Del Voight- Penn State Senior Extension Educator
I have a small Angus operation as an extension of my wifes family Angus Farms. My brother in law and father in law both have production Angus farms that produce genetics through bulls that are sold for use on numerous crossbred and purebred cattle farms in the Northeast and as far west as Texas and Montana. Many purebred operations aim at selling bulls and quality hiefers that command a little higher market price. After all they are selected for specific genetic traits that cannot be obtained once cattle are cross bred.
As usual if they do not make it as a purebred due to EPD's or other phenotypical issues they can be sold directly into traditional markets. The question remains many times what constitutes a farming operation. Do they need 100 cows? The average beef herd in Pa is about 10 cows from what I picked up from Dr. Kniffen at Penn State. So what makes a farm a hobby or production? I found this factsheet useful in the discussion. I know that from my perspective I nor my kids and wife do not get up and tend to calving or feeding needs for fun. Perhaps once a year when the weather is nice the cows calved and are on grass and plenty of rain means plenty of forage, then it is fun. Other than that it is work with the hope that a profit will turn to pay the bills. It is however a way of life for many producers. We have to file a Schedule F due to the fact that there is not other place to put our expenses and income for the farming operation. I
So here with is a nice piece discussing the IRS and what they consider a farming operation.
Prepared by: George Patrick, Farm Business Management Specialist The Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.
Reviewed by: Gerry Harrison
Some farms show losses year after year, and there is concern that the IRS may consider the farm a “hobby” or what the tax law refers to as a “not-for-profit” activity rather than a “trade or business.” Classification as a not-for-profit activity restricts the deductibility of many expenses. Activities with significant elements of personal pleasure, like riding horses, are more likely to be questioned. The nine factors test used by the IRS and the tax courts is briefly described below.
Tax Management: Hobby (Not for Profit) Farm vs. Business
Does failure of a farm to show a profit mean expenses are not deductible for tax purposes? Tax law makes a distinction between a “trade or business” and a “hobby.” If an activity shows a profit in 3 of 5 years (2 of 7 years for horse-related activities), the activity is presumed to be a trade or business and all of the expenses are deductible on Schedule F (farm income and expenses). However, if an activity is a hobby, then the deductible hobby-related expenses cannot exceed the gross receipts of the hobby. Furthermore, these expenses, other than interest and real estate taxes, are only deductible on Schedule A (itemized deductions) to the extent they exceed 2% of the total adjusted gross income of the individual.
Failure to show a profit in 3 of 5 years does NOT automatically make an activity a hobby. However, the taxpayer will have the burden of proof that the activity has a profit motive in an audit situation. Part-time and farms involved in “new” or alternative enterprises may be questioned with respect to their profit motive.
There are nine factors that are considered in determination of a profit motive:
1. Manner in which the taxpayer carries on the activity
Does the taxpayer keep accurate books and records? Is the activity conducted in a business-like manner? Does the taxpayer conduct the activity like similar activities that do show a profit?
2. Expertise of taxpayer or his advisorsHas the taxpayer prepared to conduct the business (education, training in accepted practices)? Does taxpayer consult with experts (Extension Educators)? If common production practices are not used, is the taxpayer attempting to develop new or superior techniques that may result in profits?
3. Time and effort expended by taxpayer in the activitySpending a lot of time in the activity, especially if there are no substantial personal or recreational aspects, is indicative of an intention to make a profit.
4. Expectation that assets used in activity may appreciate in valueThis needs to be more than just the value of the land is expected to go up. Will the increase in value of the assets be enough to cover the costs of the