Ridgetop - our place and how we muddle along

[Ridgetop]

Next year will do a farm tax return since I will have fertilizing, liming, and fencing expenses on the farm. I am setting the account books up now in order to have everything in line for 2022.

Finished Yelm annual expenses and sales costs. ONE down and 5 other items to go. Glad I am starting now.

!!! Just got an email that the Final Settlement Statement on the TX farm purchase is wrong! Charges and expenses put in wrong places!!! Need to sign another doc. AAAARGH!
Also heard from insurance company that insurance premium was not paid from escrow like it should have been!

At least I was planning to work on those docs today and had not already done them!!! My broker tried to get the escrow company to correct several errors but they were adamant that that was how they should be. Now - OOPS??!

Barn has been cleaned out, jugs removed and floor scraped for application of lime before next lambing cycle. I also have to order new Scrape tags. Almost out and have another 2 years to go her in CA. Need to check with TX about getting a TX Scrapie tag number. Also need to retag 3 rams with color coded tags for them. Their tags are missing but it is not a problem since I can tell them apart and the have registration papers. I tag their lambs with colors allocated to each ram - Purple is Lewis, Orange is Axtel, Blue is Moyboy. I guess I need to order green or yellow for Smalley. Gonna be stuck for a color when I get another Lewis ram before moving to Texas! LOL Start lambing next week. Sorting ewes this week for lambing and breeding. Will paint mark them to category. All young purple tags will be held out until I change rams. Got to move a couple of purple tags out of the breeding pen. Will leave in a couple of the other ewes that never marked. It is possible that the crayon was not working properly. I have a list of who was in with the ram and for which dates but prefer exact breeding dates to work with.

Anyway, back to the business side of the office and those dreaded taxes.

 

[Margali]

I feel you on the farm taxes. Trying to read thru the IRS publication is giving me a migrane. Need to file farm taxes this year and going crazy trying to understand them.

 

[Ridgetop]

Have you done farm business this year? Do you have crops or orchards? Is your farm a working farm now? If this is the first year you have been on the property and you have not had sales or income of any kind, you might want to consider waiting till next year to file and then go from there.

You do not have to file a farm tax return to continue your AG exemption on taxes in Texas. You just have to show the County Assessor that you are fulfilling the acreage and animal unit or pasture requirements to continue the AG exemption if one is already on the property. Check with the County tax offices to see how many acres you need and how many animals you need on them to satisfy the requirement. This must be done each year by January 1. I am not sure what the widow is for filing.

Each County has different requirements. My friend in Leander (which is in both Travis and Williamson Counties) needs 50 acres to qualify for his AG exclusion. They raised it several years ago. Wood County where our farm is located currently only requires 5 acres. This will eventually change as more farms are cut into "estate" plots. In Wood County 1000 lbs. of animal is required for every 5 acres on pasture. The requirements for croplands are different, as is woodland, and wildlife acreage. Also the record keeping changes for each category. If you plan to keep some of your acreage aside for hay growing and cutting, that also has a different acreage requirement. A farm tax return is not needed for the Ag tax exemption though so it depends when you want to start your farm status with the IRS.

Remember that you will have to show the IRS a profit in 2 out of the next 5 years on your farm. Depending on the expenses you have this year for start up, if those are fencing, buildings, etc., these are large expenditures. If you installed them this year you might wait to file then use their cost as the original basis for depreciation each year for a certain number of years. Pasture work, ploughing or discing, seeding, spraying, fertilizing and liming are annual expenses and can be done right after the first of the year and then written off in 2022. Since you are only able to take a loss for 3 years before showing a profit, you might want to delay the loss till next year which will give you more time to get to the point of making a profit. Or more likely, breaking even.

The important thing is to keep every receipt no matter how small. I throw them in a box and then go through them to assign them to the appropriate categories. Once they are entered in your farm recordkeeping book, you can staple them together and store them in an envelope with your return for each tax year. Just in case of IRS audit it is good to have EVERY receipt no matter how small. Overwhelming any auditors with paperwork proof is the goal.

One important item to keep is a mileage booklet in your vehicles in which to record the mileage to and from feed store, vet, sale yard, and any other trips you make for livestock or farm errands. Mileage is better to take as a business deduction than gas receipts and depreciation of vehicles. You also use your vehicles for personal use so depreciation doesn't work as well. You also get a better deduction than with mileage.

DH is waiting to do our farm taxes until next year since we closed mid October on our TX farm. I am setting up a farm account book this year. I will transfer all costs and income from receipts each month from now on in order to have a complete record. I also have all my farm receipts for the last several years in a file in case it is necessary to show farm operation losses for which we did not claim.

If you find a good farm tax person, you can have that person set up your files and then you can do subsequent tax years. We are going to do that for 2022. DH knows a lot abut farm taxes since we used to file them when we ran our commercial rabbitry and the 4-H dairy herd years ago. However we haven't filed in years and tax law has changed. DH used to work at H & R Block while in college, and took their classes every year. Now we have an accountant do our business taxes, but we often spot deductions that they missed, so knowing the tax laws is important.

I do plan to fill out a farm tax return this year although I will be doing it just for the practice and learning about how to do it. Or maybe I am a closet masochist!

 

[Baymule]

I make copies of receipts because they fade away. I categorize the receipts by which animal and get several receipts on each page. Sometimes I have expenses for several different animals on one receipt. Such as sheep drench, chicken feed, or pig feed. So I would circle the chicken feed on the copy, for chicken expenses. Then I total the receipts on that page, top page is total of all receipts on those pages for that animal. Staple on the corner.

I’ve made money on the meat chickens and the pigs. Sheep fo good to break even. If I had grass, it would cut down immensely on feed costs.

 

[Margali]

@Ridgetop I bought the land of which all but 1 acre will be for business. I've spent ~$1500 on bee and animal durable goods plus ~$850 on livestock. And I will be repairing shed before years end. *shrug* I need to figure out how to report these expenses.

 

[Baymule]

@Ridgetop I bought the land of which all but 1 acre will be for business. I've spent ~$1500 on bee and animal durable goods plus ~$850 on livestock. And I will be repairing shed before years end. *shrug* I need to figure out how to report these expenses.

Since you can show a loss for 3 years, then must show a profit, Ridgetop is advising show these expenses next year. Next year you will have a full year to raise bees and livestock, possibly make sales. Year 2 and 3 will give you even more time to build your farm. By year 4, you will need to show a profit. If you take expenses this year, then you’ll only have 2 full years to build up bees and livestock sales.

On truck mileage, I just use half the year’s mileage. If I had a LOT of farm miles, I’d keep a log.

 

[Ridgetop]

Since you can show a loss for 3 years, then must show a profit, Ridgetop is advising show these expenses next year. Next year you will have a full year to raise bees and livestock, possibly make sales. Year 2 and 3 will give you even more time to build your farm. By year 4, you will need to show a profit. If you take expenses this year, then you’ll only have 2 full years to build up bees and livestock sales.

Baymule is right. Have you produced goods this year? How much money have you made? If the income covers your expenses I would not claim that income, nor would I file a farm return for this year.

Land cannot be deducted or depreciated. Other than the land which cannot be depreciated anyway, your cash outlay is minimal this year. By waiting to file until next year, you can set up your operation, have the year to produce and sell honey, and other products. Even if you show a profit next year, the depreciation and deductions will be valuable to offset any taxes. Depreciation deduction is often what makes the largest difference in showing a deductible loss.

Your main benefit this year will be filing for or proving the AG exemption on the property. This will cut your property taxes considerably. if the property already has an AG exemption on it you need to make sure to renew it each January. If it does not it will take 5 years of annual application to obtain it since the land must be actively AG for 5 of the 7 current years. It is worth the effort though since it can mean a difference of several thousand dollars in property taxes. Check with your county to find out the requirements as to acreage and animal units you will be required to run. Beehives count as agricultural use too, so be sure to check that requirement when you file. You might meet the minimum requirements with the hives ou already have.

Buildings can be depreciated so you will assign a value to the shed and depreciate it. Repairs can be deducted in their entirety in the year they were done. If covered by insurance, no loss can be taken.

Livestock can be depreciated according to usage and anticipated length of life. For instance DH allows 7 years productive breeding years to our ewes so they would have a depreciation schedule of 7 years. Rams will breed productively for another year or so but I prefer to sell my older stock near the end of their depreciation age while they still have breedable years left and replace them with younger animals that will begin depreciation all over again. That is what most ranchers do with older stock unless they are particularly valuable for bloodlines. This gives you a figure for the sales column as well as opening another space for renewed depreciation on the replacement animal. You will have to figure out the depreciation life of your hive to take depreciation on the bees.

Farm equipment can be depreciated. So since you invested in the bee boxes and equipment (smoker, bee suit, honey gathering equipment, etc.) which will have a salable value if you disperse your operation and will be used from one year to the next, they are considered durable/long term equipment. You would assign them a depreciable value and time of depreciation. The cost of replacement is what I use for depreciable equipment/large durable goods if I have had them for a while and n longer have the receipts. If you have receipts you need to how the cost, and date of purchase on the inventory which you will use for depreciation. Depreciable items - sheds, tractors, supply wagons, bee boxes, stationary feeders, fencing, etc. are then assigned a value and depreciation schedule and depreciated every year against profits. Usable supplies such as medicines/vaccines/feed/etc. will be deducted in the year it is purchased. The wax sheets you put in the bee boxes are "supplies" and would be deducted in the year they are purchased, as would the glass or plastic jars and labels in which you plan to market your honey.

It is your choice to file your farm return when you want, just remember that you must show a profit in the 4th year. "Hobby Farms" are not recognized as a business by the IRS so if the IRS decides that your farm is a hobby farm, they will disallow any deductions.

As a precaution do not take any deductions for any portion of the house for business purposes. That leads to a whole set of IRS problems. Same goes for phone services unless you can identify long distance calls relating only to business.

 

[Ridgetop]

AND DEFINITELY GET SOMEONE KNOWLEDGEABLE TO LOOK OVER THE FARM RETURN.

 

[Baymule]

I take all my stuff to a CPA. Much easier.

 

[Margali]

@Baymule I probably will hire a CPA but I still need to understand general ideas. Otherwise, I could be fed a load of bull$$it.

I think I get where I was stuck. For my husband's EE work we use cash accounting and expenses/income have to be in quarter they actually happened. You both seem to be advising business starts next year with expenses transfering from household to business ledger at that time.

And sorry for the derail of your journal!