I also actively manage our timber but because our farms fall under pasture rent, we’ve never set up a separate “timber farm” so to speak.

 

[ksJoe]

This is very interesting. I'm definitely not a tax expert, but I'd think there may be an issue if you make a small profit on 3/5 years and then on year 6 buy a $75k skid steer or tractor. But maybe not, I really have no idea how that works. I know that I'd like to get a new tractor and if I can take that cost away from my non-farm income somehow that would be good! I've just always assumed that is not possible, but perhaps it is and I need to look into this further.

I'm also not a tax expert, and I would greatly appreciate anyone pointing any errors they think I'm making.

From a "how the world ought to work" perspective I understand your point. I don't disagree.

However, the 3 of 5 year profit appears to be a trigger that causes the IRS to take a look. That doesn't necessarily mean they'll contact you, but it does trigger something on their end.

Here is a great slide deck overview, straight from the government overlords.
I'd encourage anyone considering their tax deductions on their hunting land to read that carefully.
Here's an example of the type of info it has:



When I started researching this a few years ago I very quickly reached the conclusion that I do not want to be declared a "hobby farm".
So far, I'm only deducting the stuff that would be wierd not to (taxes, insurance, crop fertilizer), the dozer rental for repairing the ag field, and my tractor purchase.

I could also deduct fuel, driving to the property, herbicide (that I spray in places other than the ag field), tree planting expenses, grass seed for erosion control, etc. But that stuff doesn't add up to much, other than driving (2h round trip almost every weekend), which feels silly to deduct.

I am choosing to play it safe to avoid tripping the hobby farm evaluation due to lack of profit. I'm not suggesting its unethical or inappropriate to deduct more. I'm just trying to protect my opportunity for large deductions, based on the information I have found.

 

[gjs4]

If you were in NY we could talk taxes and anal bleeding. LOL

As for the question- it is risk tolerance. know a buddy with a maple sugar hobby that writes more things off than I can pay for. Gets audited and has receipts. When it comes to something like timber, how can you claim a profit if it is still growing?

If it were me, and i had a good accountant AND record keeping, I would be writing it off as you have money coming in.

Anyone on Higgins WMA? Jake posted a great vid on soil depreciation

 

[SD51555]

I've been out of the business for almost ten years, but I can share some industry knowledge as a former district manager for HRB. I managed the teams that handled all of the IRS letters for tens of thousands of customers for 11 years. I can tell you in all that time, the number of actual "audits" I've seen was 1. An audit being where a hand to god admitted (no underlying tax forms to justify the deduction) was called on the carpet by the IRS. That dude tried to claim 80% of his gross income was unreimbursed employee travel expenses. That was easy money on their part.

Back then, nearly every single "audit" was actually a simple verification letter. Someone forgot to file a form. Your ex-wife claimed the kids when she wasn't supposed to. You forgot to file in a given year. Your kid claimed himself when you also claimed him. You didn't do your state return. You forgot to add back your state tax refund from the previous year. You double reported your HSA contribution. There was no army of investigators running around out there making people substantiate their untrackable expenses for small business and real estate.

The IRS never discloses how they flag people for verification letters, but I imagine the process is very simple in that they can batch a shitload of people together for demographics and then pick a certain percentile for a verification letter. Every single woman of a certain age would have a median HSA distrubution of _____ dollars. Take the top ten percent of outliers, send them a letter for 75 cents, and ruin their summer.

 

[KY wild]

My accountant who use to work for the IRS also said that I need to show a profit 3 out of 5 years. If I buy a 20,000 tractor she deducts it over 7 years and if she does this and if I can maintain the 3 out of 5 rule then I am gold, but if I run in the red too much then maybe I can only deduct half the value and eat the rest. So the tractor only considered half for homeowner and half for farming. Perhaps I don't deduct tractor at all because I am still deducting the bushing from 5 years ago. She always deduct equipment for 7 years, don't know if it is a rule or the way she can make it work.

 

[SD51555]

Also keep in mind, the entire IRS is working from home, so they aren't doing shit anyway. They could hire a 500,000 more work from home employees, they're just gonna be getting a tan and having a robotic chicken click their mouse every 3 minutes.

 

[Howboutthemdawgs]

Also keep in mind, the entire IRS is working from home, so they aren't doing shit anyway. They could hire a 500,000 more work from home employees, they're just gonna be getting a tan and having a robotic chicken click their mouse every 3 minutes.

You have motivated me to not leave money on the table

 

[Brian662]

My accountant who use to work for the IRS

All due respect, I would look for another accountant, immediately.

H&R Block was always an extension of the IRS and wouldn't deduct jack skit for their customers. The last person I'd hire to be my CPA is a former IRS agent. There is so much gray area in tax law, hiring someone who sees in black and white isn't wise, IMO.