Let’s talk taxes

[Badgers80]

Can you help me understand the situation a bit more? Have a tax background so might be able to help.

-In this crop share, would you foot the bill with the farmer with input expenses (fertilizer, seed, lime, etc)? And you’d share in the profit.
-Sounds like the farmer would be doing 100% of the farming work (planting, spraying, harvesting), and the farmer would be making “management decisions” for the crop?
-You said you’d be interested in deducting tractor and other machinery. What would this equipment be used for? Would the farmer use it for the crop acres or would they use other equipment?

KsJoe is hitting it on the head with material participation. There’s a 7 part test with it. From what you’ve said so far, I’m not so sure you’d be considered a material participant, but different accountants have different opinions on law vs practice. Saving my butt here but don’t consider this tax advice.

 

[Turkish]

@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?

I’m not an accountant and I can’t rattle off specifics, but the timber may provide more flexibility. From the research I’ve done, the IRS recognizes that harvests happen infrequently. I listen to Timber University podcast actually sent some specific questions from the perspective of a forest landowner expecting to have harvests very infrequently. Dr Shaun Tanger responded with the following:

The IRS recognizes that income from timber is infrequent. They also recognize timber growing on the stump as an increase in value so don’t worry about classification (hobby vs business) based on income flow. Certainly you need to be able to prove that you have a profit motive (a discount cash flow analysis would do it---and a forester is able to help with that). Certainly having other more frequent income is useful for signaling that this is an investment or business (showing profit motive) but its not a deal breaker.

The only thing a CPA could provide guidance on wrt to your question would be proving investor and/or business status. What is the level of evidence for showing profit (the standard may be much lower than a cash-flow analysis)? and then if classifying as a business-- passing the hours test. But I certainly would recommend working with a CPA, particularly one with forestry knowledge. There are some forestry provisions that they don’t know about if they have never dealt with forests. One way to test that is to ask them on the spot if timber sales qualify for capital gains and can reforestation costs be deducted and amortized? If they stumble here, I’d pass on them.

Here are some educational videos you would find useful. These are free but you do have to enter an email. Then it will ask you to fill in a bit of info and you just say you don’t want continuing ed hours and make sure to check the box at the very bottom then click next. Then just select “start webinar”

https://forestrywebinars.net/webina...an-overview-of-forestry-taxes/?sr=wp~upcoming – overview

https://forestrywebinars.net/webinars/basics-of-timber-basis-re-setting-the-table/?sr=wp~upcoming – basis

https://forestrywebinars.net/webinars/timber-management-expenses-and-deductions-1/?sr=wp~upcoming – deductions and expenses

https://forestrywebinars.net/webina...ncome-following-a-timber-sale/?sr=wp~upcoming – timber sales

https://forestrywebinars.net/webinars/coping-with-losses-from-nature-and-chance-1/?sr=wp~upcoming – casualty events

 

[ksJoe]

Can you help me understand the situation a bit more? Have a tax background so might be able to help.

I would welcome your critique of my situation.

I'm a work-from-home software engineer.
The net farming income (positive or negative) has been less than 1% of my annual income for the 3 years we've had it.
We own 71 acres, of which 31 is ag (40 is hunting play ground)
A career farmer who farms 1000-2000 acres farms my 31 of ag.
Its a 60/40 split. I pay 40% of the fertilizer and get 40% of the crop.
After harvest, my share of the crop is delivered to a local coop and call them to tell them when to sell it (so I am getting actual crop to sell at my discretion)
I enroll in crop insurance for my 40%, which I pay for.
Major farming decisions are a joint decision (what to plant, if we plant or if its pointless from the drought, fertilizer, etc).
I have not objected to any of his recommendations (he's the expert), but he politely asks for my agreement on these things. I ask a few clarifying questions then say his proposal sounds good.

As I have read the regulations, I understand that due to my risk exposure and my involvement in the decisions, that I have a "material interest" in the farm and therefore it qualifies as a business and I can deduct expenses. Do you agree?

(of course, any answers provided are for entertainment purposes only and not tax advice)

Thanks!

 

[ksJoe]

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

Ask her about doing it in one year.

In 2023 when I bought my $17,000 tractor, TurboTax gave me the option of deducting it in one year. I did that, taking $17,000 off my income in '23. That made my tractor a lot cheaper. I did it in 1 year specifically so it only created a 1 year farm loss for the 3 of 5 rule.

 

[Badgers80]

I would welcome your critique of my situation.

As I have read the regulations, I understand that due to my risk exposure and my involvement in the decisions, that I have a "material interest" in the farm and therefore it qualifies as a business and I can deduct expenses. Do you agree?

(of course, any answers provided are for entertainment purposes only and not tax advice)

Thanks!

Thanks for the background

I’m on board with you on material participation there. Even though you’re not physically working the land, you’re involved in major decisions (what to plant, fertilizer, etc.), you share in the income and expenses, and you have control/risk in that you sell your portion in the market at your control. I definitely think you have merit with that background.

 

[ksJoe]

Thank you @Badgers80! Your not-official-tax-advice-for-entertainment-only comments are the closest thing I've gotten to a consult from a tax professional on this matter.

 

[Badgers80]

Thank you @Badgers80! Your not-official-tax-advice-for-entertainment-only comments are the closest thing I've gotten to a consult from a tax professional on this matter.

Well thank you much. And they say tax can’t be entertaining!

Good comment on the bonus depreciation for the tractor, too. You’re a natural!

 

[wooduck]

Have been full time farming for 30 years ,,, my opinion dont get creative with tax law to stretch yourself to be able to write it off ,, ITs really simple if you are farming for a crop write it off ,, if your raising deer food on plots pull up your boots and eat the write offs ,, Its a hobby

 

[Catscratch]

When the wife and I built our house on the land we'd bought some chunks of ground and some cattle and were building that side of life up some. A couple of years after the house was done we built our shop and I wanted to write it off as a farm expense. I met with our accountant and she bluntly said it's not a write-off. I said I'll store and maintain cattle working equipment there. She said "is your wife going to park her car in it?"... I said yes and she said it's not a write-off. I said my equipment will be in there. She said "are you keeping your full time job?". I said yes and she said it's not a write-off. I said I store the golf cart and 4 wheeler in there that I use to fix fence. She said "do you take those down to the pond to swim and fish?". I said yes and she said it's not a write-off! I want to survive any possible audits to I quit arguing with her.

 

[jsasker007]

If you buy something expensive I would only depreciate as much as you would pay in taxes and carry over the remainder of deductions. Depreciating more than what your taxes are is not advised. If you buy something for 50k but your taxes are 20k only depreciate enough to cover the taxes. jmo

 

[Ben.MN/WI]

When the wife and I built our house on the land we'd bought some chunks of ground and some cattle and were building that side of life up some. A couple of years after the house was done we built our shop and I wanted to write it off as a farm expense. I met with our accountant and she bluntly said it's not a write-off. I said I'll store and maintain cattle working equipment there. She said "is your wife going to park her car in it?"... I said yes and she said it's not a write-off. I said my equipment will be in there. She said "are you keeping your full time job?". I said yes and she said it's not a write-off. I said I store the golf cart and 4 wheeler in there that I use to fix fence. She said "do you take those down to the pond to swim and fish?". I said yes and she said it's not a write-off! I want to survive any possible audits to I quit arguing with her.

I think you have the wrong accountant!

Lots of real farmers here have off the farm jobs - heck, the best farmers I know that are actually slowly growing their land ownership have full time off the farm jobs along with their wives.

If you lived in town and have a 3 car attached garage, it might be tough to write that off as a farm expense. If you build a new machine shed on your farm that is used to store your ag equipment, it is certainly a tax deduction.

 

[Ben.MN/WI]

If you buy something expensive I would only depreciate as much as you would pay in taxes and carry over the remainder of deductions. Depreciating more than what your taxes are is not advised. If you buy something for 50k but your taxes are 20k only depreciate enough to cover the taxes. jmo

What type of taxes are you referencing? Are you referring to taxes on income generated from farming activities or off farm income taxes, property taxes, etc.?

 

[jsasker007]

Business related. Equipment that could be seen as something purchased for the business. Just pointing out not to burn up depreciation if don't have to. jmo

 

[Brian662]

Depends how the business is structured. For single owner LLC's your "losses" can offset personal tax liabilities. IMO

 

[Ben.MN/WI]

Depends how the business is structured. For single owner LLC's your "losses" can offset personal tax liabilities. IMO

Could you form a LLC to buy land, rent out or farm tillable land and buy a cool new tractor and then somehow use that a deduction on a personal tax liability?

 

[jsasker007]

There's so many different ways to take advantage of using your business to buy things that you end using personally but if it's something that could be used by the business you can work it to your advantage. That's where a good accountant comes in with all the changes in the rules that a lot of people don't even know about. Farming is not directly in my wheelhouse, just basic business in general. Last time my business was audited(2 or 3 years ago) they asked me to bring all of the vehicles listed under the business to 1 location to verify they were real and I still had them. I don't have the patience to go through itemizing for a few extra deductions or I could be saving even more. jmo

 

[jsasker007]

Good accountants cost a lot but they are worth it in my opinion. Bad accountants aren't too cheap either and can cause you a lot problems.

 

[Badgers80]

Could you form a LLC to buy land, rent out or farm tillable land and buy a cool new tractor and then somehow use that a deduction on a personal tax liability?

If you’re renting it out, no. You’re a passive participant.

If you farm it, yes, but see the discussion on the hobby loss rules.

 

[Brian662]

Could you form a LLC to buy land, rent out or farm tillable land and buy a cool new tractor and then somehow use that a deduction on a personal tax liability?

I'm not sure in that scenario, I would defer to @Badgers80 response.

 

[Turkish]

If you’re renting it out, no. You’re a passive participant.

If you farm it, yes, but see the discussion on the hobby loss rules.

@Badgers80, any thoughts on the timber tax stuff I posted up above?