IRS Eyes 2018 Payment on 2019 Farm Machinery Purchases

I have reviewed the IRS Schedule F guidance and will hit some high points here for your benefit. One issue the IRS wants to address is taxpayers deducting hobby losses. If you are not approaching a business with a profit motive, it’s a “hobby” as far as the IRS is concerned, and hobby losses cannot be used to reduce your other taxable income. One strategy that some taxpayers employ is what I will call the quasi-farm. They have a hunting lodge, ATV, and brush-hog on a 100-acre tree farm.  Nothing is ever harvested on the tree farm, except bucks during deer season, and the taxpayer deducts all of the costs to maintain the farm. The IRS would call this a hobby and disallow the losses, if it conducted an audit.

Another concern of the IRS is farmers potentially putting down deposits on 2019 purchases in the last few days of 2018. The IRS looks at four factors to make a distinction between a deposit and a currently deductible expense.
  1. Is the check just a flat amount not related to an invoice for a specific quantity of something?
  2. Does the farmer have a right to get a refund of the deposit?
  3. Did the seller treat it as a deposit in his/her books?
  4. Does the farmer have the right to substitute the supplies prepurchased for other goods?

If the answer is NO to all of those questions, you have currently deductible prepaid supplies rather than a nondeductible deposit.

There were two other items the IRS mentioned in its 2017 memo to auditors. The first was to check for farmers putting wages paid to employees on the Custom Hire line. Why? I can’t be sure, but I suspect that some taxpayers have shown some unofficial payroll on that line (i.e. They paid farm laborers cash or checks without withholding Social Security, Medicare, or Federal taxes.) A Schedule F audit is one way for the IRS to find those unofficial payrolls and ask for the unpaid payroll taxes, penalties, and interest.

Some other things that can always be in play for an audit are unreported revenue, purchases without receipts or invoices, mileage expense without mileage records, and personal expenditures made through the farm’s bank accounts. Upon audit, I’ve seen taxpayers owe $0 and sometimes over $100,000. It all depends on whether or not your ducks are in a row.

Source: Shawn Williamson,

ProAg Quick Links

Agent Toolbox Grower Toolbox Careers

ProAg News

USDA Reports Review

The USDA World Agricultural Supply and Demand Estimate (WASDE) for July was met with much skepticism based on the corn numbers. With production 195 million bushels (mb) higher than in June and nearly 375 mb above the average trade estimate, the corn market sloughed off early weakness and closed sharply higher....

Helping wheat, corn producers target fertilizer needs

A few years ago, Agricultural Research Service (ARS) scientists in Akron, Colorado began noticing a pattern to their wheat harvests: yields were higher in low-lying areas. But it was the extreme variability in yields that surprised the researchers. ...

Grants help rural businesses lower energy costs

Acting Assistant to the Secretary for Rural Development Joel Baxley today encouraged farmers, rural small businesses and agricultural producers to apply for financing in a key U.S. Department of Agriculture (USDA) program that provides loan guarantees to help rural small businesses lower their energy costs....
Get ProAg updates via email
Your browser is out-of-date!

Update your browser to view this website correctly. Update my browser now