Farm Expenses

[RMeadows]

I've officially started my farm this year. Got some calves and plan on selling them next year, of course, replenishing the stock hence making in a farm business.

Short of having a CPA do my taxes this year, what kind of documentation do you keep for your farming expenses? [img]/forums/images/icons/confused.gif[/img]

[DUMBDOG]

First of all, buying cattle and selling them the next year does not make you a farmer in the eyes of IRS. You have to do it for a profit. [img]/forums/images/icons/smile.gif[/img]

You need to keep all documentation in regards to any income or expenses that you incur. A separate checking account should be established for your farming business.

When you purchase cattle this year and sell them the next, you are buying inventory and the cost of this offsets the income in the year of sale.

If you do not want to use some sort of preparer for your return, get a good tax program, such as Turbo Tax, available in office supply stores or on the internet. It is very easy to use for the first timer and quite accurate. [img]/forums/images/icons/smile.gif[/img]

[EJB]

As a related question, for anyone that already has an ongoing farming concern, I was wondering if as a farmer you have had any particular problems during the startup phase of farming...the last business I established and ran was profitable the first year, so I had income to offset my expenses, but as I make the transition to farming, it is very likely that there will be several years of expenses exceeding revenues (by a great deal!).

Anyone had similiar situations and used the losses to offset other income? Had any problems with the IRS doing this? [img]/forums/images/icons/confused.gif[/img]

[Gatorboy]

Last year I filed my taxes claiming my new Tree Farm (Sole Proprietorship), and offset my income with the purchase of some seedlings, gas, tree protectors, my Bobcat skid steer (Big $$), etc. There will be several years of expenses before I see my first dollar from any trees that I have planted.

As a matter of fact, the IRS said they found an error (in my favor), and sent me a check for $500+ just last month. [img]/forums/images/icons/grin.gif[/img]

[EJB]

You didn't actually deduct the whole cost of the skid-steer did you? I would gess you at most could depreciate it??

With my other business, I would often "expense" big ticket items under section 179, but you could only do that as long as it didn;'t cause a loss for the business...

I would imagine that if you are starting a tree farming business, you will have years of expenses and be showing *zero* gross revenue...correct?

[Gatorboy]

I deducted about $25,000 of the Bobcat last year, rather than depreciating it over say 5 years. I had a large capital gain in 2001 and used that to offset some of my tax burden.

I am not that up on all the details -- that's what I pay my accounting firm to do. Trust me, it was legal.

With regards to any kind of farming exp. the IRS gets very picky on these if you are ever audited. Yes you can do alot of things if you never get audited. What the IRS is going to go by is how much time did you devote to this business for one. You must spend at least 15-20 hours a week running this business. If you don't they look at it as an investment or a hobby and you can only deduct the amount of expenses that is equal to or less than the profit that you made.

They are also going to look at your business plan. If you are audited they will call in an expert and have them say whether or not you actually had a viable plan. If you didn't you are screwed.

For example on raising calves. If you went out and bought a $20k tractor, $10k in equipment to feed them, etc. but all that could ever be expected from raising those calves was nowhere close to what you spent they will not allow your deductions and you will be liable for back taxes.

Also they are going to look at this as to whether or not you did this to avoid taxes or you did it to make money. You are going to have to show how you became an expert at raising cattle. It won't fly that you just started this and don't know anything about cattle or farming. They will also look at the size of your operation, etc.

Basically what it will come down to is whether you operated your business as a hobby or a true business. They don't care what you think they care what your records show and what their experts say about how you operated that business.

They can also go back many years as well. For instance if you started a business and put alot of capital into it up front and then just abandoned the business after a year or two before you realized your product potential because you got tired of it they can come after you for that as well. The reason being that you did not follow the business plan that you planned out.

You will also have to keep very meticulous records. For instance say you bought a piece of machinery and you took a 100% deduction for your business. If you use that piece of machinery for anything other than your business, ie personal use, you will be in trouble. In that case if you buy say a rotary mower to mow pastures and you use it for other ground not related to the production of those calves, like your lawn or something else, you have to divide that time up and only take the % that is related to your business.

Lastly you will have to keep meticulous records. You need to record every expense and you need to record how each one of those calves does. If you are audited your expenses will be the first thing they go through and allow or disallow. Then they will look at your records for the business. They will compare you with the rancher that really does cattle raising for a living. This person will have kept records on each cow. They will have birth wgts., wgts. of gain, how much feed was put into them, etc. You will be held to this standard for your business. That is something not many people know but it is key to having your own business, esp. when all you show is losses.

Unless you have a significant business, a real chance of getting income at some point, an excellent business plan, and you spend a great deal of time in this business I wouldn't even try it. It's just not worth the hassle for the taxes that you save.

[Gatorboy]

Whew! That was one long post there cowboydoc.

I feel alot better now if I ever get audited. I pretty much have everything covered, based on your post.

[RMeadows]

I guess maybe I worded it poorly. I plan on this year raising and seeling 1/2 dozen steers to get the farm started. I do not want to go in full force and not be able to afford what I am doing. I'll probally have no more that 15 head on my place. 20-25 after calfving before selling them.

As the place I bought needs quite a bit of work and it will take about 5 years to get where I need to be to turn a profit (albeit ever so slight), do you still see this as a problem.

I figure it'll take me 13-15 hours a week on average. I do not plan on big expenses, bought a used tractor for 5k for upkeep, fencing and feed.

I'm keeping a paper ledger of all farm expenses as they come out of my personal account this year. Should I also keep track of my time in a seperate ledger. If so, should I also have my wife track hers. We do not want to make a killing raising beef, just have it pay for it self.

I also do not plan on including the land I bought at all in the equation. What I paid vs what I can make with cattle are no where near each other. I bought the property because I liked it, but want to but it to use. Do you see any issues with that?


I'm not looking for trouble from the IRS, but this is something I always wanted to do and my kids love it as well.

For a small cattle ranch, what kind of business plan do you suggest? I know the old ranchers around I goto for advice to here would laugh if I brought that up.

Thanks

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.