Go BottomHobby farmers and the 3 5 rule
 | CharlieR
Join Date: Jul 2003 Posts: 10 DFW, TX 
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2003-07-08 59180
What is the 3/5 rule all about? When I read the tax info I come across this 3/5 rule that basically states someone must make a profit 3 years out of 5 years before he/she can write off farm deductions. Not sure it applies. When I ask other people about 3/5, they tell me only income matters and that once I actually produce I can start getting deductions. I don't live on the land (not sure if that matters). I just want to grow something and sell it to offset some of the expenses, but also write off the land interest and equipment.
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 | kwschumm
Join Date: Feb 2003 Posts: 5764 NW Oregon 
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2003-07-08 59182
We bought 15 acres of douglas firs that won't be harvested for 15-20 years. I asked our accountant about this and she told me that we could buy equipment and write it off on a depreciation schedule even though we won't make money for a long time. I hope she's right because that's what we're planning on doing! In Oregon where we grow a lot of trees that take decades to mature I can see a lot of people in this situation. ....
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 | Misenplace
Join Date: Jul 2003 Posts: 875 Michigan 
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2003-07-10 59234
I believe what you are reffering to is that you can show a loss on your equipment and investment for three years but you are expected to show a profit in five or you will likely be audited. If you are takeing right offs or deductions on buisiness expenses for those first years the govt is looseing $ on you. If it is a legitimate buisiness expense they expect you to start paying taxes on those profits or capital gains. This is too prevent "buisiness" expenses, wink, wink from occuring. Anyone takeing theese sort of deductions or planning on purchaseing or doing something along theese lines should have a long talk about your exact plans with a Certified Accountant. Most are very reasonable, In fact most are a downright bargain for what they charge compared to other professions. ....
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| lakeman
Join Date: Jul 2003 Posts: 39 Rollag Minnesota
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2003-07-10 59251
The 3/5 rule is the rule of thumb that says you have to make a profit in 3 out of 5 years. If not your operation will be called a hobby and you will only be able to deduct costs up to the amount of income. If your operation is viewed as a hobby by the IRS you are required to report the income and show the deductions on schedule A as miscellaneous itemized deductions wich limits the deductions. In order to satisfy the IRS I would treat your operation as a business. Run seperate checking accounts keep tract of expenses, do financial statements and take steps to make a profit. ....
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| Misenplace
Join Date: Jul 2003 Posts: 875 Michigan
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2003-07-10 59272
That is of course once you are up and running. no one makes a profit in the first three years, unless they are in need of a new CPA ! ....
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| lakeman
Join Date: Jul 2003 Posts: 39 Rollag Minnesota
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2003-07-10 59276
The IRS gives you an option of electing to have them look at the first two years of operation as a loss becasue you are starting up. Then you will have to show a profit in the next 3 years. I would load as many expense in the first year via the 179 deduction etc that you can. Then show profits in last 3 years. They don't say how much profit you have to show. ....
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| Misenplace
Join Date: Jul 2003 Posts: 875 Michigan
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2003-07-10 59282
Now were talkin ! And realisticly most buisiness do noy show an instant profit due to start up cost, lease hold improvements, Inventory, labor etc. A lot of folks have gotten in more than a bit of a bind in the last few years trying to right off home based buisinesses on primary residences, home pc's, The Tractor that is used to mow the lawn etc. It used to be reasonable to break out the % of actual buisiness use, But I wouldnt get caught with my hand in that pickle jar anymore. Personal use and buisiness use need to be totally seperate. ....
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| lakeman
Join Date: Jul 2003 Posts: 39 Rollag Minnesota
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2003-07-10 59285
I agree 100%. Just use the tax laws to your advantage. Use the correct strategy. (deducting assets in first year through the 179 deduction will leave no depreciation on these assets in future years. Thats when you will show income. Don't try to cheat by deducting personal expnses its not worth it. ....
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| CharlieR
Join Date: Jul 2003 Posts: 10 DFW, TX
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2003-07-10 59294
Thank you all! I have learned something and will find a CPA that knows farming. I think I'll go into the hobby farmer category but do I actually need to decide now in the first year? I think I can change at any time as long as the records are in order, though I may miss some deductions. If I can write off up to what I make that will be OK and that's what I could not find in the IRS doc 535.
Thanks again.
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| Misenplace
Join Date: Jul 2003 Posts: 875 Michigan
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2003-07-10 59297
Charlie, It really does pay to get a couple of opinions. CPA's are a bargain in my book. One thing to remember is that tax law is often vague. I have a fairly large corp and I never mix my personal tax CPA with my corp tax. My partners dont follow suit. It is critical to remember the final decesion is always yours and you give the final stamp of approval when you sign those returns. You do not want someone knocking on your door in 20 years talking fines/penalties and interest. One example I can offer is that when my wife and I met we both had homes, so double and triple everything, beds, tvs, furniture. We moved all this stuff around for several years and then started donateing it to the salvation army. I am talking like 10k worth of stuff a year. My last accountant depriciated everything untill we came up with about 25% of the purchase price for a deduction which sounded fair to me. I changed offices this past year and the new guy says, hay, claim 100% the IRS never audits this, looking more than a little peekid at that he also offered 50%, 25% or 10%. Needless to say I chose a much smaller number. It is just not worth saveing a net of only a couple dollars to walk way out in that grey area. Like I always tell my CPA, I dont mind getting audited but I damn well better not loose ! ....
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