Okay, taxes aren’t quite as bad as that lyric from the Beatles song, but they can still cause quite a deal of anxiety. This is especially true if you’re filing anything more complicated than a 1040.
Those who hobby farm have special considerations to keep in mind prior to the filing deadline (which is Tuesday, April 18 in 2023). The first thing to figure out is if you should file as a farmer or not. The difference is a farm is a business; anything you do as a hobby may not be. If you make a profit in three years out of five, you are a small business farm.
Good recordkeeping is the key (as it always should be). The IRS will allow you to claim farm income and losses if you raise poultry or livestock or grow fruits and veggies. You’ll also need records for equipment costs, labor, seeding, maintenance and anything else that might be relevant for a business.
Avoid the “hobby farm” label if you’re planning on claiming farm income. A hobby farm only produces goods for itself and does not make a profit. (That doesn’t mean you can’t make money with your hobby, selling eggs or tomatoes for example; you just can’t earn more than you invest.)
Before you started farming, in whatever capacity, you should have checked your zoning. It’s important to double check your zoning rules before filing your taxes, because if where you’re situated doesn’t allow farming and you try to claim farm income, you’re gonna have some problems. Hobby farms usually don’t need ag zoning but you shouldn’t claim business income and deductions for your farm if you’re not making a profit.
Remember that every state provides different tax breaks for agricultural land and agricultural operation. Research the profits required and the amount of land being used to make sure you can file as a small farm business.
The IRS will let you deduct ordinary and business expenses that you need to run the farm, including utility expenses, irrigation, equipment, feed and services (like veterinary care, breeding and more).
The USDA Natural Resources Conservation Service is making a big push to protect more land. You may get tax breaks if you’re willing to give up development rights on your land. You might also be able to donate a conservation easement to a charitable land trust. This will reduce the overall market value of your property – but it also allows you to claim a deduction on your tax return.
But maybe in addition to working your land you also work from home. What then? For the most part, you can only claim deductions if you’re self-employed and not working from home for an employer. However, expenses such as phone and internet can be split between working for yourself, as an employee or as a personal expense.
For more details on this side of tax prep, check out this article from TurboTax.
And, as always, if you’re not sure what you’re doing, hire an accountant! Their fee to help you file can be worth the investment, especially if you don’t want to be audited.