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Freetaxusa Com

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Freetaxusa Com

Freetaxusa com Publication 505 - Introductory Material Table of Contents IntroductionNonresident aliens. Freetaxusa com Ordering forms and publications. Freetaxusa com Tax questions. Freetaxusa com What's New for 2014 Reminders Introduction The federal income tax is a pay-as-you-go tax. Freetaxusa com You must pay the tax as you earn or receive income during the year. Freetaxusa com There are two ways to pay as you go. Freetaxusa com Withholding. Freetaxusa com If you are an employee, your employer probably withholds income tax from your pay. Freetaxusa com In addition, tax may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. Freetaxusa com The amount withheld is paid to the Internal Revenue Service (IRS) in your name. Freetaxusa com Estimated tax. Freetaxusa com If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Freetaxusa com People who are in business for themselves generally will have to pay their tax this way. Freetaxusa com You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Freetaxusa com Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. Freetaxusa com This publication explains both of these methods. Freetaxusa com It also explains how to take credit on your return for the tax that was withheld and for your estimated tax payments. Freetaxusa com If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Freetaxusa com Generally, the IRS can figure this penalty for you. Freetaxusa com This underpayment penalty, and the exceptions to it, are discussed in chapter 4. Freetaxusa com Nonresident aliens. Freetaxusa com    Before completing Form W-4, nonresident alien employees should see the Instructions for Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Freetaxusa com Also see chapter 8 of Publication 519, U. Freetaxusa com S. Freetaxusa com Tax Guide for Aliens, for important information on withholding. Freetaxusa com What's new for 2013 and 2014. Freetaxusa com   See What's New for 2014 in this Introduction, and What's New for 2013 in chapter 4. Freetaxusa com Comments and suggestions. Freetaxusa com   We welcome your comments about this publication and your suggestions for future editions. Freetaxusa com   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Freetaxusa com NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Freetaxusa com Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Freetaxusa com   You can send your comments from www. Freetaxusa com irs. Freetaxusa com gov/formspubs/. Freetaxusa com Click on “More Information” and then on Give us feedback on forms and publications. Freetaxusa com   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Freetaxusa com Ordering forms and publications. Freetaxusa com   Visit www. Freetaxusa com irs. Freetaxusa com gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 business days after your request is received. Freetaxusa com Internal Revenue Service 1201 N. Freetaxusa com Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Freetaxusa com   If you have a tax question, check the information available on IRS. Freetaxusa com gov or call 1-800-829-1040. Freetaxusa com We cannot answer tax questions sent to either of the above addresses. Freetaxusa com What's New for 2014 Use your 2013 tax return as a guide in figuring your 2014 estimated tax, but be sure to consider the following. Freetaxusa com Standard mileage rates. Freetaxusa com  The 2014 rate for business use of your vehicle is 56 cents per mile. Freetaxusa com The rate for use of your vehicle to get medical care or move is 23½ cents per mile. Freetaxusa com The rate of 14 cents per mile for charitable use is unchanged. Freetaxusa com Personal exemption increased for certain taxpayers. Freetaxusa com  For 2014, the personal exemption amount is increased to $3,950 for taxpayers with adjusted gross income at or below $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, or $152,525 if married filing separately. Freetaxusa com The personal exemption amount for taxpayers with adjusted gross income above these thresholds may be reduced. Freetaxusa com Limitation on itemized deductions. Freetaxusa com  For 2014, itemized deductions for taxpayers with adjusted gross income above $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, and $152,525 if married filing separately may be reduced. Freetaxusa com Health care coverage. Freetaxusa com  When you file your 2014 tax return in 2015, you will need to either (1) indicate on your return that you and your family had health care coverage throughout 2014, (2) claim an exemption from the health care coverage requirement for some or all of 2014, or (3) make a payment if you do not have coverage or an exemption(s) for all 12 months of 2014. Freetaxusa com For examples on how this payment works, go to www. Freetaxusa com IRS. Freetaxusa com gov/aca and click under the “Individuals & Families” section. Freetaxusa com You may want to consider this when figuring your “Other taxes” on Line 12 of the 2014 Estimated Tax Worksheet (Worksheet 2-1). Freetaxusa com For general information on these requirements, go to www. Freetaxusa com IRS. Freetaxusa com gov/aca. Freetaxusa com Advance payments of the Premium Tax Credit. Freetaxusa com  If you buy health care insurance through the Health Insurance Marketplace, you may be eligible for advance payments of the Premium Tax Credit to help pay for your insurance coverage. Freetaxusa com Receiving too little or too much in advance will affect your refund or balance due. Freetaxusa com Promptly report changes in your income or family size to your Marketplace. Freetaxusa com You may want to consider this when figuring your estimated taxes for 2014. Freetaxusa com For more information, go to www. Freetaxusa com IRS. Freetaxusa com gov/aca and see Publication 5120 and Publication 5121. Freetaxusa com http://www. Freetaxusa com IRS. Freetaxusa com gov/pub5120 Alternative minimum tax (AMT) exemption amount increased. Freetaxusa com  The AMT exemption amount is increased to $52,800 ($82,100 if married filing jointly or qualifying widow(er); $41,050 if married filing separately). Freetaxusa com Lifetime learning credit income limits. Freetaxusa com  In order to claim a lifetime learning credit, your MAGI must be less than $54,000 ($108,000 if married filing jointly). Freetaxusa com Retirement savings contribution credit income limits increased. Freetaxusa com  In order to claim this credit for 2014, your MAGI must be less than $30,000 ($60,000 if married filing jointly; $45,000 if head of household). Freetaxusa com Adoption credit or exclusion. Freetaxusa com  The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,190. Freetaxusa com In order to claim either the credit or exclusion, your MAGI must be less than $237,880. Freetaxusa com Earned income credit (EIC). Freetaxusa com  You may be able to take the EIC in 2014 if: Three or more children lived with you and you earned less than $46,997 ($52,427 if married filing jointly), Two children lived with you and you earned less than $43,756 ($49,186 if married filing jointly), One child lived with you and you earned less than $38,511 ($43,941 if married filing jointly), or A child did not live with you and you earned less than $14,590 ($20,020 if married filing jointly). Freetaxusa com Also, the maximum MAGI you can have and still get the credit has increased. Freetaxusa com You may be able to take the credit if your MAGI is less than the amount in the above list that applies to you. Freetaxusa com The maximum investment income you can have and get the credit has increased to $3,350. Freetaxusa com Reminders Future developments. Freetaxusa com  The IRS has created a page on IRS. Freetaxusa com gov for information about Publication 505 at www. Freetaxusa com irs. Freetaxusa com gov/pub505. Freetaxusa com Information about any future developments affecting Publication 505 (such as legislation enacted after we release it) will be posted on that page. Freetaxusa com Social security tax. Freetaxusa com   Generally, each employer for whom you work during the tax year must withhold social security tax up to the annual limit. Freetaxusa com The annual limit is $117,000 in 2014. Freetaxusa com Photographs of missing children. Freetaxusa com  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Freetaxusa com Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. Freetaxusa com You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Freetaxusa com Additional Medicare Tax. Freetaxusa com  Beginning in 2013, a 0. Freetaxusa com 9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. Freetaxusa com You may need to include this amount when figuring your estimated tax. Freetaxusa com See the instructions for line 12 of the 2014 Estimated Tax Worksheet. Freetaxusa com You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4, Employee's Withholding Allowance Certificate. Freetaxusa com For more information on Additional Medicare Tax, go to IRS. Freetaxusa com gov and enter “Additional Medicare Tax” in the search box. Freetaxusa com Net Investment Income Tax. Freetaxusa com  Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Freetaxusa com NIIT is a 3. Freetaxusa com 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. Freetaxusa com NIIT may need to be included when figuring estimated tax. Freetaxusa com See the instructions for line 12 of the 2014 Estimated Tax Worksheet. Freetaxusa com You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4. Freetaxusa com For more information on NIIT, go to IRS. Freetaxusa com gov and enter “Net Investment Income Tax” in the search box. Freetaxusa com Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of Hurricane Irene in New Jersey

E-file to Remain Open for Hurricane Irene Victims through Oct. 31

Updated 9/7/11 to add the following counties: Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Ocean, Salem, Sussex, Union and Warren.

NJ-2011-42, Sept. 1, 2011

MOUNTAINSIDE, N.J. — Victims of Hurricane Irene that began on Aug. 27, 2011 in parts of New Jersey may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Aug. 27, and on or before Oct. 31, have been postponed to Oct. 31, 2011. This includes corporations and other businesses that previously obtained an extension until Sept. 15 to file their 2010 returns, and individuals and businesses that received a similar extension until Oct. 17. It also includes the estimated tax payment for the third quarter, normally due Sept. 15.  

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Aug. 27, and on or before Sept. 12, as long as the deposits are made by Sept. 12, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Oct. 31 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Aug. 27 and on or before Oct. 31.

The IRS also gives affected taxpayers until Oct. 31 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Aug. 27 and on or before Oct. 31.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after Aug. 27 and on or before Sept. 12 provided the taxpayer makes these deposits by Sept. 12.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “New Jersey/Hurricane Irene” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

Related Information

Page Last Reviewed or Updated: 24-Mar-2014

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