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1040ez download Index A Addition to property, Additions and Improvements Adjusted basis, Adjusted Basis Alternative Depreciation System (ADS) Recovery periods, Recovery Periods Under ADS Required use, Required use of ADS. 1040ez download Amended return, Filing an Amended Return Apartment Cooperative, Cooperative apartments. 1040ez download Rental, Which Property Class Applies Under GDS? Automobile (see Passenger automobile) B Basis Adjustments, Basis adjustment for depreciation allowed or allowable. 1040ez download , Adjustment of partner's basis in partnership. 1040ez download , Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 1040ez download , Basis adjustment due to casualty loss. 1040ez download Basis for depreciation, What Is the Basis for Depreciation? Casualty loss, Basis adjustment due to casualty loss. 1040ez download Change in use, Property changed from personal use. 1040ez download Cost, Cost as Basis Depreciable basis, Depreciable basis. 1040ez download Other than cost, Other Basis Recapture of clean-fuel vehicle deduction or credit, Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 1040ez download Term interest, Basis adjustments. 1040ez download Unadjusted, Figuring the Unadjusted Basis of Your Property Business use of property, partial, Partial business or investment use. 1040ez download Business-use limit, recapture of Section 179 deduction, When Must You Recapture the Deduction? Business-use requirement, listed property, What Is the Business-Use Requirement? C Car (see Passenger automobile) Carryover of section 179 deduction, Carryover of disallowed deduction. 1040ez download Casualty loss, effect of, Basis adjustment due to casualty loss. 1040ez download Changing accounting method, Changing Your Accounting Method Communication equipment (see Listed property) Commuting, Commuting use. 1040ez download Computer (see Listed property) Computer software, Computer software. 1040ez download , Off-the-shelf computer software. 1040ez download Containers, Containers. 1040ez download Conventions, Which Convention Applies? Cooperative apartment, Cooperative apartments. 1040ez download Copyright, Patents and copyrights. 1040ez download (see also Section 197 intangibles) Correcting depreciation deductions, How Do You Correct Depreciation Deductions? Cost basis, Cost as Basis D Declining balance Method, Declining Balance Method Rates, Declining balance rate. 1040ez download Deduction limit Automobile, Do the Passenger Automobile Limits Apply? Section 179, How Much Can You Deduct? Depreciation Deduction Employee, Can Employees Claim a Deduction? Listed property, Can Employees Claim a Deduction? Determinable useful life, Property Having a Determinable Useful Life Excepted property, Excepted Property Incorrect amount deducted, How Do You Correct Depreciation Deductions? Methods, Which Depreciation Method Applies? Property lasting more than one year, Property Lasting More Than One Year Property owned, Property You Own Property used in business, Property Used in Your Business or Income-Producing Activity Recapture, Revoking an election. 1040ez download , Recapture of Excess Depreciation Depreciation allowable, Basis adjustment for depreciation allowed or allowable. 1040ez download Depreciation allowed, Basis adjustment for depreciation allowed or allowable. 1040ez download Depreciation deduction Listed property, What Is the Business-Use Requirement? Determinable useful life, Property Having a Determinable Useful Life Disposition Before recovery period ends, Sale or Other Disposition Before the Recovery Period Ends General asset account property, Disposing of GAA Property Section 179 deduction, When Must You Recapture the Deduction? E Election ADS, Electing ADS. 1040ez download , Election of ADS. 1040ez download Declining balance (150% DB) method, 150% election. 1040ez download Exclusion from MACRS, Election To Exclude Property From MACRS General asset account, Electing To Use a GAA Not to claim special depreciation allowance, How Can You Elect Not To Claim an Allowance? Section 179 deduction, How Do You Elect the Deduction? Straight line method, Straight line election. 1040ez download Electric vehicle, Electric Vehicles Employee Depreciation deduction, Can Employees Claim a Deduction? How to claim depreciation, Employee. 1040ez download Employee deduction, listed property, Can Employees Claim a Deduction? Energy property, Energy property. 1040ez download Exchange of MACRS property, Property Acquired in a Like-kind Exchange or Involuntary Conversion F Farm Property, Depreciation Methods for Farm Property Figuring MACRS Using percentage tables, How Is the Depreciation Deduction Figured? Without using percentage tables, Figuring the Deduction Without Using the Tables Films, Films, video tapes, and recordings. 1040ez download Free tax services, Free help with your tax return. 1040ez download G General asset account Abusive transaction, Abusive transactions. 1040ez download Disposing of property, Disposing of GAA Property Grouping property in, Grouping Property Nonrecognition transaction, Nonrecognition transactions. 1040ez download General Depreciation System (GDS), recovery periods, Recovery Periods Under GDS Gift (see Basis, other than cost) H Help (see Tax help) I Idle property, Idle Property Improvements, How Do You Treat Repairs and Improvements?, Additions and Improvements Income forecast method, Income Forecast Method Incorrect depreciation deductions, How Do You Correct Depreciation Deductions? Indian reservation Defined, Indian reservation. 1040ez download Qualified infrastructure property, Qualified infrastructure property. 1040ez download Qualified property, Qualified property. 1040ez download Recovery periods for qualified property, Indian Reservation Property Related person, Related person. 1040ez download Inheritance (see Basis, other than cost) Intangible property Depreciation method, Intangible Property, Income Forecast Method Income forecast method, Income Forecast Method Straight line method, Intangible Property Inventory, Inventory. 1040ez download Investment use of property, partial, Partial business or investment use. 1040ez download Involuntary conversion of MACRS property, Property Acquired in a Like-kind Exchange or Involuntary Conversion L Land Not depreciable, Land Preparation costs, Land Leased property, Leased property. 1040ez download Leasehold improvement property, defined, Qualified leasehold improvement property. 1040ez download , Qualified leasehold improvement property. 1040ez download Life tenant, Life tenant. 1040ez download (see also Term interests) Limit on deduction Automobile, Do the Passenger Automobile Limits Apply? Section 179, How Much Can You Deduct? Listed property 5% owner, 5% owner. 1040ez download Computer, Computers and Related Peripheral Equipment Condition of employment, Condition of employment. 1040ez download Defined, What Is Listed Property? Employee deduction, Can Employees Claim a Deduction? Employer convenience, Employer's convenience. 1040ez download Improvements to, Improvements to listed property. 1040ez download Leased, Lessee's Inclusion Amount Passenger automobile, Passenger Automobiles Qualified business use, Qualified Business Use Recordkeeping, Adequate Records Related person, Related persons. 1040ez download Reporting on Form 4562, How Is Listed Property Information Reported? Lodging, Property used for lodging. 1040ez download M Maximum deduction Electric vehicles, Electric Vehicles Passenger automobiles, Maximum Depreciation Deduction Trucks, Trucks and Vans Vans, Trucks and Vans Mobile home (see Residential rental property) Modified ACRS (MACRS) Addition or improvement, Additions and Improvements Alternative Depreciation System (ADS), Which Depreciation System (GDS or ADS) Applies? Conventions, Which Convention Applies? Declining balance method, Declining Balance Method Depreciation methods, Which Depreciation Method Applies? Farm property, Depreciation Methods for Farm Property Figuring, short tax year, Property Placed in Service in a Short Tax Year General Depreciation System (GDS), Which Depreciation System (GDS or ADS) Applies? Percentage tables, Using the MACRS Percentage Tables Property classes, Which Property Class Applies Under GDS? Recovery periods, Which Recovery Period Applies? Short tax year, Figuring the Deduction for a Short Tax Year Straight line method, Straight Line Method N Nonresidential real property, Which Property Class Applies Under GDS? Nontaxable transfer of MACRS property, Property Acquired in a Nontaxable Transfer O Office in the home, Office in the home. 1040ez download , Office in the home. 1040ez download Ownership, incidents of, Incidents of ownership. 1040ez download P Partial business use, Partial business use. 1040ez download Passenger automobile Defined, Passenger Automobiles Electric vehicles, Electric Vehicles Limit on, Do the Passenger Automobile Limits Apply? Maximum depreciation deduction, Maximum Depreciation Deduction Trucks, Trucks and Vans Vans, Trucks and Vans Patent, Patents and copyrights. 1040ez download (see also Section 197 intangibles) Personal property, Personal property. 1040ez download Phonographic equipment (see Listed property) Photographic equipment (see Listed property) Placed in service Before 1987, Property You Placed in Service Before 1987 Date, What Is the Placed in Service Date? Rule, Placed in Service Property Classes, Which Property Class Applies Under GDS? Depreciable, What Property Can Be Depreciated? Idle, Idle Property Improvements, How Do You Treat Repairs and Improvements? Leased, Leased property. 1040ez download , Leased property. 1040ez download Listed, What Is Listed Property? Personal, Personal property. 1040ez download Real, Real property. 1040ez download Retired from service, Retired From Service Tangible personal, Tangible personal property. 1040ez download Term interest, Certain term interests in property. 1040ez download Q Qualified leasehold improvement property, defined, Qualified leasehold improvement property. 1040ez download , Qualified leasehold improvement property. 1040ez download Qualified property, special depreciation allowance, What Is Qualified Property? R Real property, Real property. 1040ez download Recapture Clean-fuel vehicle deduction or credit, Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 1040ez download General asset account, abusive transaction, Abusive transactions. 1040ez download Listed property, Recapture of Excess Depreciation MACRS depreciation, Revoking an election. 1040ez download Section 179 deduction, When Must You Recapture the Deduction? Special depreciation allowance, When Must You Recapture an Allowance? Recordkeeping Listed property, Adequate Records Section 179, How Do You Elect the Deduction? Recovery periods ADS, Recovery Periods Under ADS GDS, Recovery Periods Under GDS Related persons, Related persons. 1040ez download , Related persons. 1040ez download , Related persons. 1040ez download , Related persons. 1040ez download , Related person. 1040ez download , Related persons. 1040ez download Rent-to-own property, defined, Qualified rent-to-own property. 1040ez download Rental home (see Residential rental property) Rented property, improvements, Improvements to rented property. 1040ez download Repairs, How Do You Treat Repairs and Improvements? Residential rental property, Which Property Class Applies Under GDS? Retail motor fuels outlet, Retail motor fuels outlet. 1040ez download Revoking ADS election, Electing ADS. 1040ez download General asset account election, Revoking an election. 1040ez download Section 179 election, Revoking an election. 1040ez download S Sale of property, Sale or Other Disposition Before the Recovery Period Ends Section 179 deduction Business use required, Partial business use. 1040ez download Carryover, Carryover of disallowed deduction. 1040ez download Dispositions, When Must You Recapture the Deduction? Electing, How Do You Elect the Deduction? Limits Business (taxable) income, Business Income Limit Business-use, recapture, When Must You Recapture the Deduction? Dollar, Dollar Limits Enterprise zone business, Enterprise Zone Businesses Partial business use, Partial business use. 1040ez download Married filing separate returns, Married Individuals Partnership rules, Partnerships and Partners Property Eligible, Eligible Property Excepted, Excepted Property Purchase required, Property Acquired by Purchase Recapture, When Must You Recapture the Deduction? Recordkeeping, How Do You Elect the Deduction? S corporation rules, S Corporations Settlement fees, Settlement costs. 1040ez download Short tax year Figuring depreciation, Property Placed in Service in a Short Tax Year Figuring placed-in-service date, Using the Applicable Convention in a Short Tax Year Software, computer, Computer software. 1040ez download , Off-the-shelf computer software. 1040ez download Sound recording, Films, video tapes, and recordings. 1040ez download Special depreciation allowance Election not to claim, How Can You Elect Not To Claim an Allowance? Qualified property, What Is Qualified Property? Recapture, When Must You Recapture an Allowance? Stock, constructive ownership of, Constructive ownership of stock or partnership interest. 1040ez download Straight line method, Intangible Property, Straight Line Method Created intangibles, Certain created intangibles. 1040ez download T Tangible personal property, Tangible personal property. 1040ez download Term interest, Certain term interests in property. 1040ez download Trade-in of property, Trade-in of other property. 1040ez download Trucks, Trucks and Vans U Unadjusted basis, Figuring the Unadjusted Basis of Your Property Useful life, Property Having a Determinable Useful Life V Vans, Trucks and Vans Video tape, Films, video tapes, and recordings. 1040ez download Video-recording equipment (see Listed property) W When to use ADS, Which Depreciation System (GDS or ADS) Applies? Worksheet Leased listed property, Inclusion amount worksheet. 1040ez download MACRS, MACRS Worksheet Prev  Up     Home   More Online Publications
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1040ez download 2. 1040ez download   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. 1040ez download You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. 1040ez download This chapter discusses accounting methods. 1040ez download For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. 1040ez download Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. 1040ez download Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. 1040ez download Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 1040ez download A material item is one that affects the proper time for inclusion of income or allowance of a deduction. 1040ez download An item considered material for financial statement purposes is generally also considered material for income tax purposes. 1040ez download See Publication 538 for more information. 1040ez download You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. 1040ez download If you later want to change your accounting method, you generally must get IRS approval. 1040ez download How to obtain IRS approval is discussed later under Changes in Methods of Accounting . 1040ez download Types of accounting methods. 1040ez download   Generally, you can use any of the following accounting methods. 1040ez download Each method is discussed in detail below. 1040ez download Cash method. 1040ez download Accrual method. 1040ez download Special methods of accounting for certain items of income and expenses. 1040ez download Combination (hybrid) method using elements of two or more of the above. 1040ez download Business and other items. 1040ez download   You can account for business and personal items using different accounting methods. 1040ez download For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. 1040ez download Two or more businesses. 1040ez download   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 1040ez download Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. 1040ez download Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. 1040ez download However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. 1040ez download See Accrual Method Required , later. 1040ez download Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. 1040ez download Items of income include money received as well as property or services received. 1040ez download If you receive property or services, you must include the fair market value (FMV) of the property or services in income. 1040ez download See chapter 3 for information on how to report farm income on your income tax return. 1040ez download Constructive receipt. 1040ez download   Income is constructively received when an amount is credited to your account or made available to you without restriction. 1040ez download You do not need to have possession of the income for it to be treated as income for the tax year. 1040ez download If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. 1040ez download Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. 1040ez download Direct payments and counter-cyclical payments. 1040ez download   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. 1040ez download Delaying receipt of income. 1040ez download   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. 1040ez download You must report the income in the year the money or property is received or made available to you without restriction. 1040ez download Example. 1040ez download Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. 1040ez download She was told in December that her payment was available. 1040ez download She requested not to be paid until January 2014. 1040ez download However, she must still include this payment in her 2013 income because it was made available to her in 2013. 1040ez download Debts paid by another person or canceled. 1040ez download   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. 1040ez download If you receive income in this way, you constructively receive the income when the debt is canceled or paid. 1040ez download See Cancellation of Debt in chapter 3. 1040ez download Deferred payment contract. 1040ez download   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. 1040ez download However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. 1040ez download Example. 1040ez download You are a farmer who uses the cash method and a calendar tax year. 1040ez download You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. 1040ez download You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. 1040ez download However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. 1040ez download Repayment of income. 1040ez download   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. 1040ez download If the repayment is more than $3,000, a special rule applies. 1040ez download For details, see Repayments in chapter 11 of Publication 535, Business Expenses. 1040ez download Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. 1040ez download This includes business expenses for which you contest liability. 1040ez download However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. 1040ez download See chapter 4 for information on how to deduct farm business expenses on your income tax return. 1040ez download Prepayment. 1040ez download   Generally, you cannot deduct expenses paid in advance. 1040ez download This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040ez download Example. 1040ez download On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. 1040ez download In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. 1040ez download In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. 1040ez download An exception applies if the expense qualifies for the 12-month rule. 1040ez download See Publication 538 for more information and examples. 1040ez download See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. 1040ez download Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. 1040ez download The purpose of an accrual method of accounting is to correctly match income and expenses. 1040ez download Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. 1040ez download See Accrual Method Required and Farm Inventory , later. 1040ez download Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. 1040ez download Under this rule, include an amount in income on the earliest of the following dates. 1040ez download When you receive payment. 1040ez download When the income amount is due to you. 1040ez download When you earn the income. 1040ez download When title passes. 1040ez download If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. 1040ez download Inventory. 1040ez download   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. 1040ez download An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 1040ez download See Publication 538 for more information. 1040ez download Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. 1040ez download Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. 1040ez download The all-events test has been met. 1040ez download This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. 1040ez download Economic performance has occurred. 1040ez download Economic performance. 1040ez download   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 1040ez download If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. 1040ez download If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 1040ez download Example. 1040ez download Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. 1040ez download She entered into a contract with ABC Farm Consulting in 2012. 1040ez download The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. 1040ez download It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. 1040ez download Jane paid ABC Farm Consulting $2,000 in December 2012. 1040ez download Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. 1040ez download Economic performance for Jane's liability in the contract occurs as the services are provided. 1040ez download Jane incurs the $2,000 cost in 2013. 1040ez download An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. 1040ez download For more information, see Economic Performance in Publication 538. 1040ez download Special rule for related persons. 1040ez download   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. 1040ez download Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 1040ez download For more information, see Internal Revenue Code section 267. 1040ez download Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. 1040ez download A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. 1040ez download A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. 1040ez download A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. 1040ez download A tax shelter. 1040ez download Note. 1040ez download Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). 1040ez download Family corporation. 1040ez download   A family corporation is generally a corporation that meets one of the following ownership requirements. 1040ez download Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. 1040ez download Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. 1040ez download Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. 1040ez download For more information on family corporations, see Internal Revenue Code section 447. 1040ez download Tax shelter. 1040ez download   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. 1040ez download Its principal purpose is the avoidance or evasion of federal income tax. 1040ez download It is a farming syndicate. 1040ez download A farming syndicate is an entity that meets either of the following tests. 1040ez download Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. 1040ez download More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. 1040ez download   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. 1040ez download   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. 1040ez download Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. 1040ez download This record should show the actual count or measurement of the inventory. 1040ez download It should also show all factors that enter into its valuation, including quality and weight, if applicable. 1040ez download Hatchery business. 1040ez download   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. 1040ez download Products held for sale. 1040ez download   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. 1040ez download , must be included in inventory. 1040ez download Supplies. 1040ez download   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. 1040ez download Deduct the cost of supplies in the year used or consumed in operations. 1040ez download Do not include incidental supplies in inventory as these are deductible in the year of purchase. 1040ez download Livestock. 1040ez download   Livestock held primarily for sale must be included in inventory. 1040ez download Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. 1040ez download See also Unit-livestock-price method , later. 1040ez download If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. 1040ez download Growing crops. 1040ez download   Generally, growing crops are not required to be included in inventory. 1040ez download However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. 1040ez download See Uniform capitalization rules below. 1040ez download Also see Uniform Capitalization Rules in  chapter 6. 1040ez download Items to include in inventory. 1040ez download   Your inventory should include all items held for sale, or for use as feed, seed, etc. 1040ez download , whether raised or purchased, that are unsold at the end of the year. 1040ez download Uniform capitalization rules. 1040ez download   The following applies if you are required to use an accrual method of accounting. 1040ez download The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. 1040ez download The costs of animals are subject to the uniform capitalization rules. 1040ez download Inventory valuation methods. 1040ez download   The following methods, described below, are those generally available for valuing inventory. 1040ez download The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 1040ez download Cost. 1040ez download Lower of cost or market. 1040ez download Farm-price method. 1040ez download Unit-livestock-price method. 1040ez download Cost and lower of cost or market methods. 1040ez download   See Publication 538 for information on these valuation methods. 1040ez download If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. 1040ez download However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. 1040ez download Farm-price method. 1040ez download   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. 1040ez download Market price is the current price at the nearest market in the quantities you usually sell. 1040ez download Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. 1040ez download If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. 1040ez download Unit-livestock-price method. 1040ez download   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. 1040ez download You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. 1040ez download The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. 1040ez download Unit prices and classifications are subject to approval by the IRS on examination of your return. 1040ez download You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. 1040ez download IRS approval is not required for these adjustments. 1040ez download Any other changes in unit prices or classifications do require IRS approval. 1040ez download   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. 1040ez download This method accounts only for the increase in cost of raising an animal to maturity. 1040ez download It does not provide for any decrease in the animal's market value after it reaches maturity. 1040ez download Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. 1040ez download   Do not include sold or lost animals in the year-end inventory. 1040ez download If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. 1040ez download The animals on hand at the end of the year are considered those most recently acquired. 1040ez download   You must include in inventory all livestock purchased primarily for sale. 1040ez download You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. 1040ez download However, you must be consistent from year to year, regardless of the method you have chosen. 1040ez download You cannot change your method without obtaining approval from the IRS. 1040ez download   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. 1040ez download If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. 1040ez download However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. 1040ez download This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. 1040ez download It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. 1040ez download Uniform capitalization rules. 1040ez download   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. 1040ez download This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. 1040ez download Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. 1040ez download Example 1. 1040ez download You are a farmer who uses an accrual method of accounting. 1040ez download You keep your books on the calendar year basis. 1040ez download You sell grain in December 2013 but you are not paid until January 2014. 1040ez download Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. 1040ez download Example 2. 1040ez download Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. 1040ez download Under this method, you include the sales proceeds in income for 2014, the year you receive payment. 1040ez download Deduct the costs of producing the grain in the year you pay for them. 1040ez download Special Methods of Accounting There are special methods of accounting for certain items of income and expense. 1040ez download Crop method. 1040ez download   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. 1040ez download You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. 1040ez download Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. 1040ez download    See chapter 4 for details on deducting the costs of operating a farm. 1040ez download Also see Regulations section 1. 1040ez download 162-12. 1040ez download Other special methods. 1040ez download   Other special methods of accounting apply to the following items. 1040ez download Amortization, see chapter 7. 1040ez download Casualties, see chapter 11. 1040ez download Condemnations, see chapter 11. 1040ez download Depletion, see chapter 7. 1040ez download Depreciation, see chapter 7. 1040ez download Farm business expenses, see chapter 4. 1040ez download Farm income, see chapter 3. 1040ez download Installment sales, see chapter 10. 1040ez download Soil and water conservation expenses, see chapter 5. 1040ez download Thefts, see chapter 11. 1040ez download Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 1040ez download However, the following restrictions apply. 1040ez download If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. 1040ez download If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 1040ez download Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). 1040ez download Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. 1040ez download You may also have to pay a fee. 1040ez download To obtain approval, you must generally file Form 3115. 1040ez download There are instances when you can obtain automatic consent to change certain methods of accounting. 1040ez download See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. 1040ez download For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. 1040ez download Also see Publication 538. 1040ez download 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