Words to the wise on filing federal taxes for your farm business, part III

Words to the wise on filing federal taxes for your farm business, part III

In the last two columns, I’ve discussed how important it is to keep appropriate and sufficient records for your farm business.  However, if you’re growing a small crop for recreation or for family and friends, for example (and have no intention of making a profit), then your farm might be classified as a hobby.  But that doesn’t mean it will always be classified this way.

TIP THREE:  When your hobby might be classified as a business

If you received a profit in the last three out of five years (including the current year), the IRS will classify the operation as a business.  I should note that for an equine ranch, the standard is two out of seven years.  But wait, there’s more.  If you past this first test, your hobby might still be considered a business by the IRS.  Below are some questions you should ask yourself.  These items are some of the criteria used to determine if your hobby is currently classified as a business.

  • How much is my farm conducted in a businesslike manner?
  • How much time and effort do I invest on the farm?
  • What’s my dependence on the income generated by the farm?
  • Are my losses due to uncontrollable circumstances or could they be compared to a business?
  • Have I made a profit on similar farms, crops, or ranches in the past?
  • Have I recently made any efforts to improve profitability?

Remember, no single reason changes the classification of your farm or ranch from a hobby to a business, but rather many variables are considered.  If you are concerned that your hobby might be graduating to the classification of business, don’t hesitate to consult a tax professional.

CREDITS

column by STEVEN E. CRISMAN

BIO: Steven Crisman is the managing partner of Cross, Fernandez & Riley, LLP’s (C/F/R) Winter Haven office and leads their Agriculture Practice Group.  He primarily serves the agriculture, manufacturing, warehousing, and distribution industries.  He has specific experience with citrus growers, cattle ranchers, citrus and other horticultural nurseries, citrus harvesters and other support industries as well as watermelon, blueberry and other growers.   In addition, Steve provides comprehensive tax and estate planning, attestation and business succession planning services.