# What happens if you can't make a profit on your farm 2 years out of 5? (long)



## manygoatsnmore (Feb 12, 2005)

I started filing Schedule F (farming) a couple years ago and asked for the 3 year deferral on assessing whether my farm met the definition of a for-profit farm. I just don't know how I can make this farm turn a profit on the goats in only 5 years, yet the definition seems to be making a profit 2 years of 5. I know I'm nowhere near making a profit this year, either. Between the price of feed, new stock I bought, and the depreciation deductions on the stock and barn, fencing, pickup and stock trailer, etc, I can't come even close to making this up in sales of breeding stock or meat/pets/etc. 

This will be the 3rd year I file Schedule F, which means, I think, that the IRS will be looking at my operation and determining if I am a for-profit or not-for profit farm, which makes a huge difference in how I am taxed and what is deductible. I work off farm, and the farm losses to this point have pretty well offset the taxes I would have paid if I didn't have the farm. I am trying to run the farm as a true business, but this early in the process, I'm still growing some of my young stock to see which ones I want to keep myself vs which stock I should sell, and I'm still trying to build a name for my herd that will contribute to being able to ask the prices for my breeding stock that they should command, based on their bloodlines and the milking ability in those bloodlines.

My worry is, if the IRS reviews my farm records and decides that I am not meeting the criteria for a for-profit farm, do I have to repay the difference in taxes between what I paid for the last few years and what I would have paid as a not-for profit farm?  That would be a financial hardship and pretty well wipe out any chance I would have to eventually get my farm on a financially sound footing, actually showing a profit. I know that I can eventually show a profit, once the start-up expenses are depreciated completely, and once I'm producing more of what my goats eat, rather than having to buy 100% of the hay and grain. I highly doubt it will be by next year - and if I have to show a profit 2 of every 5 years, that means showing at least a small profit both next year and the following year. :help:

How do you show the IRS you are serious about farming for profit when start-up costs are so high and it takes so much time to build a farming business of this type? :shrug:

Have any of you been through this and how did you deal with the IRS? I know that there are big farms that never actually show a profit, just borrow more money for the next year. I'm not carrying loans, just paying as I go, if that makes a difference. Any help from tax folks and farmers that are filing Schedule F would be greatly appreciated. TIA. 

BTW, the chickens pay their way and show a very small profit in egg sales, but they are a pretty minor part of the farm operations. I do intend to expand the flock as I can't keep up with demand for eggs, but they won't make up for the losses generated by the fledgling goat business.


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## Wildwood Flower (Aug 26, 2006)

I'm not sure but it seems to me that you don't have to make a profit, you just have to make some income. We raised quarter-horses for years, and believe me, it was never profitable in the long run. (Don't tell DH that...shhhhh.)

However, we continued to use the expenses as deductions all along.

Let's put it this way...they surely want a piece of your income, so they can just take your expenses too--that's the way I've always looked at it anyway.


And what is profit? If you had to make a profit within 3-5 years, and were considering your up-front expenses to start a business--well, very few could do it.

Like I said, I'm not expert...but I surely wouldn't worry about it. Just make some income and you should be fine.


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## CraftyDiva (Aug 26, 2003)

Don't know about farming, but any new business has 3 yrs to show a profit. If after the 3 yrs your unable to show a profit, the IRS considers it a hobby and not a business. The profit could be as small as $1, but it must be profit.

If IRS deems it a hobby, you maybe liable for taxes on the deductions you took in the first 3 yrs. 


.


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## Jennifer L. (May 10, 2002)

Well, if it's two years out of five, I would think you've got until five years are up to show what you are doing. I think intent has a lot to do with it, as well. If you are really trying to make a profit and aren't just fooling with the farm then it should be pretty plain to see. I don't believe it's just that cut and dried.

Jennifer


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## Jenn (Nov 9, 2004)

1- if this is your year 3 you don't need a profit until year 4 and 5 so relax this year

2- I've had neighbors with outside jobs who ran sched F losses or minimal profits for many more than 3/5 years. Just be ready to pay the extra taxes in year 4 or later if they audit you and deny you the Sched F deductions. And have business plan etc. drawn up to prove you aren't just goofing off and you actually expected profits or income by year 4...

3- Have you amoritzed your start up costs- ie you deduct them over several years not up front?

4- If you don't see a profit in this anytime soon, should you stay in this scheme- are you just throwing more money away and it's gone from calculated risk to absolute waste of money? Or do you want to do this even if there's no profit in which case maybe it is just a hobby?


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## ET1 SS (Oct 22, 2005)

There was a time when you had to show a profit once every three years, then 2 out of every five years.

Alas such is no longer the case.

You need to be functioning as if you have the 'intent' to make a profit.


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## uncle Will in In. (May 11, 2002)

I never made a profit on my farm for 0ver 20 years. When all the expenses and depreciation were deducted I went in the hole. This loss was deducted from my union wages and reduced my total taxes. After I started cash renting the ground it cut out most of the expenses, and I have been showing a profit every year. Never had a complaint from IRS.


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## Kim_NC (Sep 5, 2007)

If you don't want to "take any risks with the IRS" possibly declaring your farm a hobby and not a business, then you could make it show a very small profit by not deducting all of the expenses in these next 3 tax years. CraftyDiva is right, anything $1 or more is a profit.

Here's an article by T McConnell at the WV Extension Service that addresses this issue. He seems to feel the IRS is more resonable about the Section 183 rule than farmers think. He recommends writing off the losses even if you don't have a profit 3 of 5 yrs. Even though you're in WA, his article is still relavent as we're talking federal tax law (not state): 
http://www.wvu.edu/~agexten/farmman2/taxes/IRStest.htm

He outlines 9 points the IRS uses to determine if the operation is "for profit" when you have not met the 3 of 5 yrs general guideline. It's worth a read.


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## fellini123 (Feb 2, 2003)

Well not a farm, ut we had a boarding kennel. Same rules. We were audited in the 5th year, and although we made a profit every year we turned that profit right back into the business enlarging the kennel, putting roofs over the kennel runs etc.
Even with all my books, and I had everything saved and documented they considered us a hobby. 
Yeah right getting up at 6 AM everyday cleaning kennels, dealing with crazy owners, etc etc a hobby.
Well we had to pay the difference for the past years, and I decided to close the business as it was not worth my time to do all the work and not be looked at as a business.
My suggestion is, make a profit, even if that profit is only on the books. In other words do not claim everything you are entitled to and make a profit of a little bit.

Alice in Virginia


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## Mike in Ohio (Oct 29, 2002)

manygoatsnmore,

If you make a profit 3 years out of 5 then the IRS presumes that you are a business. If you don't and they audit you then you have to show that you have been running your activities as a business. Things that show this include your record keeping, marketing, training, etc.

Farms tend to throw off a lot of depreciation. This makes it difficult to "show a profit". Just our 3 barns and silo throw off a lot of depreciation. Then add in the fact that this is the first year that we haven't bought any additional land (4 parcels in 4 years) and add in interest expense on the mortgages.... Let's just say we won't likely show a profit for at least a few more years.

I'm comfortable that if the IRS audits us we can show that we have engaged in our farm activities in a bussiness like manner with an eye to profit. The fact that we are giving up current profits to build up for the future is part of our documented business plan.

We update our business plan every year (in writing) just after we do our taxes. We review what went right the previous year and what was problematical. We then prepare a plan for the coming year.

Mike


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## ET1 SS (Oct 22, 2005)

Since 1985 our primary activity [outside of my career of course] has been with Schedule 'E's [Multi-Family-Rentals] and they always show a loss in our book-keeping.

We also run a couple of Schedule 'C' and 'F' concerns each year, and they usually all show a loss.

Granted with our 'C's and 'F's we run at a loss for a couple years, and shut them down for a year, to restart again the following year. We have gotten into the habit of never running a 'C' or 'F' at a loss for greater than three years.

We have been audited three times. However the auditors have never really questioned our 'E's showing a loss. Whether they are a business or not, has never appeared to have been a topic. This may simply be the nature of apartment buildings. But the depreciation loss is large; tenants are generally known for tearing up rental units, so repair expenses are expected to run as a consistent expense, etc.

Each of our audits has been really just a review of where our numbers were all coming from, and what our books looked like [not all sets of our books, but one set of our books].

The auditors have always increased our refund.


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## sheeplady (Oct 31, 2003)

I too have had the same situation, running our sheep farm/beekeeping business. I use a professional tax preparer / consultant through the Farm Bureau here. The cost is also for my peace of mind in case IRS audits me. 
According to him, as long as I show good intentions  I don't have to show a profit every year or even 2 out of 5. . That includes good record keeping, some kind of substantiation that I am trying to keep this a viable farm operation. For me that includes using vet services as needed, belonging to some farm orginazations,attending some farm related seminars (this past year went to several on rotational grazing and grass based production.) 
Of course the bottom line is that I really work hard trying to make this a profitable enterprise. 7 days/ 24hours a day job. Realistically how many farmers go into it just for the $. You have to love what you are doing and that is part of the non monetary reward. My relatives of course think I am crazy.


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## pixelphotograph (Apr 8, 2007)

If you arent making a profit maybe you need to sit down and figure out where you can cut some corners and see where you are loosing money at.
Figure out what is costing you so much and figure out a way to reduce that cost.
Wish you luck.


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## cast iron (Oct 4, 2004)

I wonder about travel expenses related to the schedule F concerns. We will be filing schedule F on a few head of cattle operation on one of our properties, to which we are absentee owners. It sure would be nice to get some relief from the fuel costs associated with traveling down there all the time to tend to things.


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## Cheryl aka JM (Aug 7, 2007)

I'm a little worried about taxes this year too. I previously had my reptile business liscensed in CA~ paying my quarterly taxes to the state and taking my deductions from federal for the last two years. With the move this year~ I was not making any sales at all and I didn't know what to do about moving the "business" on paperwork so I disolved it with the state of California~ filed it as a closed business due to lack of sales.

I don't know what is going to happen with my federal taxes now

and with the homestead now......can I file my reptile and rodent breeding sales in 08 as farm expenses and profits? Or do I take out a business liscence again and file as a small business providing pet supplies?

This years taxes are going to be a nightmare!


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## ET1 SS (Oct 22, 2005)

pixel photograph said:


> If you are making a profit maybe you need to sit down and figure out where you can cut some corners and see where you are loosing money at. Figure out what is costing you so much and figure out a way to reduce that cost. Wish you luck.


You are associating 'showing a profit' with your ability to earn a living and to gain Net Worth.

The two ideas are not the same.

A person can earn a living; support his family; gain equity and build Net Worth; all while maintaining his business showing a zero profit or a Loss.

A paper-loss can be a beneficial thing to shelter other income sources.


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## ET1 SS (Oct 22, 2005)

Wayne02 said:


> I wonder about travel expenses related to the schedule F concerns. We will be filing schedule F on a few head of cattle operation on one of our properties, to which we are absentee owners. It sure would be nice to get some relief from the fuel costs associated with traveling down there all the time to tend to things.


Do you have an office in one location that you must first go to and perform paperwork, then a secondary job site where you must travel to in order to conduct business?

So long as your travel is between two business locations, then you know the answer.


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## cast iron (Oct 4, 2004)

ET1 SS said:


> Do you have an office in one location that you must first go to and perform paperwork, then a secondary job site where you must travel to in order to conduct business?
> 
> So long as your travel is between two business locations, then you know the answer.


Hmm, well, sorta, I guess... The paperwork for the farm business is located in my office which is in my detached shop building at my primary residence. This is where I do the "bookwork", such that it is. Although many times I will take the farm files and my laptop with me to the farm property because it seems I always need something from the files while working down there.

However, the actual farm property with the cattle on it is 2.5 hours travel distance from said primary residence. Of course the farm property does not have a permanent address.


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## Cheryl in SD (Apr 22, 2005)

Is there any reason you have to claim all those deductions/expenses as business expenses? At least by the end of year 4?? 



> Between the price of feed, new stock I bought, and the depreciation deductions on the stock and barn, fencing, pickup and stock trailer, etc, I can't come even close to making this up in sales of breeding stock or meat/pets/etc.


Do you have to show as much depreciation? Do you use your pickup as a personal vehicle or a farm vehicle? Books can usually show what you need them to show within reason. It would seem that you by the end of year 4 you should be able to sell enough stock to show at least $1 in profit. It would seem that by year 4 you shouldn't be buying all that much new stock, and your sales should be up.


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## missysid (Feb 21, 2006)

We never claim everything we can in our farm business. In the last 6 years we have shown a profit 2 times. Last year we did not so this year we are not turning in most of the expenses. Just the depre. schedule and all of the income (even that was low with hay crop the way it was). Our accountant is great and has helped us work things out the best way she can. She is a 4th generation farmer and breeds quarter horses so we have the best of both worlds. 

My suggestion is to find an accountant that is not only highly recommended but very familiar with the ins and outs of your business type. She thinks of deduction we would have overlooked and advises how the IRS views other deductions as she is only working with Farmers.


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## ET1 SS (Oct 22, 2005)

Wayne02 said:


> Hmm, well, sorta, I guess... The paperwork for the farm business is located in my office which is in my detached shop building at my primary residence. This is where I do the "bookwork", such that it is. Although many times I will take the farm files and my laptop with me to the farm property because it seems I always need something from the files while working down there.
> 
> However, the actual farm property with the cattle on it is 2.5 hours travel distance from said primary residence.


Then you're set.

One thing though, you keep talking about this 'primary residence'. Got to stop that, no body cares about the distance from your home to this other place. The critical distance is between your office and your farm property.


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## ET1 SS (Oct 22, 2005)

Cheryl in SD said:


> Is there any reason you have to claim all those deductions/expenses as business expenses?
> 
> Do you have to show as much depreciation?


You do if you want to keep paper-losses high.


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