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Download 1040x form 4. Download 1040x form   Farm Business Expenses Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible ExpensesReasonable allocation. Download 1040x form Prepaid Farm Supplies Prepaid Livestock Feed Labor Hired Repairs and Maintenance Interest Breeding Fees Fertilizer and Lime Taxes Insurance Rent and Leasing Depreciation Business Use of Your Home Truck and Car Expenses Travel Expenses Marketing Quota Penalties Tenant House Expenses Items Purchased for Resale Other Expenses Domestic Production Activities Deduction Capital ExpensesForestation and reforestation costs. Download 1040x form Nondeductible ExpensesPersonal, Living, and Family Expenses Other Nondeductible Items Losses From Operating a FarmAt-Risk Limits Passive Activity Limits Excess Farm Loss Limit Not-for-Profit FarmingUsing the presumption later. Download 1040x form Category 1. Download 1040x form Category 2. Download 1040x form Category 3. Download 1040x form What's New for 2013 Standard mileage rate. Download 1040x form  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Download 1040x form 5 cents. Download 1040x form See Truck and Car Expenses , later. Download 1040x form Simplified method for business use of home deduction. Download 1040x form  The IRS now provides a simplified method to determine your expenses for business use of your home. Download 1040x form For more information, see Schedule C (Form 1040), Part II, and its instructions. Download 1040x form Introduction You can generally deduct the current costs of operating your farm. Download 1040x form Current costs are expenses you do not have to capitalize or include in inventory costs. Download 1040x form However, your deduction for the cost of livestock feed and certain other supplies may be limited. Download 1040x form If you have an operating loss, you may not be able to deduct all of it. Download 1040x form Topics - This chapter discusses: Deductible expenses Domestic production activities deduction Capital expenses Nondeductible expenses Losses from operating a farm Not-for-profit farming Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch F (Form 1040) Profit or Loss From Farming 1045 Application for Tentative Refund 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8903 Domestic Production Activities Deduction See chapter 16 for information about getting publications and forms. Download 1040x form Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Download 1040x form “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Download 1040x form Schedule F, Part II, lists some common farm expenses that are typically deductible. Download 1040x form This chapter discusses many of these expenses, as well as others not listed on Schedule F. Download 1040x form Reimbursed expenses. Download 1040x form   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Download 1040x form If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Download 1040x form See Refund or reimbursement under Income From Other Sources in chapter 3. Download 1040x form Personal and business expenses. Download 1040x form   Some expenses you pay during the tax year may be part personal and part business. Download 1040x form These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Download 1040x form   You must allocate these mixed expenses between their business and personal parts. Download 1040x form Generally, the personal part of these expenses is not deductible. Download 1040x form The business portion of the expenses is deductible on Schedule F. Download 1040x form Example. Download 1040x form You paid $1,500 for electricity during the tax year. Download 1040x form You used 1/3 of the electricity for personal purposes and 2/3 for farming. Download 1040x form Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Download 1040x form Reasonable allocation. Download 1040x form   It is not always easy to determine the business and nonbusiness parts of an expense. Download 1040x form There is no method of allocation that applies to all mixed expenses. Download 1040x form Any reasonable allocation is acceptable. Download 1040x form What is reasonable depends on the circumstances in each case. Download 1040x form Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Download 1040x form Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought. Download 1040x form Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Download 1040x form However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry. Download 1040x form Poultry bought for resale and not resold during the year. Download 1040x form Deduction limit. Download 1040x form   If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies). Download 1040x form This limit does not apply if you meet one of the exceptions described later. Download 1040x form See Chapter 2 for a discussion of the cash method of accounting. Download 1040x form   If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. Download 1040x form The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. Download 1040x form The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Download 1040x form Example. Download 1040x form You may not qualify for the exception described next. Download 1040x form During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Download 1040x form Your total prepaid farm supplies expense for 2013 is $5,500. Download 1040x form Your other deductible farm expenses totaled $10,000 for 2013. Download 1040x form Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Download 1040x form The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when you use or consume the supplies. Download 1040x form Exceptions. Download 1040x form   This limit on the deduction for prepaid farm supplies expense does not apply if you are a farm-related taxpayer and either of the following apply. Download 1040x form Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances. Download 1040x form Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years. Download 1040x form   You are a farm-related taxpayer if any of the following tests apply. Download 1040x form Your main home is on a farm. Download 1040x form Your principal business is farming. Download 1040x form A member of your family meets (1) or (2). Download 1040x form For this purpose, your family includes your brothers and sisters, half-brothers and half-sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children. Download 1040x form    Whether or not the deduction limit for prepaid farm supplies applies, your expenses for prepaid livestock feed may be subject to the rules for advance payment of livestock feed, discussed next. Download 1040x form Prepaid Livestock Feed If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests. Download 1040x form The payment is for the purchase of feed rather than a deposit. Download 1040x form The prepayment has a business purpose and is not merely for tax avoidance. Download 1040x form Deducting the prepayment does not result in a material distortion of your income. Download 1040x form If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Download 1040x form If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Download 1040x form This rule does not apply to the purchase of commodity futures contracts. Download 1040x form Payment for the purchase of feed. Download 1040x form   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Download 1040x form It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase. Download 1040x form   The following are some factors that show a payment is a deposit rather than for the purchase of feed. Download 1040x form The absence of specific quantity terms. Download 1040x form The right to a refund of any unapplied payment credit at the end of the contract. Download 1040x form The seller's treatment of the payment as a deposit. Download 1040x form The right to substitute other goods or products for those specified in the contract. Download 1040x form   A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. Download 1040x form Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Download 1040x form Business purpose. Download 1040x form   The prepayment has a business purpose only if you have a reasonable expectation of receiving some business benefit from prepaying the cost of livestock feed. Download 1040x form The following are some examples of business benefits. Download 1040x form Fixing maximum prices and securing an assured feed supply. Download 1040x form Securing preferential treatment in anticipation of a feed shortage. Download 1040x form   Other factors considered in determining the existence of a business purpose are whether the prepayment was a condition imposed by the seller and whether that condition was meaningful. Download 1040x form No material distortion of income. Download 1040x form   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Download 1040x form Your customary business practice in conducting your livestock operations. Download 1040x form The expense in relation to past purchases. Download 1040x form The time of year you made the purchase. Download 1040x form The expense in relation to your income for the year. Download 1040x form Labor Hired You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. Download 1040x form You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Download 1040x form The cost of boarding farm labor is a deductible labor cost. Download 1040x form Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Download 1040x form If you must withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. Download 1040x form See chapter 13 for more information on employment taxes. Download 1040x form Also, deduct the employer's share of the social security and Medicare taxes you must pay on your employees' wages as a farm business expense on Schedule F, line 29. Download 1040x form See Taxes , later. Download 1040x form Property for services. Download 1040x form   If you transfer property to an employee in payment for services, you can deduct as wages paid the fair market value of the property on the date of transfer. Download 1040x form If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the property. Download 1040x form   Treat the wages deducted as an amount received for the property. Download 1040x form You may have a gain or loss to report if the property's adjusted basis on the date of transfer is different from its fair market value. Download 1040x form Any gain or loss has the same character the exchanged property had in your hands. Download 1040x form For more information, see chapter 8. Download 1040x form Child as an employee. Download 1040x form   You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. Download 1040x form Include these wages in the child's income. Download 1040x form The child may have to file an income tax return. Download 1040x form These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Download 1040x form For more information, see Family Employees in chapter 13. Download 1040x form    A Form W-2, Wage and Tax Statement, should be issued to the child employee. Download 1040x form   The fact that your child spends the wages to buy clothes or other necessities you normally furnish does not prevent you from deducting your child's wages as a farm expense. Download 1040x form The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Download 1040x form Spouse as an employee. Download 1040x form   You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. Download 1040x form Wages you pay to your spouse are subject to social security and Medicare taxes. Download 1040x form For more information, see Family Employees in chapter 13. Download 1040x form Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Download 1040x form However, those wages may be subject to the employment taxes discussed in chapter 13. Download 1040x form Household workers. Download 1040x form   Do not deduct amounts paid to persons engaged in household work, except to the extent their services are used in boarding or otherwise caring for farm laborers. Download 1040x form Construction labor. Download 1040x form   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Download 1040x form These wages are part of the cost of the building or other improvement. Download 1040x form You must capitalize them. Download 1040x form Maintaining your home. Download 1040x form   If your farm employee spends time maintaining or repairing your home, the wages and employment taxes you pay for that work are nondeductible personal expenses. Download 1040x form For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Download 1040x form The employee devotes the remaining time to work on your farm. Download 1040x form You cannot deduct 5% of the wages and employment taxes you pay for that employee. Download 1040x form Employment Credits Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit for qualified tax-exempt organizations hiring qualified veterans (Form 5884-C). Download 1040x form Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Download 1040x form Common items of repair and maintenance are repainting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery. Download 1040x form However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses. Download 1040x form For example, if you repair the barn roof, the cost is deductible. Download 1040x form But if you replace the roof, it is a capital expense. Download 1040x form For more information, see Capital Expenses , later. Download 1040x form Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Download 1040x form Cash method. Download 1040x form   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Download 1040x form You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Download 1040x form You can, however, deduct the interest when you start making payments on the new loan. Download 1040x form For more information, see Cash Method in chapter 2. Download 1040x form Prepaid interest. Download 1040x form   Under the cash method, you generally cannot deduct any interest paid before the year it is due. Download 1040x form Interest paid in advance may be deducted only in the tax year in which it is due. Download 1040x form Accrual method. Download 1040x form   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Download 1040x form However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Download 1040x form For more information, see Accrual Method in chapter 2. Download 1040x form Allocation of interest. Download 1040x form   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Download 1040x form Allocate the interest to the following categories. Download 1040x form Trade or business interest. Download 1040x form Passive activity interest. Download 1040x form Investment interest. Download 1040x form Portfolio interest. Download 1040x form Personal interest. Download 1040x form   You generally allocate interest on a loan the same way you allocate the loan proceeds. Download 1040x form You allocate loan proceeds by tracing disbursements to specific uses. Download 1040x form The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Download 1040x form Secured loan. Download 1040x form   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Download 1040x form Example. Download 1040x form You secure a loan with property used in your farming business. Download 1040x form You use the loan proceeds to buy a car for personal use. Download 1040x form You must allocate interest expense on the loan to personal use (purchase of the car) even though the loan is secured by farm business property. Download 1040x form If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Download 1040x form The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Download 1040x form However, you can choose to treat the loan as not secured by your home. Download 1040x form For more information, see Publication 936. Download 1040x form Allocation period. Download 1040x form   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Download 1040x form The date the loan is repaid. Download 1040x form The date the loan is reallocated to another use. Download 1040x form More information. Download 1040x form   For more information on interest, see chapter 4 in Publication 535. Download 1040x form Breeding Fees You can deduct breeding fees as a farm business expense. Download 1040x form However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc. Download 1040x form For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Download 1040x form Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. Download 1040x form You can also deduct the cost of applying these materials in the year you pay or incur it. Download 1040x form However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Download 1040x form If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last. Download 1040x form However, you can choose to deduct these expenses in the year paid or incurred. Download 1040x form If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Download 1040x form If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. Download 1040x form Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Download 1040x form It does not include land you have never used previously for producing crops or sustaining livestock. Download 1040x form You cannot deduct initial land preparation costs. Download 1040x form (See Capital Expenses , later. Download 1040x form ) Include government payments you receive for lime or fertilizer in income. Download 1040x form See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Download 1040x form Taxes You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings. Download 1040x form You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay. Download 1040x form For information on employment taxes, see chapter 13. Download 1040x form Allocation of taxes. Download 1040x form   The taxes on the part of your farm you use as your home (including the furnishings and surrounding land not used for farming) are nonbusiness taxes. Download 1040x form You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Download 1040x form To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Download 1040x form The allocation can be done from the assessed valuations. Download 1040x form If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Download 1040x form State and local general sales taxes. Download 1040x form   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Download 1040x form Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate. Download 1040x form Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Download 1040x form State and federal income taxes. Download 1040x form   Individuals cannot deduct state and federal income taxes as farm business expenses. Download 1040x form Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Download 1040x form However, you cannot deduct federal income tax. Download 1040x form Highway use tax. Download 1040x form   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Download 1040x form For information on the tax itself, including information on vehicles subject to the tax, see the Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return. Download 1040x form Self-employment tax deduction. Download 1040x form   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Download 1040x form For more information, see chapter 12. Download 1040x form Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Download 1040x form This includes premiums you pay for the following types of insurance. Download 1040x form Fire, storm, crop, theft, liability, and other insurance on farm business assets. Download 1040x form Health and accident insurance on your farm employees. Download 1040x form Workers' compensation insurance set by state law that covers any claims for job-related bodily injuries or diseases suffered by employees on your farm, regardless of fault. Download 1040x form Business interruption insurance. Download 1040x form State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Download 1040x form Insurance to secure a loan. Download 1040x form   If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense. Download 1040x form In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Download 1040x form Advance premiums. Download 1040x form   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Download 1040x form Example. Download 1040x form On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Download 1040x form The policy will cover a period of 3 years beginning on July 1, 2013. Download 1040x form Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Download 1040x form Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Download 1040x form In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Download 1040x form Deduct the remaining $500 in 2016. Download 1040x form Had the policy been effective on January 1, 2013, the deductible expense would have been $1,000 for each of the years 2013, 2014, and 2015, based on one-third of the premium used each year. Download 1040x form Business interruption insurance. Download 1040x form   Use and occupancy and business interruption insurance premiums are deductible as a business expense. Download 1040x form This insurance pays for lost profits if your business is shut down due to a fire or other cause. Download 1040x form Report any proceeds in full on Schedule F, Part I. Download 1040x form Self-employed health insurance deduction. Download 1040x form   If you are self-employed, you can deduct as an adjustment to income on Form 1040 your payments for medical, dental, and qualified long-term care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040. Download 1040x form Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2013, even if the child was not your dependent. Download 1040x form Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Download 1040x form   If you or your spouse is also an employee of another person, you cannot take the deduction for any month in which you are eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. Download 1040x form   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Download 1040x form Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Download 1040x form   For more information, see Deductible Premiums in Publication 535, chapter 6. Download 1040x form Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Download 1040x form However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Download 1040x form Advance payments. Download 1040x form   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Download 1040x form Farm home. Download 1040x form   If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live. Download 1040x form Lease or Purchase If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease. Download 1040x form If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property. Download 1040x form Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Download 1040x form Conditional sales contract. Download 1040x form   Whether an agreement is a conditional sales contract depends on the intent of the parties. Download 1040x form Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Download 1040x form No single test, or special combination of tests, always applies. Download 1040x form However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Download 1040x form The agreement applies part of each payment toward an equity interest you will receive. Download 1040x form You get title to the property after you make a stated amount of required payments. Download 1040x form The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. Download 1040x form You pay much more than the current fair rental value of the property. Download 1040x form You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Download 1040x form Determine this value when you make the agreement. Download 1040x form You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Download 1040x form The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Download 1040x form Example. Download 1040x form You lease new farm equipment from a dealer who both sells and leases. Download 1040x form The agreement includes an option to purchase the equipment for a specified price. Download 1040x form The lease payments and the specified option price equal the sales price of the equipment plus interest. Download 1040x form Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Download 1040x form For federal income tax purposes, the agreement is a conditional sales contract. Download 1040x form You cannot deduct any of the lease payments as rent. Download 1040x form You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Download 1040x form Motor vehicle leases. Download 1040x form   Special rules apply to lease agreements that have a terminal rental adjustment clause. Download 1040x form In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease. Download 1040x form If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Download 1040x form For more information, see Internal Revenue Code (IRC) section 7701(h). Download 1040x form Leveraged leases. Download 1040x form   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Download 1040x form For more information, see Publication 535, chapter 3, and Revenue Procedure 2001-28, which begins on page 1156 of Internal Revenue Bulletin 2001-19 at www. Download 1040x form irs. Download 1040x form gov/pub/irs-irbs/irb01-19. Download 1040x form pdf. Download 1040x form Depreciation If property you acquire to use in your farm business is expected to last more than one year, you generally cannot deduct the entire cost in the year you acquire it. Download 1040x form You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Download 1040x form However, you can choose to deduct part or all of the cost of certain qualifying property, up to a limit, as a section 179 deduction in the year you place it in service. Download 1040x form Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Download 1040x form Business Use of Your Home You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly: As the principal place of business for any trade or business in which you engage, As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home. Download 1040x form Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements. Download 1040x form You use it exclusively and regularly for the administrative or management activities of your trade or business. Download 1040x form You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Download 1040x form If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Download 1040x form The IRS now provides a simplified method to determine your expenses for business use of your home. Download 1040x form For more information, see Schedule C (Form 1040), Part II, and its instructions. Download 1040x form Deduction limit. Download 1040x form   If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses. Download 1040x form But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited. Download 1040x form   Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses. Download 1040x form The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses). Download 1040x form Farm expenses other than expenses that relate to the use of your home. Download 1040x form If you are self-employed, do not include your deduction for half of your self-employment tax. Download 1040x form   Deductions over the current year's limit can be carried over to your next tax year. Download 1040x form They are subject to the deduction limit for the next tax year. Download 1040x form More information. Download 1040x form   See Publication 587 for more information on deducting expenses for the business use of your home. Download 1040x form Telephone expense. Download 1040x form   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Download 1040x form However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses. Download 1040x form Cell phone charges for calls relating to your farm business are deductible. Download 1040x form If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls. Download 1040x form Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Download 1040x form Only expenses for business use are deductible. Download 1040x form These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Download 1040x form Standard mileage rate. Download 1040x form   Instead of using actual costs, under certain conditions you can use the standard mileage rate. Download 1040x form The standard mileage rate for each mile of business use is 56. Download 1040x form 5 cents in 2013. Download 1040x form You can use the standard mileage rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease. Download 1040x form   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Download 1040x form You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business. Download 1040x form Example. Download 1040x form Maureen owns a car and four pickup trucks that are used in her farm business. Download 1040x form Her farm employees use the trucks and she uses the car for business. Download 1040x form Maureen cannot use the standard mileage rate for the car or the trucks. Download 1040x form This is because all five vehicles are used in Maureen's farm business at the same time. Download 1040x form She must use actual expenses for all vehicles. Download 1040x form Business use percentage. Download 1040x form   You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. Download 1040x form You choose this method of substantiating business use the first year the vehicle is placed in service. Download 1040x form Once you make this choice, you may not change to another method later. Download 1040x form The following are uses directly connected with the business of farming. Download 1040x form Cultivating land. Download 1040x form Raising or harvesting any agricultural or horticultural commodity. Download 1040x form Raising, shearing, feeding, caring for, training, and managing animals. Download 1040x form Driving to the feed or supply store. Download 1040x form   If you keep records and they show that your business use was more than 75%, you may be able to claim more. Download 1040x form See Recordkeeping requirements under Travel Expenses , below. Download 1040x form More information. Download 1040x form   For more information on deductible truck and car expenses, see Publication 463, chapter 4. Download 1040x form If you pay your employees for the use of their truck or car in your farm business, see Reimbursements to employees under Travel Expenses next. Download 1040x form Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Download 1040x form You cannot deduct lavish or extravagant expenses. Download 1040x form Usually, the location of your farm business is considered your home for tax purposes. Download 1040x form You are traveling away from home if: Your duties require you to be absent from your farm substantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of your work while away from home. Download 1040x form If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses. Download 1040x form The following are some types of deductible travel expenses. Download 1040x form Air, rail, bus, and car transportation; Meals and lodging; Dry cleaning and laundry; Telephone and fax; Transportation between your hotel and your temporary work or business meeting location; and Tips for any of the above expenses. Download 1040x form Meals. Download 1040x form   You ordinarily can deduct only 50% of your business-related meals expenses. Download 1040x form You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties. Download 1040x form You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment. Download 1040x form For information on entertainment expenses, see Publication 463, chapter 2. Download 1040x form   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Download 1040x form You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Download 1040x form    Recordkeeping requirements. Download 1040x form You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Download 1040x form Estimates or approximations do not qualify as proof of an expense. Download 1040x form   You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense. Download 1040x form Generally, it is best to record the expense and get documentation of it at the time you pay it. Download 1040x form   If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items. Download 1040x form However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel. Download 1040x form More information. Download 1040x form   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Download 1040x form Reimbursements to employees. Download 1040x form   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Download 1040x form Employees may be reimbursed under an accountable or nonaccountable plan. Download 1040x form Under an accountable plan, the employee must provide evidence of expenses. Download 1040x form Under a nonaccountable plan, no evidence of expenses is required. Download 1040x form If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Download 1040x form If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Download 1040x form For more information, see Publication 535, chapter 11. Download 1040x form Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Download 1040x form However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received. Download 1040x form Do not take a separate deduction for the penalty. Download 1040x form Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Download 1040x form These costs include repairs, utilities, insurance, and depreciation. Download 1040x form The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Download 1040x form Items Purchased for Resale If you use the cash method of accounting, you ordinarily deduct the cost of livestock and other items purchased for resale only in the year of sale. Download 1040x form You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Download 1040x form However, see Chickens, seeds, and young plants , below. Download 1040x form Example. Download 1040x form You use the cash method of accounting. Download 1040x form In 2013, you buy 50 steers you will sell in 2014. Download 1040x form You cannot deduct the cost of the steers on your 2013 tax return. Download 1040x form You deduct their cost on your 2014 Schedule F, Part I. Download 1040x form Chickens, seeds, and young plants. Download 1040x form   If you are a cash method farmer, you can deduct the cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the year paid if you do it consistently and it does not distort income. Download 1040x form You also can deduct the cost of seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do this consistently and you do not figure your income on the crop method. Download 1040x form However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Download 1040x form   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Download 1040x form You cannot also deduct the cost from the selling price. Download 1040x form   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Download 1040x form Deduct the cost of these seeds and plants through depletion allowances. Download 1040x form For more information, see Depletion in chapter 7. Download 1040x form   The cost of chickens and plants used as food for your family is never deductible. Download 1040x form   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Download 1040x form These rules are discussed in chapter 6. Download 1040x form Example. Download 1040x form You use the cash method of accounting. Download 1040x form In 2013, you buy 500 baby chicks to raise for resale in 2014. Download 1040x form You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Download 1040x form Unless you previously adopted the method of deducting these costs in the year you sell the chickens or the harvested crops, you can deduct the cost of both the baby chicks and the seed wheat in 2013. Download 1040x form Election to use crop method. Download 1040x form   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Download 1040x form You must get IRS approval to use the crop method. Download 1040x form If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Download 1040x form For more information, see Crop method under Special Methods of Accounting in chapter 2. Download 1040x form Choosing a method. Download 1040x form   You can adopt either the crop method or the cash method for deducting the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds and young plants. Download 1040x form   Although you must use the same method for egg-laying hens, pullets, and chicks, you can use a different method for seeds and young plants. Download 1040x form Once you use a particular method for any of these items, use it for those items until you get IRS approval to change your method. Download 1040x form For more information, see Change in Accounting Method in chapter 2. Download 1040x form Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Download 1040x form These expenses must be for business purposes and  (1) paid, if you use the cash method of accounting, or (2) incurred, if you use an accrual method of accounting. Download 1040x form Accounting fees. Download 1040x form Advertising. Download 1040x form Business travel and meals. Download 1040x form Commissions. Download 1040x form Consultant fees. Download 1040x form Crop scouting expenses. Download 1040x form Dues to cooperatives. Download 1040x form Educational expenses (to maintain and improve farming skills). Download 1040x form Farm-related attorney fees. Download 1040x form Farm magazines. Download 1040x form Ginning. Download 1040x form Insect sprays and dusts. Download 1040x form Litter and bedding. Download 1040x form Livestock fees. Download 1040x form Marketing fees. Download 1040x form Milk assessment. Download 1040x form Recordkeeping expenses. Download 1040x form Service charges. Download 1040x form Small tools expected to last one year or less. Download 1040x form Stamps and stationery. Download 1040x form Subscriptions to professional, technical, and trade journals that deal with farming. Download 1040x form Tying material and containers. Download 1040x form Loan expenses. Download 1040x form   You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan. Download 1040x form Tax preparation fees. Download 1040x form   You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business. Download 1040x form You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Download 1040x form   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Download 1040x form Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Download 1040x form You can deduct 9% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. Download 1040x form Your deduction is limited to 50% of the Form W-2 wages you paid for the tax year that are properly allocable to domestic production gross receipts. Download 1040x form For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Download 1040x form Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Download 1040x form Income from cooperatives. Download 1040x form   If you receive a patronage dividend or qualified per-unit retain allocation from a cooperative which is engaged in the manufacturing, production, growth, or extraction in whole or in significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products, your income from the cooperative can give rise to a domestic production activities deduction. Download 1040x form This deduction amount is reported on Form 1099-PATR, box 6. Download 1040x form In order for you to qualify for the deduction, the cooperative is required to send you a written notice designating your portion of the domestic production activities deduction. Download 1040x form More information. Download 1040x form   For more information on the domestic production activities deduction, see the Instructions for Form 8903. Download 1040x form Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. Download 1040x form You include the expense in the basis of the asset. Download 1040x form Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Download 1040x form See chapters 2  and 6. Download 1040x form Capital expenses are generally not deductible, but they may be depreciable. Download 1040x form However, you can elect to deduct certain capital expenses, such as the following. Download 1040x form The cost of fertilizer, lime, etc. Download 1040x form (See Fertilizer and Lime under Deductible Expenses , earlier. Download 1040x form ) Soil and water conservation expenses. Download 1040x form (See chapter 5. Download 1040x form ) The cost of property that qualifies for a deduction under section 179. Download 1040x form (See chapter 7. Download 1040x form ) Business start-up costs. Download 1040x form (See Business start-up and organizational costs , later. Download 1040x form ) Forestation and reforestation costs. Download 1040x form (See Forestation and reforestation costs , later. Download 1040x form ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Download 1040x form Land and buildings. Download 1040x form Additions, alterations, and improvements to buildings, etc. Download 1040x form Cars and trucks. Download 1040x form Equipment and machinery. Download 1040x form Fences. Download 1040x form Draft, breeding, sport, and dairy livestock. Download 1040x form Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Download 1040x form Water wells, including drilling and equipping costs. Download 1040x form Land preparation costs, such as: Clearing land for farming, Leveling and conditioning land, Purchasing and planting trees, Building irrigation canals and ditches, Laying irrigation pipes, Installing drain tile, Modifying channels or streams, Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and Building roads. Download 1040x form Business start-up and organizational costs. Download 1040x form   You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Download 1040x form The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Download 1040x form Any remaining costs must be amortized. Download 1040x form See chapter 7. Download 1040x form   You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Download 1040x form However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Download 1040x form Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Download 1040x form 9100-2” at the top of the amended return. Download 1040x form File the amended return at the same address you filed the original return. Download 1040x form The election applies when figuring taxable income for the current tax year and all subsequent years. Download 1040x form   You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Download 1040x form For more information about start-up and organizational costs, see chapter 7. Download 1040x form Crop production expenses. Download 1040x form   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Download 1040x form However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. Download 1040x form For more information, see Uniform Capitalization Rules in chapter 6. Download 1040x form Timber. Download 1040x form   Capitalize the cost of acquiring timber. Download 1040x form Do not include the cost of land in the cost of the timber. Download 1040x form You must generally capitalize direct costs incurred in reforestation. Download 1040x form However, you can elect to deduct some forestation and reforestation costs. Download 1040x form See Forestation and reforestation costs next. Download 1040x form Reforestation costs include the following. Download 1040x form Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Download 1040x form The cost of seed or seedlings. Download 1040x form Labor and tool expenses. Download 1040x form Depreciation on equipment used in planting or seeding. Download 1040x form Costs incurred in replanting to replace lost seedlings. Download 1040x form You can choose to capitalize certain indirect reforestation costs. Download 1040x form   These capitalized amounts are your basis for the timber. Download 1040x form Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Download 1040x form See Depletion in chapter 7. Download 1040x form Forestation and reforestation costs. Download 1040x form   You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Download 1040x form Any remaining costs can be amortized over an 84-month period. Download 1040x form See chapter 7. Download 1040x form If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. Download 1040x form The accounts should include all reforestation treatments and the dates they were applied. Download 1040x form Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. Download 1040x form The timber account should be maintained until the timber is disposed of. Download 1040x form For more information, see Notice 2006-47, 2006-20 I. Download 1040x form R. Download 1040x form B. Download 1040x form 892, available at  www. Download 1040x form irs. Download 1040x form gov/irb/2006-20_IRB/ar11. Download 1040x form html. Download 1040x form   You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. Download 1040x form If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Download 1040x form If you are not filing Form T (Timber), attach a statement to your return with the following information. Download 1040x form The unique stand identification numbers. Download 1040x form The total number of acres reforested during the tax year. Download 1040x form The nature of the reforestation treatments. Download 1040x form The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Download 1040x form   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Download 1040x form Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Download 1040x form 9100-2” at the top of the amended return. Download 1040x form File the amended return at the same address you filed the original return. Download 1040x form    For more information about forestation and reforestation costs, see chapter 7. Download 1040x form    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Download 1040x form You can view this publication on the Internet at  www. Download 1040x form fs. Download 1040x form fed. Download 1040x form us/publications. Download 1040x form Christmas tree cultivation. Download 1040x form   If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. Download 1040x form Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Download 1040x form For more information, see Timber Depletion under Depletion in chapter 7. Download 1040x form   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Download 1040x form Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Download 1040x form   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Download 1040x form If the improvements do not have a determinable useful life, add their cost to the basis of the land. Download 1040x form The cost is recovered when you sell or otherwise dispose of it. Download 1040x form If the improvements have a determinable useful life, recover their cost through depreciation. Download 1040x form Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. Download 1040x form Recover these costs through depreciation. Download 1040x form Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Download 1040x form Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Download 1040x form These include rent and insurance premiums paid on property used as your home, life insurance premiums on yourself or your family, the cost of maintaining cars, trucks, or horses for personal use, allowances to minor children, attorneys' fees and legal expenses incurred in personal matters, and household expenses. Download 1040x form Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Download 1040x form Other Nondeductible Items You cannot deduct the following items on your tax return. Download 1040x form Loss of growing plants, produce, and crops. Download 1040x form   Losses of plants, produce, and crops raised for sale are generally not deductible. Download 1040x form However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Download 1040x form See chapter 11 for more information. Download 1040x form Repayment of loans. Download 1040x form   You cannot deduct the repayment of a loan. Download 1040x form However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Download 1040x form See Interest , earlier. Download 1040x form Estate, inheritance, legacy, succession, and gift taxes. Download 1040x form   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Download 1040x form Loss of livestock. Download 1040x form   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Download 1040x form Losses from sales or exchanges between related persons. Download 1040x form   You cannot deduct losses from sales or exchanges of property between you and certain related persons, including your spouse, brother, sister, ancestor, or lineal descendant. Download 1040x form For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Download 1040x form Cost of raising unharvested crops. Download 1040x form   You cannot deduct the cost of raising unharvested crops sold with land owned more than one year if you sell both at the same time and to the same person. Download 1040x form Add these costs to the basis of the land to determine the gain or loss on the sale. Download 1040x form For more information, see Section 1231 Gains and Losses in chapter 9. Download 1040x form Cost of unharvested crops bought with land. Download 1040x form   Capitalize the purchase price of land, including the cost allocable to unharvested crops. Download 1040x form You cannot deduct the cost of the crops at the time of purchase. Download 1040x form However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Download 1040x form Cost related to gifts. Download 1040x form   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Download 1040x form The costs are not deductible in the year of the gift or any later year. Download 1040x form For example, you cannot deduct the cost of raising cattle or the cost of planting and raising unharvested wheat on parcels of land given as a gift to your children. Download 1040x form Club dues and membership fees. Download 1040x form   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Download 1040x form This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Download 1040x form Exception. Download 1040x form   The following organizations will not be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Download 1040x form Boards of trade. Download 1040x form Business leagues. Download 1040x form Chambers of commerce. Download 1040x form Civic or public service organizations. Download 1040x form Professional associations. Download 1040x form Trade associations. Download 1040x form Real estate boards. Download 1040x form Fines and penalties. Download 1040x form   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Download 1040x form Losses From Operating a Farm If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. Download 1040x form The amount of the loss you can deduct when figuring your taxable income may be limited. Download 1040x form To figure your deductible loss, you must apply the following limits. Download 1040x form The at-risk limits. Download 1040x form The passive activity limits. Download 1040x form The following discussions explain these limits. Download 1040x form If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Download 1040x form See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Download 1040x form If you do not carry on your farming activity to make a profit, your loss deduction may be limited by the not-for-profit rules. Download 1040x form See Not-for-Profit Farming, later. Download 1040x form At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Download 1040x form These rules limit the losses you can deduct when figuring your taxable income. Download 1040x form The deductible loss from an activity is limited to the amount you have at risk in the activity. Download 1040x form You are at risk in any activity for: The money and adjusted basis of property you contribute to the activity, and Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Download 1040x form You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest. Download 1040x form For more information, see Publication 925. Download 1040x form Passive Activity Limits A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. Download 1040x form Generally, a rental activity is a passive activity. Download 1040x form If you have a passive activity, special rules limit the loss you can deduct in the tax year. Download 1040x form You generally can deduct losses from passive activities only up to income from passive activities. Download 1040x form Credits are similarly limited. Download 1040x form For more information, see Publication 925. Download 1040x form Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Download 1040x form This limit applies to any farming businesses, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. Download 1040x form Your farming losses are limited to the greater of: $300,000 ($150,000 for a married person filing a separate return), or The total net farm income for the prior five tax years. Download 1040x form Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Download 1040x form Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Download 1040x form For more details, see IRC section 461(j). Download 1040x form Excess farm loss. Download 1040x form   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Download 1040x form This loss can be determined by taking the excess of: The total deductions for the tax year from your farming businesses, over The total gross income or gain for the tax year from your farming businesses, plus the greater of: $300,000 ($150,000 for a married person filing a separate return), or The excess (if any) of the total gross income or gain from your farming businesses for the prior five tax years over the total deductions from your farming businesses for the prior five tax years. Download 1040x form   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Download 1040x form Not-for-Profit Farming If you operate a farm for profit, you can deduct all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. Download 1040x form However, if you do not carry on your farming activity, or other activity you engage or invest in, to make a profit, you report the income from the activity on Form 1040, line 21, and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). Download 1040x form Also, there is a limit on the deductions you can take. Download 1040x form You cannot use a loss from that activity to offset income from other activities. Download 1040x form Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Download 1040x form An investment activity intended only to produce tax losses for the investors also comes under this limit. Download 1040x form The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Download 1040x form It does not apply to corporations other than S corporations. Download 1040x form In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Download 1040x form No one factor alone is decisive. Download 1040x form Among the factors to consider are whether: You operate your farm in a businesslike manner; The time and effort you spend on farming indicate you intend to make it profitable; You depend on income from farming for your livelihood; Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming; You change your methods of operation in an attempt to improve profitability; You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; You were successful in making a profit in similar activities in the past; You make a profit from farming in some years and the amount of profit you make; and You can expect to make a future profit from the appreciation of the assets used in the farming activity. Download 1040x form Presumption of profit. Download 1040x form   Your farming or other activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Download 1040x form Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Download 1040x form The activity must be substantially the same for each year within this period. Download 1040x form You have a profit when the gross income from an activity is more than the deductions for it. Download 1040x form   If a taxpayer dies before the end of the 5-year (or 7-year) period, the period ends on the date of the taxpayer's death. Download 1040x form   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Download 1040x form This means the limits discussed here do not apply. Download 1040x form You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Download 1040x form You can rely on this presumption in every case, unless the IRS shows it is not valid. Download 1040x form   If you fail the 3- (or 2-) years-of-profit test, you still may be considered to operate your farm for profit by considering the factors listed earlier. Download 1040x form Using the presumption later. Download 1040x form   If you are starting out in farming and do not have 3 (or 2) years showing a profit, you may want to take advantage of this presumption later, after you have had the 5 (or 7) years of experience allowed by the test. Download 1040x form   You can choose to do this by filing Form 5213. Download 1040x form Filing this form postpones any determination that your farming activity is not carried on for profit until 5 (or 7) years have passed since you first started farming. Download 1040x form You must file Form 5213 within 3 years after the due date of your return for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving a written notice from the IRS proposing to disallow deductions attributable to the activity. Download 1040x form   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Download 1040x form Accordingly, it will not limit your deductions. Download 1040x form Rather, you will gain time to earn a profit in 3 (or 2) out of the first 5 (or 7) years you carry on the farming activity. Download 1040x form If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Download 1040x form If you do not have 3 (or 2) years of profit (and cannot otherwise show that you operated your farm for profit), the limit applies retroactively to any year in the 5-year (or 7-year) period with a loss. Download 1040x form   Filing Form 5213 automatically extends the period of limitations on any year