New client this year with a farm - he has had a loss on the farm for as long as he can remember. We are having the discussion as to whether this may be a hobby farm versus a for profit farm and I think he is seeing that in the eyes of the IRS it is a hobby, but he asked me about his sales tax exemption. We are in NY and anything he buys for the farm is exempt from sales tax. The NY wording is such that any farms undertaking commercial activity qualify - if he becomes a hobby farm, is he still considered engaged in commercial activity? thanks!
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I won’t attempt to speak for the state of New York, but federal tax law disallowing losses on hobby income should have very little affect on state and local laws concerning sales tax and property tax. In the state of Minnesota, we have what is known as a green acres credit for property taxes. If you have at least $300 worth of farm produce from your land during the year, you get a credit against your property taxes on that land. The $300 can include the value of stuff you use, such as burning $300 worth of fire wood harvested from your land. Obviously a hobby farm can easily produce at least $300 worth of stuff during the year and qualify for the credit, even though for federal tax purposes, hobby losses are not allowed.
Also keep in mind that Code Section 183 that disallows hobby losses does not use the term “hobby.” The code is entitled “activities not engaged in for profit.” Thus, a commercial operation without a profit motive could fall under the Section 183 rules that disallow losses. Say for example a farm’s primary purpose is to grow and donate food for local food shelves, but also sells some produce to finance operations and provide a little income for the workers. Such an operation may not necessarily qualify as a 501(c)(3) tax-exempt organization. Yet, it does have both a business purpose and a charitable purpose for existing. Under federal tax laws, it would have to pay tax on profits but not be able to deduct losses. Under state law, it may very well be classified as a commercial operation for sales tax and property tax purposes.
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