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Taxes 2008

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Taxes 2008

Taxes 2008 Listed Property Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Listed Property DefinedPassenger Automobile Defined Dwelling Unit Other Property Used for Transportation Computers and Related Peripheral Equipment Predominant Use TestMeeting the Predominant Use Test Qualified Business Use Method of Allocating Use Applying the Predominant Use Test Deductions After Recovery Period Leased PropertyLessor Lessee What Records Must Be KeptAdequate Records Reporting Information on Form 4562 Deductions in Later Years Appendix Topics - This chapter discusses: Listed property defined The predominant use test What records must be kept Useful Items - You may want to see: Publication 463 Travel, Entertainment, and Gift Expenses 587 Business Use of Your Home (Including Use by Day-Care Providers) 917 Business Use of a Car 946 How To Depreciate Property Form (and Instructions) 2106–EZ Unreimbursed Employee Business Expenses 2106 Employee Business Expenses 4255 Recapture of Investment Credit 4562 Depreciation and Amortization This chapter discusses some special rules and recordkeeping requirements for listed property. Taxes 2008 For complete coverage of the rules, including the rules concerning passenger automobiles, see Publication 946. Taxes 2008 If listed property is not used predominantly (more than 50%) in a qualified business use as discussed inPredominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method. Taxes 2008 Listed Property Defined Listed property is any of the following: Any passenger automobile (defined later), Any other property used for transportation, Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment), Any computer and related peripheral equipment, defined later, unless it is used only at a regular business establishment and owned or leased by the person operating the establishment. Taxes 2008 A regular business establishment includes a portion of a dwelling unit (defined later), if, and only if, that portion is used both regularly and exclusively for business as discussed in Publication 587. Taxes 2008 Any cellular telephone (or similar telecommunication equipment) placed in service or leased in a tax year beginning after 1989. Taxes 2008 Passenger Automobile Defined A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). Taxes 2008 It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile. Taxes 2008 A passenger automobile does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business, and A vehicle used directly in the trade or business of transporting persons or property for compensation or hire. Taxes 2008 Dwelling Unit A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Taxes 2008 It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis. Taxes 2008 Other Property Used for Transportation Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods. Taxes 2008 Listed property does not include: Any vehicle which, by reason of its design, is not likely to be used more than a minimal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes, Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks, Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses, Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is officially authorized, and Any vehicle, such as a taxicab, if substantially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by unrelated persons. Taxes 2008 Computers and Related Peripheral Equipment A computer is a programmable electronically activated device that: Is capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention, and Consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Taxes 2008 Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Taxes 2008 Computer or peripheral equipment does not include: Any equipment which is an integral part of property which is not a computer, Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games. Taxes 2008 Predominant Use Test If “listed property,” defined earlier, placed in service after June 18, 1984, is not used predominantly (more than 50%) in a qualified business use during any tax year: The section 179 deduction on the property is not allowable, and You must depreciate the property using the straight line method. Taxes 2008 Listed property placed in service before 1987. Taxes 2008   For listed property placed in service before 1987, depreciate the property over the following period: Class of Property Listed Property Recovery Period 3-year property 5 years 5-year property 12 years 10-year property 25 years 18-year real property 40 years 19-year real property 40 years If you must use the above recovery periods for listed property not used predominantly in a trade or business, use the percentages from Table 16 titled Listed Property Not Used Predominantly (Other Than 18- or 19-year Real Property), and Table 17 for 18- or 19-year real property, near the end of this publication in the Appendix. Taxes 2008 Listed property placed in service after 1986. Taxes 2008   For information on listed property placed in service after 1986, see Publication 946. Taxes 2008 Meeting the Predominant Use Test Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. Taxes 2008 You must allocate the use of any item of listed property used for more than one purpose during the tax year among its various uses. Taxes 2008 The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. Taxes 2008 However, the combined total of business and investment use is taken into account to figure your depreciation deduction for the property. Taxes 2008 Note: Property does not stop being predominantly used in a qualified business use because of a transfer at death. Taxes 2008 Example. Taxes 2008 Sarah Bradley uses a home computer 50% of the time to manage her investments. Taxes 2008 She also uses the computer 40% of the time in her part-time consumer research business. Taxes 2008 Sarah's home computer is listed property because it is not used at a regular business establishment. Taxes 2008 Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a qualified business use for the tax year. Taxes 2008 Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. Taxes 2008 Her combined rate of business/investment use for determining her depreciation deduction is 90%. Taxes 2008 Qualified Business Use A qualified business use is any use in your trade or business. Taxes 2008 However, it does not include: The use of property held merely to produce income (investment use), The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the property), The use of property as compensation for the performance of services by a 5% owner or related person, or The use of property as compensation for the performance of services by any person (other than a5% owner or related person) unless the value of the use is included in that person's gross income for the use of the property and income tax is withheld on that amount where required. Taxes 2008 See Employees, later. Taxes 2008 5% owner. Taxes 2008   A 5% owner of a business, other than a corporation, is any person who owns more than 5% of the capital or profits interest in the business. Taxes 2008   A 5% owner of a corporation is any person who owns, or is considered to own: More than 5% of the outstanding stock of the corporation, or Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Taxes 2008 Related person. Taxes 2008   A related person is anyone related to a taxpayer as discussed under Related persons, in chapter 2 under Nonqualifying Property in Publication 946. Taxes 2008 Entertainment Use The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordinary and necessary business expenses. Taxes 2008 See Publication 463. Taxes 2008 Leasing or Compensatory Use of Aircraft If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use. Taxes 2008 Commuting The use of a vehicle for commuting is not business use, regardless of whether work is performed during the trip. Taxes 2008 Use of Your Passenger Automobile by Another Person If someone else uses your automobile, that use is not business use unless: That use is directly connected with your business, The value of the use is property reported by you as income to the other person and tax is withheld on the income where required, or The value of the use results in a payment of fair market rent. Taxes 2008 Any payment to you for the use of the automobile is treated as a rent payment for 3). Taxes 2008 Employees Any use by an employee of his or her own listed property (or listed property rented by an employee) in performing services as an employee is not business use unless: The use is for the employer's convenience, and The use is required as a condition of employment. Taxes 2008 Use for the employer's convenience. Taxes 2008   Whether the use of listed property is for the employer's convenience must be determined from all the facts. Taxes 2008 The use is for the employer's convenience if it is for a substantial business reason of the employer. Taxes 2008 The use of listed property during the employee's regular working hours to carry on the employer's business is generally for the employer's convenience. Taxes 2008 Use required as a condition of employment. Taxes 2008   Whether the use of listed property is a condition of employment depends on all the facts and circumstances. Taxes 2008 The use of property must be required for the employee to perform duties properly. Taxes 2008 The employer need not explicitly require the employee to use the property. Taxes 2008 A mere statement by the employer that the use of the property is a condition of employment is not sufficient. Taxes 2008 Example 1. Taxes 2008 Virginia Sycamore is employed as a courier with We Deliver which provides local courier services. Taxes 2008 She owns and uses a motorcycle to deliver packages to downtown offices. Taxes 2008 We Deliver explicitly requires all delivery persons to own a small car or motorcycle for use in their employment. Taxes 2008 The company reimburses delivery persons for their costs. Taxes 2008 Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Taxes 2008 Example 2. Taxes 2008 Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Taxes 2008 He must travel to these sites on a regular basis. Taxes 2008 Uplift does not furnish an automobile or explicitly require him to use his own automobile. Taxes 2008 However, it reimburses him for any costs he incurs in traveling to the various sites. Taxes 2008 The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Taxes 2008 Method of Allocating Use For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Taxes 2008 You determine the percentage of qualified business use by dividing the number of miles the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all purposes (including business miles) during the year. Taxes 2008 For other items of listed property, allocate the property's use on the basis of the most appropriate unit of time. Taxes 2008 For example, you can determine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the computer is used for all purposes (including business hours) during the year. Taxes 2008 Applying the Predominant Use Test You must apply the predominant use test for an item of listed property each year of the recovery period. Taxes 2008 First Recovery Year If any item of listed property is not used predominantly in a qualified business use in the year it is placed in service: The property is not eligible for a section 179 deduction, and The depreciation deduction must be figured using the straight line method. Taxes 2008 Note: The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. Taxes 2008 It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Taxes 2008 Years After the First Recovery Year If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subsequent tax year during the recovery period, the following rules apply: Figure depreciation using the straight line method. Taxes 2008 Do this for each year, beginning with the year you no longer use the property predominantly in a qualified business use, and Figure any excess depreciation on the property and add it to: Your gross income, and The adjusted basis of your property. Taxes 2008 See Recapture of excess depreciation, next. Taxes 2008 Recapture of excess depreciation. Taxes 2008   You must include any excess depreciation in your gross income for the first tax year the property is not predominantly used in a qualified business use. Taxes 2008 Any excess depreciation must also be added to the adjusted basis of your property. Taxes 2008 Excess depreciation is the excess (if any) of: The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not predominantly used in a qualified business use, over The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. Taxes 2008 This means you figure your depreciation using the percentages fromTable 16 or 17. Taxes 2008 For information on investment credit recapture, see the instructions for Form 4255. Taxes 2008 Deductions After Recovery Period When listed property (other than passenger automobiles) is used for business, investment, and personal purposes, no deduction is ever allowable for the personal use. Taxes 2008 In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. Taxes 2008 To make this determination, figure the depreciation for earlier tax years as if your property were used 100% for business or investment purposes, beginning with the first tax year in which some or all use is for business or investment. Taxes 2008 See Car Used 50% or Less for Business in Publication 917. Taxes 2008 Leased Property The limitations on cost recovery deductions apply to the rental of listed property. Taxes 2008 The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). Taxes 2008 SeeLeasing a Car in Publication 917 for a discussion of leased passenger automobiles. Taxes 2008 Lessor The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Taxes 2008 A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. Taxes 2008 This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Taxes 2008 Occasional or incidental leasing activity is insufficient. Taxes 2008 For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. Taxes 2008 An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Taxes 2008 Lessee A lessee of listed property (other than passenger automobiles), must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use. Taxes 2008 Inclusion amount for property leased before 1987. Taxes 2008   You determine the inclusion amount for property leased after June 18, 1984 and before 1987 by multiplying the fair market value of the property by both the average business/investment use percentage and the applicable percentage. Taxes 2008 You can find the applicable percentages for listed property that is 5- or 10-year recovery property in Tables 19 or 20 in Appendix A of Publication 946. Taxes 2008   The lease term for listed property other than 18- or 19-year real property, and residential rental or nonresidential real property, includes options to renew. Taxes 2008 For 18- or 19-year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. Taxes 2008 You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease. Taxes 2008 Special rules. Taxes 2008   The lessee adds the inclusion amount to gross income in the next tax year if: The lease term begins within 9 months before the close of the lessee's tax year, The lessee does not use the property predominantly in a qualified business use during that portion of the tax year, and The lease term continues into the lessee's next tax year. Taxes 2008 The lessee determines the inclusion amount by taking into account the average of the business/investment use for both tax years and the applicable percentage for the tax year the lease term begins. Taxes 2008   If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclusion amount as the number of days in the lease term bears to 365. Taxes 2008 Maximum inclusion amount. Taxes 2008   The inclusion amount cannot be more than the sum of the deductible amounts of rent allocable to the lessee's tax year in which the amount must be included in gross income. Taxes 2008 What Records Must Be Kept You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements. Taxes 2008 How long to keep records. Taxes 2008   For listed property, records must be kept for as long as any excess depreciation can be recaptured (included in income). Taxes 2008 Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Taxes 2008 It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. Taxes 2008 However, your records should back up your receipts in an orderly manner. Taxes 2008 Elements of Expenditure or Use The records or other documentary evidence must support: The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses, The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year, The date of the expenditure or use, and The business or investment purpose for the expenditure or use. Taxes 2008 Written documents of your expenditure or use are generally better evidence than oral statements alone. Taxes 2008 A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. Taxes 2008 A daily log is not required. Taxes 2008 However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later. Taxes 2008 Timeliness The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. Taxes 2008 An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business: The statement is submitted by an employee to the employer, or The statement is submitted by an independent contractor to the client or customer. Taxes 2008 For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use. Taxes 2008 Business Purpose Supported An adequate record of business purpose must generally be in the form of a written statement. Taxes 2008 However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. Taxes 2008 A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Taxes 2008 For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Taxes 2008 Business Use Supported An adequate record contains enough information on each element of every business or investment use. Taxes 2008 The amount of detail required to support the use depends on the facts and circumstances. Taxes 2008 For example, a taxpayer whose only business use of a truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Taxes 2008 Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program. Taxes 2008 Separate or Combined Expenditures or Uses Each use by you is normally considered a separate use. Taxes 2008 However, repeated uses can be combined as a single item. Taxes 2008 Each expenditure is recorded as a separate item and not combined with other expenditures. Taxes 2008 If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be combined. Taxes 2008 If these expenses are combined, you do not need to support the business purpose of each expense. Taxes 2008 Instead, you can divide the expenses based on the total business use of the listed property. Taxes 2008 Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. Taxes 2008 For example, use of a truck to make deliveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. Taxes 2008 Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. Taxes 2008 Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Taxes 2008 Confidential Information If any of the information on the elements of an expenditure or use is confidential, it does not need to be in the account book or similar record if it is recorded at or near the time of the expenditure or use. Taxes 2008 It must be kept elsewhere and made available as support to the district director on request. Taxes 2008 Substantial Compliance If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems adequate. Taxes 2008 If you fail to establish that you have substantially complied with the adequate records requirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element: By your own oral or written statement containing detailed information as to the element, and By other evidence sufficient to establish the element. Taxes 2008 If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Taxes 2008 If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Taxes 2008 Sampling You can maintain an adequate record for portions of a tax year and use that record to support your business and investment use for the entire tax year if it can be shown by other evidence that the periods for which an adequate record is maintained are representative of use throughout the year. Taxes 2008 Loss of Records When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Taxes 2008 Reporting Information on Form 4562 If you claim a deduction for any listed property, you must provide the requested information on page 2, Section B of Form 4562. Taxes 2008 If you claim a deduction for any vehicle, you must answer certain questions onpage 2 of Form 4562 to provide information about the vehicle use. Taxes 2008 Employees. Taxes 2008   Employees claiming the standard mileage rate or actual expenses (including depreciation) must use Form 2106 instead of Part V of Form 4562. Taxes 2008 Employees claiming the standard mileage rate may be able to use Form 2106–EZ. Taxes 2008 Employer who provides vehicles to employees. Taxes 2008   An employer who provides vehicles to employees must obtain enough information from those employees to provide the requested information onForm 4562. Taxes 2008   An employer who provides more than five vehicles to employees need not include any information on his or her tax return. Taxes 2008 Instead, the employer must obtain the information from his or her employees and indicate on his or her return that the information was obtained and is being retained. Taxes 2008   You do not need to provide the information requested on page 2 of Form 4562 if, as an employer: You can satisfy the requirements of a written policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commuting, or You treat all vehicle use by employees as personal use. Taxes 2008 See the instructions for Form 4562. Taxes 2008 Deductions in Later Years When listed property is used for business, investment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. Taxes 2008 In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. Taxes 2008 In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for business or investment purposes in those years, beginning with the first tax year in which some or all of the property use is for business or investment. Taxes 2008 For more information about deductions after the recovery period for automobiles, see Publication 917. Taxes 2008 Appendix The following tables are for use in figuring depreciation deductions under the ACRS system. Taxes 2008 Table 1. Taxes 2008 15-Year Real Property* (Other Than Low-Inclome Housing) Table 3. Taxes 2008 Low-Income Housing* Table 6 - Table 9 Table 6 - Table 9 Table 10 - Table 13 Table 14 - Table 17 Prev  Up  Next   Home   More Online Publications
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The Taxes 2008

Taxes 2008 4. Taxes 2008   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. Taxes 2008 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. Taxes 2008 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. Taxes 2008 Category 1. Taxes 2008 Category 2. Taxes 2008 Category 3. Taxes 2008 What's New for 2013 Standard mileage rate. Taxes 2008  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. Taxes 2008 5 cents. Taxes 2008 See Truck and Car Expenses , later. Taxes 2008 Simplified method for business use of home deduction. Taxes 2008  The IRS now provides a simplified method to determine your expenses for business use of your home. Taxes 2008 For more information, see Schedule C (Form 1040), Part II, and its instructions. Taxes 2008 Introduction You can generally deduct the current costs of operating your farm. Taxes 2008 Current costs are expenses you do not have to capitalize or include in inventory costs. Taxes 2008 However, your deduction for the cost of livestock feed and certain other supplies may be limited. Taxes 2008 If you have an operating loss, you may not be able to deduct all of it. Taxes 2008 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. Taxes 2008 Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Taxes 2008 “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Taxes 2008 Schedule F, Part II, lists some common farm expenses that are typically deductible. Taxes 2008 This chapter discusses many of these expenses, as well as others not listed on Schedule F. Taxes 2008 Reimbursed expenses. Taxes 2008   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Taxes 2008 If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Taxes 2008 See Refund or reimbursement under Income From Other Sources in chapter 3. Taxes 2008 Personal and business expenses. Taxes 2008   Some expenses you pay during the tax year may be part personal and part business. Taxes 2008 These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Taxes 2008   You must allocate these mixed expenses between their business and personal parts. Taxes 2008 Generally, the personal part of these expenses is not deductible. Taxes 2008 The business portion of the expenses is deductible on Schedule F. Taxes 2008 Example. Taxes 2008 You paid $1,500 for electricity during the tax year. Taxes 2008 You used 1/3 of the electricity for personal purposes and 2/3 for farming. Taxes 2008 Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Taxes 2008 Reasonable allocation. Taxes 2008   It is not always easy to determine the business and nonbusiness parts of an expense. Taxes 2008 There is no method of allocation that applies to all mixed expenses. Taxes 2008 Any reasonable allocation is acceptable. Taxes 2008 What is reasonable depends on the circumstances in each case. Taxes 2008 Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Taxes 2008 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. Taxes 2008 Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Taxes 2008 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. Taxes 2008 Poultry bought for resale and not resold during the year. Taxes 2008 Deduction limit. Taxes 2008   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). Taxes 2008 This limit does not apply if you meet one of the exceptions described later. Taxes 2008 See Chapter 2 for a discussion of the cash method of accounting. Taxes 2008   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. Taxes 2008 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. Taxes 2008 The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Taxes 2008 Example. Taxes 2008 You may not qualify for the exception described next. Taxes 2008 During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Taxes 2008 Your total prepaid farm supplies expense for 2013 is $5,500. Taxes 2008 Your other deductible farm expenses totaled $10,000 for 2013. Taxes 2008 Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Taxes 2008 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. Taxes 2008 Exceptions. Taxes 2008   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. Taxes 2008 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. Taxes 2008 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. Taxes 2008   You are a farm-related taxpayer if any of the following tests apply. Taxes 2008 Your main home is on a farm. Taxes 2008 Your principal business is farming. Taxes 2008 A member of your family meets (1) or (2). Taxes 2008 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. Taxes 2008    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. Taxes 2008 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. Taxes 2008 The payment is for the purchase of feed rather than a deposit. Taxes 2008 The prepayment has a business purpose and is not merely for tax avoidance. Taxes 2008 Deducting the prepayment does not result in a material distortion of your income. Taxes 2008 If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Taxes 2008 If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Taxes 2008 This rule does not apply to the purchase of commodity futures contracts. Taxes 2008 Payment for the purchase of feed. Taxes 2008   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Taxes 2008 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. Taxes 2008   The following are some factors that show a payment is a deposit rather than for the purchase of feed. Taxes 2008 The absence of specific quantity terms. Taxes 2008 The right to a refund of any unapplied payment credit at the end of the contract. Taxes 2008 The seller's treatment of the payment as a deposit. Taxes 2008 The right to substitute other goods or products for those specified in the contract. Taxes 2008   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. Taxes 2008 Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Taxes 2008 Business purpose. Taxes 2008   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. Taxes 2008 The following are some examples of business benefits. Taxes 2008 Fixing maximum prices and securing an assured feed supply. Taxes 2008 Securing preferential treatment in anticipation of a feed shortage. Taxes 2008   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. Taxes 2008 No material distortion of income. Taxes 2008   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Taxes 2008 Your customary business practice in conducting your livestock operations. Taxes 2008 The expense in relation to past purchases. Taxes 2008 The time of year you made the purchase. Taxes 2008 The expense in relation to your income for the year. Taxes 2008 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. Taxes 2008 You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Taxes 2008 The cost of boarding farm labor is a deductible labor cost. Taxes 2008 Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Taxes 2008 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. Taxes 2008 See chapter 13 for more information on employment taxes. Taxes 2008 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. Taxes 2008 See Taxes , later. Taxes 2008 Property for services. Taxes 2008   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. Taxes 2008 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. Taxes 2008   Treat the wages deducted as an amount received for the property. Taxes 2008 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. Taxes 2008 Any gain or loss has the same character the exchanged property had in your hands. Taxes 2008 For more information, see chapter 8. Taxes 2008 Child as an employee. Taxes 2008   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. Taxes 2008 Include these wages in the child's income. Taxes 2008 The child may have to file an income tax return. Taxes 2008 These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Taxes 2008 For more information, see Family Employees in chapter 13. Taxes 2008    A Form W-2, Wage and Tax Statement, should be issued to the child employee. Taxes 2008   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. Taxes 2008 The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Taxes 2008 Spouse as an employee. Taxes 2008   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. Taxes 2008 Wages you pay to your spouse are subject to social security and Medicare taxes. Taxes 2008 For more information, see Family Employees in chapter 13. Taxes 2008 Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Taxes 2008 However, those wages may be subject to the employment taxes discussed in chapter 13. Taxes 2008 Household workers. Taxes 2008   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. Taxes 2008 Construction labor. Taxes 2008   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Taxes 2008 These wages are part of the cost of the building or other improvement. Taxes 2008 You must capitalize them. Taxes 2008 Maintaining your home. Taxes 2008   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. Taxes 2008 For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Taxes 2008 The employee devotes the remaining time to work on your farm. Taxes 2008 You cannot deduct 5% of the wages and employment taxes you pay for that employee. Taxes 2008 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). Taxes 2008 Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Taxes 2008 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. Taxes 2008 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. Taxes 2008 For example, if you repair the barn roof, the cost is deductible. Taxes 2008 But if you replace the roof, it is a capital expense. Taxes 2008 For more information, see Capital Expenses , later. Taxes 2008 Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Taxes 2008 Cash method. Taxes 2008   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Taxes 2008 You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Taxes 2008 You can, however, deduct the interest when you start making payments on the new loan. Taxes 2008 For more information, see Cash Method in chapter 2. Taxes 2008 Prepaid interest. Taxes 2008   Under the cash method, you generally cannot deduct any interest paid before the year it is due. Taxes 2008 Interest paid in advance may be deducted only in the tax year in which it is due. Taxes 2008 Accrual method. Taxes 2008   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Taxes 2008 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. Taxes 2008 For more information, see Accrual Method in chapter 2. Taxes 2008 Allocation of interest. Taxes 2008   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Taxes 2008 Allocate the interest to the following categories. Taxes 2008 Trade or business interest. Taxes 2008 Passive activity interest. Taxes 2008 Investment interest. Taxes 2008 Portfolio interest. Taxes 2008 Personal interest. Taxes 2008   You generally allocate interest on a loan the same way you allocate the loan proceeds. Taxes 2008 You allocate loan proceeds by tracing disbursements to specific uses. Taxes 2008 The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Taxes 2008 Secured loan. Taxes 2008   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Taxes 2008 Example. Taxes 2008 You secure a loan with property used in your farming business. Taxes 2008 You use the loan proceeds to buy a car for personal use. Taxes 2008 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. Taxes 2008 If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Taxes 2008 The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Taxes 2008 However, you can choose to treat the loan as not secured by your home. Taxes 2008 For more information, see Publication 936. Taxes 2008 Allocation period. Taxes 2008   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. Taxes 2008 The date the loan is repaid. Taxes 2008 The date the loan is reallocated to another use. Taxes 2008 More information. Taxes 2008   For more information on interest, see chapter 4 in Publication 535. Taxes 2008 Breeding Fees You can deduct breeding fees as a farm business expense. Taxes 2008 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. Taxes 2008 For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Taxes 2008 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. Taxes 2008 You can also deduct the cost of applying these materials in the year you pay or incur it. Taxes 2008 However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Taxes 2008 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. Taxes 2008 However, you can choose to deduct these expenses in the year paid or incurred. Taxes 2008 If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Taxes 2008 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. Taxes 2008 Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Taxes 2008 It does not include land you have never used previously for producing crops or sustaining livestock. Taxes 2008 You cannot deduct initial land preparation costs. Taxes 2008 (See Capital Expenses , later. Taxes 2008 ) Include government payments you receive for lime or fertilizer in income. Taxes 2008 See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Taxes 2008 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. Taxes 2008 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. Taxes 2008 For information on employment taxes, see chapter 13. Taxes 2008 Allocation of taxes. Taxes 2008   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. Taxes 2008 You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Taxes 2008 To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Taxes 2008 The allocation can be done from the assessed valuations. Taxes 2008 If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Taxes 2008 State and local general sales taxes. Taxes 2008   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Taxes 2008 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. Taxes 2008 Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Taxes 2008 State and federal income taxes. Taxes 2008   Individuals cannot deduct state and federal income taxes as farm business expenses. Taxes 2008 Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Taxes 2008 However, you cannot deduct federal income tax. Taxes 2008 Highway use tax. Taxes 2008   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Taxes 2008 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. Taxes 2008 Self-employment tax deduction. Taxes 2008   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Taxes 2008 For more information, see chapter 12. Taxes 2008 Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Taxes 2008 This includes premiums you pay for the following types of insurance. Taxes 2008 Fire, storm, crop, theft, liability, and other insurance on farm business assets. Taxes 2008 Health and accident insurance on your farm employees. Taxes 2008 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. Taxes 2008 Business interruption insurance. Taxes 2008 State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Taxes 2008 Insurance to secure a loan. Taxes 2008   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. Taxes 2008 In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Taxes 2008 Advance premiums. Taxes 2008   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Taxes 2008 Example. Taxes 2008 On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Taxes 2008 The policy will cover a period of 3 years beginning on July 1, 2013. Taxes 2008 Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Taxes 2008 Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Taxes 2008 In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Taxes 2008 Deduct the remaining $500 in 2016. Taxes 2008 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. Taxes 2008 Business interruption insurance. Taxes 2008   Use and occupancy and business interruption insurance premiums are deductible as a business expense. Taxes 2008 This insurance pays for lost profits if your business is shut down due to a fire or other cause. Taxes 2008 Report any proceeds in full on Schedule F, Part I. Taxes 2008 Self-employed health insurance deduction. Taxes 2008   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. Taxes 2008 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. Taxes 2008 Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Taxes 2008   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. Taxes 2008   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Taxes 2008 Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Taxes 2008   For more information, see Deductible Premiums in Publication 535, chapter 6. Taxes 2008 Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Taxes 2008 However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Taxes 2008 Advance payments. Taxes 2008   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Taxes 2008 Farm home. Taxes 2008   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. Taxes 2008 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. Taxes 2008 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. Taxes 2008 Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Taxes 2008 Conditional sales contract. Taxes 2008   Whether an agreement is a conditional sales contract depends on the intent of the parties. Taxes 2008 Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Taxes 2008 No single test, or special combination of tests, always applies. Taxes 2008 However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Taxes 2008 The agreement applies part of each payment toward an equity interest you will receive. Taxes 2008 You get title to the property after you make a stated amount of required payments. Taxes 2008 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. Taxes 2008 You pay much more than the current fair rental value of the property. Taxes 2008 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. Taxes 2008 Determine this value when you make the agreement. Taxes 2008 You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Taxes 2008 The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Taxes 2008 Example. Taxes 2008 You lease new farm equipment from a dealer who both sells and leases. Taxes 2008 The agreement includes an option to purchase the equipment for a specified price. Taxes 2008 The lease payments and the specified option price equal the sales price of the equipment plus interest. Taxes 2008 Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Taxes 2008 For federal income tax purposes, the agreement is a conditional sales contract. Taxes 2008 You cannot deduct any of the lease payments as rent. Taxes 2008 You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Taxes 2008 Motor vehicle leases. Taxes 2008   Special rules apply to lease agreements that have a terminal rental adjustment clause. Taxes 2008 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. Taxes 2008 If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Taxes 2008 For more information, see Internal Revenue Code (IRC) section 7701(h). Taxes 2008 Leveraged leases. Taxes 2008   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Taxes 2008 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. Taxes 2008 irs. Taxes 2008 gov/pub/irs-irbs/irb01-19. Taxes 2008 pdf. Taxes 2008 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. Taxes 2008 You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Taxes 2008 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. Taxes 2008 Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Taxes 2008 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. Taxes 2008 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. Taxes 2008 You use it exclusively and regularly for the administrative or management activities of your trade or business. Taxes 2008 You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Taxes 2008 If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Taxes 2008 The IRS now provides a simplified method to determine your expenses for business use of your home. Taxes 2008 For more information, see Schedule C (Form 1040), Part II, and its instructions. Taxes 2008 Deduction limit. Taxes 2008   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. Taxes 2008 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. Taxes 2008   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. Taxes 2008 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). Taxes 2008 Farm expenses other than expenses that relate to the use of your home. Taxes 2008 If you are self-employed, do not include your deduction for half of your self-employment tax. Taxes 2008   Deductions over the current year's limit can be carried over to your next tax year. Taxes 2008 They are subject to the deduction limit for the next tax year. Taxes 2008 More information. Taxes 2008   See Publication 587 for more information on deducting expenses for the business use of your home. Taxes 2008 Telephone expense. Taxes 2008   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. Taxes 2008 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. Taxes 2008 Cell phone charges for calls relating to your farm business are deductible. Taxes 2008 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. Taxes 2008 Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Taxes 2008 Only expenses for business use are deductible. Taxes 2008 These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Taxes 2008 Standard mileage rate. Taxes 2008   Instead of using actual costs, under certain conditions you can use the standard mileage rate. Taxes 2008 The standard mileage rate for each mile of business use is 56. Taxes 2008 5 cents in 2013. Taxes 2008 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. Taxes 2008   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Taxes 2008 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. Taxes 2008 Example. Taxes 2008 Maureen owns a car and four pickup trucks that are used in her farm business. Taxes 2008 Her farm employees use the trucks and she uses the car for business. Taxes 2008 Maureen cannot use the standard mileage rate for the car or the trucks. Taxes 2008 This is because all five vehicles are used in Maureen's farm business at the same time. Taxes 2008 She must use actual expenses for all vehicles. Taxes 2008 Business use percentage. Taxes 2008   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. Taxes 2008 You choose this method of substantiating business use the first year the vehicle is placed in service. Taxes 2008 Once you make this choice, you may not change to another method later. Taxes 2008 The following are uses directly connected with the business of farming. Taxes 2008 Cultivating land. Taxes 2008 Raising or harvesting any agricultural or horticultural commodity. Taxes 2008 Raising, shearing, feeding, caring for, training, and managing animals. Taxes 2008 Driving to the feed or supply store. Taxes 2008   If you keep records and they show that your business use was more than 75%, you may be able to claim more. Taxes 2008 See Recordkeeping requirements under Travel Expenses , below. Taxes 2008 More information. Taxes 2008   For more information on deductible truck and car expenses, see Publication 463, chapter 4. Taxes 2008 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. Taxes 2008 Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Taxes 2008 You cannot deduct lavish or extravagant expenses. Taxes 2008 Usually, the location of your farm business is considered your home for tax purposes. Taxes 2008 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. Taxes 2008 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. Taxes 2008 The following are some types of deductible travel expenses. Taxes 2008 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. Taxes 2008 Meals. Taxes 2008   You ordinarily can deduct only 50% of your business-related meals expenses. Taxes 2008 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. Taxes 2008 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. Taxes 2008 For information on entertainment expenses, see Publication 463, chapter 2. Taxes 2008   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Taxes 2008 You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Taxes 2008    Recordkeeping requirements. Taxes 2008 You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Taxes 2008 Estimates or approximations do not qualify as proof of an expense. Taxes 2008   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. Taxes 2008 Generally, it is best to record the expense and get documentation of it at the time you pay it. Taxes 2008   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. Taxes 2008 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. Taxes 2008 More information. Taxes 2008   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Taxes 2008 Reimbursements to employees. Taxes 2008   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Taxes 2008 Employees may be reimbursed under an accountable or nonaccountable plan. Taxes 2008 Under an accountable plan, the employee must provide evidence of expenses. Taxes 2008 Under a nonaccountable plan, no evidence of expenses is required. Taxes 2008 If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Taxes 2008 If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Taxes 2008 For more information, see Publication 535, chapter 11. Taxes 2008 Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Taxes 2008 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. Taxes 2008 Do not take a separate deduction for the penalty. Taxes 2008 Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Taxes 2008 These costs include repairs, utilities, insurance, and depreciation. Taxes 2008 The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Taxes 2008 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. Taxes 2008 You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Taxes 2008 However, see Chickens, seeds, and young plants , below. Taxes 2008 Example. Taxes 2008 You use the cash method of accounting. Taxes 2008 In 2013, you buy 50 steers you will sell in 2014. Taxes 2008 You cannot deduct the cost of the steers on your 2013 tax return. Taxes 2008 You deduct their cost on your 2014 Schedule F, Part I. Taxes 2008 Chickens, seeds, and young plants. Taxes 2008   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. Taxes 2008 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. Taxes 2008 However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Taxes 2008   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Taxes 2008 You cannot also deduct the cost from the selling price. Taxes 2008   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Taxes 2008 Deduct the cost of these seeds and plants through depletion allowances. Taxes 2008 For more information, see Depletion in chapter 7. Taxes 2008   The cost of chickens and plants used as food for your family is never deductible. Taxes 2008   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Taxes 2008 These rules are discussed in chapter 6. Taxes 2008 Example. Taxes 2008 You use the cash method of accounting. Taxes 2008 In 2013, you buy 500 baby chicks to raise for resale in 2014. Taxes 2008 You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Taxes 2008 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. Taxes 2008 Election to use crop method. Taxes 2008   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Taxes 2008 You must get IRS approval to use the crop method. Taxes 2008 If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Taxes 2008 For more information, see Crop method under Special Methods of Accounting in chapter 2. Taxes 2008 Choosing a method. Taxes 2008   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. Taxes 2008   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. Taxes 2008 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. Taxes 2008 For more information, see Change in Accounting Method in chapter 2. Taxes 2008 Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Taxes 2008 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. Taxes 2008 Accounting fees. Taxes 2008 Advertising. Taxes 2008 Business travel and meals. Taxes 2008 Commissions. Taxes 2008 Consultant fees. Taxes 2008 Crop scouting expenses. Taxes 2008 Dues to cooperatives. Taxes 2008 Educational expenses (to maintain and improve farming skills). Taxes 2008 Farm-related attorney fees. Taxes 2008 Farm magazines. Taxes 2008 Ginning. Taxes 2008 Insect sprays and dusts. Taxes 2008 Litter and bedding. Taxes 2008 Livestock fees. Taxes 2008 Marketing fees. Taxes 2008 Milk assessment. Taxes 2008 Recordkeeping expenses. Taxes 2008 Service charges. Taxes 2008 Small tools expected to last one year or less. Taxes 2008 Stamps and stationery. Taxes 2008 Subscriptions to professional, technical, and trade journals that deal with farming. Taxes 2008 Tying material and containers. Taxes 2008 Loan expenses. Taxes 2008   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. Taxes 2008 Tax preparation fees. Taxes 2008   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. Taxes 2008 You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Taxes 2008   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Taxes 2008 Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Taxes 2008 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. Taxes 2008 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. Taxes 2008 For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Taxes 2008 Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Taxes 2008 Income from cooperatives. Taxes 2008   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. Taxes 2008 This deduction amount is reported on Form 1099-PATR, box 6. Taxes 2008 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. Taxes 2008 More information. Taxes 2008   For more information on the domestic production activities deduction, see the Instructions for Form 8903. Taxes 2008 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. Taxes 2008 You include the expense in the basis of the asset. Taxes 2008 Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Taxes 2008 See chapters 2  and 6. Taxes 2008 Capital expenses are generally not deductible, but they may be depreciable. Taxes 2008 However, you can elect to deduct certain capital expenses, such as the following. Taxes 2008 The cost of fertilizer, lime, etc. Taxes 2008 (See Fertilizer and Lime under Deductible Expenses , earlier. Taxes 2008 ) Soil and water conservation expenses. Taxes 2008 (See chapter 5. Taxes 2008 ) The cost of property that qualifies for a deduction under section 179. Taxes 2008 (See chapter 7. Taxes 2008 ) Business start-up costs. Taxes 2008 (See Business start-up and organizational costs , later. Taxes 2008 ) Forestation and reforestation costs. Taxes 2008 (See Forestation and reforestation costs , later. Taxes 2008 ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Taxes 2008 Land and buildings. Taxes 2008 Additions, alterations, and improvements to buildings, etc. Taxes 2008 Cars and trucks. Taxes 2008 Equipment and machinery. Taxes 2008 Fences. Taxes 2008 Draft, breeding, sport, and dairy livestock. Taxes 2008 Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Taxes 2008 Water wells, including drilling and equipping costs. Taxes 2008 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. Taxes 2008 Business start-up and organizational costs. Taxes 2008   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. Taxes 2008 The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Taxes 2008 Any remaining costs must be amortized. Taxes 2008 See chapter 7. Taxes 2008   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. Taxes 2008 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). Taxes 2008 Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Taxes 2008 9100-2” at the top of the amended return. Taxes 2008 File the amended return at the same address you filed the original return. Taxes 2008 The election applies when figuring taxable income for the current tax year and all subsequent years. Taxes 2008   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. Taxes 2008 For more information about start-up and organizational costs, see chapter 7. Taxes 2008 Crop production expenses. Taxes 2008   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Taxes 2008 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. Taxes 2008 For more information, see Uniform Capitalization Rules in chapter 6. Taxes 2008 Timber. Taxes 2008   Capitalize the cost of acquiring timber. Taxes 2008 Do not include the cost of land in the cost of the timber. Taxes 2008 You must generally capitalize direct costs incurred in reforestation. Taxes 2008 However, you can elect to deduct some forestation and reforestation costs. Taxes 2008 See Forestation and reforestation costs next. Taxes 2008 Reforestation costs include the following. Taxes 2008 Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Taxes 2008 The cost of seed or seedlings. Taxes 2008 Labor and tool expenses. Taxes 2008 Depreciation on equipment used in planting or seeding. Taxes 2008 Costs incurred in replanting to replace lost seedlings. Taxes 2008 You can choose to capitalize certain indirect reforestation costs. Taxes 2008   These capitalized amounts are your basis for the timber. Taxes 2008 Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Taxes 2008 See Depletion in chapter 7. Taxes 2008 Forestation and reforestation costs. Taxes 2008   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. Taxes 2008 Any remaining costs can be amortized over an 84-month period. Taxes 2008 See chapter 7. Taxes 2008 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. Taxes 2008 The accounts should include all reforestation treatments and the dates they were applied. Taxes 2008 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. Taxes 2008 The timber account should be maintained until the timber is disposed of. Taxes 2008 For more information, see Notice 2006-47, 2006-20 I. Taxes 2008 R. Taxes 2008 B. Taxes 2008 892, available at  www. Taxes 2008 irs. Taxes 2008 gov/irb/2006-20_IRB/ar11. Taxes 2008 html. Taxes 2008   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. Taxes 2008 If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Taxes 2008 If you are not filing Form T (Timber), attach a statement to your return with the following information. Taxes 2008 The unique stand identification numbers. Taxes 2008 The total number of acres reforested during the tax year. Taxes 2008 The nature of the reforestation treatments. Taxes 2008 The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Taxes 2008   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). Taxes 2008 Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Taxes 2008 9100-2” at the top of the amended return. Taxes 2008 File the amended return at the same address you filed the original return. Taxes 2008    For more information about forestation and reforestation costs, see chapter 7. Taxes 2008    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Taxes 2008 You can view this publication on the Internet at  www. Taxes 2008 fs. Taxes 2008 fed. Taxes 2008 us/publications. Taxes 2008 Christmas tree cultivation. Taxes 2008   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. Taxes 2008 Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Taxes 2008 For more information, see Timber Depletion under Depletion in chapter 7. Taxes 2008   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Taxes 2008 Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Taxes 2008   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Taxes 2008 If the improvements do not have a determinable useful life, add their cost to the basis of the land. Taxes 2008 The cost is recovered when you sell or otherwise dispose of it. Taxes 2008 If the improvements have a determinable useful life, recover their cost through depreciation. Taxes 2008 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. Taxes 2008 Recover these costs through depreciation. Taxes 2008 Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Taxes 2008 Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Taxes 2008 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. Taxes 2008 Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Taxes 2008 Other Nondeductible Items You cannot deduct the following items on your tax return. Taxes 2008 Loss of growing plants, produce, and crops. Taxes 2008   Losses of plants, produce, and crops raised for sale are generally not deductible. Taxes 2008 However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Taxes 2008 See chapter 11 for more information. Taxes 2008 Repayment of loans. Taxes 2008   You cannot deduct the repayment of a loan. Taxes 2008 However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Taxes 2008 See Interest , earlier. Taxes 2008 Estate, inheritance, legacy, succession, and gift taxes. Taxes 2008   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Taxes 2008 Loss of livestock. Taxes 2008   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Taxes 2008 Losses from sales or exchanges between related persons. Taxes 2008   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. Taxes 2008 For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Taxes 2008 Cost of raising unharvested crops. Taxes 2008   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. Taxes 2008 Add these costs to the basis of the land to determine the gain or loss on the sale. Taxes 2008 For more information, see Section 1231 Gains and Losses in chapter 9. Taxes 2008 Cost of unharvested crops bought with land. Taxes 2008   Capitalize the purchase price of land, including the cost allocable to unharvested crops. Taxes 2008 You cannot deduct the cost of the crops at the time of purchase. Taxes 2008 However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Taxes 2008 Cost related to gifts. Taxes 2008   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Taxes 2008 The costs are not deductible in the year of the gift or any later year. Taxes 2008 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. Taxes 2008 Club dues and membership fees. Taxes 2008   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Taxes 2008 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. Taxes 2008 Exception. Taxes 2008   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. Taxes 2008 Boards of trade. Taxes 2008 Business leagues. Taxes 2008 Chambers of commerce. Taxes 2008 Civic or public service organizations. Taxes 2008 Professional associations. Taxes 2008 Trade associations. Taxes 2008 Real estate boards. Taxes 2008 Fines and penalties. Taxes 2008   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Taxes 2008 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. Taxes 2008 The amount of the loss you can deduct when figuring your taxable income may be limited. Taxes 2008 To figure your deductible loss, you must apply the following limits. Taxes 2008 The at-risk limits. Taxes 2008 The passive activity limits. Taxes 2008 The following discussions explain these limits. Taxes 2008 If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Taxes 2008 See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Taxes 2008 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. Taxes 2008 See Not-for-Profit Farming, later. Taxes 2008 At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Taxes 2008 These rules limit the losses you can deduct when figuring your taxable income. Taxes 2008 The deductible loss from an activity is limited to the amount you have at risk in the activity. Taxes 2008 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. Taxes 2008 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. Taxes 2008 For more information, see Publication 925. Taxes 2008 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. Taxes 2008 Generally, a rental activity is a passive activity. Taxes 2008 If you have a passive activity, special rules limit the loss you can deduct in the tax year. Taxes 2008 You generally can deduct losses from passive activities only up to income from passive activities. Taxes 2008 Credits are similarly limited. Taxes 2008 For more information, see Publication 925. Taxes 2008 Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Taxes 2008 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. Taxes 2008 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. Taxes 2008 Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Taxes 2008 Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Taxes 2008 For more details, see IRC section 461(j). Taxes 2008 Excess farm loss. Taxes 2008   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Taxes 2008 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. Taxes 2008   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Taxes 2008 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. Taxes 2008 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). Taxes 2008 Also, there is a limit on the deductions you can take. Taxes 2008 You cannot use a loss from that activity to offset income from other activities. Taxes 2008 Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Taxes 2008 An investment activity intended only to produce tax losses for the investors also comes under this limit. Taxes 2008 The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Taxes 2008 It does not apply to corporations other than S corporations. Taxes 2008 In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Taxes 2008 No one factor alone is decisive. Taxes 2008 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. Taxes 2008 Presumption of profit. Taxes 2008   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. Taxes 2008 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. Taxes 2008 The activity must be substantially the same for each year within this period. Taxes 2008 You have a profit when the gross income from an activity is more than the deductions for it. Taxes 2008   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. Taxes 2008   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Taxes 2008 This means the limits discussed here do not apply. Taxes 2008 You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Taxes 2008 You can rely on this presumption in every case, unless the IRS shows it is not valid. Taxes 2008   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. Taxes 2008 Using the presumption later. Taxes 2008   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. Taxes 2008   You can choose to do this by filing Form 5213. Taxes 2008 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. Taxes 2008 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. Taxes 2008   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Taxes 2008 Accordingly, it will not limit your deductions. Taxes 2008 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. Taxes 2008 If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Taxes 2008 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. Taxes 2008   Filing Form 5213 automatically extends the period of limitations on any year