Materially Participate on a Farm

[cvanveghel]

Hi, we have Farm Income/Expenses & have answered the questions that determine we do not materially participate.  In prior years we have had a profit and this is shown on the summary pages, this year we have a loss and under the Farm Profit/Loss it shows $0.  Why do the Losses not count?   If I answer to say we did Materially Participate it then shows the loss amount and our return is larger.

When it asks the number of hours worked and we file jointly is that our joint hours worked?

Thanks!  

[Coleen3 · Accepted solution]

If you worked the farm, you materially participated. If you state that you don't, you will not be able to take your loss. If you rented the farm/land, then the material participation has a different meaning.

Material participation most often applies to business activities, including farming or ranching. Material participation requires a producer to be involved in the operation of a trade or business activity on a regular, continuous, and substantial basis, thereby avoiding the passive activity loss rules. The level of involvement applies to the owner of the business or an owner of an interest in a partnership or an S Corporation. Activities associated with material participation (especially for landlords) are those things that, considered in their totality, show that the producer was significantly involved in the production of farm commodities. Examples include but are not limited to: • Paying at least half the direct production costs (operating expenses), • Furnishing at least half the tools, equipment, and/or livestock, • Advising the tenant, and/or • Regularly and frequently making or taking part in management decisions. These are examples of Farm Rental activities.

Test 1. Participation Exceeds 500 Hours The producer participates for more than 500 hours in the specific activity during the taxable year. If both spouses participate in the farm business, the participation of both spouses is counted, but the participation of children and employees is not counted.

https://www.ruraltax.org/files-ou/Passive_Loss_Rules.pdf

Another source says:

The kind of activities that a taxpayer should be able to document during each year may include the following: consulting with advisers, other experts in the industry, attending industry events, auctions or other sales, keeping business records, discussing matters with one's spouse and other partners, implementing or formulating business plans and revising them, reviewing finances, making cost projections, making disbursements, speaking with vendors on the telephone or in person, talking to potential customers, general duties of animal husbandry or harvesting of crops, planning and making improvements (such as building fences) tending to the physical labor on the farm or ranch, supervising others hired to work for you, and performing other tasks and decision-making functions. But it is imperative that records be kept to reflect the number of hours involved.

http://www.cattletoday.com/archive/2008/November/CT1802.shtml

[dleebrick]

I did not materially participate in the operation of our farm, but 2020 TT is still charging me for self-employment tax.  I don't believe this is correct.

Is this being addressed in a later update?

[MarilynG1]

@dleebrick If you received a 1099-Misc with an amount in Box 7, this is considered Self-Employment Income.

Once you deduct your Self Employment Expenses, you are assessed Self Employment Tax (which goes into your Social Security account) against any profit you show.

If you are not Materially Participating, you won't be able to claim any expenses, so you will be assessed Self Employment Tax on the entire income amount. 

Click this link for more info on How to Enter Farm Income and Expenses. 

This link gives detail about Expenses and Material Participation . 

[dleebrick]

No 1099-MISC.  I am the landowner.  I simply receive a share of the crop.

Here's the tax advice I've been given elsewhere for my situation..  

Rent based on crop or livestock sharing. If you are involved in a crop or livestock sharing arrangement with a tenant who does most of the work of operating the farm and you don't meet the special active participation test described below, you should report your income and expenses on Form 4835, Farm Rental Income and Expenses, instead of Schedule F. In that case, your net income from Form 4835 is carried over to Schedule E, Supplemental Income and Loss. It is treated like rental income and will not be subject to self-employment tax.

In order to use this form (and avoid self-employment tax on the income), you must not have materially participated in the activity. You did materially participate if you meet one of the following four tests:

• You do any three of the following four things: pay or guarantee payment of at least half the direct costs of producing the crop; furnish at least half the tools, equipment, and livestock used in producing the crop; consult with your tenant; inspect production activities periodically.
• You regularly and frequently make, or take an important part in making, important management decisions.
• You work 100 hours or more spread over five weeks or more in activities connected with crop production.
• You do things that, considered in their total effect, show that you are materially and significantly involved in the production of the farm commodities.

[Landers]

I am a landowner that allows another person to raise livestock on my land. I receive no rental income or any portion of the livestock from the person raising livestock on my property. I do help with maintaining the property that I own and that the livestock is on. Do I qualify as a material participant or other type of participant and if so, do I qualify to take advantage of any allowed tax deductions for equipment purchases such as a tractor?

Thank you.

[DMarkM1]

No.  According to the IRS you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards and groves.

In the case you describe you are not operating for a profit.  You are not leasing the property or using it to raise cattle for a profit for you.  In this case there is no business income to deduct.