Hopefully you keep good records of all your expenses. Keeping good records is the easiest way to make sure everything goes smoothly if you’re audited. But if you haven’t kept good records, there may be an alternate approach you can take to claim a loss if you need to. An almost too-crazy-to-be-true story reported in PPC’s Five-Minute Tax Briefing newsletter illustrates the strategy.
An attorney in Texas had a crop share arrangement for his 1,276-acre farm with a farmer named Clinton Pigg (yes, Pigg). Mr. Pigg planted and harvested crops, and the attorney was responsible to maintain the farm, including the equipment and the land. Part of that maintenance also included building traps for wild hogs (yes, Mr. Pigg was being harassed by hogs) that caused mayhem on the farm. The attorney spent quite a bit of time out there on the farm. But he failed to keep records showing the expenses involved in maintaining the farm.
The farm venture wasn’t very successful, and the attorney needed to claim a loss. But the IRS disallowed the farming losses because of passive loss limitations. So the attorney calculated up the amount of time he’d invested in his farming activities, which turned out to be about 100 hours—more than any other individual. This satisfied one of the material participation tests under Temp. Reg. 1.469-5T(a), and the Tax Court held that the losses were deductible.
It’s probably easier to keep good records.