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Free file taxes on line 4. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line Category 1. Free file taxes on line Category 2. Free file taxes on line Category 3. Free file taxes on line What's New for 2013 Standard mileage rate. Free file taxes on line  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. Free file taxes on line 5 cents. Free file taxes on line See Truck and Car Expenses , later. Free file taxes on line Simplified method for business use of home deduction. Free file taxes on line  The IRS now provides a simplified method to determine your expenses for business use of your home. Free file taxes on line For more information, see Schedule C (Form 1040), Part II, and its instructions. Free file taxes on line Introduction You can generally deduct the current costs of operating your farm. Free file taxes on line Current costs are expenses you do not have to capitalize or include in inventory costs. Free file taxes on line However, your deduction for the cost of livestock feed and certain other supplies may be limited. Free file taxes on line If you have an operating loss, you may not be able to deduct all of it. Free file taxes on line 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. Free file taxes on line Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Free file taxes on line “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Free file taxes on line Schedule F, Part II, lists some common farm expenses that are typically deductible. Free file taxes on line This chapter discusses many of these expenses, as well as others not listed on Schedule F. Free file taxes on line Reimbursed expenses. Free file taxes on line   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Free file taxes on line If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Free file taxes on line See Refund or reimbursement under Income From Other Sources in chapter 3. Free file taxes on line Personal and business expenses. Free file taxes on line   Some expenses you pay during the tax year may be part personal and part business. Free file taxes on line These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Free file taxes on line   You must allocate these mixed expenses between their business and personal parts. Free file taxes on line Generally, the personal part of these expenses is not deductible. Free file taxes on line The business portion of the expenses is deductible on Schedule F. Free file taxes on line Example. Free file taxes on line You paid $1,500 for electricity during the tax year. Free file taxes on line You used 1/3 of the electricity for personal purposes and 2/3 for farming. Free file taxes on line Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Free file taxes on line Reasonable allocation. Free file taxes on line   It is not always easy to determine the business and nonbusiness parts of an expense. Free file taxes on line There is no method of allocation that applies to all mixed expenses. Free file taxes on line Any reasonable allocation is acceptable. Free file taxes on line What is reasonable depends on the circumstances in each case. Free file taxes on line Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Free file taxes on line 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. Free file taxes on line Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Free file taxes on line 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. Free file taxes on line Poultry bought for resale and not resold during the year. Free file taxes on line Deduction limit. Free file taxes on line   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). Free file taxes on line This limit does not apply if you meet one of the exceptions described later. Free file taxes on line See Chapter 2 for a discussion of the cash method of accounting. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Free file taxes on line Example. Free file taxes on line You may not qualify for the exception described next. Free file taxes on line During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Free file taxes on line Your total prepaid farm supplies expense for 2013 is $5,500. Free file taxes on line Your other deductible farm expenses totaled $10,000 for 2013. Free file taxes on line Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Free file taxes on line 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. Free file taxes on line Exceptions. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line   You are a farm-related taxpayer if any of the following tests apply. Free file taxes on line Your main home is on a farm. Free file taxes on line Your principal business is farming. Free file taxes on line A member of your family meets (1) or (2). Free file taxes on line 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. Free file taxes on line    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. Free file taxes on line 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. Free file taxes on line The payment is for the purchase of feed rather than a deposit. Free file taxes on line The prepayment has a business purpose and is not merely for tax avoidance. Free file taxes on line Deducting the prepayment does not result in a material distortion of your income. Free file taxes on line If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Free file taxes on line If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Free file taxes on line This rule does not apply to the purchase of commodity futures contracts. Free file taxes on line Payment for the purchase of feed. Free file taxes on line   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Free file taxes on line 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. Free file taxes on line   The following are some factors that show a payment is a deposit rather than for the purchase of feed. Free file taxes on line The absence of specific quantity terms. Free file taxes on line The right to a refund of any unapplied payment credit at the end of the contract. Free file taxes on line The seller's treatment of the payment as a deposit. Free file taxes on line The right to substitute other goods or products for those specified in the contract. Free file taxes on line   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. Free file taxes on line Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Free file taxes on line Business purpose. Free file taxes on line   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. Free file taxes on line The following are some examples of business benefits. Free file taxes on line Fixing maximum prices and securing an assured feed supply. Free file taxes on line Securing preferential treatment in anticipation of a feed shortage. Free file taxes on line   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. Free file taxes on line No material distortion of income. Free file taxes on line   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Free file taxes on line Your customary business practice in conducting your livestock operations. Free file taxes on line The expense in relation to past purchases. Free file taxes on line The time of year you made the purchase. Free file taxes on line The expense in relation to your income for the year. Free file taxes on line 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. Free file taxes on line You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Free file taxes on line The cost of boarding farm labor is a deductible labor cost. Free file taxes on line Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Free file taxes on line 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. Free file taxes on line See chapter 13 for more information on employment taxes. Free file taxes on line 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. Free file taxes on line See Taxes , later. Free file taxes on line Property for services. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line   Treat the wages deducted as an amount received for the property. Free file taxes on line 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. Free file taxes on line Any gain or loss has the same character the exchanged property had in your hands. Free file taxes on line For more information, see chapter 8. Free file taxes on line Child as an employee. Free file taxes on line   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. Free file taxes on line Include these wages in the child's income. Free file taxes on line The child may have to file an income tax return. Free file taxes on line These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Free file taxes on line For more information, see Family Employees in chapter 13. Free file taxes on line    A Form W-2, Wage and Tax Statement, should be issued to the child employee. Free file taxes on line   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. Free file taxes on line The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Free file taxes on line Spouse as an employee. Free file taxes on line   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. Free file taxes on line Wages you pay to your spouse are subject to social security and Medicare taxes. Free file taxes on line For more information, see Family Employees in chapter 13. Free file taxes on line Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Free file taxes on line However, those wages may be subject to the employment taxes discussed in chapter 13. Free file taxes on line Household workers. Free file taxes on line   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. Free file taxes on line Construction labor. Free file taxes on line   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Free file taxes on line These wages are part of the cost of the building or other improvement. Free file taxes on line You must capitalize them. Free file taxes on line Maintaining your home. Free file taxes on line   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. Free file taxes on line For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Free file taxes on line The employee devotes the remaining time to work on your farm. Free file taxes on line You cannot deduct 5% of the wages and employment taxes you pay for that employee. Free file taxes on line 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). Free file taxes on line Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line For example, if you repair the barn roof, the cost is deductible. Free file taxes on line But if you replace the roof, it is a capital expense. Free file taxes on line For more information, see Capital Expenses , later. Free file taxes on line Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Free file taxes on line Cash method. Free file taxes on line   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Free file taxes on line You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Free file taxes on line You can, however, deduct the interest when you start making payments on the new loan. Free file taxes on line For more information, see Cash Method in chapter 2. Free file taxes on line Prepaid interest. Free file taxes on line   Under the cash method, you generally cannot deduct any interest paid before the year it is due. Free file taxes on line Interest paid in advance may be deducted only in the tax year in which it is due. Free file taxes on line Accrual method. Free file taxes on line   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Free file taxes on line 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. Free file taxes on line For more information, see Accrual Method in chapter 2. Free file taxes on line Allocation of interest. Free file taxes on line   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Free file taxes on line Allocate the interest to the following categories. Free file taxes on line Trade or business interest. Free file taxes on line Passive activity interest. Free file taxes on line Investment interest. Free file taxes on line Portfolio interest. Free file taxes on line Personal interest. Free file taxes on line   You generally allocate interest on a loan the same way you allocate the loan proceeds. Free file taxes on line You allocate loan proceeds by tracing disbursements to specific uses. Free file taxes on line The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Free file taxes on line Secured loan. Free file taxes on line   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Free file taxes on line Example. Free file taxes on line You secure a loan with property used in your farming business. Free file taxes on line You use the loan proceeds to buy a car for personal use. Free file taxes on line 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. Free file taxes on line If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Free file taxes on line The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Free file taxes on line However, you can choose to treat the loan as not secured by your home. Free file taxes on line For more information, see Publication 936. Free file taxes on line Allocation period. Free file taxes on line   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. Free file taxes on line The date the loan is repaid. Free file taxes on line The date the loan is reallocated to another use. Free file taxes on line More information. Free file taxes on line   For more information on interest, see chapter 4 in Publication 535. Free file taxes on line Breeding Fees You can deduct breeding fees as a farm business expense. Free file taxes on line 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. Free file taxes on line For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Free file taxes on line 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. Free file taxes on line You can also deduct the cost of applying these materials in the year you pay or incur it. Free file taxes on line However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Free file taxes on line 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. Free file taxes on line However, you can choose to deduct these expenses in the year paid or incurred. Free file taxes on line If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Free file taxes on line 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. Free file taxes on line Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Free file taxes on line It does not include land you have never used previously for producing crops or sustaining livestock. Free file taxes on line You cannot deduct initial land preparation costs. Free file taxes on line (See Capital Expenses , later. Free file taxes on line ) Include government payments you receive for lime or fertilizer in income. Free file taxes on line See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line For information on employment taxes, see chapter 13. Free file taxes on line Allocation of taxes. Free file taxes on line   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. Free file taxes on line You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Free file taxes on line To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Free file taxes on line The allocation can be done from the assessed valuations. Free file taxes on line If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Free file taxes on line State and local general sales taxes. Free file taxes on line   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Free file taxes on line 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. Free file taxes on line Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Free file taxes on line State and federal income taxes. Free file taxes on line   Individuals cannot deduct state and federal income taxes as farm business expenses. Free file taxes on line Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Free file taxes on line However, you cannot deduct federal income tax. Free file taxes on line Highway use tax. Free file taxes on line   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Free file taxes on line 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. Free file taxes on line Self-employment tax deduction. Free file taxes on line   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Free file taxes on line For more information, see chapter 12. Free file taxes on line Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Free file taxes on line This includes premiums you pay for the following types of insurance. Free file taxes on line Fire, storm, crop, theft, liability, and other insurance on farm business assets. Free file taxes on line Health and accident insurance on your farm employees. Free file taxes on line 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. Free file taxes on line Business interruption insurance. Free file taxes on line State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Free file taxes on line Insurance to secure a loan. Free file taxes on line   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. Free file taxes on line In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Free file taxes on line Advance premiums. Free file taxes on line   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Free file taxes on line Example. Free file taxes on line On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Free file taxes on line The policy will cover a period of 3 years beginning on July 1, 2013. Free file taxes on line Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Free file taxes on line Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Free file taxes on line In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Free file taxes on line Deduct the remaining $500 in 2016. Free file taxes on line 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. Free file taxes on line Business interruption insurance. Free file taxes on line   Use and occupancy and business interruption insurance premiums are deductible as a business expense. Free file taxes on line This insurance pays for lost profits if your business is shut down due to a fire or other cause. Free file taxes on line Report any proceeds in full on Schedule F, Part I. Free file taxes on line Self-employed health insurance deduction. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Free file taxes on line   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. Free file taxes on line   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Free file taxes on line Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Free file taxes on line   For more information, see Deductible Premiums in Publication 535, chapter 6. Free file taxes on line Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Free file taxes on line However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Free file taxes on line Advance payments. Free file taxes on line   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Free file taxes on line Farm home. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Free file taxes on line Conditional sales contract. Free file taxes on line   Whether an agreement is a conditional sales contract depends on the intent of the parties. Free file taxes on line Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Free file taxes on line No single test, or special combination of tests, always applies. Free file taxes on line However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Free file taxes on line The agreement applies part of each payment toward an equity interest you will receive. Free file taxes on line You get title to the property after you make a stated amount of required payments. Free file taxes on line 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. Free file taxes on line You pay much more than the current fair rental value of the property. Free file taxes on line 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. Free file taxes on line Determine this value when you make the agreement. Free file taxes on line You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Free file taxes on line The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Free file taxes on line Example. Free file taxes on line You lease new farm equipment from a dealer who both sells and leases. Free file taxes on line The agreement includes an option to purchase the equipment for a specified price. Free file taxes on line The lease payments and the specified option price equal the sales price of the equipment plus interest. Free file taxes on line Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Free file taxes on line For federal income tax purposes, the agreement is a conditional sales contract. Free file taxes on line You cannot deduct any of the lease payments as rent. Free file taxes on line You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Free file taxes on line Motor vehicle leases. Free file taxes on line   Special rules apply to lease agreements that have a terminal rental adjustment clause. Free file taxes on line 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. Free file taxes on line If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Free file taxes on line For more information, see Internal Revenue Code (IRC) section 7701(h). Free file taxes on line Leveraged leases. Free file taxes on line   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Free file taxes on line 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. Free file taxes on line irs. Free file taxes on line gov/pub/irs-irbs/irb01-19. Free file taxes on line pdf. Free file taxes on line 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. Free file taxes on line You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Free file taxes on line 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. Free file taxes on line Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line You use it exclusively and regularly for the administrative or management activities of your trade or business. Free file taxes on line You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Free file taxes on line If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Free file taxes on line The IRS now provides a simplified method to determine your expenses for business use of your home. Free file taxes on line For more information, see Schedule C (Form 1040), Part II, and its instructions. Free file taxes on line Deduction limit. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line   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. Free file taxes on line 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). Free file taxes on line Farm expenses other than expenses that relate to the use of your home. Free file taxes on line If you are self-employed, do not include your deduction for half of your self-employment tax. Free file taxes on line   Deductions over the current year's limit can be carried over to your next tax year. Free file taxes on line They are subject to the deduction limit for the next tax year. Free file taxes on line More information. Free file taxes on line   See Publication 587 for more information on deducting expenses for the business use of your home. Free file taxes on line Telephone expense. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line Cell phone charges for calls relating to your farm business are deductible. Free file taxes on line 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. Free file taxes on line Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Free file taxes on line Only expenses for business use are deductible. Free file taxes on line These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Free file taxes on line Standard mileage rate. Free file taxes on line   Instead of using actual costs, under certain conditions you can use the standard mileage rate. Free file taxes on line The standard mileage rate for each mile of business use is 56. Free file taxes on line 5 cents in 2013. Free file taxes on line 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. Free file taxes on line   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Free file taxes on line 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. Free file taxes on line Example. Free file taxes on line Maureen owns a car and four pickup trucks that are used in her farm business. Free file taxes on line Her farm employees use the trucks and she uses the car for business. Free file taxes on line Maureen cannot use the standard mileage rate for the car or the trucks. Free file taxes on line This is because all five vehicles are used in Maureen's farm business at the same time. Free file taxes on line She must use actual expenses for all vehicles. Free file taxes on line Business use percentage. Free file taxes on line   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. Free file taxes on line You choose this method of substantiating business use the first year the vehicle is placed in service. Free file taxes on line Once you make this choice, you may not change to another method later. Free file taxes on line The following are uses directly connected with the business of farming. Free file taxes on line Cultivating land. Free file taxes on line Raising or harvesting any agricultural or horticultural commodity. Free file taxes on line Raising, shearing, feeding, caring for, training, and managing animals. Free file taxes on line Driving to the feed or supply store. Free file taxes on line   If you keep records and they show that your business use was more than 75%, you may be able to claim more. Free file taxes on line See Recordkeeping requirements under Travel Expenses , below. Free file taxes on line More information. Free file taxes on line   For more information on deductible truck and car expenses, see Publication 463, chapter 4. Free file taxes on line 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. Free file taxes on line Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Free file taxes on line You cannot deduct lavish or extravagant expenses. Free file taxes on line Usually, the location of your farm business is considered your home for tax purposes. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line The following are some types of deductible travel expenses. Free file taxes on line 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. Free file taxes on line Meals. Free file taxes on line   You ordinarily can deduct only 50% of your business-related meals expenses. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line For information on entertainment expenses, see Publication 463, chapter 2. Free file taxes on line   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Free file taxes on line You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Free file taxes on line    Recordkeeping requirements. Free file taxes on line You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Free file taxes on line Estimates or approximations do not qualify as proof of an expense. Free file taxes on line   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. Free file taxes on line Generally, it is best to record the expense and get documentation of it at the time you pay it. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line More information. Free file taxes on line   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Free file taxes on line Reimbursements to employees. Free file taxes on line   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Free file taxes on line Employees may be reimbursed under an accountable or nonaccountable plan. Free file taxes on line Under an accountable plan, the employee must provide evidence of expenses. Free file taxes on line Under a nonaccountable plan, no evidence of expenses is required. Free file taxes on line If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Free file taxes on line If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Free file taxes on line For more information, see Publication 535, chapter 11. Free file taxes on line Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Free file taxes on line 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. Free file taxes on line Do not take a separate deduction for the penalty. Free file taxes on line Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Free file taxes on line These costs include repairs, utilities, insurance, and depreciation. Free file taxes on line The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Free file taxes on line 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. Free file taxes on line You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Free file taxes on line However, see Chickens, seeds, and young plants , below. Free file taxes on line Example. Free file taxes on line You use the cash method of accounting. Free file taxes on line In 2013, you buy 50 steers you will sell in 2014. Free file taxes on line You cannot deduct the cost of the steers on your 2013 tax return. Free file taxes on line You deduct their cost on your 2014 Schedule F, Part I. Free file taxes on line Chickens, seeds, and young plants. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Free file taxes on line   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Free file taxes on line You cannot also deduct the cost from the selling price. Free file taxes on line   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Free file taxes on line Deduct the cost of these seeds and plants through depletion allowances. Free file taxes on line For more information, see Depletion in chapter 7. Free file taxes on line   The cost of chickens and plants used as food for your family is never deductible. Free file taxes on line   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Free file taxes on line These rules are discussed in chapter 6. Free file taxes on line Example. Free file taxes on line You use the cash method of accounting. Free file taxes on line In 2013, you buy 500 baby chicks to raise for resale in 2014. Free file taxes on line You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Free file taxes on line 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. Free file taxes on line Election to use crop method. Free file taxes on line   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Free file taxes on line You must get IRS approval to use the crop method. Free file taxes on line If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Free file taxes on line For more information, see Crop method under Special Methods of Accounting in chapter 2. Free file taxes on line Choosing a method. Free file taxes on line   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. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line For more information, see Change in Accounting Method in chapter 2. Free file taxes on line Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Free file taxes on line 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. Free file taxes on line Accounting fees. Free file taxes on line Advertising. Free file taxes on line Business travel and meals. Free file taxes on line Commissions. Free file taxes on line Consultant fees. Free file taxes on line Crop scouting expenses. Free file taxes on line Dues to cooperatives. Free file taxes on line Educational expenses (to maintain and improve farming skills). Free file taxes on line Farm-related attorney fees. Free file taxes on line Farm magazines. Free file taxes on line Ginning. Free file taxes on line Insect sprays and dusts. Free file taxes on line Litter and bedding. Free file taxes on line Livestock fees. Free file taxes on line Marketing fees. Free file taxes on line Milk assessment. Free file taxes on line Recordkeeping expenses. Free file taxes on line Service charges. Free file taxes on line Small tools expected to last one year or less. Free file taxes on line Stamps and stationery. Free file taxes on line Subscriptions to professional, technical, and trade journals that deal with farming. Free file taxes on line Tying material and containers. Free file taxes on line Loan expenses. Free file taxes on line   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. Free file taxes on line Tax preparation fees. Free file taxes on line   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. Free file taxes on line You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Free file taxes on line   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Free file taxes on line Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Free file taxes on line Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Free file taxes on line Income from cooperatives. Free file taxes on line   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. Free file taxes on line This deduction amount is reported on Form 1099-PATR, box 6. Free file taxes on line 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. Free file taxes on line More information. Free file taxes on line   For more information on the domestic production activities deduction, see the Instructions for Form 8903. Free file taxes on line 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. Free file taxes on line You include the expense in the basis of the asset. Free file taxes on line Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Free file taxes on line See chapters 2  and 6. Free file taxes on line Capital expenses are generally not deductible, but they may be depreciable. Free file taxes on line However, you can elect to deduct certain capital expenses, such as the following. Free file taxes on line The cost of fertilizer, lime, etc. Free file taxes on line (See Fertilizer and Lime under Deductible Expenses , earlier. Free file taxes on line ) Soil and water conservation expenses. Free file taxes on line (See chapter 5. Free file taxes on line ) The cost of property that qualifies for a deduction under section 179. Free file taxes on line (See chapter 7. Free file taxes on line ) Business start-up costs. Free file taxes on line (See Business start-up and organizational costs , later. Free file taxes on line ) Forestation and reforestation costs. Free file taxes on line (See Forestation and reforestation costs , later. Free file taxes on line ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Free file taxes on line Land and buildings. Free file taxes on line Additions, alterations, and improvements to buildings, etc. Free file taxes on line Cars and trucks. Free file taxes on line Equipment and machinery. Free file taxes on line Fences. Free file taxes on line Draft, breeding, sport, and dairy livestock. Free file taxes on line Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Free file taxes on line Water wells, including drilling and equipping costs. Free file taxes on line 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. Free file taxes on line Business start-up and organizational costs. Free file taxes on line   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. Free file taxes on line The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Free file taxes on line Any remaining costs must be amortized. Free file taxes on line See chapter 7. Free file taxes on line   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. Free file taxes on line 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). Free file taxes on line Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free file taxes on line 9100-2” at the top of the amended return. Free file taxes on line File the amended return at the same address you filed the original return. Free file taxes on line The election applies when figuring taxable income for the current tax year and all subsequent years. Free file taxes on line   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. Free file taxes on line For more information about start-up and organizational costs, see chapter 7. Free file taxes on line Crop production expenses. Free file taxes on line   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Free file taxes on line 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. Free file taxes on line For more information, see Uniform Capitalization Rules in chapter 6. Free file taxes on line Timber. Free file taxes on line   Capitalize the cost of acquiring timber. Free file taxes on line Do not include the cost of land in the cost of the timber. Free file taxes on line You must generally capitalize direct costs incurred in reforestation. Free file taxes on line However, you can elect to deduct some forestation and reforestation costs. Free file taxes on line See Forestation and reforestation costs next. Free file taxes on line Reforestation costs include the following. Free file taxes on line Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Free file taxes on line The cost of seed or seedlings. Free file taxes on line Labor and tool expenses. Free file taxes on line Depreciation on equipment used in planting or seeding. Free file taxes on line Costs incurred in replanting to replace lost seedlings. Free file taxes on line You can choose to capitalize certain indirect reforestation costs. Free file taxes on line   These capitalized amounts are your basis for the timber. Free file taxes on line Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Free file taxes on line See Depletion in chapter 7. Free file taxes on line Forestation and reforestation costs. Free file taxes on line   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. Free file taxes on line Any remaining costs can be amortized over an 84-month period. Free file taxes on line See chapter 7. Free file taxes on line 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. Free file taxes on line The accounts should include all reforestation treatments and the dates they were applied. Free file taxes on line 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. Free file taxes on line The timber account should be maintained until the timber is disposed of. Free file taxes on line For more information, see Notice 2006-47, 2006-20 I. Free file taxes on line R. Free file taxes on line B. Free file taxes on line 892, available at  www. Free file taxes on line irs. Free file taxes on line gov/irb/2006-20_IRB/ar11. Free file taxes on line html. Free file taxes on line   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. Free file taxes on line If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Free file taxes on line If you are not filing Form T (Timber), attach a statement to your return with the following information. Free file taxes on line The unique stand identification numbers. Free file taxes on line The total number of acres reforested during the tax year. Free file taxes on line The nature of the reforestation treatments. Free file taxes on line The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Free file taxes on line   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). Free file taxes on line Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free file taxes on line 9100-2” at the top of the amended return. Free file taxes on line File the amended return at the same address you filed the original return. Free file taxes on line    For more information about forestation and reforestation costs, see chapter 7. Free file taxes on line    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Free file taxes on line You can view this publication on the Internet at  www. Free file taxes on line fs. Free file taxes on line fed. Free file taxes on line us/publications. Free file taxes on line Christmas tree cultivation. Free file taxes on line   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. Free file taxes on line Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Free file taxes on line For more information, see Timber Depletion under Depletion in chapter 7. Free file taxes on line   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Free file taxes on line Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Free file taxes on line   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Free file taxes on line If the improvements do not have a determinable useful life, add their cost to the basis of the land. Free file taxes on line The cost is recovered when you sell or otherwise dispose of it. Free file taxes on line If the improvements have a determinable useful life, recover their cost through depreciation. Free file taxes on line 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. Free file taxes on line Recover these costs through depreciation. Free file taxes on line Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Free file taxes on line Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Free file taxes on line 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. Free file taxes on line Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Free file taxes on line Other Nondeductible Items You cannot deduct the following items on your tax return. Free file taxes on line Loss of growing plants, produce, and crops. Free file taxes on line   Losses of plants, produce, and crops raised for sale are generally not deductible. Free file taxes on line However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Free file taxes on line See chapter 11 for more information. Free file taxes on line Repayment of loans. Free file taxes on line   You cannot deduct the repayment of a loan. Free file taxes on line However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Free file taxes on line See Interest , earlier. Free file taxes on line Estate, inheritance, legacy, succession, and gift taxes. Free file taxes on line   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Free file taxes on line Loss of livestock. Free file taxes on line   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Free file taxes on line Losses from sales or exchanges between related persons. Free file taxes on line   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. Free file taxes on line For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Free file taxes on line Cost of raising unharvested crops. Free file taxes on line   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. Free file taxes on line Add these costs to the basis of the land to determine the gain or loss on the sale. Free file taxes on line For more information, see Section 1231 Gains and Losses in chapter 9. Free file taxes on line Cost of unharvested crops bought with land. Free file taxes on line   Capitalize the purchase price of land, including the cost allocable to unharvested crops. Free file taxes on line You cannot deduct the cost of the crops at the time of purchase. Free file taxes on line However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Free file taxes on line Cost related to gifts. Free file taxes on line   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Free file taxes on line The costs are not deductible in the year of the gift or any later year. Free file taxes on line 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. Free file taxes on line Club dues and membership fees. Free file taxes on line   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Free file taxes on line 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. Free file taxes on line Exception. Free file taxes on line   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. Free file taxes on line Boards of trade. Free file taxes on line Business leagues. Free file taxes on line Chambers of commerce. Free file taxes on line Civic or public service organizations. Free file taxes on line Professional associations. Free file taxes on line Trade associations. Free file taxes on line Real estate boards. Free file taxes on line Fines and penalties. Free file taxes on line   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Free file taxes on line 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. Free file taxes on line The amount of the loss you can deduct when figuring your taxable income may be limited. Free file taxes on line To figure your deductible loss, you must apply the following limits. Free file taxes on line The at-risk limits. Free file taxes on line The passive activity limits. Free file taxes on line The following discussions explain these limits. Free file taxes on line If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Free file taxes on line See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Free file taxes on line 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. Free file taxes on line See Not-for-Profit Farming, later. Free file taxes on line At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Free file taxes on line These rules limit the losses you can deduct when figuring your taxable income. Free file taxes on line The deductible loss from an activity is limited to the amount you have at risk in the activity. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line For more information, see Publication 925. Free file taxes on line 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. Free file taxes on line Generally, a rental activity is a passive activity. Free file taxes on line If you have a passive activity, special rules limit the loss you can deduct in the tax year. Free file taxes on line You generally can deduct losses from passive activities only up to income from passive activities. Free file taxes on line Credits are similarly limited. Free file taxes on line For more information, see Publication 925. Free file taxes on line Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Free file taxes on line Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Free file taxes on line For more details, see IRC section 461(j). Free file taxes on line Excess farm loss. Free file taxes on line   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Free file taxes on line 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. Free file taxes on line   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Free file taxes on line 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. Free file taxes on line 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). Free file taxes on line Also, there is a limit on the deductions you can take. Free file taxes on line You cannot use a loss from that activity to offset income from other activities. Free file taxes on line Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Free file taxes on line An investment activity intended only to produce tax losses for the investors also comes under this limit. Free file taxes on line The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Free file taxes on line It does not apply to corporations other than S corporations. Free file taxes on line In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Free file taxes on line No one factor alone is decisive. Free file taxes on line 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. Free file taxes on line Presumption of profit. Free file taxes on line   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. Free file taxes on line 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. Free file taxes on line The activity must be substantially the same for each year within this period. Free file taxes on line You have a profit when the gross income from an activity is more than the deductions for it. Free file taxes on line   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. Free file taxes on line   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Free file taxes on line This means the limits discussed here do not apply. Free file taxes on line You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Free file taxes on line You can rely on this presumption in every case, unless the IRS shows it is not valid. Free file taxes on line   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. Free file taxes on line Using the presumption later. Free file taxes on line   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. Free file taxes on line   You can choose to do this by filing Form 5213. Free file taxes on line 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. Free file taxes on line 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. Free file taxes on line   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Free file taxes on line Accordingly, it will not limit your deductions. Free file taxes on line 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. Free file taxes on line If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Free file taxes on line 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. Free file taxes on line   Filing Form 5213 automatically extends the period of limitations on any year
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Free file taxes on line Publication 3920 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Introduction This publication explains some of the provisions of the Victims of Terrorism Tax Relief Act of 2001. Free file taxes on line Under this Act, the federal income tax liability of those killed in the following attacks is forgiven for certain tax years. Free file taxes on line The April 19, 1995, attack on the Alfred P. Free file taxes on line Murrah Federal Building (Oklahoma City attack). Free file taxes on line The September 11, 2001, attacks on the World Trade Center, the Pentagon, and United Airlines Flight 93 in Somerset County, Pennsylvania (September 11 attacks). Free file taxes on line Terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002 (anthrax attacks). Free file taxes on line The Act also provides other types of relief. Free file taxes on line For example, it provides that the following amounts are not included in income. Free file taxes on line Payments from the September 11th Victim Compensation Fund of 2001. Free file taxes on line Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack. Free file taxes on line Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack. Free file taxes on line Death benefits paid by an employer to the survivor of an employee if the benefits are paid because the employee died as a result of a terrorist attack. Free file taxes on line Debt cancellations made after September 10, 2001, and before January 1, 2002, because an individual died as a result of the September 11 attacks or anthrax attacks. Free file taxes on line Worksheet A. Free file taxes on line Figuring the Tax To Be Forgiven (For Decedents Who Filed a Return as Single, Married Filing Separately, Head of Household, or Qualifying Widow(er))         (A) First Eligible Year (1994 or 2000) (B) Second Eligible Year (1995 or 2001) (C) Third Eligible Year (1996 or 2002) 1 Enter the years eligible for tax forgiveness. Free file taxes on line 1       2 Enter the total tax from the decedent's income tax return. Free file taxes on line See Table 1 on page 5 for the line number for years before 2002. Free file taxes on line 2       3 Enter the following taxes, if any, shown on the decedent's income tax return. Free file taxes on line (These taxes are not eligible for forgiveness. Free file taxes on line )           a Self-employment tax. Free file taxes on line 3a         b Social security and Medicare tax on tip income not reported to employer. Free file taxes on line 3b         c Tax on excess contributions to IRAs, Coverdell education savings accounts (formerly Ed IRAs), or Archer MSAs (formerly medical savings accounts). Free file taxes on line 3c         d Tax on excess accumulation in qualified retirement plans. Free file taxes on line 3d         e Household employment taxes. Free file taxes on line 3e         f Uncollected social security and Medicare or RRTA tax on tips or group-term life insurance. Free file taxes on line 3f         g Tax on golden parachute payments. Free file taxes on line 3g       4 Add lines 3a through 3g. Free file taxes on line 4       5 Tax to be forgiven. Free file taxes on line Subtract line 4 from line 2. Free file taxes on line 5       Note. Free file taxes on line If the total of columns (A), (B), and (C) of line 5 (including any amounts shown on line 15 of Worksheet B) is less than $10,000, also complete Worksheet C. Free file taxes on line Attach the computation of the tax to be forgiven or a copy of this worksheet to the decedent's final income tax return or amended tax return (Form 1040X) for each year listed on line 1. Free file taxes on line If filing Form 1040X for an eligible year, enter the amount from line 5 above on Form 1040X in column B of line 10 as a decrease in tax. Free file taxes on line The IRS will determine the amount to be refunded. Free file taxes on line Worksheet A. Free file taxes on line Figuring the Tax To Be Forgiven (For Decedents Who Filed a Return as Single, Married Filing Separately, Head of Household, or Qualifying Widow(er))         (A) First Eligible Year (1994 or 2000) (B) Second Eligible Year (1995 or 2001) (C) Third Eligible Year (1996 or 2002) 1 Enter the years eligible for tax forgiveness. Free file taxes on line 1       2 Enter the total tax from the decedent's income tax return. Free file taxes on line See Table 1 on page 5 for the line number for years before 2002. Free file taxes on line 2       3 Enter the following taxes, if any, shown on the decedent's income tax return. Free file taxes on line (These taxes are not eligible for forgiveness. Free file taxes on line )           a Self-employment tax. Free file taxes on line 3a         b Social security and Medicare tax on tip income not reported to employer. Free file taxes on line 3b         c Tax on excess contributions to IRAs, Coverdell education savings accounts (formerly Ed IRAs), or Archer MSAs (formerly medical savings accounts). Free file taxes on line 3c         d Tax on excess accumulation in qualified retirement plans. Free file taxes on line 3d         e Household employment taxes. Free file taxes on line 3e         f Uncollected social security and Medicare or RRTA tax on tips or group-term life insurance. Free file taxes on line 3f         g Tax on golden parachute payments. Free file taxes on line 3g       4 Add lines 3a through 3g. Free file taxes on line 4       5 Tax to be forgiven. Free file taxes on line Subtract line 4 from line 2. Free file taxes on line 5       Note. Free file taxes on line If the total of columns (A), (B), and (C) of line 5 (including any amounts shown on line 15 of Worksheet B) is less than $10,000, also complete Worksheet C. Free file taxes on line Attach the computation of the tax to be forgiven or a copy of this worksheet to the decedent's final income tax return or amended tax return (Form 1040X) for each year listed on line 1. Free file taxes on line If filing Form 1040X for an eligible year, enter the amount from line 5 above on Form 1040X in column B of line 10 as a decrease in tax. Free file taxes on line The IRS will determine the amount to be refunded. Free file taxes on line Useful Items - You may want to see: Publication 547 Casualties, Disasters, and Thefts 559 Survivors, Executors, and Administrators Form (and Instructions) 706 United States Estate (and Generation- Skipping Transfer) Tax Return 1040 U. Free file taxes on line S. Free file taxes on line Individual Income Tax Return 1040NR U. Free file taxes on line S. Free file taxes on line Nonresident Alien Income Tax Return 1040X Amended U. Free file taxes on line S. Free file taxes on line Individual Income Tax Return 1041 U. Free file taxes on line S. Free file taxes on line Income Tax Return for Estates and Trusts 1310 Statement of Person Claiming Refund Due a Deceased Taxpayer 4506 Request for Copy or Transcript of Tax Form Prev  Up  Next   Home   More Online Publications