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1040x processing time 14. 1040x processing time   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Fuels Used in FarmingBuyer of fuel, including undyed diesel fuel or undyed kerosene. 1040x processing time Undyed diesel fuel, undyed kerosene, and Other Fuels (including alternative fuel). 1040x processing time Custom application of fertilizer and pesticide. 1040x processing time Fuel not used for farming. 1040x processing time Dyed Diesel Fuel and Dyed Kerosene Fuels Used in Off-Highway Business Use Fuels Used for Household Purposes or Other Than as a Fuel for Propulsion Engines How To Claim a Credit or RefundCredit only. 1040x processing time Claiming a Credit Claiming a Refund Including the Credit or Refund in Income Introduction You may be eligible to claim a credit on your income tax return for the federal excise tax on certain fuels. 1040x processing time You may also be eligible to claim a quarterly refund of the fuel taxes during the year, instead of waiting to claim a credit on your income tax return. 1040x processing time Whether you can claim a credit or refund depends on whether the fuel was taxed and the purpose (nontaxable use) for which you used the fuel. 1040x processing time The nontaxable uses of fuel for which a farmer may claim a credit or refund are generally the following. 1040x processing time Use on a farm for farming purposes. 1040x processing time Off-highway business use. 1040x processing time Uses other than as a fuel in a propulsion engine, such as home use. 1040x processing time Table 14-1 presents an overview of credits and refunds that may be claimed for fuels used for the nontaxable uses listed above. 1040x processing time See Publication 510, Excise Taxes, for more information. 1040x processing time Topics - This chapter discusses: Fuels used in farming Dyed diesel fuel and dyed kerosene Fuels used in off-highway business use Fuels used for household purposes How to claim a credit or refund Including the credit or refund in income Useful Items - You may want to see: Publication 510 Excise Taxes Form (and Instructions) 720 Quarterly Federal Excise Tax Return 4136 Credit for Federal Tax Paid on Fuels 8849 Claim for Refund of Excise Taxes See chapter 16 for information about getting publications and forms. 1040x processing time Fuels Used in Farming Owners, operators, and tenants of farms and certain other persons may be eligible to claim a credit or refund of excise taxes on fuel used in the trade or business of farming, when used on a farm in the United States for farming purposes. 1040x processing time See Table 14-1 for a list of available fuel tax credits and refunds. 1040x processing time Fuel is used on a farm for farming purposes only if used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes. 1040x processing time Farm. 1040x processing time   A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards for finishing cattle. 1040x processing time It also includes structures such as greenhouses used primarily for raising agricultural or horticultural commodities. 1040x processing time A fish farm is an area where fish are grown or raised and not merely caught or harvested. 1040x processing time Table 14-1. 1040x processing time Fuel Tax Credits and Refunds at a Glance Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed. 1040x processing time Fuel Used On a Farm for Farming Purposes Off-Highway Business Use Household Use or Use Other Than as a Fuel1 Gasoline Credit only Credit or refund None Aviation gasoline Credit only None None Undyed diesel fuel and undyed kerosene Credit or refund Credit or refund2 Credit or refund2 Kerosene for use in aviation Credit or refund None None Dyed diesel fuel and dyed kerosene None None None Other Fuels (including alternative fuels)3 Credit or refund Credit or refund None 1For a use other than as fuel in a propulsion engine. 1040x processing time 2Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending with undyed diesel fuel to be used for heating purposes. 1040x processing time See Reg. 1040x processing time 48. 1040x processing time 6427-10 (b)(1) for the definition of a blocked pump. 1040x processing time 3Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under Internal Revenue Code section 4081. 1040x processing time It includes the alternative fuels: liquefied petroleum gas (LPG),“P” Series fuels, compressed natural gas (CNG), liquefied hydrogen, any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, liquid fuel derived from biomass, liquid natural gas (LNG), liquefied gas derived from biomass, and compressed gas derived from biomass. 1040x processing time Farming purposes. 1040x processing time   As the owner, tenant, or operator and the ultimate purchaser of fuel that you purchased, you use the fuel on a farm for farming purposes if you use it in any of the following ways. 1040x processing time To cultivate the soil or to raise or harvest any agricultural or horticultural commodity. 1040x processing time To raise, shear, feed, care for, train, or manage livestock, bees, poultry, fur-bearing animals, or wildlife. 1040x processing time To operate, manage, conserve, improve, or maintain your farm and its tools and equipment. 1040x processing time To handle, dry, pack, grade, or store any raw agricultural or horticultural commodity. 1040x processing time For this use to qualify, you must have produced more than half the commodity so treated during the tax year. 1040x processing time The more-than-one-half test applies separately to each commodity. 1040x processing time Commodity means a single raw product. 1040x processing time For example, apples and peaches are two separate commodities. 1040x processing time To plant, cultivate, care for, or cut trees or to prepare (other than sawing logs into lumber, chipping, or other milling) trees for market, but only if these activities are incidental to your farming operations. 1040x processing time Your tree operations are incidental only if they are minor in nature when compared to the total farming operations. 1040x processing time   If any other person, such as a neighbor or custom operator (independent contractor), performs a service for you on your farm for any of the purposes included in list items (1) or (2), above, you are considered to be the ultimate purchaser who used the fuel on a farm for farming purposes. 1040x processing time Therefore, you can still claim the credit or refund for the fuel so used. 1040x processing time However, see Custom application of fertilizer and pesticide, later. 1040x processing time If the other person performs any other services for you on your farm for purposes not included in list items (1) or (2) above, no one can claim the credit or refund for fuel used on your farm for those other services. 1040x processing time Buyer of fuel, including undyed diesel fuel or undyed kerosene. 1040x processing time   If doubt exists whether the owner, tenant, or operator of the farm bought the fuel, determine who actually bore the cost of the fuel. 1040x processing time For example, if the owner of a farm and his or her tenant equally share the cost of gasoline used on the farm, each can claim a credit for the tax on half the fuel used. 1040x processing time Undyed diesel fuel, undyed kerosene, and Other Fuels (including alternative fuel). 1040x processing time   Usually, the farmer is the only person who can make a claim for credit or refund for the tax on undyed diesel fuel, undyed kerosene, or other fuels (including alternative fuel) used for farming purposes. 1040x processing time However, see Custom application of fertilizer and pesticide, next. 1040x processing time Also see Dyed Diesel Fuel and Dyed Kerosene, later. 1040x processing time Example. 1040x processing time Farm owner Haleigh Blue hired custom operator Tyler Steele to cultivate the soil on her farm. 1040x processing time Tyler used 200 gallons of undyed diesel fuel that he purchased to perform the work on Haleigh's farm. 1040x processing time In addition, Haleigh hired contractor Lee Brown to pack and store her apple crop. 1040x processing time Lee bought 25 gallons of undyed diesel fuel to use in packing the apples. 1040x processing time Haleigh can claim the credit for the 200 gallons of undyed diesel fuel used by Tyler on her farm because it qualifies as fuel used on the farm for farming purposes. 1040x processing time No one can claim a credit for the 25 gallons used by Lee because that fuel was not used for a farming purpose included in list items (1) or (2), above. 1040x processing time In the above example, both Tyler Steele and Lee Brown could have purchased dyed (untaxed) diesel fuel for their tasks. 1040x processing time Custom application of fertilizer and pesticide. 1040x processing time   Fuel used on a farm for farming purposes includes fuel used in the application (including aerial application) of fertilizer, pesticides, or other substances. 1040x processing time Generally, the applicator is treated as having used the fuel on a farm for farming purposes. 1040x processing time For applicators using highway vehicles, only the fuel used on the farm is exempt. 1040x processing time Fuel used traveling on the highway to and from the farm is taxable. 1040x processing time Fuel used by an aerial applicator for the direct flight between the airfield and one or more farms is treated as used for a farming purpose. 1040x processing time For aviation gasoline, the aerial applicator makes the claim as the ultimate purchaser. 1040x processing time For kerosene used in aviation, the ultimate purchaser may make the claim or waive the right to make the claim to the registered ultimate vendor. 1040x processing time A sample waiver is included as Model Waiver L in the appendix of Publication 510. 1040x processing time A registered ultimate vendor is the person who sells undyed diesel fuel, undyed kerosene, or kerosene for use in aviation to the user (ultimate purchaser) of the fuel for use on a farm for farming purposes. 1040x processing time To claim a credit or refund of tax, the ultimate vendor must be registered with the Internal Revenue Service at the time the claim is made. 1040x processing time However, registered ultimate vendors cannot make claims for undyed diesel fuel and undyed kerosene sold for use on a farm for farming purposes. 1040x processing time Fuel not used for farming. 1040x processing time   You do not use fuel on a farm for farming purposes when you use it in any of the following ways. 1040x processing time Off the farm, such as on the highway or in noncommercial aviation, even if the fuel is used in transporting livestock, feed, crops, or equipment. 1040x processing time For personal use, such as lawn mowing. 1040x processing time In processing, packaging, freezing, or canning operations. 1040x processing time In processing crude gum into gum spirits of turpentine or gum resin or in processing maple sap into maple syrup or maple sugar. 1040x processing time All-terrain vehicles (ATVs). 1040x processing time   Fuel used in ATVs on a farm for farming purposes, discussed earlier, is eligible for a credit or refund of excise taxes on the fuel. 1040x processing time Fuel used in ATVs for nonfarming purposes is not eligible for a credit or refund of the taxes. 1040x processing time If ATVs are used both for farming and nonfarming purposes, only that portion of the fuel used for farming purposes is eligible for the credit or refund. 1040x processing time Dyed Diesel Fuel and Dyed Kerosene If you purchase dyed diesel fuel or dyed kerosene for a nontaxable use, you must use it only on a farm for farming purposes or for other nontaxable purposes. 1040x processing time For example, you should not use dyed diesel fuel in a truck that is used both on the farm for farming purposes and on the highway, even though the highway use is in connection with farm business. 1040x processing time Excise tax applies to the fuel used by the truck on the highways. 1040x processing time In this situation, undyed (taxed) fuel should be purchased for the truck. 1040x processing time You should keep fuel records of the use of the truck on the farm for farming purposes, and for other uses. 1040x processing time You may be eligible for a credit or refund for the excise tax on fuel used on the farm for farming purposes. 1040x processing time Penalty. 1040x processing time   A penalty is imposed on any person who knowingly uses, sells, or alters dyed diesel fuel or dyed kerosene for any purpose other than a nontaxable use. 1040x processing time The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. 1040x processing time After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. 1040x processing time For more information on this penalty, see Publication 510. 1040x processing time Fuels Used in Off-Highway Business Use You may be eligible to claim a credit or refund for the excise tax on fuel used in an off-highway business use. 1040x processing time Off-highway business use. 1040x processing time   This is any use of fuel in a trade or business or in an income-producing activity. 1040x processing time The use must not be in a highway vehicle registered or required to be registered for use on public highways. 1040x processing time Off-highway business use generally does not include any use in a recreational motorboat. 1040x processing time Examples. 1040x processing time   Off-highway business use includes the use of fuels in a trade or business in any of the following ways. 1040x processing time In stationary machines such as generators, compressors, power saws, and similar equipment; For cleaning ; and In forklift trucks, bulldozers, and earthmovers. 1040x processing time   Off-highway nonbusiness (taxable) use of fuel includes: use in minibikes, snowmobiles, power lawn mowers, chain saws, and other yard equipment. 1040x processing time For more information, see Publication 510. 1040x processing time Fuels Used for Household Purposes or Other Than as a Fuel for Propulsion Engines You may be eligible to claim a credit or refund for the excise tax on undyed diesel fuel or kerosene used for home heating, lighting, and cooking. 1040x processing time This also applies to diesel fuel and kerosene used in a home generator to produce electricity for home use. 1040x processing time Home use of a fuel does not include use in a propulsion engine and it is not considered an off-highway business use. 1040x processing time How To Claim a Credit or Refund You may be able to claim a credit or refund of the excise tax on fuels you use for nontaxable uses. 1040x processing time The basic rules for claiming credits and refunds are listed in Table 14-2 . 1040x processing time Table 14-2. 1040x processing time Claiming a Credit or Refund of Excise Taxes This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a nontaxable use. 1040x processing time   Credit Refund Which form to use Form 4136, Credit for Federal Tax Paid on Fuels Form 8849, Claim for Refund of Excise Taxes, and Schedule 1 (Form 8849), Nontaxable Use of Fuels Type of form Annual Quarterly When to file With your income tax return By the last day of the quarter following the last quarter included in the claim Amount of tax Any amount $750 or more1 1You may carry over an amount less than $750 to the next quarter. 1040x processing time Keep at your principal place of business all records needed to enable the IRS to verify that you are the person entitled to claim a credit or refund and the amount you claimed. 1040x processing time You do not have to use any special form, but the records should establish the following information. 1040x processing time The total number of gallons bought and used during the period covered by your claim. 1040x processing time The dates of the purchases. 1040x processing time The names and addresses of suppliers and amounts bought from each during the period covered by your claim. 1040x processing time The nontaxable use for which you used the fuel. 1040x processing time The number of gallons used for each nontaxable use. 1040x processing time It is important that your records separately show the number of gallons used for each nontaxable use that qualifies as a claim. 1040x processing time For more information about recordkeeping, see Publication 583, Starting a Business and Keeping Records. 1040x processing time Credit or refund. 1040x processing time   A credit is an amount that reduces the tax on your income tax return when you file it at the end of the year. 1040x processing time If you meet certain requirements, you may claim a refund during the year instead of waiting until you file your income tax return. 1040x processing time Credit only. 1040x processing time   You can claim the following taxes only as a credit on your income tax return. 1040x processing time Tax on gasoline and aviation gasoline you used on a farm for farming purposes. 1040x processing time Tax on fuels (including undyed diesel fuel or undyed kerosene) you used for nontaxable uses if the total for the tax year is less than $750. 1040x processing time Tax on fuel you did not include in any claim for refund previously filed for any quarter of the tax year. 1040x processing time Claiming a Credit You make a claim for a fuel tax credit on Form 4136 and attach it to your income tax return. 1040x processing time Do not claim a credit for any excise tax for which you have filed a refund claim. 1040x processing time How to claim a credit. 1040x processing time   How you claim a credit depends on whether you are an individual, partnership, corporation, S corporation, trust, or farmers' cooperative association. 1040x processing time Individuals. 1040x processing time   You claim the credit on the “Credit for federal tax on fuels” line of your Form 1040. 1040x processing time If you would not otherwise have to file an income tax return, you must do so to get a fuel tax credit. 1040x processing time Partnership. 1040x processing time   Partnerships (other than electing large partnerships) claim the credit by including a statement on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040x processing time , showing each partner's share of the number of gallons of each fuel sold or used for a nontaxable use, the type of use, and the applicable credit per gallon. 1040x processing time Each partner claims the credit on his or her income tax return for the partner's share of the fuel used by the partnership. 1040x processing time An electing large partnership can claim the credit on the “Other payments” line of Form 1065-B, U. 1040x processing time S. 1040x processing time Return of Income for Electing Large Partnerships. 1040x processing time Other entities. 1040x processing time   Corporations, S corporations, farmers' cooperative associations, and trusts make the claim on the appropriate line of their income tax return. 1040x processing time When to claim a credit. 1040x processing time   You can claim a fuel tax credit on your income tax return for the year you used the fuel. 1040x processing time You may be able to make a fuel tax claim on an amended income tax return for the year you used the fuel. 1040x processing time A claim for credit or refund of an overpayment must generally be filed within the later of: Three years from the date the original return was filed, or Two years from the date the tax was paid. 1040x processing time Claiming a Refund Generally, you may claim a refund of excise taxes on Form 8849. 1040x processing time Complete and attach to Form 8849 the appropriate Form 8849 schedule(s). 1040x processing time The instructions for Form 8849 and the separate instructions for each schedule explain the requirements for making a claim for refund. 1040x processing time If you file Form 720, you can use its Schedule C for your refund claims for the quarter. 1040x processing time See the Instructions for Form 720. 1040x processing time Do not claim a refund on Form 8849 for any amount for which you have filed or will file a claim on Form 720 or Form 4136. 1040x processing time You may file a claim for refund for any quarter of your tax year for which you can claim $750 or more. 1040x processing time This amount is the excise tax on all fuels used for a nontaxable use during that quarter or any prior quarter (for which no other claim has been filed) during the tax year. 1040x processing time If you cannot claim at least $750 at the end of a quarter, you carry the amount over to the next quarter of your tax year to determine if you can claim at least $750 for that quarter. 1040x processing time If you cannot claim at least $750 at the end of the fourth quarter of your tax year, you must claim a credit on your income tax return using Form 4136. 1040x processing time Only one claim can be filed for a quarter. 1040x processing time You cannot claim a refund for excise tax on gasoline and aviation gasoline used on a farm for farming purposes. 1040x processing time You must claim a credit on your income tax return for the tax. 1040x processing time How to file a quarterly claim. 1040x processing time   File the claim for refund by filling out Schedule 1 (Form 8849) and attaching it to Form 8849. 1040x processing time Send it to the address shown in the instructions. 1040x processing time If you file Form 720, you can use its Schedule C for your refund claims. 1040x processing time See the Instructions for Form 720. 1040x processing time When to file a quarterly claim. 1040x processing time   You must file a quarterly claim by the last day of the first quarter following the last quarter included in the claim. 1040x processing time If you do not file a timely refund claim for the fourth quarter of your tax year, you will have to claim a credit for that amount on your income tax return, as discussed earlier. 1040x processing time    In most situations, the amount claimed as a credit or refund will be less than the amount deducted as fuel tax expense because the Leaking Underground Storage Tank (LUST) tax of $0. 1040x processing time 001 per gallon is generally not subject to credit or refund. 1040x processing time Including the Credit or Refund in Income Include any credit or refund of excise taxes on fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) as an expense deduction that reduced your income tax liability. 1040x processing time Which year you include a credit or refund in gross income depends on whether you use the cash or an accrual method of accounting. 1040x processing time Cash method. 1040x processing time   If you use the cash method and file a claim for refund, include the refund amount in gross income for the tax year in which you receive the refund. 1040x processing time If you claim a credit on your income tax return, include the credit amount in gross income for the tax year in which you file Form 4136. 1040x processing time If you file an amended return and claim a credit, include the credit amount in gross income for the tax year in which you receive the credit. 1040x processing time Example. 1040x processing time Sharon Brown, a farmer who uses the cash method, filed her 2012 Form 1040 on March 3, 2013. 1040x processing time On her Schedule F, she deducted the total cost of gasoline (including $110 of excise taxes) used on the farm for farming purposes. 1040x processing time Then, on Form 4136, she claimed the $110 as a credit. 1040x processing time Sharon reports the $110 as other income on line 8b of her 2013 Schedule F. 1040x processing time Accrual method. 1040x processing time   If you use an accrual method, include the amount of credit or refund in gross income for the tax year in which you used the fuels. 1040x processing time It does not matter whether you filed for a quarterly refund or claimed the entire amount as a credit. 1040x processing time Example. 1040x processing time Patty Green, a farmer who uses the accrual method, files her 2012 Form 1040 on April 15, 2013. 1040x processing time On Schedule F, she deducts the total cost of gasoline (including $155 of excise taxes) she used on the farm for farming purposes during 2012. 1040x processing time On Form 4136, Patty claims the $155 as a credit. 1040x processing time She reports the $155 as other income on line 8b of her 2012 Schedule F. 1040x processing time Prev  Up  Next   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1040x processing time 5. 1040x processing time   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. 1040x processing time Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. 1040x processing time When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. 1040x processing time Otherwise, these are capital expenses that must be added to the basis of the land. 1040x processing time (See chapter 6 for information on determining basis. 1040x processing time ) Conservation expenses for land in a foreign country do not qualify for this special treatment. 1040x processing time The deduction for conservation expenses cannot be more than 25% of your gross income from farming. 1040x processing time See 25% Limit on Deduction , later. 1040x processing time Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. 1040x processing time These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. 1040x processing time You must include in income most government payments for approved conservation practices. 1040x processing time However, you can exclude some payments you receive under certain cost-sharing conservation programs. 1040x processing time For more information, see Agricultural Program Payments in chapter 3. 1040x processing time To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. 1040x processing time Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. 1040x processing time You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. 1040x processing time You are not farming if you are engaged only in forestry or the growing of timber. 1040x processing time Farm defined. 1040x processing time   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. 1040x processing time It also includes plantations, ranches, ranges, and orchards. 1040x processing time A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. 1040x processing time It does not include an area where they are merely caught or harvested. 1040x processing time A plant nursery is a farm for purposes of deducting soil and water conservation expenses. 1040x processing time Farm rental. 1040x processing time   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. 1040x processing time If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. 1040x processing time   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. 1040x processing time Example. 1040x processing time You own a farm in Iowa and live in California. 1040x processing time You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. 1040x processing time You cannot deduct your soil conservation expenses for this farm. 1040x processing time You must capitalize the expenses and add them to the basis of the land. 1040x processing time     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. 1040x processing time Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. 1040x processing time If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. 1040x processing time Keep a copy of the plan with your books and records to support your deductions. 1040x processing time Conservation plan. 1040x processing time   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. 1040x processing time There are three types of approved plans. 1040x processing time NRCS individual site plans. 1040x processing time These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. 1040x processing time NRCS county plans. 1040x processing time These plans include a listing of farm conservation practices approved for the county where the farmland is located. 1040x processing time You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. 1040x processing time Comparable state agency plans. 1040x processing time These plans are approved by state agencies and can be approved individual site plans or county plans. 1040x processing time   A list of NRCS conservation programs is available at www. 1040x processing time nrcs. 1040x processing time usda. 1040x processing time gov/programs. 1040x processing time Individual site plans can be obtained from NRCS offices and the comparable state agencies. 1040x processing time Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. 1040x processing time These expenses include, but are not limited to, the following. 1040x processing time The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. 1040x processing time The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. 1040x processing time The eradication of brush. 1040x processing time The planting of windbreaks. 1040x processing time You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. 1040x processing time These expenses are added to the basis of the land. 1040x processing time If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. 1040x processing time See chapter 3 for information about payments eligible for the cost-sharing exclusion. 1040x processing time New farm or farmland. 1040x processing time   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. 1040x processing time You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. 1040x processing time The new farming activity does not have to be the same as the old farming activity. 1040x processing time For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. 1040x processing time Land not used for farming. 1040x processing time   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. 1040x processing time For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. 1040x processing time You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. 1040x processing time Depreciable conservation assets. 1040x processing time   You generally cannot deduct your expenses for depreciable conservation assets. 1040x processing time However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. 1040x processing time See Assessment for Depreciable Property , later. 1040x processing time   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. 1040x processing time These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. 1040x processing time You recover your capital investment through annual allowances for depreciation. 1040x processing time   You can deduct soil and water conservation expenses for nondepreciable earthen items. 1040x processing time Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. 1040x processing time Water well. 1040x processing time   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. 1040x processing time It is a capital expense. 1040x processing time You recover your cost through depreciation. 1040x processing time You also must capitalize your cost for drilling a test hole. 1040x processing time If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. 1040x processing time You can recover the total cost through depreciation deductions. 1040x processing time   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. 1040x processing time Abandonment means that all economic benefits from the well are terminated. 1040x processing time For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. 1040x processing time Endangered species recovery expenses. 1040x processing time   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. 1040x processing time Otherwise, these are capital expenses that must be added to the basis of the land. 1040x processing time   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. 1040x processing time See Internal Revenue Code section 175 for more information. 1040x processing time Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. 1040x processing time You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. 1040x processing time Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. 1040x processing time This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. 1040x processing time The depreciable property must be used in the district's soil and water conservation activities. 1040x processing time However, the following limits apply to these assessments. 1040x processing time The total assessment limit. 1040x processing time The yearly assessment limit. 1040x processing time After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. 1040x processing time The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x processing time See Table 5-1 for a brief summary of these limits. 1040x processing time Table 5-1. 1040x processing time Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. 1040x processing time Your deductible share of the cost to the district for the property. 1040x processing time Your gross income from farming. 1040x processing time No one taxpayer can deduct more than 10% of the total assessment. 1040x processing time Any amount over 10% is a capital expense and is added to the basis of your land. 1040x processing time If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040x processing time If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. 1040x processing time You can deduct the remainder in equal amounts over the next 9 tax years. 1040x processing time Limit for all conservation expenses, including assessments for depreciable property. 1040x processing time Amounts greater than 25% can be carried to the following year and added to that year's expenses. 1040x processing time The total is then subject to the 25% of gross income from farming limit in that year. 1040x processing time To ensure your deduction is within the deduction limits, keep records to show the following. 1040x processing time The total assessment against all members of the district for the depreciable property. 1040x processing time Your deductible share of the cost to the district for the depreciable property. 1040x processing time Your gross income from farming. 1040x processing time Total assessment limit. 1040x processing time   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. 1040x processing time This applies whether you pay the assessment in one payment or in installments. 1040x processing time If your assessment is more than 10% of the total amount assessed, both the following rules apply. 1040x processing time The amount over 10% is a capital expense and is added to the basis of your land. 1040x processing time If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040x processing time Yearly assessment limit. 1040x processing time   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. 1040x processing time If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. 1040x processing time If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. 1040x processing time You can deduct the remainder in equal amounts over the next 9 tax years. 1040x processing time Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x processing time Example 1. 1040x processing time This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. 1040x processing time Of the assessment, $1,500 is for digging drainage ditches. 1040x processing time You can deduct this part as a soil or conservation expense as if you had paid it directly. 1040x processing time The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. 1040x processing time The total amount assessed by the district against all its members for the depreciable equipment is $7,000. 1040x processing time The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. 1040x processing time The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. 1040x processing time To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. 1040x processing time Add $500 to the result for a total of $570. 1040x processing time Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). 1040x processing time You can deduct the balance at the rate of $70 a year over the next 9 years. 1040x processing time You add $70 to the $1,500 portion of the assessment for drainage ditches. 1040x processing time You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x processing time Example 2. 1040x processing time Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. 1040x processing time The total amount assessed by the district against all its members for depreciable equipment is $5,500. 1040x processing time The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. 1040x processing time The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). 1040x processing time Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. 1040x processing time You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. 1040x processing time Sale or other disposal of land during 9-year period. 1040x processing time   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. 1040x processing time Death of farmer during 9-year period. 1040x processing time   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. 1040x processing time 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. 1040x processing time Gross income from farming. 1040x processing time   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. 1040x processing time Gains from sales of draft, breeding, or dairy livestock are included. 1040x processing time Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. 1040x processing time Carryover of deduction. 1040x processing time   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. 1040x processing time However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. 1040x processing time Example. 1040x processing time In 2012, you have gross income of $32,000 from two farms. 1040x processing time During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. 1040x processing time However, your deduction is limited to 25% of $32,000, or $8,000. 1040x processing time The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. 1040x processing time The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. 1040x processing time Any expenses over the limit in that year are carried to 2014 and later years. 1040x processing time Net operating loss. 1040x processing time   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. 1040x processing time If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. 1040x processing time When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. 1040x processing time If you do not choose to deduct the expenses, you must capitalize them. 1040x processing time Change of method. 1040x processing time   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. 1040x processing time To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. 1040x processing time You or your authorized representative must sign the request. 1040x processing time   The request must include the following information. 1040x processing time Your name and address. 1040x processing time The first tax year the method or change of method is to apply. 1040x processing time Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. 1040x processing time If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. 1040x processing time The total expenses you paid or incurred in the first tax year the method or change of method is to apply. 1040x processing time A statement that you will account separately in your books for the expenses to which this method or change of method relates. 1040x processing time Send your request to the following  address. 1040x processing time  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. 1040x processing time Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). 1040x processing time However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. 1040x processing time Gain on sale of farmland. 1040x processing time   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. 1040x processing time If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. 1040x processing time See Section 1252 property under Other Gains in chapter 9. 1040x processing time Prev  Up  Next   Home   More Online Publications