Tax strategies to document your ranch status. As we approach tax season, it's a good time to assess whether or not you have generated a profit in your livestock or other farm activity this year.
Often, people derive great pleasure from working with their livestock, studying bloodlines and attending livestock events. The IRS will try to emphasize these elements, so it's important to be able to show that your activity is conducted for profit and not just as a hobby.
There are do's and don'ts that taxpayers should be aware of in complying with IRS regulations for agriculture.
For instance, a San Antonio, TX, woman lost her recent tax court case involving $l20,000 in deductions over a two-year period. The judge based his decision on the poor-quality records kept on her ranch, coupled with her failure to consult experts in the industry.
The IRS is not looking to any higher standard of recordkeeping than expected of ordinary small businesses. Even if you commingle funds, the main point is to have proper ledgers, separate records of each animal, cost projections and some form of a business plan. Business plans often change, and these changes should be documented in your files.
Document any sales efforts, auctions you enter and offers you get. Keep copies of advertising and promotional material such as videotapes. If you have a Web site to promote your animals, use that as evidence of your intention to make a profit.
If audited or forced to appear in tax court, you should be able to present evidence that you 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 to show you conducted your activity in a business-like manner consistent with IRS regulations.
For people starting in the business, it's important to conduct extensive research of the livestock industry. This helps show how you established your intention to be engaged in an activity for profit.
If you don't have two profit years in a seven-year period, aim for the current year to be a profit year. You may need to cut costs, sell off unprofitable animals and equipment, lease out animals, eliminate some mortality insurance and become self-insured, and try to generate sales of animals you have produced.
Even a small profit counts as a profit. And, in situations where you can show declining losses, that is evidence that you are moving closer to a profit year.