Can a Money-Losing Ranch Still Be a Business?

What Happened in the Kolar Ranch Case?

Kenward F. Kolar Jr. operated a cattle ranch in Texas that had been in his family for generations.

By the time he took over the operation, the property needed a lot of work.

Fences had to be repaired. Old equipment had to be replaced. Pastures were overgrown. The cattle herd needed to be rebuilt.

Kolar believed it could take around five to six years to get the cattle operation back to a profitable level.

He also put real time into the ranch.

His wife kept detailed financial records, and the ranch had its own operating bank account.

After other tax issues were resolved, one main question remained.

Could Section 183, often called the hobby-loss rule, block an additional $205,514 in farm deductions for 2016?

At that point, the IRS was no longer arguing about whether those expenses were documented or connected to the ranch.

The remaining issue was whether Kolar was actually running the ranch with the goal of making a profit.

The Tax Court said yes.

You can read more about the 2026 Kolar ranch case.

Ranch Business vs. Hobby: 5 Lessons From the Kolar Case

1. Years of Losses Do Not Automatically Make Your Ranch a Hobby

Let's start with the biggest misunderstanding.

There is no rule that says:

"Three losing years means hobby."

There is also no rule saying:

"Five bad years and your deductions are finished."

The three-out-of-five-year rule can give you a helpful presumption under Section 183.

But if you do not meet it, the IRS can still look at your facts and decide whether you were honestly trying to make money.

For more background, see the IRS explanation of IRS hobby or business rules.

That mattered in Kolar.

The court clearly noticed the size of the losses. In fact, it described them as "troublingly large."

From 2017 through 2022, the ranch reported more than $2 million in losses.

Those losses were about 77 times larger than the ranch's gross receipts during that period.

So the court did not ignore the bad numbers.

It simply looked at more than the numbers.

The ranch had already been in poor condition and needed years of rebuilding.

The court also looked at later events that helped explain why losses kept going. Those included Hurricane Harvey, COVID-related problems, and the severe winter storm in 2021.

Those events happened after the 2016 tax year that was before the court.

They did not cause the 2016 loss.

But they helped explain why the ranch kept struggling in the years that followed and gave more context to Kolar's long-term plan.

2. Run the Ranch Like a Business

If you tell the IRS your ranch is a business, your records should help back that up.

That was one of Kolar's stronger points.

The ranch had its own bank account.

His wife kept detailed books and financial records.

Those records were shared with their CPA.

That may sound basic, but it matters.

For a ranch or farm, good records may include:

• Bank statements
• Receipts and invoices
• Livestock records
• Equipment expenses
• Repair costs
• Feed expenses
• Insurance records
• Budgets
• Records of professional advice

But keeping records alone does not automatically prove you have a business.

You could have perfect spreadsheets and still be running an activity mostly for personal enjoyment.

The stronger question is:

Are you using those records to make better business decisions?

If your ranch keeps losing money, your books should help you see where the problems are.

• Are feed costs too high?
• Are certain animals not producing enough income?
• Are repairs eating up too much cash?
• Is the herd too small?
• Are you selling into the wrong market?

A real business owner looks at those problems and tries to fix them.

For more practical documentation guidance, see IRSProb's article on business records that can help during an IRS audit.

If you want the IRS to see a business, your records and your decisions should look like a business.

3. Your Experience, Time, and Decisions Matter

The IRS does not only look at what you say you want to do.

It looks at what you actually do.

Kolar had studied animal science and biology.

He also had years of experience around the ranch and spent serious time working on it.

That helped his case.

You do not need a degree in agriculture to run a legitimate ranch business.

Real-world experience can matter too.

So can advice from people who know the industry, such as:

• Veterinarians
• Ranch consultants
• Agricultural advisers
• CPAs
• Lenders
• Other experienced ranchers

The point is that your decisions should look informed.

If you keep losing money, what are you changing?

• Did you cut costs?
• Change the herd?
• Try a different feeding plan?
• Improve pasture management?
• Find new buyers?
• Talk to an adviser?
• Replace old equipment that was costing too much to maintain?

A person who really wants to make money normally makes changes when something is not working.

4. Be Ready to Explain Why the Losses Keep Happening

Ranching is unpredictable.

You can do many things right and still get hit with problems you cannot control.

Weather changes.

Cattle get sick.

Equipment breaks.

Feed prices go up.

Workers leave.

Drought can destroy grazing conditions.

Those things can matter when the IRS is deciding whether your losses make sense.

In Kolar's case, the court looked at the poor condition of the ranch when he took over.

It also looked at later events that helped explain why the losses continued, including Hurricane Harvey, COVID-related employee deaths, and the severe winter storm in 2021.

Again, those later events did not directly cause the 2016 loss.

They helped explain the bigger picture.

That gives ranchers an important lesson.

Document problems while they are happening.

If drought forces you to reduce your herd, keep records.

If a storm destroys fencing, save photos, insurance documents, and repair invoices.

If livestock die, keep veterinary records.

If feed costs force you to change your plan, keep the numbers that explain the decision.

And don't only document what went wrong.

Document what you did about it.

Years later, saying "we had a bad year" is not very strong.

Showing what happened, what it cost, and how you responded is much better.

5. Other Income Can Hurt Your Case, but It Does Not Decide Everything

One of the more interesting parts of Kolar was that the ranch was not his only source of money.

From 2017 through 2022, Kolar reported about $2.35 million in oil and gas royalty income.

That mattered.

The Tax Court treated his financial situation as the strongest factor working against him.

Why?

Because large outside income can make it easier to keep funding a business that keeps losing money.

It can also make the IRS wonder whether the activity is really being run for profit or whether the owner simply enjoys it and can afford the losses.

That does not mean having another job, investment income, royalties, or another successful business automatically makes your ranch a hobby.

It does not.

But it can make the IRS look more closely.

This is especially true if the ranch losses are creating large tax benefits that reduce tax on other income.

In Kolar's case, the court still found that the other facts were strong enough to show a real profit motive.

The Nine Factors Are Not a Simple Scorecard

The IRS and Tax Court often look at nine factors when deciding whether an activity is really being run for profit.

The nine profit-motive factors include:

1. How you run the activity
2. Your experience and knowledge
3. How much time and effort you put into it
4. Whether the assets may increase in value
5. Whether you have succeeded in similar businesses before
6. Your history of profits and losses
7. Whether the business has ever made meaningful profits
8. Your overall financial situation
9. Whether the activity gives you personal enjoyment

But this is not a simple test where you count the points.

In Kolar, four factors favored the taxpayer.

Two were neutral.

Three worked against him.

Still, the court said the quality of the evidence mattered more than simply counting the factors.

You can also review the IRS explanation of the business versus hobby factors.

Can Ranching, Land, and Oil Income Be Treated as One Business?

Another interesting issue in Kolar was whether different activities happening on the same property could be treated as one business.

The answer was not automatically yes.

The court generally kept the cattle-ranching activity separate from land appreciation and oil-and-gas activity.

But it included the development of well water because the water activity directly supported the cattle operation.

There are also special tax rules for deciding when farming and holding land for appreciation may be treated as one activity.

What Ranchers Should Do Before the IRS Starts Asking Questions

Do not wait for an audit to start thinking about whether your ranch looks like a real business.

Keep your business records organized.

Separate personal and ranch expenses when appropriate.

Know how the ranch is supposed to become profitable.

Review your losses each year.

If something is not working, make changes and document them.

Keep records of major setbacks such as drought, storms, disease, fires, equipment problems, or market changes.

Keep records of advice you receive from CPAs, veterinarians, lenders, or agricultural professionals.

Most importantly, make sure what you are doing matches what you are claiming on the tax return.

None of these steps guarantees that the IRS will agree with you.

But they can help show that you were truly trying to make money.

Keeping business tax records current can make it easier to explain your decisions later.

If the IRS has already contacted you, review the notice carefully before responding. IRSProb also has a guide to responding to an IRS audit letter.

Frequently Asked Questions

Final Thoughts

A ranch does not become a hobby just because it loses money.

But the longer those losses continue, the more important it becomes to show that you are honestly trying to make the operation profitable.

That is the big lesson from Kolar.

The court did not only look at the losses.

It looked at Kolar's records, his experience, the time he put into the ranch, the way he ran the operation, the problems he faced, and the decisions he made.

The numbers mattered.

They just were not the whole story.

If you want your ranch treated like a business, your actions should tell the same story as your tax return.

Disclaimer