Hobby Farm

[Christian]

A client finally succumbed to my warnings about encouraging an audit and will drop his Schedule C hobby farm from the return. He still has a few items on which the depreciation has not run out. Can these be deducted on the Schedule C or is the remaining depreciation simply lost ? 

[Sara EA]

He receives the items, so his basis in them is the amount of the remaining depreciation.  Why was a farm reporting on Sch C instead of F?

[BrewOne]

Fixed assets: under disposition, put converted to personal use and that will stop the depreciation.  You can leave them in fixed assets, handy if they're ever sold.

[Christian]

It was reported on Schedule F. It's been a loooong season.

[jasdlm]

When I first started practicing, a client (new to me then) got audited and his long-horn steer ranching business was determined to be a hobby (which it was, but ...).  They're serious about that!  (Or they used to be).

[BrewOne]

When a colleague retired, one of the clients I inherited raised miniature horses.  After doing one return and not thinking much about a small loss, he returned with a bigger loss.  That's when I started digging--the first year I did was the best (closest to breaking even) year he'd ever had!

I remember a stat--70% of farms show an annual loss--but even horses are supposed to be profitable some time.  And keep in mind the "2 out of 5 years" (horses, 2 out of 7) profitability is not absolute--I've seen the IRS disallow from the get go, although I believe there is an election to have the IRS postpone the determination on new ventures.

[schirallicpa]

I'm in NY.  NYS likes to do more auditing than the IRS here.  But I have successfully argued my way thru a handful of farm/ag audits.  The first issue in NY is the ridiculous property taxes.  Try to have a farm without property.  Try to have profitable farm when you have to pay property taxes here. (yes - there are some credits available.)  Second is interest.  Farmers are always indebted.  Interest is a fact of life eroding the profit.  And third is depreciation.  Most farmers are turning around equipment and taking advantage of bonus or Sec 179.  After taking these things out of the picture, the hobby argument tightens up.  Now we can talk about hours.  And we can talk about why someone would do all the stuff as a hobby.  And then I can start my rant about how the farmer can't seem to raise his price on milk as he needs.  He can't recover the increasing costs of trucks or equipment or electric by raising the price of milk, or soy, or any other product Uncle Sam has his hands in. Any time the government subsidizes the price of the ag product, you will have a farm loss.  So most of the time, the IRS or NYS ultimately have to back off. 

[kathyc2]

It can be hard for legit farmers to show a profit.

A lot of the hobby farms have a few acres and "someone" told them they can take the loss.  Maybe they raise five cattle for beef in a year, butchering one for themselves.  When I tell them I'm going to decrease feed, vet, etc by 20% they aren't happy.  

[BulldogTom]

Cattle prices are up right now.  This may be less of an issue until the prices come down.   But on the other hand, feed and fertilizer are up as well.

Tom
Longview, TX

[Corduroy Frog]

Christian, only you and your farmer can decide whether to continue reporting farm operations or not.  But as for stopping depreciation?

I would keep a list of such equipment (plus land and timber) at remaining value.  This give you a basis on all items, and information to report on a 4797 in the event of disposal.  Remember also, breeding cattle and bulls are 4797 items too, because they are depreciable.

Your list should also include original value as well as undepreciated value.  This will prove incredibly valuable for beneficiaries in the event the taxpayer is deceased.  The market will almost always support original cost of farm equipment unless it is obsolete or in bad condition.