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Re: Farm Expenses
Ok first of all what you have to do is make it REASONABLY ALL PEN OUT ON PAPER. What I mean by that is when you put a pencil to this and you say for five years you aren't going to have a profit well at the end of the five years you better have a heck of a profit or a good reason why not. If your profit from 20-25 head is only going to be say $3000, and that's dang good, then you can't logically go into debt more than this to run that business. The IRS sees that as a vain attempt to operate at a profit. For instance if I write off $50k worth of expenses then where do I see a profit? You never will with only $3k of potential profit. The reason you have to have a business plan is because you are what they would reasonably call a hobby. The rancher that only ranches for a living and raises 500 head of cattle and has 500 acres of land, etc. obviously he is in this for a living. Now the guy that has 20 head of cattle and makes a living at his full-time job why is he going into business of raising cattle? You have already said you want to do this because it's something you and your family enjoy. That's great but the IRS doesn't see it that way.
Now you said your place needs alot of work. The IRS is also going to hold you to only taking those deductions that directly related to the production of your cattle. For 20 head of cattle then what do you really need? You have to justify the expenses you took as to what were reasonable for that production.
As far as a ledger goes that is exactly what you need to do. As far as keeping track of hours yes that will go a long way as well.
You'd be surprised about the old guys. To do any type of loans through FSA or the bank you need a very detailed plan of exaclty how it is all going to pay on paper.
If I was in your shoes I would just do it all off the books. For 20 head of cattle take the money you do make and put it in your pocket. If you do want to do it basically it's not as hard as you think. You need to sit down and plan out all of your expenses. Then you have to plan all of your profit. Then you have to say how you are going to make this happen. There are several books out there on doing this.
Now you certainly don't have to do a business plan but if you ever get audited you will wish you had done one because it goes a long way in showing the IRS that yes you did have a plan to make money and not just show a loss every year.
The other thing you can do is just have the business as a hobby. As this you can still claim all of your deductions but just up to the point where expenses equal profit.
I can tell you from raising cattle all my life that there isn't very much profit in it. We figure if we make $50 profit per head/ year that is an excellent year. It usually never works out that way. What most people only figure is what you have to feed. But on top of that is worming, vaccinations, veterinarian expenses, unexpected deaths, hitting the market right, etc. It's tough for sure.
By all means I'm not trying to discourage you from doing it but just go to the IRS webpages and read about this very same thing in story after story. Plus I've seen it with alot of people. I've known people that thought they had it all figured out and bought all this fancy machinery, builidngs, etc. and then expected to take it all off as expenses by raising a few cattle and horses or something else. The IRS just doesn't see it that way.
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Re: Farm Expenses
Hire an accountant today or start shopping for a bankruptcy lawyer tomorrow. Old saying but very true. I beg you to at least find one that knows their way around a Schedule F and go talk to them. Don't think of them as a tax accountant either, you want to hire a CFO for your farm that can answer any financial question and provide profitable suggestions. All for a couple hundred bucks a year it's a no-brainer. There's another old saying about lawyers and accountants.. if you THINK you might need one... you do.
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Re: Farm Expenses
You might want to consider classifing it as a hobby, I believe you can deduct any expenses from what you make, you cannot show a loss, but you don't have to count any income (al long as you spend more then you make that is).
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Re: Farm Expenses
Hire a CPA. They aren't that expensive, considering the peace of mind you'll have not only knowing you have taken advantage of all that you can, but also that you haven't dug yourself a hole with the IRS.
So much of the tax law is subjective, such as when a farm is business, and when its a hobby. I can look at a situation and give advice on what to deduct, and what to leave on the table, what expenses are proportionally reasonable and which ones are not, etc. This is because I and other CPAs like me see literally thousands of situations over a career, and we have a very good feel for what your best position will be. That doesn't always mean taking all seemingly available deductions, and piling on the IRS. The objective is to pay the least amount of tax, but to try not to get examined, and if it happens, have something to hang your hat on.
I would suggest you play around with your taxes using Turbotax, but tax software does not make a professional tax preparer out of you any more that Quickbooks makes you an accountant. I'd say the number of client drafts I've seen that were done on Turbotax, and that don't need any changes for the filing version, is pretty close to zero.
You wouldn't operate on yourself, you'd go to the doctor. Unless your situation is very simple, hire the professional. He/she will keep you out of trouble.
Alan L. - Texas
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Re: Farm Expenses
I concur with Alan L - Tax avoidance is legal, Tax evasion is not. Go with a professional to make sure you stay on the legal side and avoid any painful ramifications for not understanding all the nuances of the tax code.
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Re: Farm Expenses
While I don't disagree with cowboydoc on his very informative and detailed response to the question, I find his opinion on what is required by the IRS unsettling.
How many 100's or 1000's of companies in the last ten years (i.e. dotcoms) burned thru billions (if not trillion [img]/forums/images/icons/shocked.gif[/img] ) of dollars in the last several years on business that never made a penny, never had the hope of making a penney, and never will make a penny, have been classified as "hobbies" by the IRS?...my guess would be *none*.
Why is it that corporate exec's can burn thru billions of dollars running up expenses and spending money that absolutely no one beleived could actually justify the amount of money invested in the first place, but the small/part-time farmer trying to make a living, or at least break even, needs to live in fear that the IRS will come after him and say the $15K tractor he bought was a sham and a way to avoid taxes??
In the dotcom world you had companies burn thru $50Million in expenses and never even GROSSED more than 100K per year (if anything).
Yet, if we are to beleive cowboydoc ( and I think he is probably right), if you or I invest 100K in farm equipment and never make more than 4-5K per year, we would be liable for all kinds of back taxes and penalties if they IRS decideds to reclassify our farms as a hobby.......great country we live in... [img]/forums/images/icons/mad.gif[/img]
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Re: Farm Expenses
EJB,
I pretty much agree with your post. There are companies out there pissing away more money in a week than I'll ever make in my lifetime.
Just get yourself an accountant, and follow the rules and everything will work out just fine. [img]/forums/images/icons/smile.gif[/img]
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Re: Farm Expenses
Alan is right and that's where I've learned alot of what I know. I went out and hired the best one that I could find. The money spent on a good accountant is really money in the bank.
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Re: Farm Expenses
Cowboydoc is correct. Get yourself an experienced CPA, and follow his/her suggestions closely. My father worked for the New York State Tax Dept, and his job was to coordinate state actions with the IRS. The IRS finds it easier to go after many small businesses than big corporations. The big corporations can hire the high powered law firms to find loopholes that average people can't. Save yourself a lot of grief. Accountants are well worth the money!
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Re: Farm Expenses
EJB,
If you look they are being held accountable if they get caught. I also know alot of people that have never gotten audited and take all kinds of exemptions and never get audited, but if they did they would be in big trouble. What I talk about is if you get caught. If you never get caught take all the deductions you can. But if you are ever audited then you better have your ducks in a row. If you do have your ducks in a row you won't have anything to worry about. That's what I try and explain to people about farming and taxes. Hope for the best and prepare for the worst.