Hobby farm and IRS rules

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Permalink Reply by Katy Spears on February 18, 2009 at 11:54am

When I first started this business, my mentor was a CPA. She told me that the IRS Hobby Guidelines are guidelines rather than rules. If you get audited, have an alpaca knowledgeable CPA there to explain how long it takes alpacas to have cria and how long it generally takes for alpaca breeders to show a profit. Her view was that if you are really a working farm rather than a hobby, you will be able to show that to the IRS. If it's a tax shelter then it will likely be classified this way. Keep records of the number of hours you spend on your farm biz and what activities you do related to making your farm profitable.

On the other hand, my parents are CPA's and they were very worried I'd get into trouble with the IRS with regards to being a "hobby farm". Having a CPA who is confident in your farm taking the tax advantages will go along way towards relieving your anxiety. Hope that helps some.

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Permalink Reply by Mac Johnston on February 18, 2009 at 12:00pm

Very helpful Thank you. Aree you willing to share the name of your CPA. I can you a separate e-mail address if you prefer.

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Permalink Reply by Lori on February 18, 2009 at 1:48pm

I've been told that it's commonly known that livestock farming requires more time to become profitable than crop farming and allowances are given. I've also been told that if you can demonstrate how you have tried to make a profit, and how you have adapted when those ways weren't successful, time to become profitable is extended.

We were advised to find an accountant familiar with farming. Last year we didn't have one; this year we do. It has made a WORLD of difference!!! Have you seen the H&R Block commercials where clients visit their former accountants and yell at them for all the mistakes they made/things they missed? 'nuff said. It's hard to do in some areas, but make the effort and take the time to find a good FARM accountant. That person will be your best guide. Also, take a deep breath. It doesn't sound like you're in any danger yet. :-)

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Permalink Reply by Maryann Marsh on February 18, 2009 at 10:41pm

One of the guidelines our CPA told us was that on or around the 5 year mark, we should be thinking of showing a profit. We did well last year and took our year of profit. 5 years was a good guideline for us and we have had no issues with the IRS. Hope this eases the mind a bit!

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Permalink Reply by Kathy Quinn on February 20, 2009 at 1:52pm

How does the hobby rule apply to agistment? I have heard of but not met anyone who owns a breeding business but does not have an actual farm. How do those folks avoid being classified as a hobby, or do they?

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Permalink Reply by Katy Spears on February 22, 2009 at 6:36pm

Hi Kathy,
I am certainly NO CPA but I have heard of people taking the tax breaks while their animals are agisted. Usually they have to show hours worked on the biz. Here's an example:

Let's say you board/agist your alpacas with me. If you come with me to 3 shows and work all weekend helping at the show (that could be 45 hours +), and maybe you come help me with shearing and other farm events, if you work enough hours I think it counts and you can take the tax break. I think. Not sure how many hours. A pro would know...

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Permalink Reply by Heidi Christensen on February 21, 2009 at 1:05pm

Thanks for bringing this up. I have been in the biz coming on 5 years, and an no where near making a profit. I don't make a whole lot of money in my day job - the IRS didn't help me buy my alpacas. I did want a home based business, but don't have much to write off except my payments on the two girls I am buying now. My kids give me way more return on my taxes than the alpacas do. My horse eats more than the alpacas, my rent is very low because my mom is my landlord, but yet on the other hand I do run my business as a business, rather than a hobby.

I keep thinking of friends of mine who had a horse business. They made good money at it, but I was visiting them once when they were talking about taxes, and he was wondering about not doing it as a business anymore. They were divorced shortly after, so not sure what happended, but I think about that every time tax time comes around.

I have been meaning to run this by my accountant, but still get those doubts. I'm not worried about being audited, just wonder if I will ever be able to make a profit at it.

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