How to determine if you’re a farmer for tax purposes

A 12-row corn harvester cuts corn during harvest at the John N. Mills & Sons farm in the Hanover and King William Counties of Virginia.

For many, being a farmer is a way of life. It’s in your blood. It’s a connection with the land and the animals you care for. However, sometimes what our gut says is a farmer doesn’t meet the definition for tax purposes.

Not all activities people associate with farming create what the IRS considers farm income, an essential part of meeting the definition of a farmer. Because of loss carrybacks, 199A (the flow-through tax deduction), installment sales, cash basis accounting and other tax provisions, it’s important to know what part of your operation is a farm, and what part is non-farm.

Defining farm income should be simple enough, but it’s not. There are more than six separate, though similar, definitions in the Internal Revenue Code and the Treasury Regulations, and you could be a farmer under one definition but not another. However, there are some broad brush strokes you can apply to determine if you are a farmer.

According to Internal Revenue Code valuation section IRC 2032A: “The term ‘farm’ includes stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands.”

It further states, “The term ‘farming purposes’ means—handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state.”

Other definitions indicate a farm rental is NOT farming, but some forms of crop share are farming. In addition to being a farmer, there must be a profit motive and material participation. Due to the profit motive, hobby farms are NOT farms. Timber is farming under certain provisions but not others.

The takeaway is that, in my experience, a few areas must be looked at closely. The first relates to unmanufactured state. Commodities that are grown and harvested are farming, but the processing of the commodities is NOT farming. The most common example is a vineyard versus a winery. A vineyard that grows, cleans, and packs grapes for sale is a farming activity. If the vineyard processes beyond that point, e.g., processing grapes into jam or wine, the processing does NOT generate farming income because the grapes are processed beyond their natural state.

Another area is the profit motive. As farming operations dwindle, perhaps as the farmer retires, it might change to become a hobby farm. While hobby farm losses have never been allowed, recent changes due to tax reform no longer allow hobby farmers to deduct the expenses paid for what many may consider farm activities. This could come as a shock to some when the IRS comes knocking at the door, wondering why you continue to report thousands of dollars of farm losses on your tax return when you don’t qualify as a farmer. — Rod Mauszycki, DTN

(Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in Minneapolis, MN.)

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