How Long Can You Make A Loss?

[JohnH]

Great news.
I'm getting tired of peppermint anyhow.

[RitaB]

Bruce says

Bruce says it also comes in cinnamon and apple-mango.

[JohnH]

Speaking of the bull visiting the cows:

A farmer was chatting with his neighbor when he noticed the neighbor's bull was very frisky that day.
Farmer #1 asked, "Seems like you were telling me last week that your bull had pretty much lost interest in the cows. What happened to him?"
Farmer # 2 held up a vial of liquid and replied: "The vet gave me this little bottle of stuff. I put it in the bull's water and he perked right up. Now he's after the cows pretty much all day."
Farmer #1 then asked: "So what's in the bottle?"
Farmer #2 replied" "I don't know, but it tastes a little bit like peppermint!"

[RitaB]

Tiller box

When one farmer is ready to use such a tractor, and it is for the next day or so in the custody of another sharing farmer, he will go to the dealership and buy his very own that he doesn't have to share with anyone.

Agreed. I did, however, work out a deal with my neighbor on the tiller box cause I just can't justify buying one. His bull decided to visit my cows (who were not even happy to see him), and my kids and I ran a new fence. Now, neighbor Bruce's tiller box is at my disposal.

Yes, I know I am mixing up farm and garden. Don't tell anyone.

[Snaggletooth]

Collateral Galore

My immediate question is....where did he get $32,550 to buy a new tractor? Or money to buy cattle? If he borrowed it, what bank would loan him the money on no income for 12 years? Did he sign his farm over as collateral? If not, something is fishy here. And the Mary Kay obviously is a hobby since she has W-2 income as a nurse. Or do you think the W-2 is sufficient to support them both?

These people are well collateralized for the most part. Losing $5K per year in a Farm operation is peanuts compared to land value of perhaps $500K.

Another comment on concerns about depreciating the $32,500 tractor. Remember, this cannot be s.179 except to the extent of profit, thus if there are continued losses he will have to deduct this over a period of years.

Yet another economic factor to explain the tractor, economic or not. This farmer may operate this tractor only 30-50 hours per year, the same as his contiguous neighbors. This becomes more likely true if he has another full-time job. Economically, ten such neighbors could share ownership in the same tractor. Having grown up on a farm myself, I can also tell you NONE of these people will enter into such a sharing agreement. When one farmer is ready to use such a tractor, and it is for the next day or so in the custody of another sharing farmer, he will go to the dealership and buy his very own that he doesn't have to share with anyone.

[luke]

Rita

Consider the money you are "losing" to another preparer to be "insurance" because WHEN this return gets audited YOU would've been on the hook for PENALTIES?

I have had 3 different clients with "horse farms" want to write all their expenses for their "show horse" - because so and so does it! (I think lots of people in KY think that because of where they live it will be considered a legitimate farm?)

[RitaB]

I did the same thing

I had a farmer with losses for 15 consecutive years. All items had fully depreciated, and no big additions. On year 16, after I put in the income and expenses, still a huge loss. Inquiring how he lived (purchased several jet ski's, personal car, wife always had nice clothes/jewelry/ etc), he said he didn't know, but they managed. I told him that didn't cut it with me, and he found another preparer. Haven't heard from him in about 10 years.

I had a farmer come to me several years back. He was mad at his preparer cause she warned him about the losses. I did his return for about five years, running articles about hobby losses the whole time. Most of my farmers lose money most years, but this guy lost a lot, every year, to the tune of 18,000 a year. I'd bet a dollar to a hamburger in his freezer (that he was writing off) that he wasn't reporting income.

Anyhow, he finally got mad at me, too, and went to someone else.

You know what I think? I think he is STILL taking these losses, will NEVER be audited, and my competitor is making money preparing his returns and I am not.

I would be interested to hear from someone who has actually HAD a farmer to be audited. And what was the outcome? We all know some that SHOULD be, but does it ever happen?

[veritas]

How about a three year period

allowing losses then suspending losses until the activity shows a profit?

[gboykin]

I had a farmer with losses for 15 consecutive years. All items had fully depreciated, and no big additions. On year 16, after I put in the income and expenses, still a huge loss. Inquiring how he lived (purchased several jet ski's, personal car, wife always had nice clothes/jewelry/ etc), he said he didn't know, but they managed. I told him that didn't cut it with me, and he found another preparer. Haven't heard from him in about 10 years.

[FEDUKE404]

Audits are nearing

I always handle Mary Kay and Amway tax returns with kid gloves and many warnings to the client. Sadly, they have along the way (bet they even attended a convention??) been brainwashed into thinking that just about everything they do is somehow or other "business related" and deductible. Heck, just put that decal on your rear car window and then every mile you drive is a deduction - right??

It amazes me how the IRS has not zeroed in on these two businesses specifically over the years.

As others noted, the farm has a far better possibility of justifying a loss - BUT the guy cannot play games on things he "forgot." The prior tractor things is just one issue. My guess is that if push comes to shove he may well be bordering on the edge of hobby income.

FE

[Uncle Sam]

How Long Can You Take a Loss?

In terms of feet or inches?

Seriously though - this sounds like a real fishy case. (Aren't you glad he's not a fisherman?)

I'm surprised that this taxpayer couple hasn't already been audited. Maybe you should discuss with them what their past history has been other than taking accumulated losses.
I also would check out (if the prior returns disclose it) the prior preparer, and ask them why they're switching to you.

I have a single client who works a full time day job, but also is a partner in a singing group (where I get a K-1 prepared by someone else) and he also does some music engagements on his own. Every year after looking at the Schedule C expenses I bring up the hobby loss issue to remind him of the sensitive issues. Last year after scolding him a little - he knocked down about $ 15,000 of expenses off the Schedule C where the loss then looked reasonable. This has been after I have, over the years, sent him copies of articles, NCPE seminar material, EA Journal articles discussing these very subjects.

So as others have suggested - you really ought to get into the details of their business loss history - especially how the husband expects to benefit from the depreciation on the new tractor.

[Burke]

My immediate question is....where did he get $32,550 to buy a new tractor? Or money to buy cattle? If he borrowed it, what bank would loan him the money on no income for 12 years? Did he sign his farm over as collateral? If not, something is fishy here. And the Mary Kay obviously is a hobby since she has W-2 income as a nurse. Or do you think the W-2 is sufficient to support them both?

[OtisMozzetti]

9 factors: expectation of evenutal gains

...
... land eventually gets sold from time to time, and there are usually whopping gains when this happens. In most cases, the ultimate gain from the sale of a farm can exceed the cumulative effect of all prior losses.......

Don't I recall that amidst the 9 factors which distinguish hobby vs. business, there is one stating that if there is a reasonable expectation of eventual gains on property used in the business, then that argues that the activity really is to be considered a business.

[JohnH]

Personal observation here. I have had many client situations that looked good at the outset but turned out not to be so good as time went by. But it seems that every time I have had a client situation that looked not so good a the outset (but which I took on anyhow against my better judgement because of some pervceived extenuating circumstance), it always turned out worse than expected. Trust your instincts and you'll be right more often than not.

Merry Christmas....

[SueBaby]

Sue, your questions strike to the very heart of what I was trying to illustrate.

What happened to his "old" tractor when he spent $32K for a new one? If he sold it, he most likely has 4797 recapture. If he traded it, then his basis is less than $32K. If he had a year that he didn't sell any cattle, then what happened to the cattle on his books the previous year? If he kept them and kept ALL the calves (unlikely), then you would expect his calf sales the next year to double.

You should be asking these questions and getting straight answers that make sense. If you do this, he will have a hard time avoiding income on Sch F or 4797.

Depreciable equipment for any business and cattle for farmers are items which must be revisited each year for retention or sale. They are not just simply deductions and then they mysteriously "go away."

Yeah, I really do need more info on their situation here. I have till the first of the year if I even want them as clients; what I have seen here in their boxes doesn't look good and if I do their taxes this year I am afraid it will be a good year for a big audit ---which I avoid.
THANKS TO ALL AND TO ALL A MERRY CHRISTMAS