Being a farmer is a way of life; it’s in your blood. However, what our gut says as a farmer sometimes doesn’t meet the definition for tax purposes. Because of loss carrybacks, 199A, installment sales, cash basis accounting and other tax provisions, it’s important to know what part of your operation is farm and what part is non-farm.
There are more than six separate definitions in the Internal Revenue Code and the Treasury Regulations. You could be a farmer under one but not another. However, there are broad brush strokes you can apply to determine if you are a farmer.
Under the Internal Revenue Code’s valuation section, IRC 2032A, a farm is defined as follows: “The term ‘farm’ includes stock, dairy, poultry, fruit, fur-bearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands.”
It furthers states, “The term ‘farming purposes’ means-- handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state …”
Other definitions indicate a farm rental is NOT farming, but some forms of crop share are farming. In addition, there must be a profit motive and material participation.
So what is the takeaway? A few areas must be looked at closely. One relates to unmanufactured state. Commodities that are grown and harvested are farming, but the processing of the commodities is NOT farming. An example is a vineyard versus a winery. A vineyard which grows, cleans and packs grapes for sale is a farming activity. If the vineyard processes beyond that point, e.g., into jam or wine, the processing does NOT generate farming income because grapes are processed beyond their natural state.
Another area is the profit motive. As farming operations dwindle as the farmer retires, they might become a hobby farm. Hobby losses have never been allowed. Under the changes due to tax reform the expenses of operating the hobby are no longer allowed. You are taxed on your income and can’t reduce it by expenses paid. This will come as a shock when the IRS comes knocking at your door wondering why you report thousands of dollars of farm losses on your tax return.
Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in New Ulm and Minneapolis, Minnesota.
Read Rod’s “Ask the Taxman” column at about.dtnpf.com/tax.
You may email Rod at email@example.com.
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