Since I moved onto this property, I spent ~$12k on a UTV, and another ~$8k on "stuff" from tools to seedlings to materials for building single purpose agricultural structures that could be capitalized and depreciated to offset my unrelated 1099 consulting income. If I just did 10 year straight line depreciation that's a $2k annual deduction on 2016 expenditures. This would be increased by future expenditures and by existing tools that can be "placed in service". Maintaining appropriate records won't be a problem, as I already do that for the consulting business and I like to see where the money is going anyway.
I'm not looking for any subsidies, just deductions. But to take them you have to prove you are attempting to make a profit. A lot of sources say that you come under scrutiny if you don't turn a profit in at least 3 out of 5 years, but the trees won't be productive for 5-10 years. My profitability - if it ever happens - may be even further out because I expect lots of failure and will make small incremental steps. How to tree fruit/nut producers typically handle this? Do you wait until you get closer to productivity and then capitalize "start up costs" from prior years or do the feds give you a break because of the long pre-productive period of the product?
This is from the IRS docs:
In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
- You operate your farm in a businesslike manner; [CAN PROVE]
- The time and effort you spend on farming indicate you intend to make it profitable; [CAN SHOW 5-6 DAYS PER MONTH]
- You depend on income from farming for your livelihood; [NOPE]
- Your losses are due to circumstances beyond your control or are normal in the startup phase of farming; [SEEMS APPLICABLE GIVEN PRE-PRODUCTIVE PERIOD]
- You change your methods of operation in an attempt to improve profitability; [N/A]
- You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; [NO KNOWLEDGE HERE OTHER THAN A FEW BOOKS AND PERMIES.COM]
- You were successful in making a profit in similar activities in the past; [NOPE - CONSULTING ENTIRELY UNRELATED]
- You make a profit from farming in some years and the amount of profit you make; [NOT YET]
- You can expect to make a future profit from the appreciation of the assets used in the farming activity. [PERHAPS]
Many thanks! I haven't been able to find anything on the internet that addresses this. Does anyone have firsthand experience with this?
Second-hand experience: Even with annuals-based farms, it can take years and years to get the land cleared / irrigation setup to get a farm productive. One of my friends worked for 5 years before she made any money (read: revenue, not profit) from her farm.
In my experience, the IRS cares far more about cleanliness than rationality. I think you're focusing too much on the "profit" word — the IRS defines this dramatically different than a reasonable human would. IME it means that you subscribe to the idea of making money in the future, you have some sort of a plan of how revenue might exceed expenses at some point, and you have a plan to cover the costs until then. Think about how long companies like Facebook, Twitter, and Snapchat were (and are!) unprofitable. The IRS does not mandate you be good at business, just that you are following their rules. Claiming the Tools/UTV as 100% business-related makes them happy. Opening up a separate bank account makes them happy. Keeping detailed records makes them happy.
My advice: Talk to your CPA. The tax code is far too complicated and nuanced for us mortals to understand.
There is some talk of putting the farm profit level up to $15,000 but that will never happen. People LOVE farmers and no politician is going to risk losing an election by irritating their constituents, especially someone as loved as farmers are. Can you imagine the election campaign and ammunition given to the person's adversary, "and my opponents wants to make things harder for the small family farmer by increasing the farm income requirement too $15,000"...no, it will never happen.
There is a huge difference between timber holdings (tree growth) and farming. I log, and I farm, but I am primarily a farmer. The IRS understands that farmers are inevitably going to have places they cannot grow crops and thus want them to manage their forests. I fall under that as a sheep farmer even, so when I cut wood (a lot of wood), it goes under my farm as income and is completely legal. But they also recognize that trees provide food and income. Christmas tree farms come to mind, and of course yourself. They know farming takes a huge investment and that it takes a long time to go from part-time to full time status...look at me...9 years. It is very understandable that you will take awhile as well.
As for some of your deductions, just be wary, some sound like true conservation deductions and some sound like capital expenses and never the two shall meet, right? I got a book from the IRS on filling out the Schedule F and it was invaluable for making these financial decisions. But I HIGHLY recommend you fill out the Schedule F forms starting as soon as possible. EVERYONE wants to see them. It is more then just for subsidies, it proves you are a farm, hobby farm or full-time farm. Most of the time they do not care if you make a profit or not, just that you are a true farm, without a schedule F you cannot do that. In all honesty you really are handicapping your farm by NOT filling one out. Most of the time they ask for the last 3 years, so the sooner you start, the sooner you can get loans, grants, and yes subsidies if you wish. Its nothing to discount now, a lot of help is available for beginner farmers.
There is a ton more to say on this, but I cannot say it enough; Schedule F's are the key to farming.
In Iowa they raise pigs, but slaughter hogs...the IRS does the same thing."
What he was saying was, it is okay to take some deductions, but when we over-do it, we get into trouble with the IRS. That is so true. Just don't over-do it and you will be fine.