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The Free Tax Return

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