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Form 1040x

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Form 1040x

Form 1040x 4. Form 1040x   Farm Business Expenses Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible ExpensesReasonable allocation. Form 1040x Prepaid Farm Supplies Prepaid Livestock Feed Labor Hired Repairs and Maintenance Interest Breeding Fees Fertilizer and Lime Taxes Insurance Rent and Leasing Depreciation Business Use of Your Home Truck and Car Expenses Travel Expenses Marketing Quota Penalties Tenant House Expenses Items Purchased for Resale Other Expenses Domestic Production Activities Deduction Capital ExpensesForestation and reforestation costs. Form 1040x Nondeductible ExpensesPersonal, Living, and Family Expenses Other Nondeductible Items Losses From Operating a FarmAt-Risk Limits Passive Activity Limits Excess Farm Loss Limit Not-for-Profit FarmingUsing the presumption later. Form 1040x Category 1. Form 1040x Category 2. Form 1040x Category 3. Form 1040x What's New for 2013 Standard mileage rate. Form 1040x  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Form 1040x 5 cents. Form 1040x See Truck and Car Expenses , later. Form 1040x Simplified method for business use of home deduction. Form 1040x  The IRS now provides a simplified method to determine your expenses for business use of your home. Form 1040x For more information, see Schedule C (Form 1040), Part II, and its instructions. Form 1040x Introduction You can generally deduct the current costs of operating your farm. Form 1040x Current costs are expenses you do not have to capitalize or include in inventory costs. Form 1040x However, your deduction for the cost of livestock feed and certain other supplies may be limited. Form 1040x If you have an operating loss, you may not be able to deduct all of it. Form 1040x Topics - This chapter discusses: Deductible expenses Domestic production activities deduction Capital expenses Nondeductible expenses Losses from operating a farm Not-for-profit farming Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch F (Form 1040) Profit or Loss From Farming 1045 Application for Tentative Refund 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8903 Domestic Production Activities Deduction See chapter 16 for information about getting publications and forms. Form 1040x Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Form 1040x “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Form 1040x Schedule F, Part II, lists some common farm expenses that are typically deductible. Form 1040x This chapter discusses many of these expenses, as well as others not listed on Schedule F. Form 1040x Reimbursed expenses. Form 1040x   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Form 1040x If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Form 1040x See Refund or reimbursement under Income From Other Sources in chapter 3. Form 1040x Personal and business expenses. Form 1040x   Some expenses you pay during the tax year may be part personal and part business. Form 1040x These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Form 1040x   You must allocate these mixed expenses between their business and personal parts. Form 1040x Generally, the personal part of these expenses is not deductible. Form 1040x The business portion of the expenses is deductible on Schedule F. Form 1040x Example. Form 1040x You paid $1,500 for electricity during the tax year. Form 1040x You used 1/3 of the electricity for personal purposes and 2/3 for farming. Form 1040x Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Form 1040x Reasonable allocation. Form 1040x   It is not always easy to determine the business and nonbusiness parts of an expense. Form 1040x There is no method of allocation that applies to all mixed expenses. Form 1040x Any reasonable allocation is acceptable. Form 1040x What is reasonable depends on the circumstances in each case. Form 1040x Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Form 1040x Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought. Form 1040x Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Form 1040x However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry. Form 1040x Poultry bought for resale and not resold during the year. Form 1040x Deduction limit. Form 1040x   If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies). Form 1040x This limit does not apply if you meet one of the exceptions described later. Form 1040x See Chapter 2 for a discussion of the cash method of accounting. Form 1040x   If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. Form 1040x The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. Form 1040x The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Form 1040x Example. Form 1040x You may not qualify for the exception described next. Form 1040x During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Form 1040x Your total prepaid farm supplies expense for 2013 is $5,500. Form 1040x Your other deductible farm expenses totaled $10,000 for 2013. Form 1040x Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Form 1040x The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when you use or consume the supplies. Form 1040x Exceptions. Form 1040x   This limit on the deduction for prepaid farm supplies expense does not apply if you are a farm-related taxpayer and either of the following apply. Form 1040x Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances. Form 1040x Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years. Form 1040x   You are a farm-related taxpayer if any of the following tests apply. Form 1040x Your main home is on a farm. Form 1040x Your principal business is farming. Form 1040x A member of your family meets (1) or (2). Form 1040x For this purpose, your family includes your brothers and sisters, half-brothers and half-sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children. Form 1040x    Whether or not the deduction limit for prepaid farm supplies applies, your expenses for prepaid livestock feed may be subject to the rules for advance payment of livestock feed, discussed next. Form 1040x Prepaid Livestock Feed If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests. Form 1040x The payment is for the purchase of feed rather than a deposit. Form 1040x The prepayment has a business purpose and is not merely for tax avoidance. Form 1040x Deducting the prepayment does not result in a material distortion of your income. Form 1040x If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Form 1040x If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Form 1040x This rule does not apply to the purchase of commodity futures contracts. Form 1040x Payment for the purchase of feed. Form 1040x   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Form 1040x It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase. Form 1040x   The following are some factors that show a payment is a deposit rather than for the purchase of feed. Form 1040x The absence of specific quantity terms. Form 1040x The right to a refund of any unapplied payment credit at the end of the contract. Form 1040x The seller's treatment of the payment as a deposit. Form 1040x The right to substitute other goods or products for those specified in the contract. Form 1040x   A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. Form 1040x Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Form 1040x Business purpose. Form 1040x   The prepayment has a business purpose only if you have a reasonable expectation of receiving some business benefit from prepaying the cost of livestock feed. Form 1040x The following are some examples of business benefits. Form 1040x Fixing maximum prices and securing an assured feed supply. Form 1040x Securing preferential treatment in anticipation of a feed shortage. Form 1040x   Other factors considered in determining the existence of a business purpose are whether the prepayment was a condition imposed by the seller and whether that condition was meaningful. Form 1040x No material distortion of income. Form 1040x   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Form 1040x Your customary business practice in conducting your livestock operations. Form 1040x The expense in relation to past purchases. Form 1040x The time of year you made the purchase. Form 1040x The expense in relation to your income for the year. Form 1040x Labor Hired You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. Form 1040x You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Form 1040x The cost of boarding farm labor is a deductible labor cost. Form 1040x Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Form 1040x If you must withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. Form 1040x See chapter 13 for more information on employment taxes. Form 1040x Also, deduct the employer's share of the social security and Medicare taxes you must pay on your employees' wages as a farm business expense on Schedule F, line 29. Form 1040x See Taxes , later. Form 1040x Property for services. Form 1040x   If you transfer property to an employee in payment for services, you can deduct as wages paid the fair market value of the property on the date of transfer. Form 1040x If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the property. Form 1040x   Treat the wages deducted as an amount received for the property. Form 1040x You may have a gain or loss to report if the property's adjusted basis on the date of transfer is different from its fair market value. Form 1040x Any gain or loss has the same character the exchanged property had in your hands. Form 1040x For more information, see chapter 8. Form 1040x Child as an employee. Form 1040x   You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. Form 1040x Include these wages in the child's income. Form 1040x The child may have to file an income tax return. Form 1040x These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Form 1040x For more information, see Family Employees in chapter 13. Form 1040x    A Form W-2, Wage and Tax Statement, should be issued to the child employee. Form 1040x   The fact that your child spends the wages to buy clothes or other necessities you normally furnish does not prevent you from deducting your child's wages as a farm expense. Form 1040x The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Form 1040x Spouse as an employee. Form 1040x   You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. Form 1040x Wages you pay to your spouse are subject to social security and Medicare taxes. Form 1040x For more information, see Family Employees in chapter 13. Form 1040x Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Form 1040x However, those wages may be subject to the employment taxes discussed in chapter 13. Form 1040x Household workers. Form 1040x   Do not deduct amounts paid to persons engaged in household work, except to the extent their services are used in boarding or otherwise caring for farm laborers. Form 1040x Construction labor. Form 1040x   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Form 1040x These wages are part of the cost of the building or other improvement. Form 1040x You must capitalize them. Form 1040x Maintaining your home. Form 1040x   If your farm employee spends time maintaining or repairing your home, the wages and employment taxes you pay for that work are nondeductible personal expenses. Form 1040x For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Form 1040x The employee devotes the remaining time to work on your farm. Form 1040x You cannot deduct 5% of the wages and employment taxes you pay for that employee. Form 1040x Employment Credits Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit for qualified tax-exempt organizations hiring qualified veterans (Form 5884-C). Form 1040x Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Form 1040x Common items of repair and maintenance are repainting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery. Form 1040x However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses. Form 1040x For example, if you repair the barn roof, the cost is deductible. Form 1040x But if you replace the roof, it is a capital expense. Form 1040x For more information, see Capital Expenses , later. Form 1040x Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Form 1040x Cash method. Form 1040x   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Form 1040x You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Form 1040x You can, however, deduct the interest when you start making payments on the new loan. Form 1040x For more information, see Cash Method in chapter 2. Form 1040x Prepaid interest. Form 1040x   Under the cash method, you generally cannot deduct any interest paid before the year it is due. Form 1040x Interest paid in advance may be deducted only in the tax year in which it is due. Form 1040x Accrual method. Form 1040x   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Form 1040x However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Form 1040x For more information, see Accrual Method in chapter 2. Form 1040x Allocation of interest. Form 1040x   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Form 1040x Allocate the interest to the following categories. Form 1040x Trade or business interest. Form 1040x Passive activity interest. Form 1040x Investment interest. Form 1040x Portfolio interest. Form 1040x Personal interest. Form 1040x   You generally allocate interest on a loan the same way you allocate the loan proceeds. Form 1040x You allocate loan proceeds by tracing disbursements to specific uses. Form 1040x The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Form 1040x Secured loan. Form 1040x   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Form 1040x Example. Form 1040x You secure a loan with property used in your farming business. Form 1040x You use the loan proceeds to buy a car for personal use. Form 1040x You must allocate interest expense on the loan to personal use (purchase of the car) even though the loan is secured by farm business property. Form 1040x If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Form 1040x The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Form 1040x However, you can choose to treat the loan as not secured by your home. Form 1040x For more information, see Publication 936. Form 1040x Allocation period. Form 1040x   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Form 1040x The date the loan is repaid. Form 1040x The date the loan is reallocated to another use. Form 1040x More information. Form 1040x   For more information on interest, see chapter 4 in Publication 535. Form 1040x Breeding Fees You can deduct breeding fees as a farm business expense. Form 1040x However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc. Form 1040x For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Form 1040x Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. Form 1040x You can also deduct the cost of applying these materials in the year you pay or incur it. Form 1040x However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Form 1040x If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last. Form 1040x However, you can choose to deduct these expenses in the year paid or incurred. Form 1040x If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Form 1040x If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. Form 1040x Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Form 1040x It does not include land you have never used previously for producing crops or sustaining livestock. Form 1040x You cannot deduct initial land preparation costs. Form 1040x (See Capital Expenses , later. Form 1040x ) Include government payments you receive for lime or fertilizer in income. Form 1040x See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Form 1040x Taxes You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings. Form 1040x You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay. Form 1040x For information on employment taxes, see chapter 13. Form 1040x Allocation of taxes. Form 1040x   The taxes on the part of your farm you use as your home (including the furnishings and surrounding land not used for farming) are nonbusiness taxes. Form 1040x You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Form 1040x To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Form 1040x The allocation can be done from the assessed valuations. Form 1040x If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Form 1040x State and local general sales taxes. Form 1040x   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Form 1040x Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate. Form 1040x Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Form 1040x State and federal income taxes. Form 1040x   Individuals cannot deduct state and federal income taxes as farm business expenses. Form 1040x Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Form 1040x However, you cannot deduct federal income tax. Form 1040x Highway use tax. Form 1040x   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Form 1040x For information on the tax itself, including information on vehicles subject to the tax, see the Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return. Form 1040x Self-employment tax deduction. Form 1040x   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Form 1040x For more information, see chapter 12. Form 1040x Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Form 1040x This includes premiums you pay for the following types of insurance. Form 1040x Fire, storm, crop, theft, liability, and other insurance on farm business assets. Form 1040x Health and accident insurance on your farm employees. Form 1040x Workers' compensation insurance set by state law that covers any claims for job-related bodily injuries or diseases suffered by employees on your farm, regardless of fault. Form 1040x Business interruption insurance. Form 1040x State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Form 1040x Insurance to secure a loan. Form 1040x   If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense. Form 1040x In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Form 1040x Advance premiums. Form 1040x   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Form 1040x Example. Form 1040x On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Form 1040x The policy will cover a period of 3 years beginning on July 1, 2013. Form 1040x Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Form 1040x Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Form 1040x In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Form 1040x Deduct the remaining $500 in 2016. Form 1040x Had the policy been effective on January 1, 2013, the deductible expense would have been $1,000 for each of the years 2013, 2014, and 2015, based on one-third of the premium used each year. Form 1040x Business interruption insurance. Form 1040x   Use and occupancy and business interruption insurance premiums are deductible as a business expense. Form 1040x This insurance pays for lost profits if your business is shut down due to a fire or other cause. Form 1040x Report any proceeds in full on Schedule F, Part I. Form 1040x Self-employed health insurance deduction. Form 1040x   If you are self-employed, you can deduct as an adjustment to income on Form 1040 your payments for medical, dental, and qualified long-term care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040. Form 1040x Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2013, even if the child was not your dependent. Form 1040x Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Form 1040x   If you or your spouse is also an employee of another person, you cannot take the deduction for any month in which you are eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. Form 1040x   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Form 1040x Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Form 1040x   For more information, see Deductible Premiums in Publication 535, chapter 6. Form 1040x Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Form 1040x However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Form 1040x Advance payments. Form 1040x   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Form 1040x Farm home. Form 1040x   If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live. Form 1040x Lease or Purchase If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease. Form 1040x If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property. Form 1040x Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Form 1040x Conditional sales contract. Form 1040x   Whether an agreement is a conditional sales contract depends on the intent of the parties. Form 1040x Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Form 1040x No single test, or special combination of tests, always applies. Form 1040x However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Form 1040x The agreement applies part of each payment toward an equity interest you will receive. Form 1040x You get title to the property after you make a stated amount of required payments. Form 1040x The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. Form 1040x You pay much more than the current fair rental value of the property. Form 1040x You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Form 1040x Determine this value when you make the agreement. Form 1040x You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Form 1040x The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Form 1040x Example. Form 1040x You lease new farm equipment from a dealer who both sells and leases. Form 1040x The agreement includes an option to purchase the equipment for a specified price. Form 1040x The lease payments and the specified option price equal the sales price of the equipment plus interest. Form 1040x Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Form 1040x For federal income tax purposes, the agreement is a conditional sales contract. Form 1040x You cannot deduct any of the lease payments as rent. Form 1040x You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Form 1040x Motor vehicle leases. Form 1040x   Special rules apply to lease agreements that have a terminal rental adjustment clause. Form 1040x In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease. Form 1040x If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Form 1040x For more information, see Internal Revenue Code (IRC) section 7701(h). Form 1040x Leveraged leases. Form 1040x   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Form 1040x For more information, see Publication 535, chapter 3, and Revenue Procedure 2001-28, which begins on page 1156 of Internal Revenue Bulletin 2001-19 at www. Form 1040x irs. Form 1040x gov/pub/irs-irbs/irb01-19. Form 1040x pdf. Form 1040x Depreciation If property you acquire to use in your farm business is expected to last more than one year, you generally cannot deduct the entire cost in the year you acquire it. Form 1040x You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Form 1040x However, you can choose to deduct part or all of the cost of certain qualifying property, up to a limit, as a section 179 deduction in the year you place it in service. Form 1040x Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Form 1040x Business Use of Your Home You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly: As the principal place of business for any trade or business in which you engage, As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home. Form 1040x Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements. Form 1040x You use it exclusively and regularly for the administrative or management activities of your trade or business. Form 1040x You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Form 1040x If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Form 1040x The IRS now provides a simplified method to determine your expenses for business use of your home. Form 1040x For more information, see Schedule C (Form 1040), Part II, and its instructions. Form 1040x Deduction limit. Form 1040x   If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses. Form 1040x But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited. Form 1040x   Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses. Form 1040x The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses). Form 1040x Farm expenses other than expenses that relate to the use of your home. Form 1040x If you are self-employed, do not include your deduction for half of your self-employment tax. Form 1040x   Deductions over the current year's limit can be carried over to your next tax year. Form 1040x They are subject to the deduction limit for the next tax year. Form 1040x More information. Form 1040x   See Publication 587 for more information on deducting expenses for the business use of your home. Form 1040x Telephone expense. Form 1040x   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Form 1040x However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses. Form 1040x Cell phone charges for calls relating to your farm business are deductible. Form 1040x If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls. Form 1040x Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Form 1040x Only expenses for business use are deductible. Form 1040x These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Form 1040x Standard mileage rate. Form 1040x   Instead of using actual costs, under certain conditions you can use the standard mileage rate. Form 1040x The standard mileage rate for each mile of business use is 56. Form 1040x 5 cents in 2013. Form 1040x You can use the standard mileage rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease. Form 1040x   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Form 1040x You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business. Form 1040x Example. Form 1040x Maureen owns a car and four pickup trucks that are used in her farm business. Form 1040x Her farm employees use the trucks and she uses the car for business. Form 1040x Maureen cannot use the standard mileage rate for the car or the trucks. Form 1040x This is because all five vehicles are used in Maureen's farm business at the same time. Form 1040x She must use actual expenses for all vehicles. Form 1040x Business use percentage. Form 1040x   You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. Form 1040x You choose this method of substantiating business use the first year the vehicle is placed in service. Form 1040x Once you make this choice, you may not change to another method later. Form 1040x The following are uses directly connected with the business of farming. Form 1040x Cultivating land. Form 1040x Raising or harvesting any agricultural or horticultural commodity. Form 1040x Raising, shearing, feeding, caring for, training, and managing animals. Form 1040x Driving to the feed or supply store. Form 1040x   If you keep records and they show that your business use was more than 75%, you may be able to claim more. Form 1040x See Recordkeeping requirements under Travel Expenses , below. Form 1040x More information. Form 1040x   For more information on deductible truck and car expenses, see Publication 463, chapter 4. Form 1040x If you pay your employees for the use of their truck or car in your farm business, see Reimbursements to employees under Travel Expenses next. Form 1040x Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Form 1040x You cannot deduct lavish or extravagant expenses. Form 1040x Usually, the location of your farm business is considered your home for tax purposes. Form 1040x You are traveling away from home if: Your duties require you to be absent from your farm substantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of your work while away from home. Form 1040x If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses. Form 1040x The following are some types of deductible travel expenses. Form 1040x Air, rail, bus, and car transportation; Meals and lodging; Dry cleaning and laundry; Telephone and fax; Transportation between your hotel and your temporary work or business meeting location; and Tips for any of the above expenses. Form 1040x Meals. Form 1040x   You ordinarily can deduct only 50% of your business-related meals expenses. Form 1040x You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties. Form 1040x You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment. Form 1040x For information on entertainment expenses, see Publication 463, chapter 2. Form 1040x   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Form 1040x You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Form 1040x    Recordkeeping requirements. Form 1040x You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Form 1040x Estimates or approximations do not qualify as proof of an expense. Form 1040x   You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense. Form 1040x Generally, it is best to record the expense and get documentation of it at the time you pay it. Form 1040x   If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items. Form 1040x However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel. Form 1040x More information. Form 1040x   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Form 1040x Reimbursements to employees. Form 1040x   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Form 1040x Employees may be reimbursed under an accountable or nonaccountable plan. Form 1040x Under an accountable plan, the employee must provide evidence of expenses. Form 1040x Under a nonaccountable plan, no evidence of expenses is required. Form 1040x If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Form 1040x If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Form 1040x For more information, see Publication 535, chapter 11. Form 1040x Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Form 1040x However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received. Form 1040x Do not take a separate deduction for the penalty. Form 1040x Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Form 1040x These costs include repairs, utilities, insurance, and depreciation. Form 1040x The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Form 1040x Items Purchased for Resale If you use the cash method of accounting, you ordinarily deduct the cost of livestock and other items purchased for resale only in the year of sale. Form 1040x You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Form 1040x However, see Chickens, seeds, and young plants , below. Form 1040x Example. Form 1040x You use the cash method of accounting. Form 1040x In 2013, you buy 50 steers you will sell in 2014. Form 1040x You cannot deduct the cost of the steers on your 2013 tax return. Form 1040x You deduct their cost on your 2014 Schedule F, Part I. Form 1040x Chickens, seeds, and young plants. Form 1040x   If you are a cash method farmer, you can deduct the cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the year paid if you do it consistently and it does not distort income. Form 1040x You also can deduct the cost of seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do this consistently and you do not figure your income on the crop method. Form 1040x However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Form 1040x   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Form 1040x You cannot also deduct the cost from the selling price. Form 1040x   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Form 1040x Deduct the cost of these seeds and plants through depletion allowances. Form 1040x For more information, see Depletion in chapter 7. Form 1040x   The cost of chickens and plants used as food for your family is never deductible. Form 1040x   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Form 1040x These rules are discussed in chapter 6. Form 1040x Example. Form 1040x You use the cash method of accounting. Form 1040x In 2013, you buy 500 baby chicks to raise for resale in 2014. Form 1040x You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Form 1040x Unless you previously adopted the method of deducting these costs in the year you sell the chickens or the harvested crops, you can deduct the cost of both the baby chicks and the seed wheat in 2013. Form 1040x Election to use crop method. Form 1040x   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Form 1040x You must get IRS approval to use the crop method. Form 1040x If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Form 1040x For more information, see Crop method under Special Methods of Accounting in chapter 2. Form 1040x Choosing a method. Form 1040x   You can adopt either the crop method or the cash method for deducting the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds and young plants. Form 1040x   Although you must use the same method for egg-laying hens, pullets, and chicks, you can use a different method for seeds and young plants. Form 1040x Once you use a particular method for any of these items, use it for those items until you get IRS approval to change your method. Form 1040x For more information, see Change in Accounting Method in chapter 2. Form 1040x Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Form 1040x These expenses must be for business purposes and  (1) paid, if you use the cash method of accounting, or (2) incurred, if you use an accrual method of accounting. Form 1040x Accounting fees. Form 1040x Advertising. Form 1040x Business travel and meals. Form 1040x Commissions. Form 1040x Consultant fees. Form 1040x Crop scouting expenses. Form 1040x Dues to cooperatives. Form 1040x Educational expenses (to maintain and improve farming skills). Form 1040x Farm-related attorney fees. Form 1040x Farm magazines. Form 1040x Ginning. Form 1040x Insect sprays and dusts. Form 1040x Litter and bedding. Form 1040x Livestock fees. Form 1040x Marketing fees. Form 1040x Milk assessment. Form 1040x Recordkeeping expenses. Form 1040x Service charges. Form 1040x Small tools expected to last one year or less. Form 1040x Stamps and stationery. Form 1040x Subscriptions to professional, technical, and trade journals that deal with farming. Form 1040x Tying material and containers. Form 1040x Loan expenses. Form 1040x   You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan. Form 1040x Tax preparation fees. Form 1040x   You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business. Form 1040x You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Form 1040x   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Form 1040x Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Form 1040x You can deduct 9% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. Form 1040x Your deduction is limited to 50% of the Form W-2 wages you paid for the tax year that are properly allocable to domestic production gross receipts. Form 1040x For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Form 1040x Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Form 1040x Income from cooperatives. Form 1040x   If you receive a patronage dividend or qualified per-unit retain allocation from a cooperative which is engaged in the manufacturing, production, growth, or extraction in whole or in significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products, your income from the cooperative can give rise to a domestic production activities deduction. Form 1040x This deduction amount is reported on Form 1099-PATR, box 6. Form 1040x In order for you to qualify for the deduction, the cooperative is required to send you a written notice designating your portion of the domestic production activities deduction. Form 1040x More information. Form 1040x   For more information on the domestic production activities deduction, see the Instructions for Form 8903. Form 1040x Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. Form 1040x You include the expense in the basis of the asset. Form 1040x Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Form 1040x See chapters 2  and 6. Form 1040x Capital expenses are generally not deductible, but they may be depreciable. Form 1040x However, you can elect to deduct certain capital expenses, such as the following. Form 1040x The cost of fertilizer, lime, etc. Form 1040x (See Fertilizer and Lime under Deductible Expenses , earlier. Form 1040x ) Soil and water conservation expenses. Form 1040x (See chapter 5. Form 1040x ) The cost of property that qualifies for a deduction under section 179. Form 1040x (See chapter 7. Form 1040x ) Business start-up costs. Form 1040x (See Business start-up and organizational costs , later. Form 1040x ) Forestation and reforestation costs. Form 1040x (See Forestation and reforestation costs , later. Form 1040x ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Form 1040x Land and buildings. Form 1040x Additions, alterations, and improvements to buildings, etc. Form 1040x Cars and trucks. Form 1040x Equipment and machinery. Form 1040x Fences. Form 1040x Draft, breeding, sport, and dairy livestock. Form 1040x Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Form 1040x Water wells, including drilling and equipping costs. Form 1040x Land preparation costs, such as: Clearing land for farming, Leveling and conditioning land, Purchasing and planting trees, Building irrigation canals and ditches, Laying irrigation pipes, Installing drain tile, Modifying channels or streams, Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and Building roads. Form 1040x Business start-up and organizational costs. Form 1040x   You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Form 1040x The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Form 1040x Any remaining costs must be amortized. Form 1040x See chapter 7. Form 1040x   You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Form 1040x However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Form 1040x Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Form 1040x 9100-2” at the top of the amended return. Form 1040x File the amended return at the same address you filed the original return. Form 1040x The election applies when figuring taxable income for the current tax year and all subsequent years. Form 1040x   You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Form 1040x For more information about start-up and organizational costs, see chapter 7. Form 1040x Crop production expenses. Form 1040x   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Form 1040x However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. Form 1040x For more information, see Uniform Capitalization Rules in chapter 6. Form 1040x Timber. Form 1040x   Capitalize the cost of acquiring timber. Form 1040x Do not include the cost of land in the cost of the timber. Form 1040x You must generally capitalize direct costs incurred in reforestation. Form 1040x However, you can elect to deduct some forestation and reforestation costs. Form 1040x See Forestation and reforestation costs next. Form 1040x Reforestation costs include the following. Form 1040x Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Form 1040x The cost of seed or seedlings. Form 1040x Labor and tool expenses. Form 1040x Depreciation on equipment used in planting or seeding. Form 1040x Costs incurred in replanting to replace lost seedlings. Form 1040x You can choose to capitalize certain indirect reforestation costs. Form 1040x   These capitalized amounts are your basis for the timber. Form 1040x Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Form 1040x See Depletion in chapter 7. Form 1040x Forestation and reforestation costs. Form 1040x   You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Form 1040x Any remaining costs can be amortized over an 84-month period. Form 1040x See chapter 7. Form 1040x If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. Form 1040x The accounts should include all reforestation treatments and the dates they were applied. Form 1040x Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. Form 1040x The timber account should be maintained until the timber is disposed of. Form 1040x For more information, see Notice 2006-47, 2006-20 I. Form 1040x R. Form 1040x B. Form 1040x 892, available at  www. Form 1040x irs. Form 1040x gov/irb/2006-20_IRB/ar11. Form 1040x html. Form 1040x   You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. Form 1040x If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Form 1040x If you are not filing Form T (Timber), attach a statement to your return with the following information. Form 1040x The unique stand identification numbers. Form 1040x The total number of acres reforested during the tax year. Form 1040x The nature of the reforestation treatments. Form 1040x The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Form 1040x   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Form 1040x Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Form 1040x 9100-2” at the top of the amended return. Form 1040x File the amended return at the same address you filed the original return. Form 1040x    For more information about forestation and reforestation costs, see chapter 7. Form 1040x    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Form 1040x You can view this publication on the Internet at  www. Form 1040x fs. Form 1040x fed. Form 1040x us/publications. Form 1040x Christmas tree cultivation. Form 1040x   If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. Form 1040x Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Form 1040x For more information, see Timber Depletion under Depletion in chapter 7. Form 1040x   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Form 1040x Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Form 1040x   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Form 1040x If the improvements do not have a determinable useful life, add their cost to the basis of the land. Form 1040x The cost is recovered when you sell or otherwise dispose of it. Form 1040x If the improvements have a determinable useful life, recover their cost through depreciation. Form 1040x Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. Form 1040x Recover these costs through depreciation. Form 1040x Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Form 1040x Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Form 1040x These include rent and insurance premiums paid on property used as your home, life insurance premiums on yourself or your family, the cost of maintaining cars, trucks, or horses for personal use, allowances to minor children, attorneys' fees and legal expenses incurred in personal matters, and household expenses. Form 1040x Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Form 1040x Other Nondeductible Items You cannot deduct the following items on your tax return. Form 1040x Loss of growing plants, produce, and crops. Form 1040x   Losses of plants, produce, and crops raised for sale are generally not deductible. Form 1040x However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Form 1040x See chapter 11 for more information. Form 1040x Repayment of loans. Form 1040x   You cannot deduct the repayment of a loan. Form 1040x However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Form 1040x See Interest , earlier. Form 1040x Estate, inheritance, legacy, succession, and gift taxes. Form 1040x   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Form 1040x Loss of livestock. Form 1040x   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Form 1040x Losses from sales or exchanges between related persons. Form 1040x   You cannot deduct losses from sales or exchanges of property between you and certain related persons, including your spouse, brother, sister, ancestor, or lineal descendant. Form 1040x For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Form 1040x Cost of raising unharvested crops. Form 1040x   You cannot deduct the cost of raising unharvested crops sold with land owned more than one year if you sell both at the same time and to the same person. Form 1040x Add these costs to the basis of the land to determine the gain or loss on the sale. Form 1040x For more information, see Section 1231 Gains and Losses in chapter 9. Form 1040x Cost of unharvested crops bought with land. Form 1040x   Capitalize the purchase price of land, including the cost allocable to unharvested crops. Form 1040x You cannot deduct the cost of the crops at the time of purchase. Form 1040x However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Form 1040x Cost related to gifts. Form 1040x   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Form 1040x The costs are not deductible in the year of the gift or any later year. Form 1040x For example, you cannot deduct the cost of raising cattle or the cost of planting and raising unharvested wheat on parcels of land given as a gift to your children. Form 1040x Club dues and membership fees. Form 1040x   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Form 1040x This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Form 1040x Exception. Form 1040x   The following organizations will not be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Form 1040x Boards of trade. Form 1040x Business leagues. Form 1040x Chambers of commerce. Form 1040x Civic or public service organizations. Form 1040x Professional associations. Form 1040x Trade associations. Form 1040x Real estate boards. Form 1040x Fines and penalties. Form 1040x   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Form 1040x Losses From Operating a Farm If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. Form 1040x The amount of the loss you can deduct when figuring your taxable income may be limited. Form 1040x To figure your deductible loss, you must apply the following limits. Form 1040x The at-risk limits. Form 1040x The passive activity limits. Form 1040x The following discussions explain these limits. Form 1040x If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Form 1040x See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Form 1040x If you do not carry on your farming activity to make a profit, your loss deduction may be limited by the not-for-profit rules. Form 1040x See Not-for-Profit Farming, later. Form 1040x At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Form 1040x These rules limit the losses you can deduct when figuring your taxable income. Form 1040x The deductible loss from an activity is limited to the amount you have at risk in the activity. Form 1040x You are at risk in any activity for: The money and adjusted basis of property you contribute to the activity, and Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Form 1040x You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest. Form 1040x For more information, see Publication 925. Form 1040x Passive Activity Limits A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. Form 1040x Generally, a rental activity is a passive activity. Form 1040x If you have a passive activity, special rules limit the loss you can deduct in the tax year. Form 1040x You generally can deduct losses from passive activities only up to income from passive activities. Form 1040x Credits are similarly limited. Form 1040x For more information, see Publication 925. Form 1040x Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Form 1040x This limit applies to any farming businesses, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. Form 1040x Your farming losses are limited to the greater of: $300,000 ($150,000 for a married person filing a separate return), or The total net farm income for the prior five tax years. Form 1040x Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Form 1040x Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Form 1040x For more details, see IRC section 461(j). Form 1040x Excess farm loss. Form 1040x   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Form 1040x This loss can be determined by taking the excess of: The total deductions for the tax year from your farming businesses, over The total gross income or gain for the tax year from your farming businesses, plus the greater of: $300,000 ($150,000 for a married person filing a separate return), or The excess (if any) of the total gross income or gain from your farming businesses for the prior five tax years over the total deductions from your farming businesses for the prior five tax years. Form 1040x   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Form 1040x Not-for-Profit Farming If you operate a farm for profit, you can deduct all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. Form 1040x However, if you do not carry on your farming activity, or other activity you engage or invest in, to make a profit, you report the income from the activity on Form 1040, line 21, and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). Form 1040x Also, there is a limit on the deductions you can take. Form 1040x You cannot use a loss from that activity to offset income from other activities. Form 1040x Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Form 1040x An investment activity intended only to produce tax losses for the investors also comes under this limit. Form 1040x The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Form 1040x It does not apply to corporations other than S corporations. Form 1040x In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Form 1040x No one factor alone is decisive. Form 1040x Among the factors to consider are whether: You operate your farm in a businesslike manner; The time and effort you spend on farming indicate you intend to make it profitable; You depend on income from farming for your livelihood; Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming; You change your methods of operation in an attempt to improve profitability; You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; You were successful in making a profit in similar activities in the past; You make a profit from farming in some years and the amount of profit you make; and You can expect to make a future profit from the appreciation of the assets used in the farming activity. Form 1040x Presumption of profit. Form 1040x   Your farming or other activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Form 1040x Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Form 1040x The activity must be substantially the same for each year within this period. Form 1040x You have a profit when the gross income from an activity is more than the deductions for it. Form 1040x   If a taxpayer dies before the end of the 5-year (or 7-year) period, the period ends on the date of the taxpayer's death. Form 1040x   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Form 1040x This means the limits discussed here do not apply. Form 1040x You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Form 1040x You can rely on this presumption in every case, unless the IRS shows it is not valid. Form 1040x   If you fail the 3- (or 2-) years-of-profit test, you still may be considered to operate your farm for profit by considering the factors listed earlier. Form 1040x Using the presumption later. Form 1040x   If you are starting out in farming and do not have 3 (or 2) years showing a profit, you may want to take advantage of this presumption later, after you have had the 5 (or 7) years of experience allowed by the test. Form 1040x   You can choose to do this by filing Form 5213. Form 1040x Filing this form postpones any determination that your farming activity is not carried on for profit until 5 (or 7) years have passed since you first started farming. Form 1040x You must file Form 5213 within 3 years after the due date of your return for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving a written notice from the IRS proposing to disallow deductions attributable to the activity. Form 1040x   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Form 1040x Accordingly, it will not limit your deductions. Form 1040x Rather, you will gain time to earn a profit in 3 (or 2) out of the first 5 (or 7) years you carry on the farming activity. Form 1040x If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Form 1040x If you do not have 3 (or 2) years of profit (and cannot otherwise show that you operated your farm for profit), the limit applies retroactively to any year in the 5-year (or 7-year) period with a loss. Form 1040x   Filing Form 5213 automatically extends the period of limitations on any year
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The Form 1040x

Form 1040x Publication 936 - Introductory Material Table of Contents Reminders IntroductionOrdering forms and publications. Form 1040x Tax questions. Form 1040x Useful Items - You may want to see: Reminders Future developments. Form 1040x  For the latest information about developments related to Publication 936, Home Mortgage Interest Deduction, such as legislation enacted after it was published, go to www. Form 1040x irs. Form 1040x gov/pub936. Form 1040x Photographs of missing children. Form 1040x  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Form 1040x Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Form 1040x You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Form 1040x Introduction This publication discusses the rules for deducting home mortgage interest. Form 1040x Part I contains general information on home mortgage interest, including points and mortgage insurance premiums. Form 1040x It also explains how to report deductible interest on your tax return. Form 1040x Part II explains how your deduction for home mortgage interest may be limited. Form 1040x It contains Table 1, which is a worksheet you can use to figure the limit on your deduction. Form 1040x Comments and suggestions. Form 1040x   We welcome your comments about this publication and your suggestions for future editions. Form 1040x   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Form 1040x NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Form 1040x Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Form 1040x   You can send your comments from www. Form 1040x irs. Form 1040x gov/formspubs. Form 1040x Click on “More Information” and then on “Comment on Tax Forms and Publications. Form 1040x ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Form 1040x Ordering forms and publications. Form 1040x   Visit www. Form 1040x irs. Form 1040x gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Form 1040x Internal Revenue Service 1201 N. Form 1040x Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Form 1040x   If you have a tax question, check the information available on IRS. Form 1040x gov or call 1-800-829-1040. Form 1040x We cannot answer tax questions sent to either of the above addresses. Form 1040x Useful Items - You may want to see: Publication 523 Selling Your Home 527 Residential Rental Property 530 Tax Information for Homeowners 535 Business Expenses   See How To Get Tax Help near the end of this publication, for information about getting these publications. Form 1040x Prev  Up  Next   Home   More Online Publications