Guidance for Special Types of Businesses
Rules for Businesses in Certain Industries/Market Segment Specialization Program Guides(MSSP)/Market Segment Understandings (MSU)
Farming
Hobby Farmers

A farmer who operates a farm for profit can deduct all the ordinaryand necessary expenses of carrying on the business of farming. However, if you do notcarry on your farming activity, or other activity you engage or invest in, to make aprofit, there is a limit on the deductions you can take. You cannot use a loss from thatactivity to offset other income. Activities you do as a hobby, or mainly for sport orrecreation, come under this limit. So does an investment activity intended only to producetax losses for the investors.

The limit on not-for-profit losses applies to individuals,partnerships, estates, trusts, and S corporations. It does not apply to corporations otherthan S corporations.

In determining whether you are carrying on your farming activity forprofit, all the facts are taken into account. No one factor alone is decisive. Among thefactors to be considered are whether:

• You operate your farm in a businesslike manner.
• The time and effort you spend on farming indicates 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 made a profit in similar activities in the past.
• You make a profit from farming in some years and how much profit you make, and
• You can expect to make a future profit from the appreciation of the assets used in the farming activity.

Partnershipsand S Corporations.

Presumptionof profit. Your farming or other activity is presumed to be carried on forprofit if it produced a profit in at least 3 of the last 5 tax years, including thecurrent year. Activities that consist primarily of breeding, training, showing, or racinghorses are presumed to be carried on for profit if they produced a profit in at least 2out of the last 7 tax years, including the current year. The activity must be the same foreach year within this period. You have a profit when gross income from an activity is morethan the deductions from that activity.

Important References:                                  

Publication 225                Farmer's TaxGuide
Form 5213                      Election to Postpone Determination as to Whether the Presumption Applies That an Activityis Engaged in for Profit