Hobby Farm

[Beth]

I have a client that recently purchased a house in the county, and this year decided to plant and sale some grain. He and his wife have and will keep their day jobs (non farming), but will use this newly created business to earn some extra income. He may also rent out a shed.

Earnings will likely be minimal this year (a couple thousand at most), and of course there are some expenses. Next couple years earnings probably will be in the $5000-$7000 range.

Does it make sense for him to set up an LLC for the farm? Any other guidance regarding this type of situation will be appreciated, as this is newer to me.

What kinds of things should I be looking for for the schedule F with regard to allocating overhead expenses between their homestead and the darm?

[oceanlovin'ea]

Not a hobby

I wouldn't call that a hobby. Have them keep good records of expenses for seed, fertilizer, spraying, watering costs, etc.

Renting the barn would involve determining basis of barn as well as basis of house and farming land. Maybe their sales contract divided up the cost. Or property records might show the homestead separate from other structures.

Linda F

[Black Bart]

Does it make sense for him to set up an LLC for the farm?

Yes -- for a couple of reasons:

(1) These state-issued entities provide liability coverage for the client, but only sort of because lawyers usually sue everybody in sight including the family dog. Still, it can't hurt to have one for whatever fig leaf it provides, although I'd advise them to buy farm liability insurance too.

(2) LLCs are trendy and the latest thing (replacing corporations in popularity) for small businesses. Clients (even Jack's Lemonade) like their firm name to "sound cool" (I've had unincorporated clients add "Inc." to their biz name for that reason only). They feel it gives them prestige and an appearance of importance. Further, it enhances your professional image; he'll tell friends that -- unlike the old-fashioned preparers they're using -- his accountant, BethBetterBiz, put him into an LLC and they'll be duly impressed. Too, it's no extra trouble; it still goes on a C or 1065 and no balance sheet needed for a small-assets business. And you get a fee for setting up the LLC and filling out the franchise tax form every year.

What kinds of things should I be looking for for the schedule F with regard to allocating overhead expenses between their homestead and the darm?

As to the house utilities, etc., you'll probably end up doing what many do, which is to estimate a percentage of the total for farm expense (25% or whatever). Or you may want to do OIH and apportion it all out by square footage. The farm outbuildings and water wells have separate meters in many cases and that takes care of those.

There have been previous discussions here on some of this. Go to the black line at the top of this page, click on "Search, type in "farm house," and hit "Go." Next, try "farm residence."