My son, the farmer! I am so proud! (cost, community, poultry)
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It was '2 out of 3', then it changed to '2 out of 5', then around 2000 the IRS dropped that as a hard rule. Now it is merely a guideline. If you fail to meet this guideline, it may cause an audit, in which an auditor will want to review your business model. To see if you are trying to make a profit.
There are some businesses that simply do not show a profit very often. For those types of businesses it is expected that you might only show a profit once every 10 or even 20 years.
Which is why the IRS had to drop it as a 'rule'.
For example I have a parcel of forest land. You can not cut timber on the same land every year. You can not cut timber every 5 years either.
I have pushed the '2 out of 5' guideline many times. I have gone through 3 audits so far. In each audit we came out smelling of roses.
you are using profits from the business to purchase new equipment and thus use the tax laws to claim your business made no profit
( big farmers do that all the time )
However, this couple will not be using profits from their business for a few years.
you are using profits from the business to purchase new equipment and thus use the tax laws to claim your business made no profit
( big farmers do that all the time )
However, this couple will not be using profits from their business for a few years.
And you know this how????
If they are smart........they will.
Big farmers would use the same paperwork as they would.
It was '2 out of 3', then it changed to '2 out of 5', then around 2000 the IRS dropped that as a hard rule. Now it is merely a guideline. If you fail to meet this guideline, it may cause an audit, in which an auditor will want to review your business model. To see if you are trying to make a profit.
I didn't know that. I studied accounting in college but graduated in 1999 and didn't go into that field, so I wasn't aware of that change.
But regardless of that, if this couple runs at enough of a loss for 3-4 years on this little 11 acre venture to impact the tax liability on their W-2 earnings I think they would have a hard time convincing an auditor that they are trying very hard to make a profit. The exception would be if they plan to go establish a commercial orchard or vineyard which would take a few years before it started to generate any revenue, but I don't recall that the OP suggested they planned to do that. And even if they do, legitimate expenses for a venture like that would be pretty minimal after the first year.
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There are some businesses that simply do not show a profit very often. For those types of businesses it is expected that you might only show a profit once every 10 or even 20 years.
Which is why the IRS had to drop it as a 'rule'.
For example I have a parcel of forest land. You can not cut timber on the same land every year. You can not cut timber every 5 years either.
I seem to recall from my studies that horse racing had a different schedule than other businesses which I thought was interesting, but not surprising given the nature of that business.
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I have pushed the '2 out of 5' guideline many times. I have gone through 3 audits so far. In each audit we came out smelling of roses.
As long as all the expenses are legitimate there shouldn't be any problem. The folks who are going to have trouble are the ones who try to expense out the mileage for every trip to the grocery store and things like that.
... However, this couple will not be using profits from their business for a few years.
If you plant veggies and get into a Farmer's Market; you can get receipts of income the first year. Clearly not much, but that is all it takes.
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Originally Posted by duster1979
I didn't know that. I studied accounting in college but graduated in 1999 and didn't go into that field, so I wasn't aware of that change.
No sweat
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... I think they would have a hard time convincing an auditor that they are trying very hard to make a profit.
Attending conventions, workshops, Ag Extension classes are all 'proof' of intent.
Keep receipts, flyers and hand-outs from each event. Keep notes so you can rattle-off what topics you attended and how you intent to use that knowledge to tweak your operation.
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... The exception would be if they plan to go establish a commercial orchard or vineyard which would take a few years before it started to generate any revenue, but I don't recall that the OP suggested they planned to do that. And even if they do, legitimate expenses for a venture like that would be pretty minimal after the first year.
7 to 10 years is normal for fruit trees.
I have 40+ fruit / nut / herb trees, I use them on my schedule 'F' filing.
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... As long as all the expenses are legitimate there shouldn't be any problem. The folks who are going to have trouble are the ones who try to expense out the mileage for every trip to the grocery store and things like that.
I agree. There is a very narrow gate that a camel must crawl through to use a mileage write-off.
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