My husband and I own a small farm in addition to all the other things we have going on. We have several goats, chickens, a few cows, and rabbits. We occasionally sell a goat or two to thin out the herd, or really because my husband says we have WAY TOO many.
Since we earn some money on the farm, we must report that revenue to the IRS.
This brings up, how do we treat that income?
Is it a Hobby?
Well, we enjoy what we do.
Is it a Business?
We do earn a little revenue from the sales.
The classification of our Farm will determine how we treat that income, and the corresponding expenses, on our taxes.
Treated as a business:
We would report the income and all the expenses as a sole proprietorship (in our case) as self-employment income. We could even take a loss if the expenses are greater than the revenue. This could potentially offset our tax liability!
Treated as a hobby:
Prior to 2018, we would have reported the gross income, but only reported the expenses up to the amount of revenue that was earned in that year. We would then reduce the expense by 2% of our Adjusted Gross Income. For instance, if we sold $500 worth of goats in 2018, and had $2000 in expenses, we could ONLY deduct $500 of those expenses (not taking the 2% of AGI into consideration). We would not be able to use the Standard Deduction if we insisted on taking the hobby expense deduction.
NEW FOR 2018: The hobby expense deduction is no longer applicable so there are no deductions for hobby expenses available. However, the standard deduction has increased so there is some offset but we will discuss that in a later topic.
So, it seems like classifying the venture as a business is a no-brainer!
But wait, the IRS has a few guidelines on if we can treat our farm as a hobby, or a business.
These include how we treat the activity, how much time and effort we devote to the farm, and if we have ever made a profit, just to name a few.
For us, our Farm is definitely a hobby as we have not made a profit, and don’t expect to for quite some time. That may change in the future, but for now, it’s an easy determination for us.
If you have another source of income and need help determining if it qualifies as a business, feel free to reach out to me so we can discuss the tax consequences.
Hope you all have a blessed day!
~S~