If I build a pond and have an ag exemption or wildlife exemption, can I write the cost of construction off as I am providing a water source for either the ag or wildlife? I am in Texas and am trying to make the sting of the cost a little easier to take.

Thanks

Gunny

The answer is ask your CPA.
Now my answer.
I would get the ag/wildlife exemption first. Make sure your pond is appropriate for what you are claiming it is used for. In other words, you can't write off a 10 acre pond to water 2 cows or irrigate your tomato plants.

You might want to see what your NRCS agent says.

Jersey has it right. Talk to a CPA that specializes in preparing tax returns for farmers. There is an extensive amount of tax code related specifically to farming. I'm not very familiar with that section of the code (I don't prepare any traditional farm schedules). From what I understand however is that you can deduct certain soil and water conservation expenses but it is limited to 25% of the income produced by the farm, however the deduction can be used to create a Net Operating Loss (NOL) carryover that can be used in later years (subject to the 25% of farm income). There is a good publication related to the tax code for farmers, ironically it's called... Farmers Tax Guide. Chapter 5 discusses soil and water conservation expenses.

I highly recommend that you discuss this topic with a CPA that is well versed in farm schedules.

And of course the disclaimer:
The above post is designed for amusement purposes only. It should not be considered tax advice and therefore should not be used during the preparation of a tax return. Although I do own a pair of overalls and a pitchfork and I am constantly slinging the bull, I am not an expert on farm taxation. Although I posted a link to an IRS tax publication, I highly recommend that you limit your exposure to Internal Revenue Code. Prolonged exposure to the code can cause nausea and projectile vomiting, dementia, extreme depression followed by bouts of anxiety and the desire to commit tomfoolery.

gunny my short answer is first do as JHAp says about tax codes. Also you need to show income as well in order to show expense or you will be raising a red flag. OF course you can still show lose in the first year, etc. how much you can write off not sure but needs to basically be a legit business. I know i wrote off check I gave contractor for building my holding ponds, but of course use it everyday for biz. IRS (aka big bro) is not reading this are they?

Thanks Guys

Gunny

Im accepting bribes Not to report this thread.

Definitely going to need the cpa on this one. Even if you have proven income you need to show it is not a hobby farm by seperating your finances from the farm's. i am in the process of doing this since I am turning my hobby into a side business. Ponds are a proven way to store logs in the summer . I may be able to deduct some pond expenses.

Hobby farm losses are a major hot button with the IRS lately. The IRS has developed specialized tax audit guides related to certain industries that have a history of "non-compliance" (using the IRS vernacular) with IRS code. There are about 50 of these specialized audit guides. Five or six of the fifty are agricultural/farm related. One guide is specifically designed to determine if a farm is a hobby and not a viable farm. You can view all of the guides here ---> IRS Market Segment Specialization Program Audit Technique Guides. If you scroll down the page about half way you will see the Hobby Farm Guide and the Farm Guide. This will give you and idea of what the IRS is looking at related to these operations.

By the way, I am not trying to discourage anyone from creating a farm schedule and deducting farm expenses. The point of this post is merely to point out that this is an area of tax code in which the IRS is very interested.

Come to Branson and I'll buy you two beers one for the first post I made and a second for the above post.

I filed my first schedule F in 1981 and was audited almost immediately( went to Dallas office with paperwork). My taxes were in order and haven't been audited since. Like everyone has said, utilize a competent CPA that has experience in farm tax matters. Personally, I would EXPECT to be audited after filing your first Schedule F. IMHO, pictures of my operation seemed to make the process more "personal", but again defer to tax professionals...du

JHAP, I read some of that (2-15) and it seems that the focus of the the IRS,
is ironically, the false claim of income. That seems to be what they are looking for
in order to tip them off as to the likelihood of potential fraud.
I'm really not affected, but always like to know what our friends at the IRS are doing.

David, IMHO bringing photos is a great audit defense. As you indicated it brings the farm to a more personal level.

Rmedgar, yes false claim of income is one of the hot points. When I first began in public accounting (1980) farm schedules were hardly every audited. It was commonly accepted that farms can lose money for many years in a row. Eventually people began to take advantage of this apparently free ride and would plant a few plants and declare themselves farmers. The would then deduct riding mowers, UTVs, etc, etc. The IRS began targeting farms for audit and discovered that many of these farms were basically just hobbies. Taxpayers reported a thousand bucks in income and tens of thousands in expenses.

There is absolutely nothing wrong with farm schedules. But you have to run the farm like a business - with the intent to make profit and must have a reasonable expectation to make a profit. The IRS is going to look at many factors to make a determination including whether or not you rely on the income from the farm, how much time is devoted to the farm versus time devoted to other income producing activities (in other words do you have another full time job?), do you have the knowledge and experience to be able operate a farm (they look at evidence of participation in AG programs and seminars, and memberships in Co-Ops, etc, etc. You get the idea.

Since Greg Grimes threw his hat into the ring I'll say this. Greg is a prime example of a person that I'm sure would not have any difficulty in prevailing in a IRS audit. Here is a guy that manages ponds for a living, he is very knowledgeable about all things ponds, he write articles for Pond Boss, etc, etc. It would be very easy to hold him out as a expert and therefore the reasonable expectation to make a profit would be very high. There are many folks here on these forums that would similarily qualify.

thank you

Jhap you make me fell better but I still would be nervous on audit even knowing what I do is right. One guy told me as long as you continue to pay more in taxes you should never be audtied. Well this year we will pay less taxes due to lower profits first time ever since starting my business in 1996. You have calmed my nerves i do get "the call".

I wrote to the IRS several years ago and asked them very politly to remove me from thier mailing list.A couple weeks later I got a bill for about $800.00. I try not to have any contact with them anymore.
And I have every intention of being in branson,and anybody that tries to keep me down to 2 beers is going overboard the first time they turn thier back on me

This falls under the myth category. It's more about how you arrived at the tax number, not what the tax number is.



You are in good company. I suspect most of America will be in a similar situation.

Restraining you to two beers is just crazy talk. That's almost as bad as putting a "cozy" on Sunil's beer. Sure it may be possible but you won't like the outcome.