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ONLINE EXCLUSIVE- In the Cattle or Horse Business? Is it Business or Hobby? How well would your farm or ranch meet the test?

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By June Henderson, CPA

The IRS “Hobby Loss” provision applies to individuals, partnerships, LLCs filing as a partnership and
S-corporations. If you are a farmer or rancher, you should learn more about how this provision may affect you. The tax code provides that Hobby entities are not allowed to deduct expenses in excess of income from an activity which is not engaged in for profit.

Whether an activity is a business or a hobby depends upon whether or not the taxpayer entered into the activity with the objective of “making a profit”. For farmers and ranchers who have other income sources not related to your farming activity, building a case that you are in the cattle or horse business with the intent of making a profit is very important.

Should your farm or ranch fall into the category of being profitable for two out of seven years, your business would be presumed to be a business and not a hobby. But, keep in mind that the “two profit years out of seven” rule is a presumption and not a safe harbor. Without proper planning and recordkeeping, the IRS could still reach the conclusion that your activity is a hobby rather than a business.

For example, the horse industry has suffered declines over the past 6 to 8 years. If you invested in putting together a good band of brood mares and selected prime breedings for those mares, there has been little opportunity to recover those costs or to “profit” from these activities. There are no rules related to how many horses an entity should own in order to qualify as a business. But, in order to preserve the objective of making a profit, you should be wary about investing so much that you have little hope of recovering your investment through winnings, services revenues or sale of horses. Fuel prices, costs of feed and hay have risen over the past few years while the average sale price of the horse has fallen. Due to these conditions, many horse-related businesses are experiencing losses spanning several years. How do you best insure that your losses will not be looked upon as “Hobby Losses” by our taxing authorities?

There are nine important factors to consider in determining whether the owner of an activity intends to make a profit.
1. The manner in which you carry on the activity
2. Your expertise or that of your advisors
3. The time and effort you spend in carrying on the activity
4. Your expectation that the assets used in the activity will appreciate in value
5. Your success in other similar or dissimilar activities
6. Your history of income or losses with respect to the activity
7. The amount of occasional profits, if any, which you have earned
8. Your financial status
9. Any personal pleasure or recreation you may have experienced

What are the best practices to establishing proof that your farming/ranching undertaking is “for profit”?
Planning for profit years is important. You might shift revenue and expenses from one year to another, such as paying two years of property taxes within one reporting year, or holding onto livestock for sale and grouping the sales within one reporting year which may make the “sale” year more profitable.
Selling horses, cattle or breeding rights, leasing broodmares or purchasing cattle embryos are tactics to shift revenue and expenses in order to plan for a “profit year”.

Consistently using straight line depreciation is also a good practice that can be used when planning for profit years. This does not affect the overall profitability of your business activity, but could help you qualify for the two out of seven year profit conditions.

Farmers and ranchers should always try to operate in a manner which indicates there is a profit motive. The creation of a business plan is one of the top recommendations along with the development of an annual budget. Also recommended is that owners keeps a daily, weekly log or “diary” in which issues that affect profitability can be recorded. Documenting issues such as livestock related accidents, failed breedings, illness, disease or changes in the way you do business can prove to be important should there be an audit. It is also difficult to remember these issues years later if not documented.

Record keeping is key.
Keeping a good set of books and operating with businesslike methods is one of the most important steps that you can take. In the past IRS evaluations have had positive outcomes if the farmer had prepared budgets and operating procedures which forecasted that the operation would be profitable even if the profits did not come to pass.

For farming/ranching operations, a lack of a business plan, a budget or projections for future profits can be damaging. It is a good practice to have a written plan. It is also easier to follow your plan if it is written and it is also much easier to explain your plan should the IRS evaluate your business.

Your business plan should provide details such as anticipated profits from future sales of animals, crops or leases as well as plans, for the purchase of future income producing assets such as replacement heifers or herd bulls.

Another thing to keep in mind is the concept that farming and ranching assets may be expected to appreciate. The term “profit” includes appreciation in the value of assets, including your land.
If little profit is realized from your ranching operation, perhaps an overall profit might occur from the increase in value of the land, livestock or other assets used in the business.

Failure to meet the “for profit” requirements are often related to investigations or audits in which case the taxpayer did not have counsel. As with any business undertaking, you should seek legal and financial advice about the economics of your activity. Even though you may be quite experienced with the aspects and undertakings of your ranching operation, seeking and following the advice of a professional is valid documentation that your intent is to improve the financial outcome of your business.

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Farm & Ranch

Meanwhile, Back at the Ranch…

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By Rayford Pullen | [email protected]

When May arrives, we start thinking about weed control. With two years of drought under our belts, grass grazed short and hay stocks depleted, what we do now will influence our forage conditions for the entire year. With 75 percent of our annual warm season forages made by July 15 in North Texas, we need to get the grass growing while the sun shines.

Speaking of the sun shining, the biggest deterrent to growing lots of grass is restricted sunlight, and the biggest sun blockers we have are weeds.

Have you noticed weeds are normally just slightly taller than your grass and are probably blocking 90 percent of the sunlight from reaching the grass itself? So obviously, we need to improve conditions, so sunlight reaches the plants we want to grow.

With grass extremely short, more sunlight is hitting the soil surface now, which in turn results in more weed seed germinating. With the moisture we have received, we expect an abundance of weeds this year.

To read more, pick up a copy of the May issue of NTFR magazine. To subscribe by mail, call 940-872-5922.

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Farm & Ranch

Land Market Report: March Land Sales

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By Jared Groce

Rural land sales are continuing on a steady pace for early spring, with prices holding very strong with the sell-to-list price ratios remaining very high, even on properties that have been on the market for a longer than usual time period. The total number of transactions are picking up once again as the spring selling season kicks off, and the average acreage continues to decrease.

Larger acreage properties seem to be in higher demand than smaller properties currently, with many buyers simply parking cash in real estate to hedge against inflation. Interest rates seem to have settled down and most experts agree that rates will be reduced by the fed this year. Some lenders have programs in place that allow the buyer to reduce their rates without having to go through a full refinance ordeal.

To read more, pick up a copy of the May issue of NTFR magazine. To subscribe by mail, call 940-872-5922.

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Farm & Ranch

Texas FFA State Vice President Weston Parr

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Future Farmers of America was founded by a group of farmers in 1928 with the mission of preparing the next generation of agriculture. It has done just that during its 95-year history, as the organization works to give back to others by following its motto, “learning to do, doing to learn, earning to live, living to serve.”

FFA is an organization made up of state associations, and at the helm of the Texas FFA is a team of 12 officers representing their respective areas within the Lone Star State. These individuals dedicate a year of their lives as they serve members, provide leadership, and work together with the state staff and board of directors to develop policy and lead the organization of over 177,000 members.

North Texas is represented by Area IV and Area IV, stretching from Wilbarger County to Bell County and from Runnels County to Grayson County. This year, those chosen to lead this great area are State President Isaac Hawkins Jr., Area IV, and State Vice President Weston Parr, Area V.

Parr is from the Sam Rayburn FFA chapter and the Area V Association, but the leader who now serves more than 19,100 members of Area V entered the FFA organization as a shy teenager who sat in the back of the room.

“I didn’t talk to a whole lot of people. I didn’t know what I wanted to do with my life or where I could see myself, so I wasn’t involved on my high school campus,” Parr recalled.

“Then I started FFA and slowly but surely, my ag teachers worked me into attending more contests, meeting new people, and speaking. I remember the first time I gave an officer speech to my chapter. I can still remember how embarrassing it was. To see the progression from that moment to speaking on stage at the state convention in front of thousands of people. Now I feel like I can enter the industry I want and be successful all because of what FFA afforded me for five years.”

There is not much Parr did not do during his time in high school. His contest participation included chapter conducting, wool judging, cotton judging, wildlife, and job interview, but his favorite was extemporaneous speaking, which he did not start until his senior year of high school.

“I wish I could go back to my freshman, sophomore, and junior years and start that sooner. I think if I had more time, I would have been more successful than I already was, but that was something I didn’t realize I liked at the time. I’m not naturally somebody who likes to speak in public, but it was actually my favorite,” Parr said.

Parr won several awards during his time competing. In 2023 alone, Parr earned the Texas FFA Service-Learning Proficiency title, was a National FFA Service-Learning Proficiency finalist, and a Texas FFA Extemporaneous Speaking finalist. In addition to his CDE and LDE events during high school, he showed commercial steers at Houston, and boilers at most major shows, participated in the county show with projects in ag mechanics, showed goats from time to time, and showed heifers until graduation.

“FFA provides invaluable resources and knowledge to be successful once you leave high school and you are out of the blue jacket for the first time. I have been a part of a lot of great organizations over the years, and they are all great in their own way, but in my opinion, FFA is the most successful at producing members of society who want to go and do something with themselves,” Parr said.

He was halfway through his time as Area V Association President and attending the national convention when he began to ponder the idea of running for state office.

“This is around the time when you usually figure out if you want to go through and be a state officer or you decide that area officer is your last run. I was unsure of where I wanted to go, but I knew I didn’t want to be done with FFA. I decided maybe it would be a good opportunity not only for me to make more friendships and connections, but also to give back to the program that allowed me to be able to do what I can do today,” Parr explained.

To read more, pick up a copy of the May issue of NTFR magazine. To subscribe by mail, call 940-872-5922.

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