Hello. Thank you for allowing us to help you with your questions. The reporting form and deductible expenses depends on how active you are in the business of renting grazing land.
If you were fully involved in taking care of the cattle and the land and spent over 500 hours (over 3 months of 40-hour workweeks), then you would report your profit and losses on Schedule F, "Profit and Loss from Farming." You would be able to deduct all expenses associated with ranching and take a loss on your Form 1040 against other income, but you would owe self-employment tax on any earnings above $400. It doesn't sound like that is your situation.
If you are actively involved with renting the land for grazing, such as fencing the land, providing water for the cows, working with the cowboys, and other similar activities and the cowboys pay you based on the number of cows or a portion of the proceeds from the sale of the cows; then you would report the amount the cowboys pay you and the deductible expenses on Form 4835, "Farm Rental Income and Expenses." On Form 4835, you would deduct any expenses associated with the land you rent. That would include things like paying for fencing or fencing materials; the property taxes paid on the land; depreciation for any tractors or other equipment used to maintain the land; any other supplies, fees, or taxes related to the rented land; and gasoline or diesel fuel used in equipment to maintain the land. If you have more expenses than the rental paid, you can only deduct the amount of loss up to the amount of passive income that you report. In other words, you can't deduct a farm rental loss from other types of income listed on your return. You can also receive a credit for the sales tax paid on any gas or diesel fuel that is used in generators or equipment used for maintaining your land and not for highway driving. That fuel tax credit is calculated on Form 4136 and reported on line 72 of your Form 1040. Most states have similar fuel credits that you can claim in addition to the federal fuel tax credit. This is considered a passive income activity, so you won't have to worry about self-employment taxes.
If you just rent the land to the cowboys for a set fee and they do all of the work, then you would report the activity on Schedule E "Supplemental Income and Loss." You can deduct all of the same expenses as listed above and any other reasonable expenses for maintenance, improvement, and upkeep of the land. Like the last case, you can only deduct expenses to the extent of the rent you receive. If you use farm equipment on your land, you can still apply for the fuel tax credits.
Whether you report your income and expenses as a farm rental on Form 4835 or as a passive rental on Schedule E depends on whether the owners of the cattle pay you based on the number of cows or a share of the profits or if they pay you a set fee. If it's a set fee, use Schedule E. If it's based on profits or number of cows, use Form 4835. Either way, you can deduct your property taxes, fencing and gates, the cost of the excavator if you rented it or the depreciated cost of the excavator if you own it, the fuel for the excavator when it's used on your land and the fuel for the ATV when it's used on your land. You could depreciate the cost of the ATV based on percentage of time it's used for rental purposes such as inspecting fences, but I wouldn't recommend it, because it will look suspicious to depreciate the business use of the ATV for a passive rental activity. You can apply for the federal fuel tax refund on Form 4136 for any fuel used in vehicles on your land, such as the ATV or excavator. Here is the weblink to the Colorado forms and instructions to get a refund of fuel sales tax used in agricultural, off-highway use: https://www.colorado.gov/pacific/sites/default/files/DR7189.pdf
I hope this answers your questions. I am happy to continue working with you if you need more explanation. I own ranch land and lease it for grazing under the same type of situation. I also rent out the land primarily for the agricultural property tax exemption. This is a topic that I am very familiar with and I want to ensure that you get the information you need so that you are satisfied.
21 Mar 2016, 9:16 PM