Are You Farming for Profit or Hobby?

By: Sandy Buxton, Extension Educator, Cornell Cooperative Extension - Washington County

When operating a farm or small business for profit, it is possible to deduct the operating expenses that occur in the ordinary operation of the business on Schedule F (or another Schedule). However, if you are not attempting to make a profit through investment, work and planning, then the income needs to be reported on the front of the 1040 and limited deductions can be itemized on Schedule A.

Under these rules, activities carried out as a hobby, sport or recreation can not be claimed as a business. This also includes investment activity undertaken only to provide a tax loss for the investor.

In concluding whether or not farm activity is being carried on for profit, the IRS uses a number of factors for review. No one factor alone is decisive.

• You operate your farm in a business-like manner.
• The time and effort you spend on farming indicate that you intend to make it profitable. 
• You depend on income from farming for your livelihood.
• Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming.
• You change your methods of operation in an attempt to improve profitability.
• You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business.
• You were successful in making a profit in the past doing similar activities.
• You can make a profit from farming in some years and how much profit you make.
• You can expect to make a future profit from the appreciation of assets used in the farming activity.

There is a rule regarding presumption of profit, that the business should make a profit in 3 of the last 5 years. If your business can not pass this test, it is still possible to be considered a farm business but you must demonstrate why you did not meet the test, extreme start-up costs, poor conditions and/or other activities.

The bottom line is that you must take a strong look at what you are interested in and see what is happening as to whether or not you can call it a business. Many people develop hobbies into part time businesses, but they don't have the opportunity to underwrite the expenses as tax deductions. Once the activity starts to become more self-sustaining, it is a business with all of the trappings - recordkeeping, insurance, DBA, etc.