This will be the first Thanksgiving in eight years that I won’t be serving my family a turkey raised on my own farm. Am I sad? Not too much. Having a November free of trying to keep a few dozen large birds fed, watered and safe is pretty nice. The year the ram and the biggest tom got into a fight (with only one survivor) will be remembered for a long time in my family—did you know that bruised meat tastes terrible? We all ate a lot of stuffing that year.
Thinking about producing food for my family from my own farm leads me to thinking about taxes. Taxes? Well, when I harvest that bird, I have to decide if I am weighing it and charging myself the retail price of the meat. That’s what I do if I am claiming that I am running a farm. If raising a few hundred head of poultry and a dozen sheep is just an expensive hobby, then no one (besides me) really cares what the value is of the animals I consume.
The main tax difference between a hobby farm and a farm that is a business is that with the hobby, you record any income from your farming-type operations on your Form 1040, as miscellaneous or other income. You will pay taxes on any gross income you make selling products from your operation.
If you are trying to make money on your farm, you most likely can file a Schedule F “Profit or Loss from Farming.” There is a real advantage in filing a Schedule F. When you treat the farm as a business, you can deduct most of the expenses you incurred in producing the products you sold. Everything from feed to gas for the delivery truck and the costs of keeping up the website can be deducted from the gross income made by selling those turkeys. The end result is that the overall tax burden on this net income will be reduced.
However, just because you want to file a Schedule F doesn’t mean you can. The Internal Revenue Service pays careful attention to this line between hobby and farm. The rule of thumb is that the farm must make a net profit for three out of five years to be considered a farm business rather than a hobby. There have been farmers (hobbiests) audited that have been challenged and forced to pay huge fines.
Now, we all know that there are good periods and bad periods in farming, and we (unfortunately) may go through five years without a profit. This can especially be the case if your Schedule F lists a lot of depreciation on fixed assets (we’ll talk about depreciation another time…). If you can show that you are honestly trying to make a profit, you may be able to convince the IRS that you are really farming, and not just throwing money at an expensive hobby.
Here are a few tips for differentiating a farm from a hobby:
- If you use product from the farm in your own home, show the value of that product as income coming into the farm operation in your bookkeeping. If I serve my family a turkey that I raised, on paper the farm gains $100 of gross farm income. Since “family food” isn’t an expense on your Schedule F, this will probably increase your tax liability, but it shows that you consider the farm a business, saving a lot more in fines if you get caught.
- Show that you’ve done research to set your prices to make a profit. There is a great chapter on setting prices in Fearless Farm Finances (pages 193-199).
- Show that you have a marketing program in which you try to sell your products. This can be as simple as an email list of customers, or ads in the paper or on the gas station bulletin board.
- When selling any product be sure to give invoices or receipts and use consistent units and prices. Keep good records of what you sell, to whom and when.
- Try not to just give product away to Aunt Sally or Cousin Joe. Raise a little extra on the side if you need to for these “giveaways,” and don’t count the expenses to produce them on your Schedule F.
I hope that this Thanksgiving you are thankful for your farm and all the joy it brings, whether it is a hobby or an income-producing business.
Jody Padgham is the Financial Director for MOSES, and Editor of Fearless Farm Finances.
November 26, 2013