J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Farm Losses

If your deductible farm expenses exceed your farm income, you have a loss from the operation of your farm. The amount you can deduct of your farm loss may be limited by a number of rules. However, consider how the following rules may especially impact on farming activities.

PASSIVE ACTIVITY RULES

Losses from an activity in which you do not materially participate and any rental activity cannot exceed your income from passive activities. Thus, if you own the farm but do not work it yourself, you may not be able to deduct your losses.

AT-RISK RULES

These rules, which limit your deduction for losses to your economic investment, apply to farming activities in the same way in which they apply to nonfarming activities.

HOBBY LOSS RULES

If you are not engaged in the farming activity with a realistic profit motive, then your losses are not deductible. They do not carry over to another year; they are gone forever. There is considerable litigation each year involving gentlemen farmers, and their success in deducting losses depends on demonstrating a profit motive. For details, see Chapter 26.

FARMING LOSSES

Farming losses cannot be used as a tax shelter. Farming losses by those receiving certain subsidies are limited in how much can be used to offset nonfarm income on Schedule F. The limit is the greater of $300,000 ($150,000 for married persons filing separately) or the net farm income received over the past 5 years.

Losses limited by this rule are not lost forever; they can ...