Tax Guide for Farmers – Not-for-Profit Farming

The Internal Revenue Code contains the laws that govern federal income tax reporting. The Code includes a section of requirements for farming businesses and the related income and expenses.

The section of the Code includes requirements for how to report income taxes for not-profit farming business. Not-for-profit farming businesses are the focus of this article.

Not-For-Profit Farming Business

When you operate a farm for a profit, you can deduct all of the ordinary expenses related to the farming business on Schedule F of your tax return. However, in the case of a farming business operated as a not-for-profit, you must report any income on line 21 of Form 1040.

In addition, you can deduct expenses for a not-for-profit farm only if you itemize deductions on Schedule A of Form 1040. And there is a limit on the amount of the deduction you can take. A loss from a not-for-profit farm cannot be deducted against income from other activities.

The rules about reporting income and expenses for not-for-profit businesses also apply to activities performed as a hobby, as well as to investment activities run with the intent of producing a loss for the investors.

The above limits apply whether the not-for-profit is an individual, estate, or trust, or is organized as a partnership or S corporation. Other types of corporations do not have to adhere to these limitations.

To determine if you are operating your farm as a not-for-profit, you must evaluate the entire farming business. The factors include but may not be limited to the following:

  • You operate the farm in a manner similar to other businesses,
  • You dedicate a sufficient amount of time to demonstrate an intent to make the farm profitable,
  • You depend on income from the farm to live,
  • You experience losses because of events outside of your control or in an amount deemed reasonable for a start-up farm,
  • You change farming operations in an attempt to turn a profit,
  • You have sufficient knowledge to operate a profitable farming business,
  • You have operated a similar business in the past for a profit,
  • You make a profit from the farming business in some years, and
  • You expect to make a profit in future years as the farming assets appreciate.

Presumption of Profit

Your farming business is considered to be not-for-profit only if it has not made a profit in at least three of the previous five years. In the case of businesses dedicated to breeding, racing, showing, or training horses, they are considered to be not-for-profit only if they have not made a profit in at least two of the previous seven years.

If your farming business passes the for-profit test, the business is not subject to the not-for-profit limitations and can take deductions on Schedule F, even in years when the business experiences a loss. If your farming business fails the for-profit test, your business may still be considered for-profit based on an evaluation of the factors noted in the previous section.

For purposes of this calculation, a farming business is considered to have made a profit when its gross income exceeds its deductions. If a taxpayer dies before the end of the five- or seven-year period, the period ends on the date of the taxpayer’s death.

How can I get further help with questions about my not-for-profit farming business?

A tax attorney is the best person to speak with about questions related to your farming business or any other tax questions. Only a tax attorney has the formal training to address not-for-profit questions, as well as provide the confidentiality of attorney-client privilege when discussing your taxes.

You can speak with a tax attorney by calling the phone number at the top of this web site or by completing the form below. A tax attorney will then contact you to give you the help you need.

Your first discussion with the tax attorney is completely free of charge. Therefore, you have every reason to speak with a tax attorney today.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.