Many of our readers will ask us questions about starting a farm, however, when discussing it with them, many of them are talking about a hobby farm and not a real farm. For tax purposes, a hobby farm has some very unfavorable consequences to the farmer. Net income is always reported, however, a net loss is limited in zero.
Therefore, how do you make sure that your farm is a farm and not a hobby. Here are several items to keep in mind:
- Your intent of the farming operation is to make money, not create a tax loss.
- You must run the farm like a regular business. This means having a separate checking account for the business; do not commingle personal funds and farm funds together; have letterhead and business cards for the farm, etc.
- If the operation runs at a loss for several years, you must be able to document how the farm will finally make money. In some cases, showing how you have created extra value in the farm when it will be sold will be sufficient, but be ready for an audit if the farm shows too many years of losses.
- A horse farm has a greater chance of being determined as a hobby farm.
- The size of the operation can affect the hobby status. It is fairly hard to argue that a 2 acre garden plot is a farm (however, in some extensive forms of farming, this can be true).
Remember, the key point to ask yourself, is this truly a operation operated like a farm business, or is it merely intended to create a tax loss. If it is the latter, then it is more difficult to not treat as a hobby.
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