Unbilled Revenue

[Nashville]

Guy owns an S corporation with heavy equipment. In last couple of years, profits have been extremely marginal, at best.

Same guy owns a very large farm. He uses the equipment owned by his corporation to keep his farm mowed, graveled, bulldozed, etc. He does not bill the farm from his corporation. However, he is able to estimate roughly how many hours he spends using his equipment on his farm.

Every year I've been telling him to estimate his hours' usage in bulldozing, dump trucks, mowers, etc. and I have been claiming revenue for the corporation by using the same hourly rates that he would charge anyone else. I then take a deduction for this amount on his personal return on Schedule F.

I am confident that this is entirely proper, fair and unbiased. His corporation, now in its 4th year, has made a profit two years and a loss two years. The problem may be that his Schedule F consistently shows very large losses. And unlike Schedule Cs, where I insist on occasional profits, I am inclined to take repetitive losses on Schedule F.

Comments?

[Burke]

IMO, you can only get away with repetitive losses on Sche F if that his is only occupation. If he has other business(es) and/or wages that generate income, then the "farming" may deemed to be a hobby. Oftentimes, the client lives on said "farm." You kind of have to review each situation, to determine where his/her income actually comes from. What does he live off of? Retirement, pensions, Social Security? Also, the "farming" activities....does he rent pasture? Raise cattle? Breed horses? Sell such livestock? etc, etc. The presence of an unrelated corp which has shown a profit 2 out of 4 years warrants a good look at the farm losses.

[Nashville]

Good Observations

Good Discussion Burke. Fortunately, the kind of equipment he has in the corporation actually lends itself to farm work. Gravel Hauling, bulldozing, bush-hogging.

This guy inherited from his father who had owned Bank of America stock since WWII. Stock became millions. He has been raising cattle, corn and soybeans all his life, and hauls his own farm products to market in cattle trailers and grainery vehicles.

Will be hard for the service to establish that he is only a "part-time" farmer.

I do disallow losses on some so-called "farms." One entirely urban lady from Philadelphia bought a house and 6 acres, and only raises rabbits and chickens. She sold three hens for $12 in 2008 and wanted to claim losses on her farm. When I told her this was ridiculous she went to the guy across town.

[erchess]

Scant Details Available

A retired individual with a good pension, social security, and I think investments, bought a house and some land in my rural area. He began to operate a "farm" which ended up being reclassified by the IRS as a hobby. I don't know details because he is a social contact and not a client. He never made any secret socially of the fact that the point of the supposed farm was to give him something to do and lower his food costs even before you consider how he reduced his taxes with the "farm loss". He had cattle, several kinds of barnyard fowl, sheep, pigs, and a garden that produced surplus vegetables which he sold at the Farmer's Market. When he had slaughtering done he kept some and sold the rest to the the people who did the slaughtering or perhaps more accurately bartered their work for some of the fruits of their labor. He was putting in six to eight hours a day in seven days a week and having the time of his life doing all this. As far as I know the only thing that has changed is the tax treatment of his activity. He enjoys the work, doesn't need to go to the gym to stay in shape, and the loss on his hobby is less than the grocery store cost of the food he keeps for his table. He has even come to view the rules under which he lost the tax benefits as fair and reasonable. I personally sympathize with what he was originally trying to to do. As he understands the rules under which he lost it was never reasonable to think he would turn a profit from producing so little of any one thing.

[Burke]

Guy owns an S corporation with heavy equipment.
Every year I've been telling him to estimate his hours' usage in bulldozing, dump trucks, mowers, etc. and I have been claiming revenue for the corporation by using the same hourly rates that he would charge anyone else. I then take a deduction for this amount on his personal return on Schedule F. The problem may be that his Schedule F consistently shows very large losses. Comments?

Doesn't this have a wash effect? Simply deducting in one place and adding it to another which ultimately comes back to the 1040? I guess there might be a reason if the SCorp had other shareholders.

[Corduroy Frog]

Washes

Burke, that's exactly the case. AGI (in theory) doesn't change with or without the billing. But there are two effects which may creep in.

One effect is the aforementioned suspicion aroused by creating a bigger loss on Sch. F. In this guy's case he is substantially spending hundreds of hours on the farm.

The other is the effect is Subchapter S losses. The SubS pretty much breaks even, but would be losing $2000-$3000 in Revenue each year if the farm was not charged for the work. Only 25 hrs with a bulldozer trips $2000. SubS losses may not be deductible if they exceed basis.