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Hobby Farming vs. Business Farming & How to Treat Each for Tax Purposes


IRS Definition of a Farm 

IRC Section 2032A(e)(4): The term “farm” includes stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands.

Special Tax Treatments for Farms

  • Special Estimated Tax payment modif: If more than 2/3 of gross income comes from farming, farmers can make 1 estimated Payment or pay in full rather than 4 quarterly estimated payments.
  • No capitalizing of current year Fertilizer & Lime.
  • Safe harbor for bus use of farm vehicle – 75% without normal log.
  • Bad weather/disaster –
  • may postpone gains (if qualify)

Hobby Farming or Business Farming?

The key distinguisher for hobby farming is that it is not for profit motive. Hobby farming is primarily for pleasure or recreation. If generating income refer to Form 1040, Misc. income and Schedule A, Subj to 2%, for expenses.

IRC Definition in Pub. 225 for Business Farming: “You are in the business of farming if you cultivate, operate or manage a farm for profit, either as owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. It also includes plantations, ranches, ranges and orchards.”

Schedule F is used to report farming activities. Part 1 and 3 are used to calculate income (cash or accrual, using “Crop” Method), and Part 2 is used to calculate expenses (prepaid farm supplies, labor, repairs, insurance, rent or lease, taxes, etc). Schedule J allows income averaging for current year over the past 3 base years. Other forms for Farming include Publication 225 Farmers Tax Guide, Form 4136: Credit for Federal Tax Paid on Fuels, and Form 4835: Farm Rental Income and Expenses.

Have more questions? Tune in for tomorrow’s NSA Webinar

Jolly Ranchers: Schedule F & J
Thursday, Sept. 22, 2:00pm – 4:00pm EST

IRS CE: 2 Hours Federal Tax Law / NASBA CE: 2 Hours Taxes

You will learn:

  • Identify what farming is for tax purposes.
  • Recognize the difference between hobby farming and business farming and how to treat each for tax purposes.
  • Be equipped to prepare Schedule F
  • Explain the Optional SE for Farmers
  • Discover an oft-overlooked tax saver for farmers
  • Describe how to treat various farming compensation or subsidy payments, depreciation of farm assets, and labor costs.

#taxpolicy #Education #Tax
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