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State free file 3. State free file   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. State free file Form 4797. State free file Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. State free file Granting the right to remove deposits. State free file Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. State free file You must report the income from all the different sources on your tax return, unless it is excluded by law. State free file Where you report the income on your tax return depends on its source. State free file This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. State free file For information on where to report other income, see the Instructions for Form 1040, U. State free file S. State free file Individual Income Tax Return. State free file Accounting method. State free file   The rules discussed in this chapter assume you use the cash method of accounting. State free file Under the cash method, you generally include an item of income in gross income in the year you receive it. State free file See Cash Method in chapter 2. State free file   If you use an accrual method of accounting, different rules may apply to your situation. State free file See Accrual Method in chapter 2. State free file Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. State free file Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. State free file Use this schedule to figure the net profit or loss from regular farming operations. State free file Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. State free file This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. State free file It also includes income from the sale of crop shares if you materially participate in producing the crop. State free file See Rents (Including Crop Shares) , later. State free file Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. State free file Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. State free file Land. State free file Depreciable farm equipment. State free file Buildings and structures. State free file Livestock held for draft, breeding, sport, or dairy purposes. State free file Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. State free file Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. State free file Sales of Farm Products Where to report. State free file    Table 3-1 shows where to report the sale of farm products on your tax return. State free file Schedule F. State free file   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. State free file This includes money and the fair market value of any property or services you receive. State free file When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). State free file See chapter 6 for information on the basis of assets. State free file You generally report these amounts on Schedule F for the year you receive payment. State free file Example. State free file In 2012, you bought 20 feeder calves for $11,000 for resale. State free file You sold them in 2013 for $21,000. State free file You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. State free file Form 4797. State free file   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. State free file In either case, you should always report these sales on Form 4797 instead of Schedule F. State free file See Livestock under Ordinary or Capital Gain or Loss in chapter 8. State free file Animals you do not hold primarily for sale are considered business assets of your farm. State free file Table 3-1. State free file Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. State free file   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. State free file This applies even if your agent pays you in a later year. State free file For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. State free file Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. State free file You must meet all the following conditions to qualify. State free file Your principal trade or business is farming. State free file You use the cash method of accounting. State free file You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. State free file The weather-related condition caused an area to be designated as eligible for assistance by the federal government. State free file Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. State free file The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. State free file A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. State free file See Other Involuntary Conversions in chapter 11. State free file Usual business practice. State free file   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. State free file Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. State free file If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. State free file Connection with affected area. State free file   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. State free file However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. State free file This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. State free file Classes of livestock. State free file   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. State free file Do not separate animals into classes based on age, sex, or breed. State free file Amount to be postponed. State free file   Follow these steps to figure the amount of gain to be postponed for each class of animals. State free file Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. State free file For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. State free file Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. State free file Example. State free file You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. State free file As a result of drought, you sold 135 head during 2012. State free file You realized $70,200 from the sale. State free file On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. State free file The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. State free file How to postpone gain. State free file   To postpone gain, attach a statement to your tax return for the year of the sale. State free file The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. State free file A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). State free file Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. State free file A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. State free file The number of animals sold in each of the 3 preceding years. State free file The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. State free file The total number of animals sold and the number sold because of weather-related conditions during the tax year. State free file A computation, as described above, of the income to be postponed for each class of livestock. State free file   Generally, you must file the statement and the return by the due date of the return, including extensions. State free file However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. State free file For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). State free file Attach the statement to the amended return and write “Filed pursuant to section 301. State free file 9100-2” at the top of the amended return. State free file File the amended return at the same address you filed the original return. State free file Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. State free file Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. State free file However, if you materially participate in farming operations on the land, the rent is farm income. State free file See Landlord Participation in Farming in chapter 12. State free file Pasture income and rental. State free file   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. State free file You must enter it as Other income on Schedule F. State free file If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. State free file Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. State free file It does not matter whether you use the cash method of accounting or an accrual method of accounting. State free file If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. State free file See Landlord Participation in Farming in chapter 12. State free file Report the rental income on Schedule F. State free file If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). State free file The income is not included in self-employment income. State free file Crop shares you use to feed livestock. State free file   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. State free file You must include the fair market value of the crop shares in income at that time. State free file You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. State free file Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. State free file See  chapter 12. State free file Crop shares you give to others (gift). State free file   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. State free file You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. State free file Example. State free file A tenant farmed part of your land under a crop-share arrangement. State free file The tenant harvested and delivered the crop in your name to an elevator company. State free file Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. State free file They sell their crop shares in the following year and the elevator company makes payments directly to your children. State free file In this situation, you are considered to have received rental income and then made a gift of that income. State free file You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. State free file Crop share loss. State free file   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. State free file See Publication 925 for information on these rules. State free file Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. State free file However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. State free file See Cost-Sharing Exclusion (Improvements) , later. State free file Report the agricultural program payment on the appropriate line of Schedule F, Part I. State free file Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. State free file However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. State free file Claim the deduction on Schedule F for the year of repayment or reduction. State free file Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. State free file However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. State free file You do not need approval from the IRS to adopt this method of reporting CCC loans. State free file Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. State free file However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. State free file For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. State free file Revenue Procedure 2008-52, 2008-36 I. State free file R. State free file B. State free file 587, is available at  www. State free file irs. State free file gov/irb/2008-36_IRB/ar09. State free file html. State free file You can request income tax withholding from CCC loan payments you receive. State free file Use Form W-4V, Voluntary Withholding Request. State free file See chapter 16 for information about ordering the form. State free file To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. State free file Attach a statement to your return showing the details of the loan. State free file You must file the statement and the return by the due date of the return, including extensions. State free file If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). State free file Attach the statement to the amended return and write “Filed pursuant to section 301. State free file 9100-2” at the top of the return. State free file File the amended return at the same address you filed the original return. State free file When you make this election, the amount you report as income becomes your basis in the commodity. State free file See chapter 6 for information on the basis of assets. State free file If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. State free file If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. State free file If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. State free file If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. State free file Form 1099-A. State free file   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. State free file “CCC” should be shown in box 6. State free file The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. State free file Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. State free file If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. State free file Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. State free file Market gain should be reported as follows. State free file If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. State free file However, adjust the basis of the commodity for the amount of the market gain. State free file If you did not include the CCC loan in income in the year received, include the market gain in your income. State free file The following examples show how to report market gain. State free file Example 1. State free file Mike Green is a cotton farmer. State free file He uses the cash method of accounting and files his tax return on a calendar year basis. State free file He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. State free file In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. State free file 00 per pound). State free file In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. State free file 50 per pound (lower than the loan amount). State free file Later in 2013, he sold the cotton for $2,500. State free file The market gain on the redemption was $. State free file 50 ($2. State free file 00 – $1. State free file 50) per pound. State free file Mike realized total market gain of $500 ($. State free file 50 x 1,000 pounds). State free file How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. State free file Included CCC loan. State free file   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. State free file The $500 market gain is not recognized on the redemption. State free file He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. State free file   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. State free file His gain from the sale is $1,000 ($2,500 – $1,500). State free file He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. State free file Excluded CCC loan. State free file   Mike has income of $500 from market gain in 2013. State free file He reports it on Schedule F, lines 4a and 4b. State free file His basis in the cotton is zero, so his gain from its sale is $2,500. State free file He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. State free file Example 2. State free file The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. State free file Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. State free file In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. State free file How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. State free file Included CCC loan. State free file   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. State free file The $500 market gain is not recognized on the redemption. State free file Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. State free file   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. State free file Mike has no gain or loss on its sale to the cotton buyer for that amount. State free file Excluded CCC loan. State free file   As in Example 1, Mike has income of $500 from market gain in 2013. State free file He reports it on Schedule F, lines 4a and 4b. State free file His basis in the cotton is zero, so his gain from its sale is $1,500. State free file He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. State free file Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. State free file You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. State free file Cost-share payments you receive may qualify for the cost-sharing exclusion. State free file See Cost-Sharing Exclusion (Improvements) , later. State free file CRP payments are reported to you on Form 1099-G. State free file Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. State free file See the instructions for Schedule SE (Form 1040). State free file Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. State free file You generally include them in the year you receive them. State free file Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. State free file You can request income tax withholding from crop disaster payments you receive from the federal government. State free file Use Form W-4V, Voluntary Withholding Request. State free file See chapter 16 for information about ordering the form. State free file Election to postpone reporting until the following year. State free file   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. State free file You use the cash method of accounting. State free file You receive the crop insurance proceeds in the same tax year the crops are damaged. State free file You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. State free file   Deferral is not permitted for proceeds received from revenue insurance policies. State free file   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. State free file Check the box on line 8c and attach a statement to your tax return. State free file The statement must include your name and address and contain the following information. State free file A statement that you are making an election under IRC section 451(d) and Regulations section 1. State free file 451-6. State free file The specific crop or crops physically destroyed or damaged. State free file A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. State free file The cause of the physical destruction or damage and the date or dates it occurred. State free file The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. State free file The name of each insurance carrier from whom you received payments. State free file   One election covers all crops representing a single trade or business. State free file If you have more than one farming business, make a separate election for each one. State free file For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. State free file   An election is binding for the year unless the IRS approves your request to change it. State free file To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. State free file Ogden Submission Processing Center P. State free file O. State free file Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. State free file These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. State free file They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. State free file Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. State free file You must include these benefits in income in the year you receive them. State free file You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. State free file Report the benefits on Schedule F, Part I, as agricultural program payments. State free file You can usually take a current deduction for the same amount as a feed expense. State free file Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. State free file A payment is any economic benefit you get as a result of an improvement. State free file However, this exclusion applies only to that part of a payment that meets all three of the following tests. State free file It was for a capital expense. State free file You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. State free file You must include the payment for a deductible expense in income, and you can take any offsetting deduction. State free file See chapter 5 for information on deducting soil and water conservation expenses. State free file It does not substantially increase your annual income from the property for which it is made. State free file An increase in annual income is substantial if it is more than the greater of the following amounts. State free file 10% of the average annual income derived from the affected property before receiving the improvement. State free file $2. State free file 50 times the number of affected acres. State free file The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. State free file Qualifying programs. State free file   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. State free file The rural clean water program authorized by the Federal Water Pollution Control Act. State free file The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. State free file The water bank program authorized by the Water Bank Act. State free file The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. State free file The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. State free file The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. State free file The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. State free file Certain small watershed programs, listed later. State free file Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. State free file Several state programs have been approved. State free file For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). State free file Small watershed programs. State free file   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. State free file The programs under the Watershed Protection and Flood Prevention Act. State free file The flood prevention projects under the Flood Control Act of 1944. State free file The Emergency Watershed Protection Program under the Flood Control Act of 1950. State free file Certain programs under the Colorado River Basin Salinity Control Act. State free file The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. State free file The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. State free file The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. State free file The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. State free file The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. State free file The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. State free file The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. State free file The Conservation Security Program authorized by the Food Security Act of 1985. State free file The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. State free file Income realized. State free file   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). State free file Value of the improvement. State free file   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. State free file The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. State free file Any government payments under a program not listed earlier. State free file Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. State free file Any government payment to you for rent or for your services. State free file The denominator of the fraction is the total cost of the improvement. State free file Excludable portion. State free file   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. State free file 10% of the prior average annual income from the affected acreage. State free file The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. State free file $2. State free file 50 times the number of affected acres. State free file The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. State free file You may need to consult your tax advisor for assistance. State free file Example. State free file One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. State free file The total cost of the improvement was $500,000. State free file The USDA paid $490,000. State free file You paid $10,000. State free file The value of the cost-sharing improvement is $15,000. State free file The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. State free file The excludable portion is the greater amount, $1,550. State free file You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. State free file   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. State free file Any payment excluded from income is not part of your basis. State free file In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. State free file   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. State free file How to report the exclusion. State free file   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. State free file The statement must include the following information. State free file The dollar amount of the cost funded by the government payment. State free file The value of the improvement. State free file The amount you are excluding. State free file   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. State free file Recapture. State free file   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. State free file In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. State free file You must report the recapture on Form 4797. State free file See Section 1255 property under Other Gains in chapter 9. State free file Electing not to exclude payments. State free file   You can elect not to exclude all or part of any payments you receive under these programs. State free file If you make this election for all of these payments, none of the above restrictions and rules apply. State free file You must make this election by the due date, including extensions, for filing your return. State free file In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. State free file If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). State free file Write “Filed pursuant to section 301. State free file 9100-2” at the top of the amended return and file it at the same address you filed the original return. State free file Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. State free file You must include these payments on Schedule F, lines 4a and 4b. State free file The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. State free file You must include these payments on Schedule F, lines 6a and 6b. State free file The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. State free file Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. State free file As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. State free file If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. State free file If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. State free file Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. State free file Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. State free file The gain or loss is capital or ordinary depending on how you used the quota. State free file See Capital or ordinary gain or loss , later. State free file Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. State free file Adjusted basis. State free file   The adjusted basis of your quota is determined differently depending on how you obtained the quota. State free file The basis of a quota derived from an original grant by the federal government is zero. State free file The basis of a purchased quota is the purchase price. State free file The basis of a quota received as a gift is generally the same as the donor's basis. State free file However, under certain circumstances, the basis is increased by the amount of gift taxes paid. State free file If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. State free file The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. State free file Reduction of basis. State free file   You are required to reduce the basis of your tobacco quota by the following amounts. State free file Deductions you took for amortization, depletion, or depreciation. State free file Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. State free file The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). State free file Amount treated as interest. State free file   You must reduce your tobacco quota buyout program payment by the amount treated as interest. State free file The interest is reportable as ordinary income. State free file If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. State free file   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. State free file You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. State free file For more information, see Notice 2005-57, 2005-32 I. State free file R. State free file B. State free file 267, available at www. State free file irs. State free file gov/irb/2005-32_IRB/ar13. State free file html. State free file Installment method. State free file   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. State free file Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. State free file See chapter 10 for more information. State free file Capital or ordinary gain or loss. State free file   Whether your gain or loss is ordinary or capital depends on how you used the quota. State free file Quota used in the trade or business of farming. State free file   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. State free file See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. State free file Quota held for investment. State free file   If you held the quota for investment purposes, any gain or loss is capital gain or loss. State free file The same result also applies if you held the quota for the production of income, though not connected with a trade or business. State free file Gain treated as ordinary income. State free file   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. State free file Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. State free file The cost of acquiring a quota. State free file Amounts for amortization, depletion, or depreciation. State free file Amounts to reflect a reduction in the quota pounds. State free file   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. State free file Self-employment income. State free file   The tobacco quota buyout payments are not self-employment income. State free file Income averaging for farmers. State free file   The gain or loss resulting from the quota payments does not qualify for income averaging. State free file A tobacco quota is considered an interest in land. State free file Income averaging is not available for gain or loss arising from the sale or other disposition of land. State free file Involuntary conversion. State free file   The buyout of the tobacco quota is not an involuntary conversion. State free file Form 1099-S. State free file   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. State free file The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. State free file Like-kind exchange of quota. State free file   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. State free file See Notice 2005-57 for more information. State free file Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. State free file Taxation of payments to tobacco growers. State free file   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. State free file Individuals will generally report the payments as an Agricultural program payment on Schedule F. State free file If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. State free file Self-employment income. State free file   Payments to growers generally represent self-employment income. State free file If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. State free file Income averaging for farmers. State free file   Payments to growers who are individuals qualify for farm income averaging. State free file Form 1099-G. State free file   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. State free file Other Payments You must include most other government program payments in income. State free file Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. State free file How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. State free file Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. State free file You must also capitalize the full cost of the improvement. State free file Since you have included the payments in income, they do not reduce your basis. State free file However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. State free file National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. State free file You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. State free file If you produce a tobacco crop, report the payments as income from farming on your Schedule F. State free file If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. State free file Payment to More Than One Person The USDA reports program payments to the IRS. State free file It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). State free file If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. State free file You should file Form 1099-G to report the identity of the actual recipient to the IRS. State free file You should also give this information to the recipient. State free file You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. State free file Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. State free file However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. State free file See chapter 16 for information about ordering Form 1099-G. State free file Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). State free file If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. State free file Form 1099-PATR. State free file   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. State free file Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. State free file For information on the alternative minimum tax, see the Instructions for Form 6251. State free file Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. State free file They include the following items. State free file Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). State free file The stated dollar value of qualified written notices of allocation. State free file The fair market value of other property. State free file Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. State free file You must reduce the cost or other basis of these items by the amount of such patronage dividends received. State free file Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. State free file If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. State free file Qualified written notice of allocation. State free file   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. State free file A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. State free file The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. State free file You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. State free file Signing and giving a written agreement to the cooperative. State free file Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. State free file The cooperative must notify you in writing of this bylaw and give you a copy. State free file Endorsing and cashing a qualified check paid as part of the same patronage dividend. State free file You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. State free file Qualified check. State free file   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. State free file It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. State free file It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. State free file Loss on redemption. State free file   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. State free file The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. State free file Nonqualified notice of allocation. State free file   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. State free file Your basis in the notice is zero. State free file You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. State free file Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. State free file However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. State free file   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. State free file For example, if it represents interest income, report it on your return as interest. State free file Buying or selling capital assets or depreciable property. State free file   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. State free file You must, however, reduce the basis of these assets by the dividends. State free file This reduction is taken into account as of the first day of the tax year in which the dividends are received. State free file If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. State free file   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. State free file Example. State free file On July 1, 2012, Mr. State free file Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. State free file The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). State free file Mr. State free file Brown files his return on a calendar year basis. State free file For 2012, he claimed a depreciation deduction of $311, using the 10. State free file 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). State free file On July 2, 2013, the cooperative association paid Mr. State free file Brown a $300 cash patronage dividend for buying the machine. State free file Mr. State free file Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. State free file Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. State free file 38% × 1. State free file 5 = 23. State free file 07% Depreciation deduction for 2013 ($2,289 × 23. State free file 07%) $528 Exceptions. State free file   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. State free file If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. State free file If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). State free file   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. State free file Personal purchases. State free file   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). State free file This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. State free file Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. State free file A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. State free file These allocations can be paid in money, other property, or qualified certificates. State free file Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. State free file Qualified certificates. State free file   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. State free file The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. State free file If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. State free file Nonqualified certificates. State free file   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. State free file Your basis in the certificate is zero. State free file You must include in income any amount you receive from its sale, redemption, or other disposition. State free file Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. State free file Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. State free file For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. State free file General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. State free file Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. State free file It is excluded from taxable income (see Exclusions , later). State free file Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. State free file If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. State free file Election to defer income from discharge of indebtedness. State free file   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. State free file Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. State free file See IRC section 108(i) and Publication 4681 for details. State free file Form 1099-C. State free file   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. State free file The amount of debt canceled is shown in box 2. State free file Exceptions The following discussion covers some exceptions to the general rule for canceled debt. State free file These exceptions apply before the exclusions discussed below. State free file Price reduced after purchase. State free file   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. State free file Reduce your basis in the property by the amount of the reduction in the debt. State free file The rules that apply to bankruptcy and insolvency are explained below under Exclusions . State free file Deductible debt. State free file   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. State free file This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. State free file Example. State free file You get accounting services for your farm on credit. State free file Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. State free file Your accountant forgives part of the amount you owe for the accounting services. State free file How you treat the canceled debt depends on your method of accounting. State free file Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. State free file Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. State free file Exclusions Do not include canceled debt in income in the following situations. State free file The cancellation takes place in a bankruptcy case under title 11 of the U. State free file S. State free file Code. State free file The cancellation takes place when you are insolvent. State free file The canceled debt is a qualified farm debt. State free file The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). State free file See Publication 334, Tax Guide for Small Business, chapter 5. State free file The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. State free file The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. State free file If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. State free file If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. State free file See Form 982 , later, for information on how to claim an exclusion for a canceled debt. State free file Debt. State free file   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. State free file Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. State free file Bankruptcy. State free file   A bankruptcy case is a case under title 11 of the U. State free file S. State free file Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. State free file   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. State free file Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . State free file Insolvency. State free file   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. State free file   You can exclude canceled debt from gross income up to the amount by which you are insolvent. State free file If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. State free file Otherwise, you include the difference in gross income. State free file Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . State free file You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. State free file Example. State free file You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. State free file Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. State free file Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). State free file You can exclude this amount from income. State free file The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. State free file If not, you must include it in income. State free file Reduction of tax attributes. State free file   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. State free file Order of reduction. State free file   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. State free file Net operating loss (NOL). State free file Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. State free file Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. State free file General business credit carryover. State free file Reduce the credit carryover to or from the tax year of the debt cancellation. State free file Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. State free file Minimum tax credit. State free file Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. State free file Reduce the credit 331/3 cents for each dollar of excluded canceled debt. State free file Capital loss. State free file Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. State free file Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. State free file Basis. State free file Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. State free file Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. State free file Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. State free file Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. State free file Inventory and accounts and notes receivable. State free file Other property. State free file Reduce the basis one dollar for each dollar of excluded canceled debt. State free file However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. State free file For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. State free file 1017-1(b)(2). State free file Also see Electing to reduce the basis of depreciable property

The State Free File

State free file Publication 587 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionOrdering forms and publications. State free file Tax questions. State free file Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 587, such as legislation enacted after it was published, go to www. State free file irs. State free file gov/pub587. State free file What's New The IRS now provides a simplified method to determine your expenses for business use of your home. State free file The simplified method is an alternative to calculating and substantiating actual expenses. State free file For more information, see Using the Simplified Method under Figuring the Deduction, later. State free file Reminders Photographs of missing children. State free file  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. State free file Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. State free file You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. State free file Introduction The purpose of this publication is to provide information on figuring and claiming the deduction for business use of your home. State free file The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. State free file It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. State free file However, it does not include any part of your property used exclusively as a hotel, motel, inn, or similar establishment. State free file Qualifying for a Deduction gives the requirements for qualifying to deduct expenses for the business use of your home (including special rules for employees and special rules for storing inventory or product samples). State free file For special rules that apply to daycare providers, see Daycare Facility . State free file After you determine that you qualify for the deduction, Figuring the Deduction explains the expenses you can deduct using either your actual expenses or the simplified method. State free file The simplified method is an alternative to calculating and substantiating actual expenses. State free file Where To Deduct explains where a self-employed person, employee, or partner will report the deduction. State free file This publication also includes information on the following. State free file Selling a home that was used partly for business. State free file Deducting expenses for furniture and equipment used in your business. State free file Records you should keep. State free file Finally, this publication contains worksheets to help you figure the amount of your deduction if you use your home in your farming business and you are filing Schedule F (Form 1040), you use your home for work as an employee, or you are a partner and the use of your home resulted in unreimbursed ordinary and necessary expenses that you are required to pay under the partnership agreement. State free file If you used your home for business and you are filing Schedule C (Form 1040), you will use either Form 8829 or the Simplified Method Worksheet in your Instructions for Schedule C. State free file The rules in this publication apply to individuals. State free file If you need information on deductions for renting out your property, see Publication 527, Residential Rental Property. State free file Comments and suggestions. State free file   We welcome your comments about this publication and your suggestions for future editions. State free file   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. State free file NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. State free file Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. State free file   You can send your comments from www. State free file irs. State free file gov/formspubs/. State free file Click on “More Information” and then on “Comment on Tax Forms and Publications. State free file ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. State free file Ordering forms and publications. State free file   Visit www. State free file irs. State free file gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. State free file Internal Revenue Service 1201 N. State free file Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. State free file   If you have a tax question, check the information available on IRS. State free file gov or call 1-800-829-1040. State free file We cannot answer tax questions sent to either of the above addresses. State free file Useful Items - You may want to see: Publications 523 Selling Your Home 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Forms (and Instructions) Schedule C (Form 1040) Profit or Loss from Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization 8829 Expenses for Business Use of Your Home  See How To Get Tax Help , near the end of this publication for information about getting publications and forms. State free file Prev  Up  Next   Home   More Online Publications