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Students And Taxes

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Students And Taxes

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

Students and taxes Part Six -   Figuring Your Taxes and Credits The eight chapters in this part explain how to figure your tax and how to figure the tax of certain children who have more than $2,000 of unearned income. Students and taxes They also discuss tax credits that, unlike deductions, are subtracted directly from your tax and reduce your tax dollar for dollar. Students and taxes Chapter 36 discusses the earned income credit. Students and taxes Chapter 37 discusses a wide variety of other credits, such as the adoption credit. Students and taxes Table of Contents 30. Students and taxes   How To Figure Your TaxIntroduction Figuring Your Tax Alternative Minimum Tax (AMT) Tax Figured by IRSFiling the Return 31. Students and taxes   Tax on Unearned Income of Certain ChildrenWhat's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Students and taxes Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Students and taxes Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Students and taxes Figuring the Child's Tax (Form 8615, Part III) 32. Students and taxes   Child and Dependent Care CreditReminders Introduction Useful Items - You may want to see: Tests To Claim the CreditQualifying Person Test Earned Income Test Work-Related Expense Test Joint Return Test Provider Identification Test How To Figure the CreditFiguring Total Work-Related Expenses Earned Income Limit Dollar Limit Amount of Credit How To Claim the CreditTax credit not refundable. Students and taxes Employment Taxes for Household Employers 33. Students and taxes   Credit for the Elderly or the DisabledIntroduction Useful Items - You may want to see: Are You Eligible for the Credit?Qualified Individual Income Limits How to Claim the CreditCredit Figured for You Credit Figured by You 34. Students and taxes   Child Tax CreditIntroduction Useful Items - You may want to see: Qualifying Child Amount of CreditLimits on the Credit Claiming the Credit Additional Child Tax Credit Completing Schedule 8812 (Form 1040A or 1040)Part I Parts II–IV 35. Students and taxes   Education CreditsIntroduction Useful Items - You may want to see: Who Can Claim an Education Credit Qualified Education ExpensesNo Double Benefit Allowed Adjustments to Qualified Education Expenses 36. Students and taxes   Earned Income Credit (EIC)What's New Reminders Introduction Useful Items - You may want to see: Do You Qualify for the Credit?If Improper Claim Made in Prior Year Part A. Students and taxes Rules for EveryoneRule 1. Students and taxes Your AGI Must Be Less Than: Rule 2. Students and taxes You Must Have a Valid Social Security Number (SSN) Rule 3. Students and taxes Your Filing Status Cannot Be Married Filing Separately Rule 4. Students and taxes You Must Be a U. Students and taxes S. Students and taxes Citizen or Resident Alien All Year Rule 5. Students and taxes You Cannot File Form 2555 or Form 2555-EZ Rule 6. Students and taxes Your Investment Income Must Be $3,300 or Less Rule 7. Students and taxes You Must Have Earned Income Part B. Students and taxes Rules If You Have a Qualifying ChildRule 8. Students and taxes Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Rule 9. Students and taxes Your Qualifying Child Cannot Be Used By More Than One Person To Claim the EIC Rule 10. Students and taxes You Cannot Be a Qualifying Child of Another Taxpayer Part C. Students and taxes Rules If You Do Not Have a Qualifying ChildRule 11. Students and taxes You Must Be at Least Age 25 but Under Age 65 Rule 12. Students and taxes You Cannot Be the Dependent of Another Person Rule 13. Students and taxes You Cannot Be a Qualifying Child of Another Taxpayer Rule 14. Students and taxes You Must Have Lived in the United States More Than Half of the Year Part D. Students and taxes Figuring and Claiming the EICRule 15. Students and taxes Your Earned Income Must Be Less Than: IRS Will Figure the EIC for You How To Figure the EIC Yourself ExamplesExample 1. Students and taxes John and Janet Smith (Form 1040A) Example 2. Students and taxes Kelly Green (Form 1040EZ) 37. Students and taxes   Other CreditsWhat's New Introduction Useful Items - You may want to see: Nonrefundable CreditsAdoption Credit Alternative Motor Vehicle Credit Alternative Fuel Vehicle Refueling Property Credit Credit to Holders of Tax Credit Bonds Foreign Tax Credit Mortgage Interest Credit Nonrefundable Credit for Prior Year Minimum Tax Plug-in Electric Drive Motor Vehicle Credit Residential Energy Credits Retirement Savings Contributions Credit (Saver's Credit) Refundable CreditsCredit for Tax on Undistributed Capital Gain Health Coverage Tax Credit Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld Prev  Up  Next   Home   More Online Publications