Client Farm

[Christian]

A longtime client married two years ago (third wife). They both sold their respective homes and relocated to a ten acre lot outside the corporate limits of the city. When he came in last year he had hatched the idea of declaring his ten acres as a farm indicating he would raise tomatoes and goats. I was so astounded as he and wife both hold full time jobs he in HVAC work and she a registered nurse that I burst out into such laughter I had to cover my face in embarassment. He is already renting a house from a previous marriage. Despite my advice he proceeded apace buying a $50,000 tractor which was set up for depreciation and buying a few goats.This year he has come in with no income and has bought an old pickup truck for his farm plus some additional thousands of dollars of depreciable equipment. Many of you have much greater experience with this sort of thing and just out of curiosity (as I strenously tried to talk him out of this) I am just wondering where this is going.

[Lynn EA USTCP in Louisiana]

Hobby. What does he plan to sell ?

[Christian]

Some tomatoes he can raise and a goat from time to time. Seriously Lynn how long before the Service takes a close look at this farce. In truth I have known folks here who raise a few cows to go on for years losing money and never hear a peep out of the IRS. He has just inherited a considerable fortune from his mother and will be reporting significant dividend and capital gain income going forward. He hatched this idea to cut his taxes. To me it is self evident but I wonder if they will in fact ever check him. Just curious to know what other preparers have seen in this regard in their experience with this sort of thing.

[Lynn EA USTCP in Louisiana]

Read this ATG  - https://www.irs.gov/pub/irs-utl/irc183activitiesnotengagedinforprofit.pdf ,.

show client the requirements to overcome the not for profit, I,e. Hobby, designation.

[Margaret CPA in OH]

Christian, I just have to wonder why you would still consider him a client and go along with 'this farce,' your words.  I could not and would not prepare and sign such a return.  YMMV but I did fire a client when I did not go along with a pseudo business that clearly was not.

[RitaB]

We all know this one is a hobby.  Imagine if he put in a $50,000 swimming pool and called it a business because he sold three neighborhood kids $100 season passes.  For some reason, people think hobby farms are treated differently than hobby swimming pools.  Probably because they get away with it.  All the time. 

I would just tell him you can't reduce taxable income with hobby losses.  Because you can't.   

 

[BLACK BART]

4 hours ago, Christian said:

...I am just wondering where this is going....it is self evident but I wonder if they will in fact ever check him. Just curious to know what other preparers have seen in this regard in their experience with this sort of thing.

2 hours ago, RitaB said:

...For some reason, people think hobby farms are treated differently...Probably because they get away with it.  All the time. 

 

Where it's going is...nowhere.  Interesting subject though.  Many years ago a "farmer" of sorts sent his wife to me with his papers - she dutifully worked at the factory, made $15K (going wages at the time) and every year he lost $15K on the "hay farm".   He actually had equipment (discs, harrows, old tricycle John Deere, etc.).  I dutifully told her about hobby losses (she was unconcerned, saying "Smitty handles all that").  Third year: same story - I gave her one of Edsel's "Come to Jesus" talks and she replied "Well, we been doin' it this way 15 years and nobody's complained yet.  I've got a hair-do appointment, so if you give me my papers back I'll be on my way." 

I actually ran into "Smitty" one time a few years later, asked how it was going, and he said "Fine; just fine  Never heard nothin' frum nobody.  Guess ever'thang will be alright if the Smirnoff holds out" (he was a tad on the shiftless side).  

Curious, I looked up some IRS history on the subject: they (IRS) had (sometime in the 80's I think) done a survey on the hobby problem and it was much more widespread than they'd thought.  They sent many letters out about it and a majority replied and complied, but then they  did a follow-up survey about five years later and found that a large percentage had gone right back to their old ways of doin' things.  Surprisingly, IRS never followed that up or took any further action on it and the initiative died.

Still, I'd hate to be there if/when the shoe dropped.

   

[Christian]

I have prepard his mother and father's taxes for about 25 years and his some likely seven or eight. Bart's reply is precisely what I had anticipated as I myself have seen this as well an ongoing small operation losing money year after year and never and I do mean never questioned. I have no intention of kicking the guy out. I've advised him of the risk he is taking and if the Service will not enforce their own rules I am not a paid federal employee. If they call him in for a little chat well he will owe some tax but I willl print out what Lynn has referred me to and give it to him and send  him on his merry way. Well that is an audit guide which I doubt he would fully understand so I'll review it and perhaps can make a few points. Unlike my concern for a single mother making a poor health insurance judgement through the heathcare exchange under pressure this guy is loaded and if audited he will not miss any taxes imposed.

[JohnH]

Just make sure you have him locked down with multiple disclosures so if he gets audited he can't try to point the responsibility finger back at you.  You know he will. 

[Lee B]

Christian,

Based on your posts, you already knew what you were going to do, so why even ask the question(s)?

[Abby Normal]

14 hours ago, RitaB said:

I would just tell him you can't reduce taxable income with hobby losses.  Because you can't.   

I would also explain math to him. You spend 50k to save 20k in taxes, you are 30k poorer. Keep the cash and try to earn money instead. Or just give it to charity for the deduction and do some good in the world!

[RitaB]

26 minutes ago, Abby Normal said:

I would also explain math to him. You spend 50k to save 20k in taxes, you are 30k poorer. Keep the cash and try to earn money instead. Or just give it to charity for the deduction and do some good in the world!

He's spending 50,000 because he enjoys what he's buying.  Just like the guy with the swimming pool would still install it, and ask his tax pro after he filled it up.  If only elements of personal pleasure was addressed by the nine factors...

 

[RitaB]

38 minutes ago, cbslee said:

Christian,

Based on your posts, you already knew what you were going to do, so why even ask the question(s)?

He wanted to know how the audit lottery would go.

[Roberts]

I basically walk them through the rules and tell them I'll show a loss for 2 years if you are dead serious they plan on showing a profit. After that I deduct all expenses up to the amount of income and note on the return that expenses were capped. I don't know for a fact their true motive but I've told them the rules and covered my rear.

 

[Christian]

Well he is advising he is going to sell tomatoes by the bushel in the city's farmer's market. Who knows maybe he will expand and sell them to Kraft Heinz. I am going to outline to him by letter my concerns and keep a copy for myself. He does have some time to get this business up and going and if he posts a couple of thousand dollars in income he could in fact post some yearly profits. After all who am I the geat grandson of a poor German immigrant who did extremely well after coming here to attempt to prejudge and crush a budding entrepreneurial spirit. After all this is America ! Truth be told if he can post some profit even a slim one judging by all these other small time operators I have seen over time he is safe on second heading home. 

 

[Christian]

In conclusion I'll pass this along. Years ago I had a small farmer who kept perfect records but for 15 or more years never posted a profit. If he got near one he ran out and bought a piece of machinery. Coming in one year he said a lady had come to see him and I asked why he had not called. He explained she sat at his kitchen table and after some two hours prepared to leave saying they would be sending him a check for $54 as he had a gas tank on his property and bought gas for his tractor having it delivered onsite (something he never bothered to advise me or my Uncle his former taxman about) and that he owed no tax liability for the year in question. He never heard anything more.

[Christian]

P. S. Well after a barrage of material relating to the risk of having a hobby farm supplied by yours truly and one of Black Bart's "Come to Jesus" talks the client "Saw the Light" and has agreed that he must show a profit with his farm return at least every other year or so. This will surely lay this to rest. Thank goodness. 

 

[schirallicpa]

all this said - show me a farmer that actually make a profit (who's last name isn't Koch)..................

And no farmer who's trying to start out can possibly give up a full time job to become a full time farmer.  Equipment and taxes (I'm in NY) will eat you alive.  And to give it a true go, it takes a few years.  You don't grow and profit on tomatoes overnight.  

 

 

[Christian]

This is just a sideline he and wife are not giving up anything. Her teenage daughter is interested in going to veternarian school after high school. She is raising registered goats ! Who knew there were such things. Apparently some immigrants who now live in the area eat the darn things !! My grandfather used to sponsor a local baseball team in our tiny community. In one season they lost. He evidently had an annual dinner for them a picnic sort of. He had an ageing billy goat on his farm so he cooked him up.  I am told the meat was as tough as shoe leather.

[Lee B]

I used to have an Indian restaurant as a client, the two meats in their entrees were goat and chicken.

[Margaret CPA in OH]

In case anyone thinks we never learn anything on this forum....

[schirallicpa]

We live in Western NY and there are a number of local farmers that raise only meat goats to send to NYC.

I don't think I've ever tasted goat meat or goat milk.  But I do like my goat milk soap.

 

[BulldogTom]

2 hours ago, schirallicpa said:

I don't think I've ever tasted goat meat 

It is tough unless cooked properly, similar to venison, but not as gamey in flavor.   Usually heavily seasoned if BBQed (not my favorite).   Best way to cook is slow simmered in a chile Colorado or chile Verde.  I have only eaten it when prepared by Mexicans.   There may be other ways to cook goat in different parts of the country.

Tom
Modesto, CA 

[BLACK BART]

18 hours ago, schirallicpa said:

...I don't think I've ever tasted goat meat or goat milk...

 

15 hours ago, BulldogTom said:

It is tough unless cooked properly... 

Neither have I, but I once had a landlord tell me that some (evicted) renters had celebrated their home country's national holiday by slaughtering a goat on the apartment living room carpet.  He was mad enough to have chewed that goat up raw.