Farming is a pleasure activity for some individuals, and for others, it’s how they support themselves. If you farm for profit, how do you prove it to the IRS?
Sometimes farming can be viewed as a hobby by the IRS and any losses are disallowed on your tax return. However, if you farm for profit, the profit is taxed and losses are deductible.
A farm is considered a for-profit farm if income exceeds expenses at least three out of five consecutive years. If there is no profit for at least three out of five years and the farm is audited by the IRS, the farmer must prove it is an active farm. The following are a few ways to help prove that you are farming for a profit:
- Maintain books and a checking account for the farming activity. These accounts should be separate from your personal accounts.
- Keep a written business plan that includes short and long term projections of how a profit will be made. The prediction of your profits needs to be realistic.
- Document the time and effort expended farming along with the use of any farming experts. Employing qualified individuals to help in the farming activity can reduce the amount of time spent farming.
These are just a few of the things that should be maintained in case the IRS audits your farming activity. Please contact your Rea & Associates advisor if you have questions regarding ensuring your farming activity is considered an active business.