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Free fillable forms Publication 969 - Additional Material Prev  Up  Next   Home   More Online Publications
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Historic Places and Preservation

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Free fillable forms 5. Free fillable forms   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. Free fillable forms Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. Free fillable forms 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. Free fillable forms Otherwise, these are capital expenses that must be added to the basis of the land. Free fillable forms (See chapter 6 for information on determining basis. Free fillable forms ) Conservation expenses for land in a foreign country do not qualify for this special treatment. Free fillable forms The deduction for conservation expenses cannot be more than 25% of your gross income from farming. Free fillable forms See 25% Limit on Deduction , later. Free fillable forms Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. Free fillable forms 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. Free fillable forms You must include in income most government payments for approved conservation practices. Free fillable forms However, you can exclude some payments you receive under certain cost-sharing conservation programs. Free fillable forms For more information, see Agricultural Program Payments in chapter 3. Free fillable forms 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. Free fillable forms 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. Free fillable forms You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. Free fillable forms You are not farming if you are engaged only in forestry or the growing of timber. Free fillable forms Farm defined. Free fillable forms   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Free fillable forms It also includes plantations, ranches, ranges, and orchards. Free fillable forms A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. Free fillable forms It does not include an area where they are merely caught or harvested. Free fillable forms A plant nursery is a farm for purposes of deducting soil and water conservation expenses. Free fillable forms Farm rental. Free fillable forms   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. Free fillable forms 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. Free fillable forms   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. Free fillable forms Example. Free fillable forms You own a farm in Iowa and live in California. Free fillable forms 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. Free fillable forms You cannot deduct your soil conservation expenses for this farm. Free fillable forms You must capitalize the expenses and add them to the basis of the land. Free fillable forms     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. Free fillable forms 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. Free fillable forms If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. Free fillable forms Keep a copy of the plan with your books and records to support your deductions. Free fillable forms Conservation plan. Free fillable forms   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. Free fillable forms There are three types of approved plans. Free fillable forms NRCS individual site plans. Free fillable forms These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. Free fillable forms NRCS county plans. Free fillable forms These plans include a listing of farm conservation practices approved for the county where the farmland is located. Free fillable forms 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. Free fillable forms Comparable state agency plans. Free fillable forms These plans are approved by state agencies and can be approved individual site plans or county plans. Free fillable forms   A list of NRCS conservation programs is available at www. Free fillable forms nrcs. Free fillable forms usda. Free fillable forms gov/programs. Free fillable forms Individual site plans can be obtained from NRCS offices and the comparable state agencies. Free fillable forms Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. Free fillable forms These expenses include, but are not limited to, the following. Free fillable forms The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. Free fillable forms The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. Free fillable forms The eradication of brush. Free fillable forms The planting of windbreaks. Free fillable forms You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. Free fillable forms These expenses are added to the basis of the land. Free fillable forms 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. Free fillable forms See chapter 3 for information about payments eligible for the cost-sharing exclusion. Free fillable forms New farm or farmland. Free fillable forms   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. Free fillable forms 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. Free fillable forms The new farming activity does not have to be the same as the old farming activity. Free fillable forms 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. Free fillable forms Land not used for farming. Free fillable forms   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. Free fillable forms 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. Free fillable forms You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. Free fillable forms Depreciable conservation assets. Free fillable forms   You generally cannot deduct your expenses for depreciable conservation assets. Free fillable forms 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. Free fillable forms See Assessment for Depreciable Property , later. Free fillable forms   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. Free fillable forms 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. Free fillable forms You recover your capital investment through annual allowances for depreciation. Free fillable forms   You can deduct soil and water conservation expenses for nondepreciable earthen items. Free fillable forms Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. Free fillable forms Water well. Free fillable forms   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. Free fillable forms It is a capital expense. Free fillable forms You recover your cost through depreciation. Free fillable forms You also must capitalize your cost for drilling a test hole. Free fillable forms 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. Free fillable forms You can recover the total cost through depreciation deductions. Free fillable forms   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. Free fillable forms Abandonment means that all economic benefits from the well are terminated. Free fillable forms For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. Free fillable forms Endangered species recovery expenses. Free fillable forms   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. Free fillable forms Otherwise, these are capital expenses that must be added to the basis of the land. Free fillable forms   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. Free fillable forms See Internal Revenue Code section 175 for more information. Free fillable forms 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. Free fillable forms 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. Free fillable forms 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. Free fillable forms This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. Free fillable forms The depreciable property must be used in the district's soil and water conservation activities. Free fillable forms However, the following limits apply to these assessments. Free fillable forms The total assessment limit. Free fillable forms The yearly assessment limit. Free fillable forms After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. Free fillable forms The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. Free fillable forms See Table 5-1 for a brief summary of these limits. Free fillable forms Table 5-1. Free fillable forms 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. Free fillable forms Your deductible share of the cost to the district for the property. Free fillable forms Your gross income from farming. Free fillable forms No one taxpayer can deduct more than 10% of the total assessment. Free fillable forms Any amount over 10% is a capital expense and is added to the basis of your land. Free fillable forms If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Free fillable forms 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. Free fillable forms You can deduct the remainder in equal amounts over the next 9 tax years. Free fillable forms Limit for all conservation expenses, including assessments for depreciable property. Free fillable forms Amounts greater than 25% can be carried to the following year and added to that year's expenses. Free fillable forms The total is then subject to the 25% of gross income from farming limit in that year. Free fillable forms To ensure your deduction is within the deduction limits, keep records to show the following. Free fillable forms The total assessment against all members of the district for the depreciable property. Free fillable forms Your deductible share of the cost to the district for the depreciable property. Free fillable forms Your gross income from farming. Free fillable forms Total assessment limit. Free fillable forms   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. Free fillable forms This applies whether you pay the assessment in one payment or in installments. Free fillable forms If your assessment is more than 10% of the total amount assessed, both the following rules apply. Free fillable forms The amount over 10% is a capital expense and is added to the basis of your land. Free fillable forms If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Free fillable forms Yearly assessment limit. Free fillable forms   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. Free fillable forms 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. Free fillable forms If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. Free fillable forms You can deduct the remainder in equal amounts over the next 9 tax years. Free fillable forms 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. Free fillable forms Example 1. Free fillable forms This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. Free fillable forms Of the assessment, $1,500 is for digging drainage ditches. Free fillable forms You can deduct this part as a soil or conservation expense as if you had paid it directly. Free fillable forms The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. Free fillable forms The total amount assessed by the district against all its members for the depreciable equipment is $7,000. Free fillable forms 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. Free fillable forms The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. Free fillable forms 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%. Free fillable forms Add $500 to the result for a total of $570. Free fillable forms 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). Free fillable forms You can deduct the balance at the rate of $70 a year over the next 9 years. Free fillable forms You add $70 to the $1,500 portion of the assessment for drainage ditches. Free fillable forms 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. Free fillable forms Example 2. Free fillable forms 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. Free fillable forms The total amount assessed by the district against all its members for depreciable equipment is $5,500. Free fillable forms The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. Free fillable forms 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). Free fillable forms Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. Free fillable forms 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. Free fillable forms Sale or other disposal of land during 9-year period. Free fillable forms   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. Free fillable forms Death of farmer during 9-year period. Free fillable forms   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. Free fillable forms 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. Free fillable forms Gross income from farming. Free fillable forms   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. Free fillable forms Gains from sales of draft, breeding, or dairy livestock are included. Free fillable forms Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. Free fillable forms Carryover of deduction. Free fillable forms   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. Free fillable forms However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. Free fillable forms Example. Free fillable forms In 2012, you have gross income of $32,000 from two farms. Free fillable forms During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. Free fillable forms However, your deduction is limited to 25% of $32,000, or $8,000. Free fillable forms 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. Free fillable forms 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. Free fillable forms Any expenses over the limit in that year are carried to 2014 and later years. Free fillable forms Net operating loss. Free fillable forms   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. Free fillable forms 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. Free fillable forms 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. Free fillable forms If you do not choose to deduct the expenses, you must capitalize them. Free fillable forms Change of method. Free fillable forms   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. Free fillable forms 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. Free fillable forms You or your authorized representative must sign the request. Free fillable forms   The request must include the following information. Free fillable forms Your name and address. Free fillable forms The first tax year the method or change of method is to apply. Free fillable forms 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. Free fillable forms If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. Free fillable forms The total expenses you paid or incurred in the first tax year the method or change of method is to apply. Free fillable forms A statement that you will account separately in your books for the expenses to which this method or change of method relates. Free fillable forms Send your request to the following  address. Free fillable forms  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. Free fillable forms 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). Free fillable forms However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. Free fillable forms Gain on sale of farmland. Free fillable forms   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. Free fillable forms 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. Free fillable forms See Section 1252 property under Other Gains in chapter 9. Free fillable forms Prev  Up  Next   Home   More Online Publications