Tax Credits for a Hobby Farm

Income from hobby activities, including farms operated without a profit motive, is just as taxable as income from a job or business. Just like any other income, the Internal Revenue Service makes tax credits available that allow business owners to deduct expenses from taxable income. However, with a not-for-profit activity such as hobby farming, the IRS may limit these deductions. However, taxpayers that postpone the determination of non-profit activity can take advantage of additional deductions.

Hobby Loss Rule

The Internal Revenue Service does not allow a taxpayer to deduct losses on a hobby farm from taxable income because the taxpayer doesn't operate the farm for a profit. However, a taxpayer can deduct net operating losses experienced while running a hobby farm against the taxable income from the hobby farm operation. For example, if a farm qualifying as a hobby farm experienced $2,000 in sales and $3,000 in expenses, the expenses can reduce taxable hobby farm income to $0. However, the taxpayer cannot deduct the extra $1,000 from any other taxable income.

Eligibility as a Hobby Farm

If a taxpayer can prove that a farm did not earn a profit for three of the previous five tax years, the IRS typically considers the property to be a hobby farm. If the hobby farm involves horse-related activities, the farm cannot earn a profit for more than two of the previous seven tax years. Other considerations for hobby farm eligibility, as determined by the IRS, include whether the taxpayer operates the farm in a businesslike manner, whether the taxpayer expends enough time and effort to suggest a profit motive, whether the taxpayer has profitable expertise in farming or if the taxpayer has been successful in small profit ventures in the past.

Filing Taxes

IRS rules stipulate that taxpayers must include any income from a hobby activity, including farming, on their returns when filing annual taxes. Taxpayers must notate income from a hobby farm or similar not-for-profit activity on line 21 of IRS Form 1040 and include deductions claimed for a hobby farm on Schedule A of IRS Form 1040.

Postponement of Determination of Profit

Individuals operating a hobby farm who want to take advantage of claiming all expenses as a tax credit may file IRS Form 5213. This form delays the IRS from making the determination whether the farm is a hobby farm or operates for profit. This will allow a farmer to delay the determination of his farm as a hobby farm under IRS qualifications for five years, or seven years if the farm involves horse-related activities. Taxpayers must file Form 5213 within three years of the start of farming activities or within 60 days of an IRS notice disallowing deductions from the hobby activity.

References

• HobbyFarms.com; Farm Income and Taxes; Rich Schell; March 2004
• Purdue University; Frequently Asked Farm Management and Marketing Questions: Is My Farm a Business or a Hobby (Not-for-Profit) Farm?; May 2002
• IRS.gov: Publication 225 (2010), Farmer's Tax Guide -- 4. Farm Business Expenses -- Not-for-Profit Farming
• IRS.gov: Publication 17 (2010), Your Federal Income Tax -- 12. Other Income