The IRS taxes hobby farms differently than businesses.
Like other endeavours, the Internal Revenue Service (IRS) places farms into two main categories for tax purposes: not-for-profit activities, also known as hobby farms, or trades and businesses. If you own a farm, determining whether it is a hobby farm or a business is vital in determining your tax liability. Hobby farms are taxed much differently than businesses, so talk to a tax attorney or accountant if you need assistance with a hobby farm tax issue.
Hobbies and Businesses
The IRS considers a farm a hobby when it fails to meet specific criteria that a business or trade must meet. There are nine factors the IRS uses to determine the status of a farm, which include: the manner the owner operates the farm, the time and effort the owner spends pursuing or working on the farm, the owner's success in similar activities and the farm's history of profits or losses.
Deductions
Whether a farm constitutes a not-for-profit endeavour or a business or trade is significant in that it affects what kind of tax deductions an owner can take. According to the IRS, farm businesses or trades can deduct a variety of expenses from their taxes, such as wages for laborers hired, expenses for repairs and maintenance, breeding fees, lime and fertilizer costs and a variety of other expenses associated with running a farm. Hobby farm owners cannot deduct many of these expenses.
Proffit
Some people who own a small farm or run a farm in addition to other businesses or employment are concerned that if their farm does not show a proffit that the IRS will no longer consider it a business. Part-time or small business farmers who do not show a profit in three out of the previous five years may still consider the farm a business or trade for tax purposes, according to Purdue University, but these farmers have the burden of proving to the IRS that the owner operates the farm with the intention of profitability if the IRS ever audits the owner.
Transitioning
Even if you own a hobby farm, that doesn't mean you are condemned to the same tax status forever. You can change a hobby into a business if you can prove to the IRS that you meet the standards for a business or trade. To do this, you can take steps such as implementing a business bookkeeping system, keeping accurate records, keeping business and personal expenses separate and hiring professional advisers such as attorneys or accountants who can advise you about the business of farming.
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