Tax Filing and Deductions
If you determine that your hobby farm is a hobby, you’ll need to file a tax return and report any income or expenses related to the farm. The rules for hobby farms can be complex, so consult a tax professional. To claim expenses from hobby farming as a tax deduction, you need to demonstrate that you turned a profit from your farming activities or were trying to.
Hobby farm profits are reported under “Other Income” on Form 1040, and farmers are required to use Schedule F to detail profits and losses. It’s important to keep accurate records of all farming activities.
Deductible Farming Expenses
- Feed
- Fertilizer
- Seed
- Wages to employees
- Interest paid on loans
- Depreciation to recover equipment costs
- Utilities
- Insurance premiums
You can deduct these expenses even if they exceed income, allowing a farm operating at a loss to offset your overall tax burden.
Distinguishing Between Hobby and Business
To get tax breaks, you need to prove your farm is a business by demonstrating intent to make a profit. The IRS guidelines outline that a farm owner is considered a farmer if they "cultivate, operate or manage a farm for profit."
The IRS has specific guidelines to determine whether a farm is considered a hobby or a profit-making enterprise. It’s crucial for farmers looking to maximize income and minimize tax burden to understand the difference.
Profitability Requirement
The IRS considers a farm to be a non-deductible hobby if it doesn’t produce a profit for three out of five years. Farms breeding horses have an extended profit ramp-up stage, requiring a profit in two out of seven years.
If the IRS can prove there’s no intent to make a profit, or that there’s an attempt to generate tax losses to offset other taxable income, the activity is assumed to be a hobby, and all deductions are disallowed.
Reporting Income and Expenses
- Profitable Hobby Farm
- Income: Reported under "Other Income" on Form 1040.
- Expenses: Detailed using Schedule F.
- Non-profitable Hobby Farm (Possible Disallowance of Deductions)
- Importance: Valid record-keeping to avoid disqualification by the IRS.
Publication 225 outlines factors considered by the IRS in determining if a farm is a hobby or business, and farmers can contact the IRS for further assistance.