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.
Reply With Quote
