Don’t Be A Hobby Farm
Many of our readers will ask us questions about starting a farm, however, when discussing it with them, many of them are talking about a hobby farm and not a real farm. For tax purposes, a hobby farm has some very unfavorable consequences to the farmer. Net income is always reported, however, a net loss is limited in zero.
Therefore, how do you make sure that your farm is a farm and not a hobby. Here are several items to keep in mind:
- Your intent of the farming operation is to make money, not create a tax loss.
- You must run the farm like a regular business. This means having a separate checking account for the business; do not commingle personal funds and farm funds together; have letterhead and business cards for the farm, etc.
- If the operation runs at a loss for several years, you must be able to document how the farm will finally make money. In some cases, showing how you have created extra value in the farm when it will be sold will be sufficient, but be ready for an audit if the farm shows too many years of losses.
- A horse farm has a greater chance of being determined as a hobby farm.
- The size of the operation can affect the hobby status. It is fairly hard to argue that a 2 acre garden plot is a farm (however, in some extensive forms of farming, this can be true).
Remember, the key point to ask yourself, is this truly a operation operated like a farm business, or is it merely intended to create a tax loss. If it is the latter, then it is more difficult to not treat as a hobby.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
We are about the file our fifth year of farm taxes, we’ve both been working full time off the farm trying to get infrastructure in place. We keep separate financial records and bank accounts for the farm, we are a listed LLC, we have logos etc. We do sell some products but it hasn’t been much due to working full time. This year I am making the leap to farm full time. Question is- are we too late? Are they going to claim we are a hobby and not a business because of the 2 years out of 5 years profit rule? Thanks very much for your opinion!