Question About Ranches

[WhiteOleander]

We have a client that is running a ranch in a S-Corp. They only have about 7 head of cattle. It is a very small operation. Because of the added expense of running the corp, they plan to close the corp and continue as a Sch F.

The issue is not closing the corp. They are applying to the appraisal district here for an agriculture exemption on the land. They also plan to feed deer and manage the property as a wildlife area. No more cattle or other livestock.

Since this is no longer a for profit venture, we said that there would be no need for a Sch F. They will not be selling anything. They were told that since they are maintaining the wildlife area, they can write off all the expenses as usual.

I've done some searching. But, I can't find any reference to this. Has anyone come across this?

[Koss]

Ranch Questions

You wrote:

They were told that since they are maintaining the wildlife area, they can write off all the expenses as usual.

I agree that a Schedule F would not be appropriate if they are not operating a business with a profit motive. You can't deduct business expenses if you are not engaged in a trade or business.

I don't see how they can "write off all the expenses as usual" if there is no business operation.

I can theorize about a couple possible mechanisms that might make some expenses deductible--but not as business expenses.

One might be able to take the position that they are holding the property as an investment. Expenses associated with maintaining it might be deductible as investment expenses. But good luck with that. Aren't investment expenses limited to investment income? Maybe this would work if they have investment income from another source.

Maybe someone has put some strange ideas in their head about a conservation easement. The phrase "wildlife area" conjures up notions of some sort of public good, or a charitable purpose.

Of course, declaring that your own property is a "wildlife area" does not make the expenses associated with it deductible. If they donate the property to a 501(c)(3) entity, or to the government itself, and then pay expenses to maintain it, that might be deductible. But that's not an easement. We're talking about outright donation of the property. Or something very close to it, such as holding back a life estate, and giving the remainder interest to a charity or to the government. But if they want their kids or other family to inherit the property, or if they want to be able to sell it one day, that's not an option.

Conservation easements are incredibly complicated, and they have been used in a lot of tax evasion scams. I'm not sure if an easement is applicable in this situation. I'd need to do more research.

The only other possibility I can think of is that at least in theory, they could set up their own charitable organization, or find an existing charitable organization, to "maintain the property." Then they could donate money to the organization for that purpose, and presumably have a charitable deduction on Schedule A. Maintaining a "wildlife area," if it's properly articulated, can be a legitimate tax-exempt purpose. But setting up such an organization is a lot of work. Didn't you say the whole point was to eliminate the expense of operating an S-corp?

Is the ranch somehow associated with their primary residence? Or is it something that could be treated as a second home?

You wrote:

They were told that since they are maintaining the wildlife area, they can write off all the expenses as usual.

Told by whom?

Whoever gave them this advice may not have understood the question.

"We're going to close the corporation and just run the ranch as a sole proprietorship on Schedule F. Can we still deduct the expenses?"

Well, yeah. Of course. But running the ranch "as a sole proprietorship on Schedule F" implies that there is still a business, and a profit motive. If they left out the part about just "maintaining a wildlife area," then they got the wrong answer.

Who were they talking to? A lawyer?

BMK

[Jiggers]

They are applying to the appraisal district here for an agriculture exemption on the land. They also plan to feed deer and manage the property as a wildlife area. No more cattle or other livestock.

They were told that since they are maintaining the wildlife area, they can write off all the expenses as usual.

I've done some searching. But, I can't find any reference to this. Has anyone come across this?

I have been doing Farm returns for 30 years and haven't encountered this issue.

But I know that you can put the land in a "land bank" and receive payments for not farming the land. The income is reported on Schedule F, and any related expenses such as property taxes, etc. are deductible.

Maintaining the property as a deer lease is another possibility. The income from the deer lease is reported on Schedule F, and any related expenses are are deductible. BUT, this is a side income for a farmer.

IF the only business is a deer lease or hunting lease, the income and expenses are put on Schedule C.

In both instances there has to be a profit motive.

The owners primary concern is keeping the land classified as "Agricultural" by the appraisal district so that the property taxes are based on the "AG Value" versus FMV of the land.

I think that there might be a possibility of putting the land in some kind of wildlife preserve. I had one client that was doing this so that the AG use of the land was used for the appraisal. Lots of paper work was being submitted to some governmental agency. However, I didn't do that, just knew of my client doing that, and before it came to be, the land was sold. I don't have any information of what was involved and what agency. Maybe your client's local USDA or Extension Service has that information.

[WhiteOleander]

Thanks I agree with all your thoughts.

You said """"Maybe someone has put some strange ideas in their head about a conservation easement. The phrase "wildlife area" conjures up notions of some sort of public good, or a charitable purpose""""" I think this is the theory. They will maintain the land and wild animals for the public good. Hence, expenses will be deductible.

As far as who told them this, I have no idea. Maybe they just dreamed it up themselves.

[Snaggletooth]

Public Trust

In my state, you can form a "public trust" or "public corporation" for such a thing. Don't know about reporting requirements. It would appear a 990 would be required if there is any income, and don't know whether there would be ANY reporting requirements if revenue is absent.

But the entity would be separate from the individuals, and the land would be irrevocably owned by the trust, not the individuals. That means divesting themselves of ownership, and the expenses would not be deductible by those individuals in any sense.

I know a couple of people who died without heirs and left their land in a public trust as a wildlife refuge. The conservator is the State of Tennessee.

Probably not the option your clients are looking for...