Anybody else surprised the IRS doesn't crack down on Schedule F?

[LCP]

Whether as a hobby or because many small farmers eat a good chunk of what they grow or raise?

Perhaps the farm lobby is too powerful??

[Edward]

Because a majority of the politicians in Washington have farms for the purpose of easy tax write offs. Ever hear of a Part-Time farmer having any profit? Most end up with big losses and its been going on for years. Actually, I have never heard of a Part Time farmer being audited - has anybody experienced a schedule F audit on a part-timer?
If reclassified as Hobby they would be in serious trouble. I had one farmer several years back who was DISABLED with his kids doing most of the farm work and he was having big losses. If any new clients come to me who are Part time farmers I send them somewhere else.

[Lion]

I'm a Farmer, of sorts

I have farmland in IL that my grandfather bought in the 1800's. I have sharecroppers and cash rent and file on Form 4835 and Schedule E. Last year my revenues from crops and cash totaled $16,413 with profits totaling $13,942. However, I sold my 2008 crops in 2009, so showed a small loss in 2008. Netting the two years, a more typical annual profit for my farm rental activities is a little over $7,000. I have cousins farming lands contiguous to mine, so I have trusted advisors on the ground who keep me in the loop. (My cousins and I used to own our lands as an undivided interest, and I received a K-1.) Also, my sharecroppers are two brothers from a family that has helped my relatives farm our lands for more than two generations. I suppose the IRS could argue that my farming activity is a hobby, but I'm going to continue with Form 4835 as long as I make the decisions for the acres I own.

[AJsTax]

I think the main reason

they do not spend more time on it the very small numbers involved to the other problems. With less than 2% of the population filing SCh F there are many more involved that cheat on EIC, child dependency, etc.
Leasing the land for production is no more a hobby than any other rental activity. I would fight that to the end if they tried to reclassify.
And I will take all the "hobby farmers" you want to give me. I enjoy doing those returns. along with my own small farm.

[taxxcpa]

Farm audit

One of my clients who had a farm got audited. He had a big loss on his Sch C business plus some farm loss. His wife had a W-2 for a little over $100,000 which was wiped out by his losses.

The auditor changed some utility expense from Farm expense to personal expense, and allowed about 99% of the losses.

There may have been some creative accounting, but it worked out OK for the client.

[gman]

all the time

I see the schedule F loss all the time. I have even warned some of my clients, but they have gotten away with it for 20-30 years. It amazes me every year the loss they have against their w-2.

[taxxcpa]

Farm profits

I've never seen a Farm tax return that showed a profit. The only profit is if they sell their farm at a capital gain.

[Jiggers]

Farm with a profit

I've never seen a Farm tax return that showed a profit. The only profit is if they sell their farm at a capital gain.

I have farmers that show profits. And pay self-employment tax and contribute to retirement plans.

I have farmers that never made a profit. Relied on wife's W-2 and other income. Didn't build SS benefits or disability benefits. One had a stroke, 2 tangled with bulls and lost. Couldn't draw disability.

I have farmers that have a cash profit, but then do some investing in equipment, cattle, etc. and have a book loss due to Section 179 or Bonus Depreciation.

[snowshine]

Sometimes the IRS cracksdown if the farm loss is big enough. I recall the boxer George Foreman got nailed back in the 80's for claiming losses on the farm his father was a sharecropper on when he was a boy. Apparently, as a farmer, George was a hell of a boxer!

I believe he ended up starting the grill business to pay the IRS.

[Golden Rocket]

Different than Sch C

Although many have tried to make Sch F a mirror image of Sch C as far as application of audit, there are too many inherent differences.

One is a profit motive. Farming is not just a pleasure diversion from mainstream employment, it is hard work. What can start as a 1-hr task in the sunshine can turn into 3 days in a blizzard or flood. Although farming MIGHT be a diversion, there are not many people who delight in the work involved. It is often grueling, backbreaking, and short of any willing help.

Another is the purchase of land. When real estate factors are measured, it is inconceivable one would spend thousands of extra dollars for the privilege of losing big money. Many of the expenses of keeping up farmland and improvements are there anyway, whether you have income or not.

And eventually, if the IRS waits in the bushes long enough, there WILL be profit. Maybe not from operations but from sales. Sales of land at BIG gains on Sch D, Sales of livestock and equipment on a 4797 where depreciation is recaptured often result in a TON of money for the govt. It's hard to imagine big money if you only look at a Sch F.

Not quite the same as opening up your back room to a birdwatcher's club and using a Sch C to write off your books. The concepts of motive and hobby take on different dimensions when migrating from a C to an F, and I think a tax attorney would agree.

[Burke]

Good points. Where the abuse comes into play, IMO, is when they live on the "farm," have full-time jobs elsewhere, little or no income from farming, etc.

[taxxcpa]

Frams

Good points. Where the abuse comes into play, IMO, is when they live on the "farm," have full-time jobs elsewhere, little or no income from farming, etc.

That is generally the case in the ones I've seen. Some people want to retire to a farm, so they go through the motions for several years making very small sales, often raising cattle and increasing the herd rather than making sales.
To me it seems like a lot of work with very little payoff unless they sell the entire farm later. I've seen some big gains when farms are sold.