Selling calves but not operating a farm

[Gretel]

TP, who years ago leased land and operated his own farm operation is working as employee for big farm operation. They gave him four cows as part of his compensation, each of them had a calf, two were sold in 2014. They run with the herd and TP has under $100 of his own expenses for the vet. I will be expanding his herd. Is this considered Sch.F activity? Maybe not in 2014 but when he continues to increase his livestock? I guess this goes by the same rules as lot flipping, if you do enough (whatever that is) of it than it's a business and not a Sch.D activity.

The other issue is the compensation. If not included in W-2 he has no basis in the cows. It should be included in W-2 wages, right? If not, then it needs to be added to line 7 and then take depreciation?

[Black Bart]

TP, who years ago leased land and operated his own farm operation is working as employee for big farm operation. They gave him four cows as part of his compensation, each of them had a calf, two were sold in 2014. They run with the herd and TP has under $100 of his own expenses for the vet. I will be expanding his herd. Is this considered Sch.F activity? Maybe not in 2014 but when he continues to increase his livestock? I guess this goes by the same rules as lot flipping, if you do enough (whatever that is) of it than it's a business and not a Sch.D activity.

The other issue is the compensation. If not included in W-2 he has no basis in the cows. It should be included in W-2 wages, right? If not, then it needs to be added to line 7 and then take depreciation?

I agree with what you say above - yeah, it's an F. Personally, I'd rather put the calves on a '14 F rather than a D in order to give the overall situation the appearance of credibility; taking off the vet bills and depreciating the cows depending on when he put them in service.

The W-2 is a bit more complicated unless you are doing the payroll yourself (see example below - it's a bit dated {2010}, but still in force, I think). A possible problem is that if the farmer's having the W-2s done elsewhere, many times they will simply list cash wages paid on the W-2 and ignore the cow compensation . Also it's common for your guy to be working with or for friends, relatives, or someone else he doesn't want mad at him, so he might he hesitant to send an 8919 with his return which tends to upset employers if or when IRS contacts them. So...if that's the case and if the income from the cows' market value cost didn't cost your guy too much SE by putting them on an F, then I might just do that and forget about any special treatment on a W-2. That's the quick and dirty way to do it. The downside of doing this, of course, is that the employer will probably do the exact same thing next year, and the next, and the next, and......

http://extension.missouri.edu/carrol.../WagesPaid.pdf,

It's a lovely profession, ain't it....

[Gretel]

Wow, Bart. I was just through reading the article you mentioned before I went back to the message board - and here it is again. Life is wonderful.

I decided to report as hobby for 2014, and next year switch to F if it is really more of a farming business then. Schedule D didn't feel right any longer. I have been thinking about the compensation issue and that this type of in-kind (Cows) is probably not subject to FICA taxes. Basis is zero, which cheats the TP out of depreciation being used on Sch.F. Regular taxes will be a wash over the years and since income is pretty much in 15% tax bracket anyway I do not see much harm.

However, I hope the employer will do it right. I prepared a letter for my client with a copy of the article and some pages from Pub. 225. Next year I will need to make the real decision and maybe I am a little smarter then, too.