HOBBY FARM RULES
The first step in qualifying for favorable tax treatment as a farmer is establishing that you are in business to make a profit. You can not raise alpacas as a hobby farmer and receive the same tax preferences as a for-profit farmer. A farming operation is presumed to be for profit if it has reported a profit in three of the last five tax years, including the current year.
If you fail the three years of profit test, you may still qualify as a "for profit" enterprise if your intention is to be profitable. Some of the factors considered when assessing your intent are:
1. You operate your farm in a business-like manner.
2. The time and effort you spend on farming indicates you intend to make it profitable.
3. You depend on income from farming for your livelihood.
4. Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming.
5. You change your methods of operation in an attempt to improve profitability.
6. That you make a profit from farming in some years and how much profit you make.
7. You or your advisors have the knowledge needed to carry on the farming activity as a successful business.
8. You made a profit in similar activities in the past.
9. You are not carrying on the farming for personal pleasure or recreation.
You don't have to qualify on each of these factors - the cumulative picture drawn by your answers will provide the basis for the determination.