The Internal Revenue Service sets out specific tax guidelines for homesteaders and hobby farmers — and it’s important to understand them. Why? Because those who qualify could benefit from particularly hefty tax breaks.
But tax laws are complicated at the best of times, and let’s face it, nobody looks forward to tax season. So, industry professionals banded together to provide some quick tips and tricks to make doing taxes that little bit easier.
Hobbyist or Farmer
Definition is always crucial in the tax world. Therefore, people must decide whether they’re a farmer or a hobbyist with a small farm business or a hobby farm.
The difference? Profit.
As per Internal Revenue Code Section 183 (lovingly known as the hobby farming regs), the government prevents hobbyists from claiming any incurred losses from their pleasure activities. This was likely formed to stop people from buying unprofitable properties as tax write-offs.
The IRS considers farms that profit three out of five years a business. Although, this rule changes slightly when the farm breeds, shows, trains, or races horses. In this case, profit must only be made two out of seven years.
While that may be disappointing to hear, there’s still hope.
Intention Over Reality
On the surface, farms that turn a profit are businesses, and those that don’t are hobby farms. However, it’s really about the intention to make a profit.
Farms demonstrating their motive to make money are allowed to deduct losses from their income.
Experts encourage those wishing to claim to keep accurate records of equipment costs, labor, maintenance, seeding, and other factors deemed relevant. Plus, the IRS states farms must raise poultry, fish, or livestock or grow fruits and vegetables to fit into the agriculture category during tax season.
The Dreaded Hobby Farm Label
People set on claiming farm income for tax reasons should steer clear of the hobbyist label. The IRS considered hobby farms to be those that produce food for themselves and doesn’t make a profit.
On the other hand, most taxation agencies don’t use the term homestead. So, farmers must identify whether they’re a “small business farm” or a “hobby farm” for tax purposes.
Zoning Matters
No matter the type of farming operation, checking local zoning legislation before completing tax paperwork is critical. Some areas don’t allow farming, putting those who attempt to claim farm income at serious legal risk.
In non-agricultural zones, running a hobby farm isn’t usually an issue. But, as previously stated, those who fit this category should not be trying to claim income or deductions anyway.
Tax Breaks and Hobby Farming
Every state boasts tax breaks for agricultural operations and land. However, the specifics change from state to state.
To qualify, most state rules require a certain amount of in-use land. Depending on location, they may also need a minimum income requirement to offer breaks. In other words, the farm must be a business, not a hobby, as previously mentioned.
Like any business, farms can deduct ordinary and business outgoings required to run the operation, such as:
- Irrigation
- Utilities
- Services like breeding or veterinary care
- Equipment including tractors and silos
- Animal feed
- Livestock for resale or business need
- Loans and interest
- Labor expenses
Provided state rules allow it, farms can qualify for property tax reductions too.
The Greener the Better
Those who forgo their lands’ development rights could benefit from additional tax breaks. Some small farm businesses also decide to donate an easement to charitable land trusts for added benefit.
While it does lower the property’s market value, farmers reap the tax deduction rewards.
Accountants Make Tax Season Easier
Farmers love doing things themselves. After all, starting a homestead or farm is no small feat! But getting a tax professional involved will likely pay off.
Accountants are well-versed in uncovering tax breaks and deductions. Plus, they can effortlessly spot tax return mistakes, potentially saving farm owners hundreds in fines and penalties.
It’s All About Records
At the end of the day, successfully completing tax season, regardless of the business type, is all about records. Professionals encourage people to clearly document all business transactions, letting them reap the money-saving benefits of deductions and write-offs.