Opinions on start up vs. in business

[JG EA]

With Schedule C activity it has always seemed fairly clear when the business began. Usually with income. The analogy has been used of "opening your doors" to begin sales, whether or not a sale is made.

Now, dealing with a new farm: The clients did some obvious start up things like clear land, build a fence, build shelters. They also bought the animals to use for breeding. I've read Pub 225. It doesn't say there has to be sales to be in the business of farming. Everything looks like a farm now. I know that the animals can't be depreciated until they are mature. But couldn't I start with writing off some start up costs, depreciating the fences and buildings, count the feed, etc?

Have you ever had a problem with a farm being a passive activity when the taxpayers have other jobs? I wouldn't think so, since all the work needs to be done. I'm thinking the only real problem is - is it a hobby farm as opposed to a for profit business. Has anyone sent in the form to ask the IRS to hold off on determining whether it is for profit, or would this be inviting trouble if a profit is not made in the third year?
JG

[Redneck]

Farms

I have a number of clients that have farms and a real job to. None of them have had any problems with the IRS. Most of my clients show some income(not profit) every year except the first because of startup. Some of these client spend big bucks on equipment and farm 40 50 or 100 acres, some also lease land. No problems yet.

[OldJack]

Farming

First let me say that for the last 10-15 years the IRS has not been very active about auditing small farm operations. As to the 3 out of 5 profit rule, that is only a safe harbor rule. You should never ask the IRS for anything, especially where they can say no and then you are screwed. I have seen new farm operations go for many years without turning a profit and the IRS not audit. It is common for a startup farm to deduct losses for years as they purchase equipment and animals. I would never automatically classify a farm operation as a hobby.. I would leave that to the IRS after a good fight. The only real farm hobby status is when the owner doesn't do anything on the farm but set on their butt and get their income from work in town. The minute your client started work on the land and purchased animals for breeding he can claim he is a farmer.

[jainen]

five or ten years

Unless he puts in a tenant or a manager to run the whole operation, it is almost certainly non-passive even if he has another job.

As to the profit motive, remember that can be based on expectation that assets will appreciate even if operational expenses exceed annual income. Land, waterworks, heritage crops, various intangibles, etc. might have tremendous future value if he can feed a negative cash flow for five or ten years.

[JG EA]

Thanks.

Thanks for these answers. It really helps me. I really needed to run these questions by someone, and appreciate your help.