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2010 Tax File Free

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2010 Tax File Free

2010 tax file free 10. 2010 tax file free   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. 2010 tax file free Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. 2010 tax file free Use Schedule SE to figure net earnings from self-employment. 2010 tax file free Sole proprietor or independent contractor. 2010 tax file free   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. 2010 tax file free SE tax rate. 2010 tax file free    For 2013, the SE tax rate on net earnings is 15. 2010 tax file free 3% (12. 2010 tax file free 4% social security tax plus 2. 2010 tax file free 9% Medicare tax). 2010 tax file free Maximum earnings subject to self-employment tax. 2010 tax file free    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. 2010 tax file free 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. 2010 tax file free   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. 2010 tax file free 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. 2010 tax file free   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. 2010 tax file free 4% social security part of the SE tax on any of your net earnings. 2010 tax file free However, you must pay the 2. 2010 tax file free 9% Medicare part of the SE tax on all your net earnings. 2010 tax file free Special Rules and Exceptions Aliens. 2010 tax file free   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. 2010 tax file free S. 2010 tax file free citizens. 2010 tax file free Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. 2010 tax file free S. 2010 tax file free social security system. 2010 tax file free However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. 2010 tax file free S. 2010 tax file free residents for self-employment tax purposes. 2010 tax file free For more information on aliens, see Publication 519, U. 2010 tax file free S. 2010 tax file free Tax Guide for Aliens. 2010 tax file free Child employed by parent. 2010 tax file free   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. 2010 tax file free Church employee. 2010 tax file free    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. 2010 tax file free 28 or more in wages from the church or organization. 2010 tax file free For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. 2010 tax file free Fishing crew member. 2010 tax file free   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. 2010 tax file free You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. 2010 tax file free The pay is not more than $100 per trip. 2010 tax file free The pay is received only if there is a minimum catch. 2010 tax file free The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. 2010 tax file free You get a share of the catch or a share of the proceeds from the sale of the catch. 2010 tax file free Your share depends on the amount of the catch. 2010 tax file free The boat's operating crew normally numbers fewer than 10 individuals. 2010 tax file free (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. 2010 tax file free ) Notary public. 2010 tax file free   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). 2010 tax file free State or local government employee. 2010 tax file free   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. 2010 tax file free Foreign government or international organization employee. 2010 tax file free   You are subject to SE tax if both the following conditions are true. 2010 tax file free You are a U. 2010 tax file free S. 2010 tax file free citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. 2010 tax file free Your employer is not required to withhold social security and Medicare taxes from your wages. 2010 tax file free U. 2010 tax file free S. 2010 tax file free citizen or resident alien residing abroad. 2010 tax file free    If you are a self-employed U. 2010 tax file free S. 2010 tax file free citizen or resident alien living outside the United States, in most cases you must pay SE tax. 2010 tax file free Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. 2010 tax file free Exception. 2010 tax file free    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. 2010 tax file free Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. 2010 tax file free The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. 2010 tax file free   For more information, see the Instructions for Schedule SE (Form 1040). 2010 tax file free More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. 2010 tax file free A loss from one business reduces your profit from another business. 2010 tax file free Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. 2010 tax file free Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. 2010 tax file free It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. 2010 tax file free Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. 2010 tax file free If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. 2010 tax file free Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. 2010 tax file free The regular method. 2010 tax file free The nonfarm optional method. 2010 tax file free The farm optional method. 2010 tax file free You must use the regular method unless you are eligible to use one or both of the optional methods. 2010 tax file free Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. 2010 tax file free You want to receive credit for social security benefit coverage. 2010 tax file free You incurred child or dependent care expenses for which you could claim a credit. 2010 tax file free (An optional method may increase your earned income, which could increase your credit. 2010 tax file free ) You are entitled to the earned income credit. 2010 tax file free (An optional method may increase your earned income, which could increase your credit. 2010 tax file free ) You are entitled to the additional child tax credit. 2010 tax file free (An optional method may increase your earned income, which could increase your credit. 2010 tax file free ) Effects of using an optional method. 2010 tax file free   Using an optional method could increase your SE tax. 2010 tax file free Paying more SE tax could result in your getting higher benefits when you retire. 2010 tax file free   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. 2010 tax file free   The optional methods may be used only to figure your SE tax. 2010 tax file free To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. 2010 tax file free Regular Method Multiply your total earnings subject to SE tax by 92. 2010 tax file free 35% (. 2010 tax file free 9235) to get your net earnings under the regular method. 2010 tax file free See Short Schedule SE, line 4, or Long Schedule SE, line 4a. 2010 tax file free Net earnings figured using the regular method are also called actual net earnings. 2010 tax file free Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. 2010 tax file free You may use this method if you meet all the following tests. 2010 tax file free You are self-employed on a regular basis. 2010 tax file free This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. 2010 tax file free The net earnings can be from either farm or nonfarm earnings or both. 2010 tax file free You have used this method less than 5 years. 2010 tax file free (There is a 5-year lifetime limit. 2010 tax file free ) The years do not have to be one after another. 2010 tax file free Your net nonfarm profits were: Less than $5,024, and Less than 72. 2010 tax file free 189% of your gross nonfarm income. 2010 tax file free Net nonfarm profits. 2010 tax file free   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). 2010 tax file free   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. 2010 tax file free Gross nonfarm income. 2010 tax file free   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). 2010 tax file free Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. 2010 tax file free Table 10-1. 2010 tax file free Figuring Nonfarm Net Earnings IF your gross nonfarm income is. 2010 tax file free . 2010 tax file free . 2010 tax file free THEN your net earnings are equal to. 2010 tax file free . 2010 tax file free . 2010 tax file free $6,960 or less Two-thirds of your gross nonfarm income. 2010 tax file free More than $6,960 $4,640 Actual net earnings. 2010 tax file free   Your actual net earnings are 92. 2010 tax file free 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. 2010 tax file free 35% (. 2010 tax file free 9235) to get actual net earnings). 2010 tax file free Actual net earnings are equivalent to net earnings figured using the regular method. 2010 tax file free Optional net earnings less than actual net earnings. 2010 tax file free   You cannot use this method to report an amount less than your actual net earnings from self-employment. 2010 tax file free Gross nonfarm income of $6,960 or less. 2010 tax file free   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. 2010 tax file free Example 1. 2010 tax file free Net nonfarm profit less than $5,024 and less than 72. 2010 tax file free 189% of gross nonfarm income. 2010 tax file free Ann Green runs a craft business. 2010 tax file free Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. 2010 tax file free She meets the test for being self-employed on a regular basis. 2010 tax file free She has used the nonfarm optional method less than 5 years. 2010 tax file free Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . 2010 tax file free 9235). 2010 tax file free Because her net profit is less than $5,024 and less than 72. 2010 tax file free 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). 2010 tax file free Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. 2010 tax file free Example 2. 2010 tax file free Net nonfarm profit less than $5,024 but not less than 72. 2010 tax file free 189% of gross nonfarm income. 2010 tax file free Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. 2010 tax file free She must use the regular method to figure her net earnings. 2010 tax file free She cannot use the nonfarm optional method because her net profit is not less than 72. 2010 tax file free 189% of her gross income. 2010 tax file free Example 3. 2010 tax file free Net loss from a nonfarm business. 2010 tax file free Assume that in Example 1 Ann has a net loss of $700. 2010 tax file free She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. 2010 tax file free Example 4. 2010 tax file free Nonfarm net earnings less than $400. 2010 tax file free Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. 2010 tax file free In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. 2010 tax file free Gross nonfarm income of more than $6,960. 2010 tax file free   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. 2010 tax file free Example 1. 2010 tax file free Net nonfarm profit less than $5,024 and less than 72. 2010 tax file free 189% of gross nonfarm income. 2010 tax file free John White runs an appliance repair shop. 2010 tax file free His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. 2010 tax file free He meets the test for being self-employed on a regular basis. 2010 tax file free He has used the nonfarm optional method less than 5 years. 2010 tax file free His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . 2010 tax file free 9235). 2010 tax file free Because his net profit is less than $5,024 and less than 72. 2010 tax file free 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. 2010 tax file free Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. 2010 tax file free Example 2. 2010 tax file free Net nonfarm profit not less than $5,024. 2010 tax file free Assume that in Example 1 John's net profit is $5,400. 2010 tax file free He must use the regular method. 2010 tax file free He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. 2010 tax file free Example 3. 2010 tax file free Net loss from a nonfarm business. 2010 tax file free Assume that in Example 1 John has a net loss of $700. 2010 tax file free He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. 2010 tax file free Farm Optional Method Use the farm optional method only for earnings from a farming business. 2010 tax file free See Publication 225 for information about this method. 2010 tax file free Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. 2010 tax file free To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. 2010 tax file free Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. 2010 tax file free Add the net earnings figured under each method to arrive at your total net earnings from self-employment. 2010 tax file free You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. 2010 tax file free If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. 2010 tax file free Example. 2010 tax file free You are a self-employed farmer. 2010 tax file free You also operate a retail grocery store. 2010 tax file free Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. 2010 tax file free Table 10-2. 2010 tax file free Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. 2010 tax file free Method 1. 2010 tax file free Using the regular method for both farm and nonfarm income. 2010 tax file free Method 2. 2010 tax file free Using the optional method for farm income and the regular method for nonfarm income. 2010 tax file free Method 3. 2010 tax file free Using the regular method for farm income and the optional method for nonfarm income. 2010 tax file free Method 4. 2010 tax file free Using the optional method for both farm and nonfarm income. 2010 tax file free Note. 2010 tax file free Actual net earnings is the same as net earnings figured using the regular method. 2010 tax file free Table 10-3. 2010 tax file free Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. 2010 tax file free Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. 2010 tax file free Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. 2010 tax file free Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. 2010 tax file free Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. 2010 tax file free Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. 2010 tax file free However, certain taxpayers must use Section B—Long Schedule SE. 2010 tax file free If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. 2010 tax file free Joint return. 2010 tax file free   Even if you file a joint return, you cannot file a joint Schedule SE. 2010 tax file free This is true whether one spouse or both spouses have earnings subject to SE tax. 2010 tax file free If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. 2010 tax file free However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. 2010 tax file free Attach both schedules to the joint return. 2010 tax file free More than one business. 2010 tax file free   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. 2010 tax file free A loss from one business will reduce your profit from another business. 2010 tax file free File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. 2010 tax file free Example. 2010 tax file free You are the sole proprietor of two separate businesses. 2010 tax file free You operate a restaurant that made a net profit of $25,000. 2010 tax file free You also have a cabinetmaking business that had a net loss of $500. 2010 tax file free You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. 2010 tax file free You file Schedule SE showing total earnings subject to SE tax of $24,500. 2010 tax file free Prev  Up  Next   Home   More Online Publications
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The 2010 Tax File Free

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