Thats no farm… its HOBBY
Those who are just beginning the farm operation or those who are slowly withdrawing from it would do well to familiarize themselves with the Internal Revenue Code § 183 “Activities Not Engaged in for Profit”, occasionally referred The “Horse Shelter” or Hobby Loss Rules.
This code section is designed to prevent tax payers from claiming business losses (and thereby reducing income available for taxation) on activities that the tax payer primarily engages in for recreation, entertainment and personal enjoyment rather than a legitimate business purpose. Specifically, horse farms and cattle operations of small sizes are eyed with greater scrutiny.
The IRS has historically found this a difficult area to litigate in, but has developed training manuals and policies to help examiners who may have no knowledge of farm operations, in order to ensure compliance with the Internal Revenue Code. A review of the training manual shows the IRS attempts to familiarize its agents with the world of competitive show animals, but also the distinction between registered herds of cattle and commercial herds of cattle. The manual advises examiners to consider calculating the volume of feed purchased versus animals sold to ensure no under reporting of income, such as cash sales.