Hobby Farming and the IRS

The following tips by a specialist in extension farm business may help you better understand IRS tax rules that govern hobby farming.

| March/April 1981

If you're a homesteader who also works a full-time job away from the farm, or if like many of MOTHER EARTH NEWS' readers you engage in a "bootstrap business" for extra income, you should be aware of some special regulations set down by the government's Internal Revenue Service.

In particular, you ought to become acquainted with the "hobby farming rules" of Internal Revenue Code Section 183, which state—in effect—that the government won't allow you to claim any loss incurred through hobby or pleasure activities as an offset against other taxable income.

This section was—presumably—created by the IRS to dissuade individuals from purchasing unprofitable properties for use as tax write-offs. However, there is hope for the good-intentioned part-time farmer. If you can simply demonstrate a profit motive to the government, you will be allowed to deduct your farming losses from your non-farm income.

And about the best way I know to show a profit motive is to have records of the net income from your farming activities over a period of time. However, doing so may not be an easy task for the man, woman, or family just starting out on a homestead.

As an aid to such farmers, a "two out of five years" tax rule was enacted in 1969 and revised in 1976. The regulation allows a farmer or part-time entrepreneur to elect —in advance—a five-year period of time in which to show ability to make a profit.

After you've demonstrated that you have a profit motive by coming out "in the black" on any two of the five consecutive years, it will be presumed from then on that you're engaged in the activity for that purpose. Thereafter, the IRS has the burden of proof in any related charge that may be levied against you. (By the way, if your farm activity consists of breeding, training. showing, or racing horses ... you have seven years in which to demonstrate two years of profit.)

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