Losses From Operating a Farm(p26)

If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. The amount of the loss you can deduct when figuring your taxable income may be limited. To figure your deductible loss, you must apply the following limits.

• The at-risk limits.
• The passive activity limits.

The following discussions explain these limits.

If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.

The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. These rules limit the losses you can deduct when figuring your taxable income. The deductible loss from an activity is limited to the amount you have at risk in the activity.

You are at risk in any activity for:

1. The money and adjusted basis of property you contribute to the activity, and
2. Amounts you borrow for use in the activity if:
   1. You are personally liable for repayment, or
   2. You pledge property (other than property used in the activity) as security for the loan.

You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest.

For more information, see Publication 925.

A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. Generally, a rental activity is a passive activity.

If you have a passive activity, special rules limit the loss you can deduct in the tax year. You generally can deduct losses from passive activities only up to income from passive activities. Credits are similarly limited.

For more information, see Publication 925.

For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. This limit applies to any farming business, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. Your farming losses will be limited to the greater of:

• $300,000 ($150,000 for a married person filing a separate return), or
• The total net farm income for the prior five tax years.

Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Also, the limitation on farm losses should be applied before the passive activity loss rules are applied.

For more details, see section 461(j) of the Internal Revenue Code.

Generally, an excess farm loss is the amount of the farming loss that exceeds the amount of the limitation (as described above). This loss can be determined by taking the excess of:

• The total deductions for the tax year from the farming business, over
• The total gross income or gain for the tax year from the farming business, plus the greater of:
  1. $300,000 ($150,000 for a married person filing a separate return), or
  2. The excess (if any) of the total gross income or gain from the farming business for the prior five tax years over the total deductions from the farming business for the prior five tax years.

Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year.