Help with expenses of working farm

[taxea]

My client purchased a working farm business. I haven't done this before and can't find anything that tells if and what I can claim as startup; what to amortize; what to expense.
The contract is a "Contract of Conditional sale with future option to buy between the land lease holder and my client.
The land is one acre. My client pays 170. a month for lease rent and 50. per month for water.
He paid an agreed price of 15K. The future option to buy out the contract is another 15K in August of 2018.
All equipment to run the farm was included in the first 15K payment.

How do I do this?

[TAXNJ]

Associations

Did you try researching farm associations in addition to IRS area of farms?

Sometime ago had found an in-depth farm tax guide that would be a good source. So the info is available with some research on that specific area.

[TAXNJ]

In addition

As a start, you have to determine if it is a conditional sales agreement (If an agreement is found to be a conditional sales agreement, then the payments made pursuant to the agreement are non-deductible purchase payments.) and you would know how to handle the payments from a tax point.

So you will have to decide to distinguish a lease from a conditional sales agreement (as you may know the intent of the parties controls whether an agreement is a true lease or a conditional sales agreement.)

Also, for lease payments to be deductible as a business expense, the lease agreement must be a “tax true lease”

Sounds like you have an interesting scenario and there much information on this subject

[spanel]

My client purchased a working farm business. I haven't done this before and can't find anything that tells if and what I can claim as startup; what to amortize; what to expense.
The contract is a "Contract of Conditional sale with future option to buy between the land lease holder and my client.
The land is one acre. My client pays 170. a month for lease rent and 50. per month for water.
He paid an agreed price of 15K. The future option to buy out the contract is another 15K in August of 2018.
All equipment to run the farm was included in the first 15K payment.

How do I do this?

What kind of a " farm" is this? Only sitting on 1 acre? Are you sure this "farm" makes money?

Chris

[Burke]

The contract is a "Contract of Conditional sale with future option to buy between the land lease holder and my client.
The land is one acre. My client pays 170. a month for lease rent and 50. per month for water.
He paid an agreed price of 15K. The future option to buy out the contract is another 15K in August of 2018.
All equipment to run the farm was included in the first 15K payment.How do I do this?

Never dealt with a "conditional sale" contract so I would have to have the entire thing to read to give you an educated opinion. It sounds like a lease agreement on the land only with a future option to buy. So the lease payments would be rent paid. Deduct on Schedule F. As well as the water. But the $15K up front which included "all equipment to run the farm" sounds like a separate outright sale to me. I would assume he doesn't have to give the equipment back? So it would be depreciated. If he forfeits the equipment upon not exercising his option to buy, then that's a different matter.

[TAXNJ]

If

Never dealt with a "conditional sale" contract so I would have to have the entire thing to read to give you an educated opinion. It sounds like a lease agreement on the land only with a future option to buy. So the lease payments would be rent paid. Deduct on Schedule F. As well as the water. But the $15K up front which included "all equipment to run the farm" sounds like a separate outright sale to me. I would assume he doesn't have to give the equipment back? So it would be depreciated. If he forfeits the equipment upon not exercising his option to buy, then that's a different matter.

If understanding your reply correctly regarding the land payments are rent. Note that if a "conditional sale" contract with option to buy, then lease payments would not be rent paid deduction, (reference Chapter 4 of Publication 535, Business Expenses) there is many reference material on this subject but Original Poster needs to read the contract to make the determination if a true tax lease or not.

[Jiggers]

I am still curious as to what is raised on this "one-acre" farm.

Most of my farmers have enough equipment to fill one acre.

Unless it is a feed-lot operation. But there shouldn't be much equipment.

Something missing or some city-slicker being taken for his money. Yep, I had one client like that.

[Uncle]

Pretty common farm on Oahu

I am still curious as to what is raised on this "one-acre" farm.

Most of my farmers have enough equipment to fill one acre.

Unless it is a feed-lot operation. But there shouldn't be much equipment.

Something missing or some city-slicker being taken for his money. Yep, I had one client like that.

I will guess they are growing flowers, herbs, mushrooms, maybe apple bananas. One of my clients sells $400,000 gross of flowers from under an acre. Takes a dozen hard working folks to work the farm. A farm like that would sell for maybe a million per acre. Hard numbers to grasp, no?

Christopher Mewhort, EA

[taxea]

the 15K includes one acre of fully mature betel vines. The leaves of which are the product being sold. Also includes farm equipment, none of which is motorized-all manual tools. I was hoping I could expense the plants and equipment as startup expense as it was already a fully functional farm when purchased. The betel vines have a preproduction of about 8 months from seedlings to maturity. Client is purchasing a going business, no land included in the 15K.

[TAXNJ]

Land or no land

the 15K includes one acre of fully mature betel vines. The leaves of which are the product being sold. Also includes farm equipment, none of which is motorized-all manual tools. I was hoping I could expense the plants and equipment as startup expense as it was already a fully functional farm when purchased. The betel vines have a preproduction of about 8 months from seedlings to maturity. Client is purchasing a going business, no land included in the 15K.

Your original post states "The contract is a "Contract of Conditional sale with future option to buy between the land lease holder" that's what my reply post addressed. suggest you read the contract to make the determination if a true tax lease or Contract of Conditional sale with future option to buy.

[taxea]

Your original post states "The contract is a "Contract of Conditional sale with future option to buy between the land lease holder" that's what my reply post addressed. suggest you read the contract to make the determination if a true tax lease or Contract of Conditional sale with future option to buy.

The second payment is not to purchase the land but, rather, to complete the purchase of the going business.

[Burke]

The rent payments you mentioned seem to be to lease the land from a person other than the business owner. So they would be deductible on Sche F. And based on the additional information, it looks like it qualifies as an installment sale of the business itself. Was a form 8594 completed allocating the cost of the business between equipment, plants and goodwill? I would expense the equipment if it qualifies and amortize the goodwill.

[TAXNJ]

Ok

The second payment is not to purchase the land but, rather, to complete the purchase of the going business.

Generally, it sounds like a conditional sales agreement (If an agreement is found to be a conditional sales agreement, then the payments made pursuant to the agreement are non-deductible purchase payments.) BUT you have read the terms of the sales agreement and in the position to know better than any of us.

[taxea]

Thanks NJ thats what I was thinking and hoping for.