As tax season approaches, it's a good idea to assess whether or not you've generated a profit in your farm activity during the past year.
There are several dos and don'ts that taxpayers should be aware of in complying with IRS regulations. People have only themselves to blame if the IRS determines their activity is a hobby rather than a business.
For instance, Sandra Brannon of San Antonio, TX, lost her recent tax court case involving $120,000 in deductions over a two-year period. The judge based his decision largely on poor-quality books and records kept on her farm.
The IRS doesn't look for any higher standard of record keeping from farmers than is expected of ordinary small businesses. Even if you commingle funds, the main point is to have proper ledgers, cost projections, appraisals of your farm property and some form of a business plan. Business plans often can change, and these changes should be documented in your files.
Any sales efforts, auctions you enter and offers you get should be documented. Keep copies of advertising and other promotional material. If you have a Web site where you promote your farm or crops, that can be further evidence of your intention to make a profit.
If you're audited or go to tax court, be able to present evidence that you've consulted an expert such as a tax attorney, or that you have obtained a tax opinion letter justifying your expenditures. Tax attorneys spend much of their time simply evaluating facts and issuing tax opinion letters that become part of your permanent file. These letters can be used as evidence showing that you've conducted your activity in a businesslike manner consistent with IRS regulations.
If you don't have two profit years in a seven-year period, try showing a profit this year. I suggest, among other things, cutting costs, selling unprofitable livestock and equipment, leasing out property, deferring improvements and trying harder to generate crop sales.
Lawyer John Alan Cohan has served the farming industry since '81. He has clients in all 50 states and can be reached at 310-557-9900 or visit his Web site (www.legalalertnews.com).