Showing a loss on farm for more then 3 years

[JMH351]

From what I've read, you can only show a loss on your farming for 3 consecutive years?  If so, what happens after that?  Can you show a small profit the 4th year and have a loss for the next 3?

[DanielV01]

It depends.  The IRS' standard is that if you are in business, you should reasonably be expected to be profitable over the course of a period of time.  Businesses can and do have down years.  But the general pattern is that they will usually make money.  If someone is claiming loss year after year, the IRS can and many times will question if the "business" is truly a business or if it is a hobby, which is generally a not-for-profit activity.  If they determine on the merits that the "business" is actually a hobby, then they will reclassify the "business", which means that income generated is treated as ordinary, non-business income (not subject to Social Security/Medicare or self-employment taxes).  On the other hand, under current tax law, deductions against this type of income is simply not allowed.

What the IRS will look at, though are facts and circumstances of the case.  Certain circumstances may well be legitimate business operations that are producing loss year over year, and this can especially be the case with farming.  If a farm is not able to produce because of severe drought, for example, or catastrophic loss of livestock, or upheavals in the commodities market, there could very well be losses several years running.  In these cases, the IRS may delve into whether employees (if any) were being compensated fairly (not overpaid for their services for the purpose of claiming loss), whether the farm is set up for commercial-type production (instead of a large family farm that might sell some products at the local farmer's market, for example), and other factors.

For a more detailed consideration of this subject, please see the following website:  Earning side income: Is it a hobby or a business?

[JMH351]

This is my 3rd tax year crop farming, it actually does make a profit and has each year except that I'm allowed to deduct the interest from the loan I purchased the land with, and that as pushed it to the loss side each year so far.  I am doing it to make money, more then just a hobby.  I can reduce expenses in a calendar year and make those purchases the previous or following in some cases, where I could actually show a profit every couple years or so.  But, till I get that loan paid down, or I don't claim the interest in my farming expenses, was wondering what my options were.

[Mike9241]

hobby loss is not self-assessed. the IRS would have to audit and then "assert" hobby loss. thinks like projections that will show it will be profitable in the future. do you have a business plan?   has the property appreciated? 

for example rentals activities frequently show losses their entire existence. however,  they would be profitable except for the required depreciation deductions. the property is worth at least the original cost so upon sale there will be a profit when all the years are considered. 

Referencing the IRC Section 183, the key elements for deciding whether or not an activity is for-profit include:

The manner in which the activity is carried out or conducted –i.e., is it conducted in a businesslike manner?
The respective taxpayer’s qualification(s) concerning the activity.
The time spent on the activity.
The venture’s assets and their value appreciation potential.
The taxpayer’s history with the same or varying activity(ies).
The success or failure of the activity.
The amount of infrequent returns relative to losses and the taxpayer’s investment.
The financial status of the taxpayer – i.e., will the taxpayer benefit from the losses? What is their main source of income?
The taxpayer’s pleasure or recreation, resulting from the activity – i.e., does the taxpayer partake in the activity for pleasure?

[JMH351]

Sorry, but didn't really understand a word of that, wayyyyy over my head.  I do not have employees, it is just me, I do have another job besides.