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Www freetax com Publication 597 - Introductory Material Table of Contents Introduction Introduction This publication provides information on the income tax treaty between the United States and Canada. Www freetax com It discusses a number of treaty provisions that often apply to U. Www freetax com S. Www freetax com citizens or residents who may be liable for Canadian tax. Www freetax com Treaty provisions are generally reciprocal (the same rules apply to both treaty countries). Www freetax com Therefore, a Canadian resident who receives income from the United States may refer to this publication to see if a treaty provision may affect the tax to be paid to the United States. Www freetax com This publication does not deal with Canadian income tax laws; nor does it provide Canada's interpretation of treaty articles, definitions, or specific terms not defined in the treaty itself. Www freetax com The United States—Canada income tax treaty was signed on September 26, 1980. Www freetax com It has been amended by five protocols, the most recent of which generally became effective January 1, 2009. Www freetax com In this publication, the term “article” refers to the particular article of the treaty, as amended. Www freetax com Prev  Up  Next   Home   More Online Publications
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Www freetax com 3. Www freetax com   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. Www freetax com Form 4797. Www freetax com Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. Www freetax com Granting the right to remove deposits. Www freetax com Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. Www freetax com You must report the income from all the different sources on your tax return, unless it is excluded by law. Www freetax com Where you report the income on your tax return depends on its source. Www freetax com This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. Www freetax com For information on where to report other income, see the Instructions for Form 1040, U. Www freetax com S. Www freetax com Individual Income Tax Return. Www freetax com Accounting method. Www freetax com   The rules discussed in this chapter assume you use the cash method of accounting. Www freetax com Under the cash method, you generally include an item of income in gross income in the year you receive it. Www freetax com See Cash Method in chapter 2. Www freetax com   If you use an accrual method of accounting, different rules may apply to your situation. Www freetax com See Accrual Method in chapter 2. Www freetax com Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. Www freetax com Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. Www freetax com Use this schedule to figure the net profit or loss from regular farming operations. Www freetax com Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. Www freetax com This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. Www freetax com It also includes income from the sale of crop shares if you materially participate in producing the crop. Www freetax com See Rents (Including Crop Shares) , later. Www freetax com Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. Www freetax com Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. Www freetax com Land. Www freetax com Depreciable farm equipment. Www freetax com Buildings and structures. Www freetax com Livestock held for draft, breeding, sport, or dairy purposes. Www freetax com Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. Www freetax com Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. Www freetax com Sales of Farm Products Where to report. Www freetax com    Table 3-1 shows where to report the sale of farm products on your tax return. Www freetax com Schedule F. Www freetax com   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. Www freetax com This includes money and the fair market value of any property or services you receive. Www freetax com When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). Www freetax com See chapter 6 for information on the basis of assets. Www freetax com You generally report these amounts on Schedule F for the year you receive payment. Www freetax com Example. Www freetax com In 2012, you bought 20 feeder calves for $11,000 for resale. Www freetax com You sold them in 2013 for $21,000. Www freetax com You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. Www freetax com Form 4797. Www freetax com   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. Www freetax com In either case, you should always report these sales on Form 4797 instead of Schedule F. Www freetax com See Livestock under Ordinary or Capital Gain or Loss in chapter 8. Www freetax com Animals you do not hold primarily for sale are considered business assets of your farm. Www freetax com Table 3-1. Www freetax com Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. Www freetax com   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. Www freetax com This applies even if your agent pays you in a later year. Www freetax com For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. Www freetax com Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. Www freetax com You must meet all the following conditions to qualify. Www freetax com Your principal trade or business is farming. Www freetax com You use the cash method of accounting. Www freetax com You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. Www freetax com The weather-related condition caused an area to be designated as eligible for assistance by the federal government. Www freetax com Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. Www freetax com The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. Www freetax com A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. Www freetax com See Other Involuntary Conversions in chapter 11. Www freetax com Usual business practice. Www freetax com   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. Www freetax com Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. Www freetax com If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. Www freetax com Connection with affected area. Www freetax com   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. Www freetax com However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. Www freetax com This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. Www freetax com Classes of livestock. Www freetax com   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. Www freetax com Do not separate animals into classes based on age, sex, or breed. Www freetax com Amount to be postponed. Www freetax com   Follow these steps to figure the amount of gain to be postponed for each class of animals. Www freetax com Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. Www freetax com For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. Www freetax com Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. Www freetax com Example. Www freetax com You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. Www freetax com As a result of drought, you sold 135 head during 2012. Www freetax com You realized $70,200 from the sale. Www freetax com On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. Www freetax com The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. Www freetax com How to postpone gain. Www freetax com   To postpone gain, attach a statement to your tax return for the year of the sale. Www freetax com The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. Www freetax com A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). Www freetax com Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. Www freetax com A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. Www freetax com The number of animals sold in each of the 3 preceding years. Www freetax com The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. Www freetax com The total number of animals sold and the number sold because of weather-related conditions during the tax year. Www freetax com A computation, as described above, of the income to be postponed for each class of livestock. Www freetax com   Generally, you must file the statement and the return by the due date of the return, including extensions. Www freetax com However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. Www freetax com For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). Www freetax com Attach the statement to the amended return and write “Filed pursuant to section 301. Www freetax com 9100-2” at the top of the amended return. Www freetax com File the amended return at the same address you filed the original return. Www freetax com Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. Www freetax com Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. Www freetax com However, if you materially participate in farming operations on the land, the rent is farm income. Www freetax com See Landlord Participation in Farming in chapter 12. Www freetax com Pasture income and rental. Www freetax com   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. Www freetax com You must enter it as Other income on Schedule F. Www freetax com If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. Www freetax com Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. Www freetax com It does not matter whether you use the cash method of accounting or an accrual method of accounting. Www freetax com If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. Www freetax com See Landlord Participation in Farming in chapter 12. Www freetax com Report the rental income on Schedule F. Www freetax com If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). Www freetax com The income is not included in self-employment income. Www freetax com Crop shares you use to feed livestock. Www freetax com   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. Www freetax com You must include the fair market value of the crop shares in income at that time. Www freetax com You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. Www freetax com Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. Www freetax com See  chapter 12. Www freetax com Crop shares you give to others (gift). Www freetax com   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. Www freetax com You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. Www freetax com Example. Www freetax com A tenant farmed part of your land under a crop-share arrangement. Www freetax com The tenant harvested and delivered the crop in your name to an elevator company. Www freetax com Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. Www freetax com They sell their crop shares in the following year and the elevator company makes payments directly to your children. Www freetax com In this situation, you are considered to have received rental income and then made a gift of that income. Www freetax com You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. Www freetax com Crop share loss. Www freetax com   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. Www freetax com See Publication 925 for information on these rules. Www freetax com Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. Www freetax com However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. Www freetax com See Cost-Sharing Exclusion (Improvements) , later. Www freetax com Report the agricultural program payment on the appropriate line of Schedule F, Part I. Www freetax com Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. Www freetax com However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. Www freetax com Claim the deduction on Schedule F for the year of repayment or reduction. Www freetax com Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. Www freetax com However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. Www freetax com You do not need approval from the IRS to adopt this method of reporting CCC loans. Www freetax com Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. Www freetax com However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. Www freetax com For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. Www freetax com Revenue Procedure 2008-52, 2008-36 I. Www freetax com R. Www freetax com B. Www freetax com 587, is available at  www. Www freetax com irs. Www freetax com gov/irb/2008-36_IRB/ar09. Www freetax com html. Www freetax com You can request income tax withholding from CCC loan payments you receive. Www freetax com Use Form W-4V, Voluntary Withholding Request. Www freetax com See chapter 16 for information about ordering the form. Www freetax com To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. Www freetax com Attach a statement to your return showing the details of the loan. Www freetax com You must file the statement and the return by the due date of the return, including extensions. Www freetax com 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). Www freetax com Attach the statement to the amended return and write “Filed pursuant to section 301. Www freetax com 9100-2” at the top of the return. Www freetax com File the amended return at the same address you filed the original return. Www freetax com When you make this election, the amount you report as income becomes your basis in the commodity. Www freetax com See chapter 6 for information on the basis of assets. Www freetax com If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. Www freetax com If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. Www freetax com If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. Www freetax com If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. Www freetax com Form 1099-A. Www freetax com   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. Www freetax com “CCC” should be shown in box 6. Www freetax com The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. Www freetax com Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. Www freetax com If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. Www freetax com Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. Www freetax com Market gain should be reported as follows. Www freetax com If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. Www freetax com However, adjust the basis of the commodity for the amount of the market gain. Www freetax com If you did not include the CCC loan in income in the year received, include the market gain in your income. Www freetax com The following examples show how to report market gain. Www freetax com Example 1. Www freetax com Mike Green is a cotton farmer. Www freetax com He uses the cash method of accounting and files his tax return on a calendar year basis. Www freetax com He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. Www freetax com In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. Www freetax com 00 per pound). Www freetax com In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. Www freetax com 50 per pound (lower than the loan amount). Www freetax com Later in 2013, he sold the cotton for $2,500. Www freetax com The market gain on the redemption was $. Www freetax com 50 ($2. Www freetax com 00 – $1. Www freetax com 50) per pound. Www freetax com Mike realized total market gain of $500 ($. Www freetax com 50 x 1,000 pounds). Www freetax com How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. Www freetax com Included CCC loan. Www freetax com   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. Www freetax com The $500 market gain is not recognized on the redemption. Www freetax com He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. Www freetax com   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. Www freetax com His gain from the sale is $1,000 ($2,500 – $1,500). Www freetax com He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. Www freetax com Excluded CCC loan. Www freetax com   Mike has income of $500 from market gain in 2013. Www freetax com He reports it on Schedule F, lines 4a and 4b. Www freetax com His basis in the cotton is zero, so his gain from its sale is $2,500. Www freetax com He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. Www freetax com Example 2. Www freetax com The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. Www freetax com Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. Www freetax com In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. Www freetax com How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. Www freetax com Included CCC loan. Www freetax com   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. Www freetax com The $500 market gain is not recognized on the redemption. Www freetax com Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. Www freetax com   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. Www freetax com Mike has no gain or loss on its sale to the cotton buyer for that amount. Www freetax com Excluded CCC loan. Www freetax com   As in Example 1, Mike has income of $500 from market gain in 2013. Www freetax com He reports it on Schedule F, lines 4a and 4b. Www freetax com His basis in the cotton is zero, so his gain from its sale is $1,500. Www freetax com He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. Www freetax com Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. Www freetax com You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. Www freetax com Cost-share payments you receive may qualify for the cost-sharing exclusion. Www freetax com See Cost-Sharing Exclusion (Improvements) , later. Www freetax com CRP payments are reported to you on Form 1099-G. Www freetax com Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. Www freetax com See the instructions for Schedule SE (Form 1040). Www freetax com Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. Www freetax com You generally include them in the year you receive them. Www freetax com Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. Www freetax com You can request income tax withholding from crop disaster payments you receive from the federal government. Www freetax com Use Form W-4V, Voluntary Withholding Request. Www freetax com See chapter 16 for information about ordering the form. Www freetax com Election to postpone reporting until the following year. Www freetax com   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. Www freetax com You use the cash method of accounting. Www freetax com You receive the crop insurance proceeds in the same tax year the crops are damaged. Www freetax com You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. Www freetax com   Deferral is not permitted for proceeds received from revenue insurance policies. Www freetax com   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. Www freetax com Check the box on line 8c and attach a statement to your tax return. Www freetax com The statement must include your name and address and contain the following information. Www freetax com A statement that you are making an election under IRC section 451(d) and Regulations section 1. Www freetax com 451-6. Www freetax com The specific crop or crops physically destroyed or damaged. Www freetax com A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. Www freetax com The cause of the physical destruction or damage and the date or dates it occurred. Www freetax com The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. Www freetax com The name of each insurance carrier from whom you received payments. Www freetax com   One election covers all crops representing a single trade or business. Www freetax com If you have more than one farming business, make a separate election for each one. Www freetax com For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. Www freetax com   An election is binding for the year unless the IRS approves your request to change it. Www freetax com To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. Www freetax com Ogden Submission Processing Center P. Www freetax com O. Www freetax com Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. Www freetax com These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. Www freetax com They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. Www freetax com Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. Www freetax com You must include these benefits in income in the year you receive them. Www freetax com You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. Www freetax com Report the benefits on Schedule F, Part I, as agricultural program payments. Www freetax com You can usually take a current deduction for the same amount as a feed expense. Www freetax com Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. Www freetax com A payment is any economic benefit you get as a result of an improvement. Www freetax com However, this exclusion applies only to that part of a payment that meets all three of the following tests. Www freetax com It was for a capital expense. Www freetax com You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. Www freetax com You must include the payment for a deductible expense in income, and you can take any offsetting deduction. Www freetax com See chapter 5 for information on deducting soil and water conservation expenses. Www freetax com It does not substantially increase your annual income from the property for which it is made. Www freetax com An increase in annual income is substantial if it is more than the greater of the following amounts. Www freetax com 10% of the average annual income derived from the affected property before receiving the improvement. Www freetax com $2. Www freetax com 50 times the number of affected acres. Www freetax com The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Www freetax com Qualifying programs. Www freetax com   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. Www freetax com The rural clean water program authorized by the Federal Water Pollution Control Act. Www freetax com The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. Www freetax com The water bank program authorized by the Water Bank Act. Www freetax com The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. Www freetax com The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. Www freetax com The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. Www freetax com The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. Www freetax com Certain small watershed programs, listed later. Www freetax com Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Www freetax com Several state programs have been approved. Www freetax com For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). Www freetax com Small watershed programs. Www freetax com   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. Www freetax com The programs under the Watershed Protection and Flood Prevention Act. Www freetax com The flood prevention projects under the Flood Control Act of 1944. Www freetax com The Emergency Watershed Protection Program under the Flood Control Act of 1950. Www freetax com Certain programs under the Colorado River Basin Salinity Control Act. Www freetax com The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. Www freetax com The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. Www freetax com The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. Www freetax com The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. Www freetax com The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. Www freetax com The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. Www freetax com The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. Www freetax com The Conservation Security Program authorized by the Food Security Act of 1985. Www freetax com The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. Www freetax com Income realized. Www freetax com   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). Www freetax com Value of the improvement. Www freetax com   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. Www freetax com The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. Www freetax com Any government payments under a program not listed earlier. Www freetax com Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. Www freetax com Any government payment to you for rent or for your services. Www freetax com The denominator of the fraction is the total cost of the improvement. Www freetax com Excludable portion. Www freetax com   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. Www freetax com 10% of the prior average annual income from the affected acreage. Www freetax com The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. Www freetax com $2. Www freetax com 50 times the number of affected acres. Www freetax com The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. Www freetax com You may need to consult your tax advisor for assistance. Www freetax com Example. Www freetax com One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. Www freetax com The total cost of the improvement was $500,000. Www freetax com The USDA paid $490,000. Www freetax com You paid $10,000. Www freetax com The value of the cost-sharing improvement is $15,000. Www freetax com The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. Www freetax com The excludable portion is the greater amount, $1,550. Www freetax com You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. Www freetax com   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. Www freetax com Any payment excluded from income is not part of your basis. Www freetax com In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. Www freetax com   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. Www freetax com How to report the exclusion. Www freetax com   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. Www freetax com The statement must include the following information. Www freetax com The dollar amount of the cost funded by the government payment. Www freetax com The value of the improvement. Www freetax com The amount you are excluding. Www freetax com   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. Www freetax com Recapture. Www freetax com   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. Www freetax com In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. Www freetax com You must report the recapture on Form 4797. Www freetax com See Section 1255 property under Other Gains in chapter 9. Www freetax com Electing not to exclude payments. Www freetax com   You can elect not to exclude all or part of any payments you receive under these programs. Www freetax com If you make this election for all of these payments, none of the above restrictions and rules apply. Www freetax com You must make this election by the due date, including extensions, for filing your return. Www freetax com In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. Www freetax com 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). Www freetax com Write “Filed pursuant to section 301. Www freetax com 9100-2” at the top of the amended return and file it at the same address you filed the original return. Www freetax com Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. Www freetax com You must include these payments on Schedule F, lines 4a and 4b. Www freetax com The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. Www freetax com You must include these payments on Schedule F, lines 6a and 6b. Www freetax com The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. Www freetax com Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. Www freetax com As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. Www freetax com If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. Www freetax com If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. Www freetax com Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. Www freetax com Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. Www freetax com The gain or loss is capital or ordinary depending on how you used the quota. Www freetax com See Capital or ordinary gain or loss , later. Www freetax com Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. Www freetax com Adjusted basis. Www freetax com   The adjusted basis of your quota is determined differently depending on how you obtained the quota. Www freetax com The basis of a quota derived from an original grant by the federal government is zero. Www freetax com The basis of a purchased quota is the purchase price. Www freetax com The basis of a quota received as a gift is generally the same as the donor's basis. Www freetax com However, under certain circumstances, the basis is increased by the amount of gift taxes paid. Www freetax com If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. Www freetax com The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. Www freetax com Reduction of basis. Www freetax com   You are required to reduce the basis of your tobacco quota by the following amounts. Www freetax com Deductions you took for amortization, depletion, or depreciation. Www freetax com Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. Www freetax com The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). Www freetax com Amount treated as interest. Www freetax com   You must reduce your tobacco quota buyout program payment by the amount treated as interest. Www freetax com The interest is reportable as ordinary income. Www freetax com If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. Www freetax com   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. Www freetax com You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. Www freetax com For more information, see Notice 2005-57, 2005-32 I. Www freetax com R. Www freetax com B. Www freetax com 267, available at www. Www freetax com irs. Www freetax com gov/irb/2005-32_IRB/ar13. Www freetax com html. Www freetax com Installment method. Www freetax com   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. Www freetax com Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. Www freetax com See chapter 10 for more information. Www freetax com Capital or ordinary gain or loss. Www freetax com   Whether your gain or loss is ordinary or capital depends on how you used the quota. Www freetax com Quota used in the trade or business of farming. Www freetax com   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. Www freetax com See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. Www freetax com Quota held for investment. Www freetax com   If you held the quota for investment purposes, any gain or loss is capital gain or loss. Www freetax com The same result also applies if you held the quota for the production of income, though not connected with a trade or business. Www freetax com Gain treated as ordinary income. Www freetax com   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. Www freetax com Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. Www freetax com The cost of acquiring a quota. Www freetax com Amounts for amortization, depletion, or depreciation. Www freetax com Amounts to reflect a reduction in the quota pounds. Www freetax com   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. Www freetax com Self-employment income. Www freetax com   The tobacco quota buyout payments are not self-employment income. Www freetax com Income averaging for farmers. Www freetax com   The gain or loss resulting from the quota payments does not qualify for income averaging. Www freetax com A tobacco quota is considered an interest in land. Www freetax com Income averaging is not available for gain or loss arising from the sale or other disposition of land. Www freetax com Involuntary conversion. Www freetax com   The buyout of the tobacco quota is not an involuntary conversion. Www freetax com Form 1099-S. Www freetax com   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. Www freetax com The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. Www freetax com Like-kind exchange of quota. Www freetax com   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. Www freetax com See Notice 2005-57 for more information. Www freetax com Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. Www freetax com Taxation of payments to tobacco growers. Www freetax com   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. Www freetax com Individuals will generally report the payments as an Agricultural program payment on Schedule F. Www freetax com If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. Www freetax com Self-employment income. Www freetax com   Payments to growers generally represent self-employment income. Www freetax com If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. Www freetax com Income averaging for farmers. Www freetax com   Payments to growers who are individuals qualify for farm income averaging. Www freetax com Form 1099-G. Www freetax com   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. Www freetax com Other Payments You must include most other government program payments in income. Www freetax com Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. Www freetax com How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. Www freetax com Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. Www freetax com You must also capitalize the full cost of the improvement. Www freetax com Since you have included the payments in income, they do not reduce your basis. Www freetax com However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. Www freetax com National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. Www freetax com You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. Www freetax com If you produce a tobacco crop, report the payments as income from farming on your Schedule F. Www freetax com If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. Www freetax com Payment to More Than One Person The USDA reports program payments to the IRS. Www freetax com It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). Www freetax com If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. Www freetax com You should file Form 1099-G to report the identity of the actual recipient to the IRS. Www freetax com You should also give this information to the recipient. Www freetax com You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. Www freetax com Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. Www freetax com However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. Www freetax com See chapter 16 for information about ordering Form 1099-G. Www freetax com Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). Www freetax com If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. Www freetax com Form 1099-PATR. Www freetax com   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. Www freetax com Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. Www freetax com For information on the alternative minimum tax, see the Instructions for Form 6251. Www freetax com Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. Www freetax com They include the following items. Www freetax com Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). Www freetax com The stated dollar value of qualified written notices of allocation. Www freetax com The fair market value of other property. Www freetax com Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. Www freetax com You must reduce the cost or other basis of these items by the amount of such patronage dividends received. Www freetax com Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. Www freetax com If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. Www freetax com Qualified written notice of allocation. Www freetax com   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. Www freetax com A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. Www freetax com The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. Www freetax com You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. Www freetax com Signing and giving a written agreement to the cooperative. Www freetax com Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. Www freetax com The cooperative must notify you in writing of this bylaw and give you a copy. Www freetax com Endorsing and cashing a qualified check paid as part of the same patronage dividend. Www freetax com You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. Www freetax com Qualified check. Www freetax com   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. Www freetax com It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. Www freetax com It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. Www freetax com Loss on redemption. Www freetax com   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. Www freetax com The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. Www freetax com Nonqualified notice of allocation. Www freetax com   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. Www freetax com Your basis in the notice is zero. Www freetax com You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. Www freetax com Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. Www freetax com However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. Www freetax com   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. Www freetax com For example, if it represents interest income, report it on your return as interest. Www freetax com Buying or selling capital assets or depreciable property. Www freetax com   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. Www freetax com You must, however, reduce the basis of these assets by the dividends. Www freetax com This reduction is taken into account as of the first day of the tax year in which the dividends are received. Www freetax com If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. Www freetax com   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. Www freetax com Example. Www freetax com On July 1, 2012, Mr. Www freetax com Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. Www freetax com The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). Www freetax com Mr. Www freetax com Brown files his return on a calendar year basis. Www freetax com For 2012, he claimed a depreciation deduction of $311, using the 10. Www freetax com 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). Www freetax com On July 2, 2013, the cooperative association paid Mr. Www freetax com Brown a $300 cash patronage dividend for buying the machine. Www freetax com Mr. Www freetax com Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. Www freetax com Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. Www freetax com 38% × 1. Www freetax com 5 = 23. Www freetax com 07% Depreciation deduction for 2013 ($2,289 × 23. Www freetax com 07%) $528 Exceptions. Www freetax com   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. Www freetax com If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. Www freetax com If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). Www freetax com   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. Www freetax com Personal purchases. Www freetax com   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). Www freetax com This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. Www freetax com Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. Www freetax com A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. Www freetax com These allocations can be paid in money, other property, or qualified certificates. Www freetax com Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. Www freetax com Qualified certificates. Www freetax com   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. Www freetax com The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. Www freetax com If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. Www freetax com Nonqualified certificates. Www freetax com   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. Www freetax com Your basis in the certificate is zero. Www freetax com You must include in income any amount you receive from its sale, redemption, or other disposition. Www freetax com Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. Www freetax com Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. Www freetax com For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Www freetax com General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. Www freetax com Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. Www freetax com It is excluded from taxable income (see Exclusions , later). Www freetax com Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. Www freetax com If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. Www freetax com Election to defer income from discharge of indebtedness. Www freetax com   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. Www freetax com Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. Www freetax com See IRC section 108(i) and Publication 4681 for details. Www freetax com Form 1099-C. Www freetax com   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. Www freetax com The amount of debt canceled is shown in box 2. Www freetax com Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Www freetax com These exceptions apply before the exclusions discussed below. Www freetax com Price reduced after purchase. Www freetax com   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. Www freetax com Reduce your basis in the property by the amount of the reduction in the debt. Www freetax com The rules that apply to bankruptcy and insolvency are explained below under Exclusions . Www freetax com Deductible debt. Www freetax com   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. Www freetax com This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. Www freetax com Example. Www freetax com You get accounting services for your farm on credit. Www freetax com Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. Www freetax com Your accountant forgives part of the amount you owe for the accounting services. Www freetax com How you treat the canceled debt depends on your method of accounting. Www freetax com Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Www freetax com Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Www freetax com Exclusions Do not include canceled debt in income in the following situations. Www freetax com The cancellation takes place in a bankruptcy case under title 11 of the U. Www freetax com S. Www freetax com Code. Www freetax com The cancellation takes place when you are insolvent. Www freetax com The canceled debt is a qualified farm debt. Www freetax com The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). Www freetax com See Publication 334, Tax Guide for Small Business, chapter 5. Www freetax com The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. Www freetax com The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. Www freetax com If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. Www freetax com If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. Www freetax com See Form 982 , later, for information on how to claim an exclusion for a canceled debt. Www freetax com Debt. Www freetax com   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. Www freetax com Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. Www freetax com Bankruptcy. Www freetax com   A bankruptcy case is a case under title 11 of the U. Www freetax com S. Www freetax com Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. Www freetax com   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. Www freetax com Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . Www freetax com Insolvency. Www freetax com   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. Www freetax com   You can exclude canceled debt from gross income up to the amount by which you are insolvent. Www freetax com If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. Www freetax com Otherwise, you include the difference in gross income. Www freetax com Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . Www freetax com You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. Www freetax com Example. Www freetax com You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. Www freetax com Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. Www freetax com Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). Www freetax com You can exclude this amount from income. Www freetax com The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. Www freetax com If not, you must include it in income. Www freetax com Reduction of tax attributes. Www freetax com   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. Www freetax com Order of reduction. Www freetax com   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. Www freetax com Net operating loss (NOL). Www freetax com Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. Www freetax com Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. Www freetax com General business credit carryover. Www freetax com Reduce the credit carryover to or from the tax year of the debt cancellation. Www freetax com Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. Www freetax com Minimum tax credit. Www freetax com Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. Www freetax com Reduce the credit 331/3 cents for each dollar of excluded canceled debt. Www freetax com Capital loss. Www freetax com Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. Www freetax com Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. Www freetax com Basis. Www freetax com Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. Www freetax com Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. Www freetax com Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. Www freetax com Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. Www freetax com Inventory and accounts and notes receivable. Www freetax com Other property. Www freetax com Reduce the basis one dollar for each dollar of excluded canceled debt. Www freetax com However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. Www freetax com For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. Www freetax com 1017-1(b)(2). Www freetax com Also see Electing to reduce the basis of depreciable property