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Hand R Block Taxes

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Hand R Block Taxes

Hand r block taxes 4. Hand r block taxes   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Hand r block taxes Payments from checking accounts. Hand r block taxes Amounts paid within 30 days. Hand r block taxes Optional method for determining date of reallocation. Hand r block taxes Interest on a segregated account. Hand r block taxes How to report. Hand r block taxes Interest You Can DeductStatement. Hand r block taxes Expenses paid to obtain a mortgage. Hand r block taxes Prepayment penalty. Hand r block taxes De minimis OID. Hand r block taxes Constant-yield method. Hand r block taxes Loan or mortgage ends. Hand r block taxes Interest You Cannot DeductPenalties. Hand r block taxes Who is a key person? Exceptions for pre-June 1997 contracts. Hand r block taxes Interest allocated to unborrowed policy cash value. Hand r block taxes Capitalization of Interest When To Deduct InterestPrepaid interest. Hand r block taxes Discounted loan. Hand r block taxes Refunds of interest. Hand r block taxes Prepaid interest. Hand r block taxes Discounted loan. Hand r block taxes Tax deficiency. Hand r block taxes Related person. Hand r block taxes Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Hand r block taxes Introduction This chapter discusses the tax treatment of business interest expense. Hand r block taxes Business interest expense is an amount charged for the use of money you borrowed for business activities. Hand r block taxes Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Hand r block taxes Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Hand r block taxes 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Hand r block taxes Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Hand r block taxes If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Hand r block taxes Allocate your interest expense to the following categories. Hand r block taxes Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Hand r block taxes You allocate loan proceeds by tracing disbursements to specific uses. Hand r block taxes The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Hand r block taxes Secured loan. Hand r block taxes   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Hand r block taxes Example. Hand r block taxes You secure a loan with property used in your business. Hand r block taxes You use the loan proceeds to buy an automobile for personal use. Hand r block taxes You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Hand r block taxes    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Hand r block taxes The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Hand r block taxes For more information, see Publication 936. Hand r block taxes Allocation period. Hand r block taxes   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. Hand r block taxes The date the loan is repaid. Hand r block taxes The date the loan is reallocated to another use. Hand r block taxes Proceeds not disbursed to borrower. Hand r block taxes   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Hand r block taxes This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Hand r block taxes Proceeds deposited in borrower's account. Hand r block taxes   Treat loan proceeds deposited in an account as property held for investment. Hand r block taxes It does not matter whether the account pays interest. Hand r block taxes Any interest you pay on the loan is investment interest expense. Hand r block taxes If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Hand r block taxes Example. Hand r block taxes Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Hand r block taxes No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Hand r block taxes On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Hand r block taxes On September 4, Celina uses an additional $40,000 from the account for personal purposes. Hand r block taxes Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Hand r block taxes From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Hand r block taxes From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Hand r block taxes Order of funds spent. Hand r block taxes   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Hand r block taxes Any unborrowed amounts held in the same account. Hand r block taxes Any amounts deposited after these loan proceeds. Hand r block taxes Example. Hand r block taxes On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Hand r block taxes The following table shows the transactions in her account during the tax year. Hand r block taxes Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Hand r block taxes She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Hand r block taxes She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Hand r block taxes She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Hand r block taxes For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Hand r block taxes Payments from checking accounts. Hand r block taxes   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Hand r block taxes You can treat checks written on the same day as written in any order. Hand r block taxes Amounts paid within 30 days. Hand r block taxes   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Hand r block taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Hand r block taxes   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Hand r block taxes If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Hand r block taxes   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Hand r block taxes Example. Hand r block taxes Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Hand r block taxes Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Hand r block taxes Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Hand r block taxes Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Hand r block taxes In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Hand r block taxes Optional method for determining date of reallocation. Hand r block taxes   You can use the following method to determine the date loan proceeds are reallocated to another use. Hand r block taxes You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Hand r block taxes The first day of that month. Hand r block taxes The date the loan proceeds are deposited in the account. Hand r block taxes However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Hand r block taxes Interest on a segregated account. Hand r block taxes   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Hand r block taxes When the interest earned is used up, any remaining payments are from loan proceeds. Hand r block taxes Example. Hand r block taxes You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Hand r block taxes When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Hand r block taxes You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Hand r block taxes All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Hand r block taxes The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Hand r block taxes The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Hand r block taxes Loan repayment. Hand r block taxes   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Hand r block taxes Personal use. Hand r block taxes Investments and passive activities (other than those included in (3)). Hand r block taxes Passive activities in connection with a rental real estate activity in which you actively participate. Hand r block taxes Former passive activities. Hand r block taxes Trade or business use and expenses for certain low-income housing projects. Hand r block taxes Line of credit (continuous borrowings). Hand r block taxes   The following rules apply if you have a line of credit or similar arrangement. Hand r block taxes Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Hand r block taxes Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Hand r block taxes Treat these loans as repaid in the order shown on the loan agreement. Hand r block taxes Loan refinancing. Hand r block taxes   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Hand r block taxes Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Hand r block taxes Debt-financed distribution. Hand r block taxes   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Hand r block taxes The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Hand r block taxes How to report. Hand r block taxes   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Hand r block taxes If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Hand r block taxes If the proceeds were used in an investment activity, enter the interest on Form 4952. Hand r block taxes If the proceeds are used for personal purposes, the interest is generally not deductible. Hand r block taxes Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Hand r block taxes Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Hand r block taxes It does not matter what type of property secures the loan. Hand r block taxes You can deduct interest on a debt only if you meet all the following requirements. Hand r block taxes You are legally liable for that debt. Hand r block taxes Both you and the lender intend that the debt be repaid. Hand r block taxes You and the lender have a true debtor-creditor relationship. Hand r block taxes Partial liability. Hand r block taxes   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Hand r block taxes Example. Hand r block taxes You and your brother borrow money. Hand r block taxes You are liable for 50% of the note. Hand r block taxes You use your half of the loan in your business, and you make one-half of the loan payments. Hand r block taxes You can deduct your half of the total interest payments as a business deduction. Hand r block taxes Mortgage. Hand r block taxes   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Hand r block taxes However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Hand r block taxes Statement. Hand r block taxes   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Hand r block taxes You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Hand r block taxes A governmental unit is a person for purposes of furnishing the statement. Hand r block taxes   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Hand r block taxes You cannot deduct this amount. Hand r block taxes For information on how to report this refund, see Refunds of interest, later in this chapter. Hand r block taxes Expenses paid to obtain a mortgage. Hand r block taxes   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Hand r block taxes These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Hand r block taxes If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Hand r block taxes Prepayment penalty. Hand r block taxes   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Hand r block taxes Interest on employment tax deficiency. Hand r block taxes   Interest charged on employment taxes assessed on your business is deductible. Hand r block taxes Original issue discount (OID). Hand r block taxes   OID is a form of interest. Hand r block taxes A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Hand r block taxes The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Hand r block taxes   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Hand r block taxes Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Hand r block taxes You generally deduct OID over the term of the loan. Hand r block taxes Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Hand r block taxes De minimis OID. Hand r block taxes   The OID is de minimis if it is less than one-fourth of 1% (. Hand r block taxes 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Hand r block taxes   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Hand r block taxes On a constant-yield basis over the term of the loan. Hand r block taxes On a straight-line basis over the term of the loan. Hand r block taxes In proportion to stated interest payments. Hand r block taxes In its entirety at maturity of the loan. Hand r block taxes You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Hand r block taxes Example. Hand r block taxes On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Hand r block taxes The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Hand r block taxes Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Hand r block taxes The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Hand r block taxes 0025 × 10). Hand r block taxes You choose to deduct the OID on a straight-line basis over the term of the loan. Hand r block taxes Beginning in 2013, you can deduct $150 each year for 10 years. Hand r block taxes Constant-yield method. Hand r block taxes   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Hand r block taxes You figure your deduction for the first year using the following steps. Hand r block taxes Determine the issue price of the loan. Hand r block taxes Generally, this equals the proceeds of the loan. Hand r block taxes If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Hand r block taxes Multiply the result in (1) by the yield to maturity. Hand r block taxes Subtract any qualified stated interest payments from the result in (2). Hand r block taxes This is the OID you can deduct in the first year. Hand r block taxes   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Hand r block taxes To get the adjusted issue price, add to the issue price any OID previously deducted. Hand r block taxes Then follow steps (2) and (3) above. Hand r block taxes   The yield to maturity is generally shown in the literature you receive from your lender. Hand r block taxes If you do not have this information, consult your lender or tax advisor. Hand r block taxes In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Hand r block taxes Example. Hand r block taxes The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Hand r block taxes The yield to maturity on your loan is 10. Hand r block taxes 2467%, compounded annually. Hand r block taxes For 2013, you can deduct $93 [($98,500 × . Hand r block taxes 102467) − $10,000]. Hand r block taxes For 2014, you can deduct $103 [($98,593 × . Hand r block taxes 102467) − $10,000]. Hand r block taxes Loan or mortgage ends. Hand r block taxes   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Hand r block taxes A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Hand r block taxes If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Hand r block taxes See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Hand r block taxes Points. Hand r block taxes   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Hand r block taxes These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Hand r block taxes If any of these charges (points) are solely for the use of money, they are interest. Hand r block taxes   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Hand r block taxes However, you can choose to fully deduct points in the year paid if you meet certain tests. Hand r block taxes For exceptions to the general rule, see Publication 936. Hand r block taxes The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Hand r block taxes Partial payments on a nontax debt. Hand r block taxes   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Hand r block taxes You can deduct only the interest. Hand r block taxes This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Hand r block taxes Installment purchase. Hand r block taxes   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Hand r block taxes If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Hand r block taxes The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Hand r block taxes For more information on installment sales and unstated interest, see Publication 537. Hand r block taxes Interest You Cannot Deduct Certain interest payments cannot be deducted. Hand r block taxes In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Hand r block taxes You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Hand r block taxes Interest paid with funds borrowed from original lender. Hand r block taxes   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Hand r block taxes You can deduct the interest expense once you start making payments on the new loan. Hand r block taxes   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Hand r block taxes All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Hand r block taxes Capitalized interest. Hand r block taxes   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Hand r block taxes See Capitalization of Interest, later. Hand r block taxes In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Hand r block taxes Add this interest to the basis of the property. Hand r block taxes Commitment fees or standby charges. Hand r block taxes   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Hand r block taxes You may be able to deduct them as business expenses. Hand r block taxes   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Hand r block taxes See Capitalization of Interest, later. Hand r block taxes Interest on income tax. Hand r block taxes   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Hand r block taxes Treat this interest as a business deduction only in figuring a net operating loss deduction. Hand r block taxes Penalties. Hand r block taxes   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Hand r block taxes You cannot deduct them. Hand r block taxes Generally, you cannot deduct any fines or penalties. Hand r block taxes Interest on loans with respect to life insurance policies. Hand r block taxes   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Hand r block taxes   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Hand r block taxes However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Hand r block taxes Who is a key person?   A key person is an officer or 20% owner. Hand r block taxes However, the number of individuals you can treat as key persons is limited to the greater of the following. Hand r block taxes Five individuals. Hand r block taxes The lesser of 5% of the total officers and employees of the company or 20 individuals. Hand r block taxes Exceptions for pre-June 1997 contracts. Hand r block taxes   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Hand r block taxes If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Hand r block taxes Interest allocated to unborrowed policy cash value. Hand r block taxes   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Hand r block taxes This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Hand r block taxes For more information, see section 264(f) of the Internal Revenue Code. Hand r block taxes Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Hand r block taxes The property must be produced by you for use in your trade or business or for sale to customers. Hand r block taxes You cannot capitalize interest related to property that you acquire in any other manner. Hand r block taxes Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Hand r block taxes Designated property is any of the following. Hand r block taxes Real property. Hand r block taxes Tangible personal property with a class life of 20 years or more. Hand r block taxes Tangible personal property with an estimated production period of more than 2 years. Hand r block taxes Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Hand r block taxes Property you produce. Hand r block taxes   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Hand r block taxes Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Hand r block taxes Carrying charges. Hand r block taxes   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Hand r block taxes You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Hand r block taxes For more information, see chapter 7. Hand r block taxes Capitalized interest. Hand r block taxes   Treat capitalized interest as a cost of the property produced. Hand r block taxes You recover your interest when you sell or use the property. Hand r block taxes If the property is inventory, recover capitalized interest through cost of goods sold. Hand r block taxes If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Hand r block taxes Partnerships and S corporations. Hand r block taxes   The interest capitalization rules are applied first at the partnership or S corporation level. Hand r block taxes The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Hand r block taxes   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Hand r block taxes You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Hand r block taxes To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Hand r block taxes Additional information. Hand r block taxes   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Hand r block taxes For more information, see sections 1. Hand r block taxes 263A-8 through 1. Hand r block taxes 263A-15 of the regulations and Notice 88-99. Hand r block taxes Notice 88-99 is in Cumulative Bulletin 1988-2. Hand r block taxes When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Hand r block taxes Cash method. Hand r block taxes   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Hand r block taxes You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Hand r block taxes Prepaid interest. Hand r block taxes   You generally cannot deduct any interest paid before the year it is due. Hand r block taxes Interest paid in advance can be deducted only in the tax year in which it is due. Hand r block taxes Discounted loan. Hand r block taxes   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Hand r block taxes For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Hand r block taxes Refunds of interest. Hand r block taxes   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Hand r block taxes If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Hand r block taxes Accrual method. Hand r block taxes   Under an accrual method, you can deduct only interest that has accrued during the tax year. Hand r block taxes Prepaid interest. Hand r block taxes   See Prepaid interest, earlier. Hand r block taxes Discounted loan. Hand r block taxes   See Discounted loan, earlier. Hand r block taxes Tax deficiency. Hand r block taxes   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Hand r block taxes If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Hand r block taxes   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Hand r block taxes Related person. Hand r block taxes   If you use an accrual method, 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. Hand r block taxes The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Hand r block taxes See section 267 of the Internal Revenue Code for more information. Hand r block taxes Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Hand r block taxes See Treatment of gift and demand loans, later, in this discussion. Hand r block taxes A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Hand r block taxes A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Hand r block taxes A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Hand r block taxes An additional payment in an amount equal to the forgone interest. Hand r block taxes The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Hand r block taxes Forgone interest. Hand r block taxes   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Hand r block taxes Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Hand r block taxes Internal Revenue Bulletins are available on the IRS web site at www. Hand r block taxes irs. Hand r block taxes gov/irb. Hand r block taxes You can also contact an IRS office to get these rates. Hand r block taxes Loans subject to the rules. Hand r block taxes   The rules for below-market loans apply to the following. Hand r block taxes Gift loans (below-market loans where the forgone interest is in the nature of a gift). Hand r block taxes Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Hand r block taxes Corporation-shareholder loans. Hand r block taxes Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Hand r block taxes Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Hand r block taxes   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Hand r block taxes Treatment of gift and demand loans. Hand r block taxes   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Hand r block taxes ) equal to the forgone interest on the loan. Hand r block taxes You are then treated as transferring this amount back to the lender as interest. Hand r block taxes These transfers are considered to occur annually, generally on December 31. Hand r block taxes If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Hand r block taxes The lender must report it as interest income. Hand r block taxes Limit on forgone interest for gift loans of $100,000 or less. Hand r block taxes   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Hand r block taxes This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Hand r block taxes If the borrower's net investment income is $1,000 or less, it is treated as zero. Hand r block taxes This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Hand r block taxes Treatment of term loans. Hand r block taxes   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Hand r block taxes ) on the date the loan is made. Hand r block taxes This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Hand r block taxes The same amount is treated as original issue discount on the loan. Hand r block taxes See Original issue discount (OID) under Interest You Can Deduct, earlier. Hand r block taxes Exceptions for loans of $10,000 or less. Hand r block taxes   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Hand r block taxes This exception applies only to the following. Hand r block taxes Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Hand r block taxes Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Hand r block taxes This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Hand r block taxes Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Hand r block taxes Exceptions for loans without significant tax effect. Hand r block taxes   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Hand r block taxes Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Hand r block taxes Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Hand r block taxes Certain employee-relocation loans. Hand r block taxes Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Hand r block taxes S. Hand r block taxes trade or business and not exempt from U. Hand r block taxes S. Hand r block taxes tax under an income tax treaty. Hand r block taxes Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Hand r block taxes Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Hand r block taxes Consider all the following factors. Hand r block taxes Whether items of income and deduction generated by the loan offset each other. Hand r block taxes The amount of the items. Hand r block taxes The cost of complying with the below-market loan provisions if they were to apply. Hand r block taxes Any reasons, other than taxes, for structuring the transaction as a below-market loan. Hand r block taxes Exception for loans to qualified continuing care facilities. Hand r block taxes   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Hand r block taxes A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Hand r block taxes Designed to provide services under continuing care contracts (defined below). Hand r block taxes Includes an independent living unit, and either an assisted living or nursing facility, or both. Hand r block taxes Substantially all of the independent living unit residents are covered by continuing care contracts. Hand r block taxes A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Hand r block taxes The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Hand r block taxes The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Hand r block taxes The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Hand r block taxes For more information, see section 7872(h) of the Internal Revenue Code. Hand r block taxes Sale or exchange of property. Hand r block taxes   Different rules generally apply to a loan connected with the sale or exchange of property. Hand r block taxes If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Hand r block taxes However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Hand r block taxes See Unstated Interest and Original Issue Discount (OID) in Publication 537. Hand r block taxes More information. Hand r block taxes   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Hand r block taxes 7872-5 of the regulations. Hand r block taxes Prev  Up  Next   Home   More Online Publications
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The Hand R Block Taxes

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