I started farming 7 years ago. We learned that we could report a negative net income for 5 of the first 7 years. That was not hard to do at all! In the 6th and 7th years I just didn't report all expenses so that I could show a net "profit". We had a family crisis last year and as a result I'm not sure this farm is sustainable. Can I dissolve the farm and would I have to recapture all of the expenses that were claimed over the years? They were definitely legitimate expenses at the time, but times have changed since the crisis.
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The IRS expectation is to show a profit three of five years or two out of seven years for horse related activities. So I am assuming you have a horse operation.
That being said, the IRS does not automatically disallow expenses as soon as you miss that threshold. The risk is that the IRS may argue you have a hobby farm rather than one for profit. You can overcome this by having a good business plan with a profit motive.
If you cease operations because it is not profitable, you do not automatically have to pick up the previous years expenses which you deducted. That being said keep in mind the IRS could come in and argue you have a hobby loss in any of those years. If they did audit you and indicate you have a hobby loss those expenses would be eliminated or drastically reduced under hobby loss rules.
If you sell assets which you had depreciated under the farm you will need to recapture the depreciation when you sell the asset.
Here is a good article published by an extension office. It is not authoritative or from the IRS but written in plain language which explains farming and hobby losses. https://extension.usu.edu/ruraltax/tax-topics/farm-losses-versus-hobby-losses
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