Hobby Farming and the IRS
(Page 2 of 2)
March/April 1981
By Stephen R. Sutter
[1] The manner in which the tax-payer conducts his or herfarming activity. Is it businesslike? Are detailed financial records kept? Are those records separate from those of personal financial activities? (For instance—although many full-time commercial farmers fail to do so— you should keep a separate checking account for your agricultural activities.)
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The IRS will also note any strategies you've used in attempts to make a profit. An auditor may disallow losses, though, if it appears that your activities are "preparatory" to carrying on an enterprise instead of constituting "on-going" business.
[2] The time and effort the taxpayer expends in the business. Naturally, being able to show that you've devoted an impressive amount of management time and physical labor to your hobby will be to your advantage.
[3] The expertise of the taxpayer or of his or her advisors. The extent of your background in farming will be weighed carefully. (If you are inexperienced, you might consider hiring a professional manager or consultant to give credibility to your claim.)
[4] The taxpayer's pursuit of knowledge concerning his or her business activity. It will be to your advantage to make a continual effort to become educated in both production practices and management techniques. Your county extension agent can suggest appropriate publications, courses, and meetings.
[5] The presence of a taxpayer's residence or recreational facilities on or near the farm. The absence of a "showplace" appearance to your working acres will be a definite plus ... but, although the fact that your personal residence is on the farm while your primary occupation is off the farm may be viewed negatively by the IRS, it shouldn't override the other factors already mentioned.
NOTHING REPLACES RECORDS
Of course, farming isn't the only activity covered by the IRS "hobby" regulations. Many part-time pursuits have elements of pleasure and can be profitable as well. Always keep good records of any of your business transactions, so that you can—perhaps—make use of the tax savings that may result from a loss in your hobby or your bootstrap business.
EDITOR'S NOTE: See page 82 for tips on keeping accurate and easily accessible tax records .
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