Our Animals Come Tax Time

[Egg_Newton]

So, I started my taxes this morning and it occurred to me even though I'm not really in this for the money and to make a business out of it there is a possibility of a profit to be made and a much greater possibility of a tax write off in my back yard. 2012 was my first year really investing in goats. With all the feed supplies animals supplements etc it can be an expensive hobby to start up but if I classify it as a business I can write off that expense and keep a really close eye on my sales and expenditures to see if I actually do make a profit. I'm curious how all of you handle your herd at tax time?

 

[goodhors]

Any livestock is an expense, we turn no profit on them. Money spent is just
like other folks would count towards Entertainment. We entertain ourselves
with the livestock! We have never tried to use them to go the business route.

Unless you have a business plan, have a REAL way to turn a profit with the
animals, you probably shouldn't try using them as business expenses. Almost
100% guaranteed to be audited. With no real plan, you will probably not get
the allowances. And in "real life" the folks who jump into animals like
goats as a business, jump out again when they get overwhelmed by the
time needed to BE a business. Sucks you dry with the work, constant
demands from all parts of the system. Cleaning, feeding, handling milk,
selling offspring, getting in hay or feed, losing animals with NO days off.
They are then a job, including HARD WORK, not fun anymore.

What we tell folks who are gushing about how they "LOVE" their livestock,
intent on building herds, flocks, is to STOP! Then we ask pointed questions
about their Goal for these ever increasing numbers of animals. Stuff like
"How many horses can you ride in a day or a week? Why can't you own ONE
horse who does several things, instead of a horse for each job?" Others
would be "How many goats can you milk in a day? CAN you eat those baby
goats that come from breeding the mothers you want to milk? Who will BUY
your extra goats? How MUCH does it cost to feed ALL these goats (or sheep,
or chickens, ducks, geese, cattle) in a week? Do you LIKE fixing fence, shoveling
coops out, dragging bales around?

Unfortunately, they tend to go crazy with quantity, overload themselves, their
smaller acres, so they burn out as fast as they jumped into the owning thing.
Our questions are to make them THINK, get answers, before they are
overloaded. All this animal keeping REALLY cuts into free time, time with the
kids, visiting family or other activities they USED to enjoy. I see maybe 1 out of
15 folks who still do livestock in 6 years. Others dropped out, dumped animals
at a loss just to get them gone. Lot of wasted money, though they had fun for
a while. They never seem to do things in a small way, just jump in with a big
splash in buying better stock, improved fence, buildings, ways to haul the animals.

You might better put the cost of your animals in the Grocery column, think of it
as part of your food expenses for better living.

I wouldn't even try to use them as a tax deduction, you are not a business. I wrote
all the same kind of thing on Hobby Farms Tax:

http://www.backyardherds.com/forum/viewtopic.php?id=24378

 

[Egg_Newton]

Wow, that was depressing.....

Okay so not a tax write off. But, I still want to track profit vs. cost for my own curiosity. I'm not in it to make money. I'm in it because I want to provide my family with healthier food and because I love the animals.

 

[goodhors]

Tracking your animal expenses and possible profits is a great idea.
You can match the better food value (milk, eggs) against what
purchasing those products would cost. Usually the flavor is much
better as well.

You might want to track your work hours on the animals, because
your labor has a value too. Should be added in to expenses, so
you know that good stuff, food production, doesn't "just happen".
Or if you make products to sell from the animals, soap, beeswax,
eggs, the labor involved in producing those items for sale.

Kind of like that joke about what does a wife do all day? If
a person had to PAY for all those "wife jobs" they would have
more money spent than some other expensive kinds of employment!

 

[ksalvagno]

It may be depressing but a reality. You have to show a profit after 3 years too.

But tracking everything is a great idea!

 

[Bossroo]

I would heartilly suggest the one hire an accountant/ tax preparer that is well versed in farm operations. I can't give specific data or location of the farm business, only generalities due to impending possible law suit. Here is an example of yesterday's IRS audit that will cost the tax payer over $5,000 in additional taxes and likely end up with the client suing his tax preparer ( as stated by very angry tax payers). Tax payer and his wife own a farm and decided to form a corporation with both of them as owners of the business. They purchased inventory, well pump, farm truck, supplies, etc. as a start up. Their tax accountant was not too familiar with farm operations, so he did some fancy depretiation on above as well as deducting " rent costs" of land for the corporation's operation resulting in a very handsome refund. The tax payer did not pay any rent since they have started this business on their own land and did not know how the tax accountant came up with any of these claimed deductions. The IRS will do additional audit surveys on this tax preparer's other clients and if found with additional/ creative deduction errors, and will make a visit to his business to audit his records and business practices. If found deficient, he will be fined many thausands of dollars.























theri

 

[jodief100]

We claim ours. You have to track EVERYTHING. I have a spreadsheet I can send you. You have to save your reciepts. You have to have income of some sort. You have to have a plan. You have to be prepared if the IRS comes a knocking.....

Find a good accountant who specilizes in farms. It will be worth the few hundred dolaars you pay him/her.

 

[Bossroo]

I would heartilly suggest the one hire an accountant/ tax preparer that is well versed in farm operations. I can't give specific data or location of the farm business, only generalities due to impending possible law suit. Here is an example of yesterday's IRS audit that will cost the tax payer over $5,000 in additional taxes and likely end up with the client suing his tax preparer ( as stated by very angry tax payers). Tax payer and his wife own a farm and decided to form a corporation with both of them as owners of the business. They purchased inventory, well pump, farm truck, supplies, etc. as a start up. Their tax accountant was not too familiar with farm operations, so he did some fancy depretiation on above as well as deducting " rent costs" of land for the corporation's operation resulting in a very handsome refund. The tax payer did not pay any rent since they have started this business on their own land and did not know how the tax accountant came up with any of these claimed deductions. The IRS will do additional audit surveys on this tax preparer's other clients and if found with additional/ creative deduction errors, and will make a visit to his business to audit his records and business practices. If found deficient, he will be fined many thausands of dollars.
Update... yesterday, the tax payer agreed to the results of the audit paid the substancial additional tax and penalties due and agreed to cooperate in forthcomming audits of the tax preparer as to their tax returns.
The tax preparer will now face an audit of all of the tax records for the last 3 years and most of the cliens' past 3 years tax returns will also be audited.






















theri

 

[ourflockof4]

I would talk to a good accountant & see what they have to say.

It has been mentioned that you have to show a profit in 3 years, I'm not so sure about that. I have been filing a farm loss for 5 or 6 years now. The first couple of years it has only a few hundred dollars per year, but it was still a loss. At that time I was renting out some of my land and the rental income was less the the amount of the percentage of insurance & tax on the land, so we had a loss. I asked him about the whole 3 year thing & he explained to me that if your income (from a day job or other sources) was high enough to justify the loss it wasn't a big deal.

Maybe our setup is different though since we have decent non farm income. What he said makes sense to me though, I don't know how you can start farming slowly & not have a loss for the first 5 years or so.

Also, right or wrong we kind of pick & choose what animals we will actually write off. Our cattle, hogs, & meat birds are here to make money, so we right off everything for them. The chickens, goats, & turkeys are more of my wifes hobby so we dont write off anything for them (even though it would be a loss)

We bought quite a few feeder stock last year along with the feed to go with it, so we had a bigger write off. This year I will have income from all of those animal & no loss since everything was bought last year. But, that income will be offset by facility improvments & upgrading equipment. I can cash flow the equipment after I sell the feeders. The 2 will cancel themselves out & since we are still getting our farm started I will still have more investment/loss then I will income. I will be building equity in our operation though. I will have income, but no profit.

 

[goodhors]

I would talk to a good accountant & see what they have to say.

It has been mentioned that you have to show a profit in 3 years, I'm not so sure about that. I have been filing a farm loss for 5 or 6 years now. The first couple of years it has only a few hundred dollars per year, but it was still a loss. At that time I was renting out some of my land and the rental income was less the the amount of the percentage of insurance & tax on the land, so we had a loss. I asked him about the whole 3 year thing & he explained to me that if your income (from a day job or other sources) was high enough to justify the loss it wasn't a big deal.

Maybe our setup is different though since we have decent non farm income. What he said makes sense to me though, I don't know how you can start farming slowly & not have a loss for the first 5 years or so.

Also, right or wrong we kind of pick & choose what animals we will actually write off. Our cattle, hogs, & meat birds are here to make money, so we right off everything for them. The chickens, goats, & turkeys are more of my wifes hobby so we dont write off anything for them (even though it would be a loss)

We bought quite a few feeder stock last year along with the feed to go with it, so we had a bigger write off. This year I will have income from all of those animal & no loss since everything was bought last year. But, that income will be offset by facility improvments & upgrading equipment. I can cash flow the equipment after I sell the feeders. The 2 will cancel themselves out & since we are still getting our farm started I will still have more investment/loss then I will income. I will be building equity in our operation though. I will have income, but no profit.

Keep ALL your records, receipts, for at least 10 years, which I believe is the limit the IRS can come back for auditing tax returns. Could be wrong on time length, ask your accountant. I know several people doing things like you describe, appeared to pass with the IRS when filed. However after about 7 years down the road of losses, they did get audited and had to pay when things got gone over. They also had independent income and farm was the write-off. For some reason their number came up for the IRS and they got audited. You may not have a problem, tax laws are ALWAYS changing, but it is best to hold on to all the paper records for proof, if needed. You can't argue your side with no physical evidence to produce.