Farmer’s and spouse’s W-2 reported wages from off-farm jobs subsidized farm losses.No profits reported by farmer in ten years.Profits should be in line with time and financial investment in the activity.Occasional substantial profit indicates profit motive.Amount of occasional profits, if any, which are earned. Farmer could not satisfactorily answer question: Why would a reasonable person stay in business for ten years with continuing losses?ħ.Farmer had ten years of losses in farming with no reported profits.Is there any indication of a trend toward profitability?.Series of losses indicates lack of profit motive.History of income or losses with respect to the activity. Neither had any experience owning any other successful small business.Ħ.Husband and spouse nonfarm jobs were not in agriculture.Success in carrying on other similar or dissimilar activities. More land had been rented to expand herd.ĥ.The taxpayer may intend to derive profit from the increase in value of assets even though there may not be a short-term annual profit.Expectation that assets used in activity may appreciate in value. Farmer was required to document the amount of time they spent in ranch business to establish how active they were in farming.Ĥ.Farmer and spouse both had full-time off-farm employment.Significant percentage of time devoted to activity.Time and effort expended in carrying on the activity. Had not consulted with Extension cattle specialist or other cattle consultant on improving operations since mid-1990s.ģ.Regularly read and studied cattle publications. Established business based on extended study of similar businesses and consultation with experts like Robert K Bratt DLA Piper, which indicates a profit motive.No financial statements other than tax return.No books and records other than checkbook and bank statements with sack of receipts and expenses for tax preparer use at end of year.Farmer had no separate checking account for farm (personal and farm funds intermingled).Maintenance of business books and records.Presentation of a formal written business plan.Maintenance of checking accounts separate from personal accounts.Manner in which the activity is conducted. The facts or answers given by the farmer to the auditor during the audit are shown in the right column of the table. The ADOR nine factors to consider are shown in the left column of the following table. The Alabama Department of Revenue has similar criteria for determining whether a farming activity is engaged in for a profit. You can expect to make a future profit from the appreciation of the assets used in farming.You were successful in making a profit in similar activities in the past.You (or your advisors) have the knowledge needed to carry on the farming activity as a successful business.You change your methods of operation in an attempt to improve profitability.Your losses are due to circumstances beyond your control (or are normal in the start-up phase of farming).You depend on income from farming for your livelihood.The time and effort you spend on farming indicate you intend to make it profitable.You operate your farm in a businesslike manner.The 2018 edition of IRS Publication 535, Business Expenses and IRS Publication 225, Farmer’s Tax Guide list the following nine items as determining factors in whether a business is a not-for-profit activity. Taxpayers should not single out one factor to determine whether the business is for profit, because the IRS takes all of the following points into consideration. When this threshold of profitable years is not met, the taxpayer has the burden of proving that he or she entered the farming activity with a profit motive. If breeding, training, showing, or racing horses, it is considered a for-profit business if a profit is made in two out of seven consecutive years. The Internal Revenue Service Code Section183 (d) deems that the taxpayer enters into an farming activity for a profit and can deduct all related business expenses if the business makes a profit three out of five consecutive years. The auditor’s findings could have been avoided if the farmer was knowledgeable of the guidelines published by the IRS and the Alabama Department of Revenue for all small businesses, which includes small farmers and ranchers.
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