Is My Farm a Hobby or a Business?
Perhaps you started a backyard garden to supplement store-bought produce and discovered that you have a green thumb. You quickly accumulated more food than you and your family needed, and you gave away the excess to friends and neighbors. So far, your garden is still strictly in the realm of a hobby.
But let’s say that, instead of giving the food away, you set up a booth at a local farmer’s market and sell it. You expand your garden to generate more food, and you begin to earn income—albeit supplementary to your primary income—from the food sales. At this point, you may have gone from gardening for fun to farming as a business in the eyes of the Internal Revenue Service (IRS).
The IRS has strict rules about what is considered a business and what is considered a hobby. According to IRS Publication 225, you are in the farming business if you “cultivate, operate, or manage a farm for profit, either as owner or tenant.”[1] As a for-profit farmer, you must pay taxes on any income you generate from farming. However, being a farmer also comes with tax benefits, such as special income tax deductions.
Tax considerations may have a major effect on the timing of farm income and deductions and, as a result, they can be a significant factor in determining the structure of certain farm transactions (i.e., acquiring new equipment). Farmers should be aware of taxes and tax laws to avoid mistakes that reduce their after-tax income, says the Land Grant University Tax Education Foundation.[2]
Choosing a Farm Business Structure
If your farm is a for-profit business, the type of business structure you choose for your farm has legal and tax implications and should be chosen carefully based on your situation. For example, sole proprietor farmers do not have to register their business with the state or file any paperwork to set up their business the way that businesses formed as separate legal entities do. But if sole proprietor farmers are sued or owe debts to creditors, their personal assets may be at risk.
As a farmer, you can choose any type of business form for your farm, including the following:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
- Corporation (including S corporation and C corporation)
- Nonprofit corporation
- Cooperative
The Small Business Administration gives a brief overview of these different business structures.[3] The website Beginning Farmers recommends that new farmers consult with an attorney and a certified public accountant that understand the farming laws where the farm is located.[4]
Federal Farming Laws
The US Department of Agriculture (USDA) regulates farming and ranching, as well as food quality, safety, and nutrition labeling. It consists of twenty-nine agencies that oversee everything from food safety and inspection, to crop and livestock insurance regulations, to the national biotechnology regulatory framework.
Many of these farming regulations are set forth in the farm bill—a legislative package that Congress passes about once every five years. The farm bill is the primary way that the government sets agricultural and food policy. It has a huge impact on how food is grown, the types of food produced, and farmers’ livelihoods. Once a farm bill is passed, the USDA writes the rules for how its programs will be implemented.
The 2018 Farm Bill, which expires in 2023 and provided $428 billion in funding, covers the following topics:
- Price and income support for farmers
- Natural resource conservation
- Federal loan programs for farmers
- Farm and food research and education
- Rural farm development
Farm bill assistance is provided to farmers through a variety of programs.[5] For example, you may qualify for financial assistance if you are a veteran, minority, or woman farmer or rancher. The USDA is not the only federal department that oversees agricultural practices. The Environmental Protection Agency (EPA) also has several programs that are relevant to farmers.[6] Some of these programs only apply to farm operations of a particular size or in a specific location. The regulatory burdens imposed on farms vary, but may involve application, permitting, planning, labeling, testing, waste management, and other requirements.
The EPA has the authority to impose civil and criminal penalties on noncompliant farmers. Violations of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), for instance, which relates to pesticide application, can result in fines up to $50,000 and a year of imprisonment.
State Farming Laws
The EPA notes that many states’ requirements may be broader in scope or more stringent than those of the EPA. Because state laws vary considerably, farmers must remain up to speed on state agricultural statutes, which deal with much more than environmental issues. The National Agricultural Law Center[7] notes that these laws touch on a wide range of farming topics:
- Agricultural liens
- Biofuels
- Climate change
- Fence law
- Grain sales and storage
- Noxious weeds
- Ownership of agricultural lands
- Recreational use
- Tax assessment of agricultural land
- Unmanned aerial vehicles (i.e., drones)
To place just one of these issues under the spotlight, more than forty states—in addition to the federal government—have statutes addressing climate change in agricultural production.
Legal Support for Farmers
For most farmers, the hard work is more than made up for by the reward of knowing they are helping to feed the world. But the demands of farming go beyond the long hours and physical toil: understanding the many federal and local farming laws presents a very different type of challenge.
You might need a hand not only at harvest time, but any time you have legal questions about farming. Our attorneys are knowledgeable about the laws that affect farmers. Whether you are just starting your farm or are a long-time farmer wanting to expand or change your operation, we are here to help. Please contact us to schedule an appointment.
[1] About Publication 225, Farmer’s Tax Guide, Internal Revenue Serv., https://www.irs.gov/forms-pubs/about-publication-225.
[2] Tax Guide for Owners and Operations of Small And Medium Size Farms, Land Grant Univ. Tax Educ. Found., Inc. (Philip E. Harris & Linda E. Curry eds., 2011), https://ruraltax.org/files-ou/taxguidetosmallmidsizefarm.pdf.
[3] Choose a business structure, U.S. Small Bus. Admin., https://www.sba.gov/business-guide/launch-your-business/choose-business-structure.
[4] Farm Incorporation, Beginning Farmers, https://www.beginningfarmers.org/farm-business-planning/farm-incorporation/.
[5] Farmers’ Guide to Farm Bill Programs, U.S. Dep’t of Agric. (July 2019), https://www.farmers.gov/sites/default/files/documents/FarmBill-2018-Brochure-11×17.pdf.
[6] Laws and Regulations that Apply to Your Agricultural Operation by Farm Activity, U.S. Env’t Prot. Agency, https://www.epa.gov/agriculture/laws-and-regulations-apply-your-agricultural-operation-farm-activity.
[7] State Law Clearinghouse, The Nat’l Agric. Law Ctr., https://nationalaglawcenter.org/state-compilations/.
