To make the most of tax planning, it’s important to identify what type of farming operation you’re running and how much of your time is spent on farming activities. In general, farmers fall into three categories: full-time, part-time or hobby.
To classify as a part-time farm, there must be a reasonable expectation of profit.
Farming represents the chief source of income for full-time farmers, whereas part-time and hobby farmers earn their primary income - generally more than 50% of all income - by working off-farm. To classify as a part-time farm, there must also be a reasonable expectation of profit. This is the key difference between part-time and hobby farming, as hobby operations are considered recreational with no realistic expectation of profit.
Stephanie Enders, senior manager at MNP in Leduc, Alta., sees a rising number of part-time farmers seeking accounting and tax planning advice each year. She says they may be in a situation where they plan to continue their off-farm employment, or entering or growing a farming business where they hope to move to full-time in the future.
Ask your accountant
If your operation classifies as a part-time farm, it is important to seek professional tax advice on an ongoing basis. Here are three top questions to ask your accountant at your next meeting.
1. What can I do to minimize my tax liability?
“It’s important to connect with your accountant regularly and especially before year-end,” Enders says. “When records are kept up-to-date, we can do tax estimates to see where you are sitting and figure out what the best tax strategy is.”
For the many farmers who use the cash basis of accounting for income tax purposes, this means meeting in the fall to discuss pre-buying inputs or using the optional inventory adjustment.
Click here to see more...