By Brian Ravencraft
Sometimes farming is considered a hobby. The farmer grows crops or keeps livestock for enjoyment reasons. Profit does not come into play. An operation run like this is known as a hobby farm. The other side of the coin is farming for profit. These farm operations are carried out with the purpose of making money in mind. However, the lines can get blurry. A hobby farm can turn into a business for one reason or another.
Taxpayers must be aware of the distinction between a hobby farm and a business farm. The Internal Revenue Service (IRS) is always a good resource to turn to for clarification on this matter. Here is a list of factors they share regarding whether farming activity if a business or hobby:
• The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
• The taxpayer puts time and effort into the activity to show they intend to make it profitable.
• The taxpayer depends on income from the activity for their livelihood.
• The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
• The taxpayer has enough income from other sources to fund the activity.
• Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
• There is a change to methods of operation to improve profitability.
• Taxpayers and their advisor have the knowledge needed to carry out the activity as a successful business.
• The taxpayer was successful in making a profit in similar activities in the past.
• Activity makes a profit in some years and how much profit it makes.
• The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.
This list from the IRS is comprehensive and beyond helpful, but working with a tax professional to help guide you is imperative. Each farm is different, each financial situation is different, and a tax advisor can help you make the right choices as your operation grows and changes. If you farm for business purposes, your tax burden will be affected.
As always, I am here to answer any questions you may have. Please don’t hesitate to reach out.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.agribusinessaccounting.com or www.HolbrookManter.com.