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Is My Farm a Hobby or Business?

Steve Brown, Robert Page and, Deacue Fields (February, 2011)

Summary

The Internal Revenue Service deems that the taxpayer enters into an activity for a profit and can deduct all related business expenses if the business makes a profit 3 out of 5 consecutive years. If breeding, training, showing, or racing horses, it is considered a for-profit business if a profit is made in 2 out of 7 consecutive years. When this threshold of profitable years is not met, the taxpayer has the burden of proving that he/she entered in to the farming activity with a profit motive. Taxpayers should not single out one factor to determine whether the business is for profit, because the IRS takes all of the following points into consideration.