It’s a broiling hot day here at Morning Song Farm, the kind of heat that makes every worker, including this ambitious farmer, dream of slinking off to some shady spot to stare quietly into space. But not today. It’s time to celebrate! I just got the call from my husband saying the IRS has decided to allow me to continue my farming business.

We bought this subtropical fruit and nut farm in 2001, with the intention of it being mostly my responsibility; my husband would continue to support us from his off-farm business. I would be running all aspects of our soon-to-be-organic 20-acre farm. It seemed like the perfect project for me, with a love of horticulture, organic gardening, and work experience in marketing. What this little farm begged for was someone just like me.

The previous owners had been getting almost nothing for their macadamia nuts; they had let their beautiful limes drop and rot, half the property had been sitting idle, the coyotes ate their entire persimmon crop every year, and the avocado grove had been producing a half to a third of industry standards. What especially astounded us, is that the owners had been spending their days, for oh, 20 years, turning valves on and off in what had to be the most complicated 3-water source, staggered watering system on the planet. Nothing was automated. With my background and vision combined with my husband’s ability to fix/modify/invent anything in a pinch, I saw a great opportunity for a made-in-heaven job for me in an arena I felt passionate about, combined with a chance to really allow my husband to shine, with whatever time he had to contribute, at what he does best. It was going to be fun! We were even going to get closer than ever before, this being the first real opportunity to work together as equals on something we both cared about deeply. It was going to be perfect. The farm even came with a free tractor!

Only an experienced farmer can guess at the rude awakening we had! Fortunately the one thing I can say I had done fairly well from the beginning was that I had kept excellent financial records. Using Quicken, I had kept track of our expenses in two files: checking and cash. So when the IRS sent a routine letter stating our records from two years ago would be the subject of an audit; I wasn’t worried. What could go wrong? Well, I ran into a few, surprise, whopper snags along the way, and think that my fellow farmers might benefit from my mistakes

First, they subjected us to an exhaustive audit. The bill from our accountant exceeded $2,000. Instead of taking audit samples and extrapolating, which is what I expected, the auditor reviewed every receipt. He questioned everything, which took a lot of our accountant’s time. One disallowed expense was cash paid to day laborers. Although we had receipts for those who worked through a contracting service, it should come as no surprise the IRS disallowed non-receipted cash payments paid directly to workers. Still, the audit revealed little amiss with my financial records. So we were pretty blown away with the IRS’s next move. They said they were considering disallowing the entire farm, labeling it as a hobby, instead of a business. If the IRS were successful in disallowing the entire farm as a business, we would owe considerable back taxes for 2001, and would be unable to count as business expenses any of the farm’s expenses for 2002. We would have had to immediately put the farm up for sale, just to cover the IRS bill! Frightened, we alerted our real estate agent, but didn’t actually list the property.

The IRS claimed that since the farm didn’t have a profit for the first year, they could just disallow ALL receipts because it wasn’t a business that year, but rather a hobby, unless I could produce a detailed, verifiable accounting of every hour we had worked on the farm for the year 2001, and the time had to be equal to or over 500 hours, combined for my husband and me. Employees’ time didn’t count! That just amazed me. I had a grove manager full time in 2001, and another $20,000 in day laborers’ salaries.
Webster’s definition of hobby: An activity or interest pursued outside one’s regular occupation, primarily for pleasure. Some hobby, this farm! By the time we found ourselves defending ourselves against the label, we’d cleared five rough acres, installed micro irrigation, ordered and installed 500 new baby avocado trees, regraded roads, automated the well-fed irrigation system on half the farm, become active in farmers’ markets, and completed the job of becoming CCOF Certified Organic. We’d joined the California Macadamia Society, California Avocado Society, and the Farm Bureau. We’d joined the Rare Fruit Growers Association and had purchased hundreds of rare fruit trees: Passionfruit, Feiojas, Loquat, Jujube, Himalyan and Pakistani Mulberries, Dovyalis, Che, Dragon Fruit, Cara Cara, Tarocco Blood Orange, Kaffir Lime, Fingered Citron, Yuzu, Gold Nugget, Okitsu Satsuma and Pixie Mandarins, and more. We’d established relationships with well-known nationwide organic wholesalers. We’d installed electric fencing and added livestock to the farm. We’d built a professional looking website, which included on-line ordering for our macadamias. We sure thought we were in business.

Webster’s first definition of business: The occupation, work, or trade in which a person is engaged. There’s no mention of profit. I admit we didn’t have any, but if you need to have a profit to be a business, I guess Enron was a hobby, too.

The IRS mailed us a form to fill out, telling us to make additional copies for each day we worked on the farm during our first year of ownership, now 2 years ago, of what work we’d done, how much time it took, and how the task might be verified.

Every new farmer in this country needs to know what the IRS can require! Surely the IRS wasn’t expecting me to be able to comply with their request. The word needs to get out, because the average new farmer might not have kept the kind of records that I happened to have kept. I kept schedule calendars, a detailed daily farm journal, copies of all letters sent, transcripts of phone conversations, and every E-mail transmission relating to my farm from two computers. It still took me 140 hours to compile the records for the first 6 months into one concise manuscript, as they required. They’d demanded 12 months of data, but after documenting the first half of the year, I’d proved we’d not only met the 500-hour requirement, we’d substantially exceeded 1,000 hours. Now I had only three or four days until the, by their definition, non-negotiable deadline, and had no heart to go on. Really, I just didn’t have it in me. I’d been getting up in the middle of the night and working until dawn for months on the financial audit, and now this time audit. I told my accountant to retain an attorney if the IRS wanted the other six months of this utterly importunate time sucker. The examiner accepted the six-month manuscript. I have no idea if it was ever read. There is no indication it ever was; perhaps the IRS weighed it and made their determination or maybe they got a ruler out and decided because it was thicker than 3 inches it would pass.

The resentment that I was being required to write this monolith while planting time passed me by, while my hard-earned stevia plants (try starting them!), just-delivered baby citrus and subtropical rare fruit trees sat languishing in the oncoming heat, intruded oppressively in my thoughts.

Also, heads up: Any personal journal or diary you keep can be subpoenaed, I was threatened. So if you value your privacy, it’s a good idea to refrain from making remarks in a journal of the kind that you might not want others to see. Mixing a diary and farm journal into one document can result in a violating perusal by some prurient IRS number-cruncher reading everything you had to say about your husband, lover, or the eccentric neighbor with the rattlesnake hobby. Keep personal comments out of your farm journal! Do keep detailed records of where you spend your time daily. Make sure some of that time is verifiable. Weeding is wonderful, but not very verifiable. Keep seminar receipts. And of course it takes time to spend money. Every invoiced expense requires verifiable time. For instance, Home Depot is an hour round trip for us. You might think you could just make something up in the event of an audit, but fabrication takes a lot more time than transcription; you won’t be given a lot of time. Even throwing myself into it as I did, and having excellent records to work from, (rather than having to make stuff up) I got through only half the year before the deadline was upon me. As I buckled under the weight of the deadline, I was granted an extension early on, but your examiner doesn’t have to grant you this.

Finally, I found having a detailed record of where my time went can be useful in ways other than for taxes. A year and a half after a conversation with a worm compost-making guy, I could go back to the notes from that conversation and place an order. It seems to me farming is a job with more places to screw up than your average job, and it sure helps to be able to go over information from the past year’s season to see what I’ve forgotten, where I bought it, what the advice was, and how much time it took. I had no idea the IRS counted time. My journal saved me. So can yours.

Donna and Frank Buono own Morning Song Farm in Rainbow, California. E mail Donna at: morningsongfarm@cox.net.