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Hr block Publication 542 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Photographs of missing children. Hr block  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Hr block Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Hr block You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Hr block Introduction This publication discusses the general tax laws that apply to ordinary domestic corporations. Hr block It explains the tax law in plain language so it will be easier to understand. Hr block However, the information given does not cover every situation and is not intended to replace the law or change its meaning. Hr block Note. Hr block This publication is not revised on an annual basis. Hr block To find changes that may affect current year returns, see the instructions for your income tax return for the current year; and Changes to Current Forms and Publications at www. Hr block irs. Hr block gov/formspubs. Hr block Comments and suggestions. Hr block   We welcome your comments about this publication and your suggestions for future editions. Hr block   You can write to us at the following address: Internal Revenue Service Business, Exempt Organizations and International Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Hr block NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Hr block Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Hr block   You can email us at *taxforms@irs. Hr block gov (The asterisk must be included in the address). Hr block Please put “Publications Comment” on the subject line. Hr block You can also send us comments at www. Hr block irs. Hr block gov/formspubs/. Hr block Select “Comment on Tax Forms and Publications” under “Information about. Hr block ” Although we cannot respond individually to each comment, we do appreciate your feedback and will consider your comments as we revise our tax products. Hr block Tax questions. Hr block   If you have a tax question, visit IRS. Hr block gov or call 1-800-829-1040. Hr block We cannot answer tax questions at either of the addresses listed above. Hr block Ordering forms and publications. Hr block   Visit www. Hr block irs. Hr block gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How to Get Tax Help, later in this publication. Hr block Additional forms. Hr block   A list of other forms and statements that a corporation may need to file is included at the end of this publication. Hr block Useful Items - You may want to see: Publication 510 Excise Taxes (Including Fuel Tax Credits and Refunds) 535 Business Expenses 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 925 Passive Activity and At-Risk Rules 946 How to Depreciate Property Prev  Up  Next   Home   More Online Publications
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Hr block 4. Hr block   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. Hr block 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. Hr block 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. Hr block Category 1. Hr block Category 2. Hr block Category 3. Hr block What's New for 2013 Standard mileage rate. Hr block  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. Hr block 5 cents. Hr block See Truck and Car Expenses , later. Hr block Simplified method for business use of home deduction. Hr block  The IRS now provides a simplified method to determine your expenses for business use of your home. Hr block For more information, see Schedule C (Form 1040), Part II, and its instructions. Hr block Introduction You can generally deduct the current costs of operating your farm. Hr block Current costs are expenses you do not have to capitalize or include in inventory costs. Hr block However, your deduction for the cost of livestock feed and certain other supplies may be limited. Hr block If you have an operating loss, you may not be able to deduct all of it. Hr block 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. Hr block Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Hr block “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Hr block Schedule F, Part II, lists some common farm expenses that are typically deductible. Hr block This chapter discusses many of these expenses, as well as others not listed on Schedule F. Hr block Reimbursed expenses. Hr block   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Hr block If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Hr block See Refund or reimbursement under Income From Other Sources in chapter 3. Hr block Personal and business expenses. Hr block   Some expenses you pay during the tax year may be part personal and part business. Hr block These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Hr block   You must allocate these mixed expenses between their business and personal parts. Hr block Generally, the personal part of these expenses is not deductible. Hr block The business portion of the expenses is deductible on Schedule F. Hr block Example. Hr block You paid $1,500 for electricity during the tax year. Hr block You used 1/3 of the electricity for personal purposes and 2/3 for farming. Hr block Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Hr block Reasonable allocation. Hr block   It is not always easy to determine the business and nonbusiness parts of an expense. Hr block There is no method of allocation that applies to all mixed expenses. Hr block Any reasonable allocation is acceptable. Hr block What is reasonable depends on the circumstances in each case. Hr block Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Hr block 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. Hr block Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Hr block 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. Hr block Poultry bought for resale and not resold during the year. Hr block Deduction limit. Hr block   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). Hr block This limit does not apply if you meet one of the exceptions described later. Hr block See Chapter 2 for a discussion of the cash method of accounting. Hr block   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. Hr block 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. Hr block The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Hr block Example. Hr block You may not qualify for the exception described next. Hr block During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Hr block Your total prepaid farm supplies expense for 2013 is $5,500. Hr block Your other deductible farm expenses totaled $10,000 for 2013. Hr block Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Hr block 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. Hr block Exceptions. Hr block   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. Hr block 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. Hr block 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. Hr block   You are a farm-related taxpayer if any of the following tests apply. Hr block Your main home is on a farm. Hr block Your principal business is farming. Hr block A member of your family meets (1) or (2). Hr block 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. Hr block    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. Hr block 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. Hr block The payment is for the purchase of feed rather than a deposit. Hr block The prepayment has a business purpose and is not merely for tax avoidance. Hr block Deducting the prepayment does not result in a material distortion of your income. Hr block If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Hr block If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Hr block This rule does not apply to the purchase of commodity futures contracts. Hr block Payment for the purchase of feed. Hr block   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Hr block 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. Hr block   The following are some factors that show a payment is a deposit rather than for the purchase of feed. Hr block The absence of specific quantity terms. Hr block The right to a refund of any unapplied payment credit at the end of the contract. Hr block The seller's treatment of the payment as a deposit. Hr block The right to substitute other goods or products for those specified in the contract. Hr block   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. Hr block Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Hr block Business purpose. Hr block   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. Hr block The following are some examples of business benefits. Hr block Fixing maximum prices and securing an assured feed supply. Hr block Securing preferential treatment in anticipation of a feed shortage. Hr block   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. Hr block No material distortion of income. Hr block   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Hr block Your customary business practice in conducting your livestock operations. Hr block The expense in relation to past purchases. Hr block The time of year you made the purchase. Hr block The expense in relation to your income for the year. Hr block 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. Hr block You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Hr block The cost of boarding farm labor is a deductible labor cost. Hr block Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Hr block 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. Hr block See chapter 13 for more information on employment taxes. Hr block 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. Hr block See Taxes , later. Hr block Property for services. Hr block   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. Hr block 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. Hr block   Treat the wages deducted as an amount received for the property. Hr block 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. Hr block Any gain or loss has the same character the exchanged property had in your hands. Hr block For more information, see chapter 8. Hr block Child as an employee. Hr block   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. Hr block Include these wages in the child's income. Hr block The child may have to file an income tax return. Hr block These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Hr block For more information, see Family Employees in chapter 13. Hr block    A Form W-2, Wage and Tax Statement, should be issued to the child employee. Hr block   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. Hr block The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Hr block Spouse as an employee. Hr block   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. Hr block Wages you pay to your spouse are subject to social security and Medicare taxes. Hr block For more information, see Family Employees in chapter 13. Hr block Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Hr block However, those wages may be subject to the employment taxes discussed in chapter 13. Hr block Household workers. Hr block   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. Hr block Construction labor. Hr block   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Hr block These wages are part of the cost of the building or other improvement. Hr block You must capitalize them. Hr block Maintaining your home. Hr block   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. Hr block For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Hr block The employee devotes the remaining time to work on your farm. Hr block You cannot deduct 5% of the wages and employment taxes you pay for that employee. Hr block 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). Hr block Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Hr block 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. Hr block 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. Hr block For example, if you repair the barn roof, the cost is deductible. Hr block But if you replace the roof, it is a capital expense. Hr block For more information, see Capital Expenses , later. Hr block Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Hr block Cash method. Hr block   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Hr block You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Hr block You can, however, deduct the interest when you start making payments on the new loan. Hr block For more information, see Cash Method in chapter 2. Hr block Prepaid interest. Hr block   Under the cash method, you generally cannot deduct any interest paid before the year it is due. Hr block Interest paid in advance may be deducted only in the tax year in which it is due. Hr block Accrual method. Hr block   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Hr block 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. Hr block For more information, see Accrual Method in chapter 2. Hr block Allocation of interest. Hr block   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Hr block Allocate the interest to the following categories. Hr block Trade or business interest. Hr block Passive activity interest. Hr block Investment interest. Hr block Portfolio interest. Hr block Personal interest. Hr block   You generally allocate interest on a loan the same way you allocate the loan proceeds. Hr block You allocate loan proceeds by tracing disbursements to specific uses. Hr block The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Hr block Secured loan. Hr block   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Hr block Example. Hr block You secure a loan with property used in your farming business. Hr block You use the loan proceeds to buy a car for personal use. Hr block 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. Hr block If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Hr block The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Hr block However, you can choose to treat the loan as not secured by your home. Hr block For more information, see Publication 936. Hr block Allocation period. Hr block   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. Hr block The date the loan is repaid. Hr block The date the loan is reallocated to another use. Hr block More information. Hr block   For more information on interest, see chapter 4 in Publication 535. Hr block Breeding Fees You can deduct breeding fees as a farm business expense. Hr block 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. Hr block For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Hr block 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. Hr block You can also deduct the cost of applying these materials in the year you pay or incur it. Hr block However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Hr block 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. Hr block However, you can choose to deduct these expenses in the year paid or incurred. Hr block If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Hr block 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. Hr block Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Hr block It does not include land you have never used previously for producing crops or sustaining livestock. Hr block You cannot deduct initial land preparation costs. Hr block (See Capital Expenses , later. Hr block ) Include government payments you receive for lime or fertilizer in income. Hr block See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Hr block 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. Hr block 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. Hr block For information on employment taxes, see chapter 13. Hr block Allocation of taxes. Hr block   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. Hr block You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Hr block To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Hr block The allocation can be done from the assessed valuations. Hr block If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Hr block State and local general sales taxes. Hr block   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Hr block 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. Hr block Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Hr block State and federal income taxes. Hr block   Individuals cannot deduct state and federal income taxes as farm business expenses. Hr block Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Hr block However, you cannot deduct federal income tax. Hr block Highway use tax. Hr block   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Hr block 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. Hr block Self-employment tax deduction. Hr block   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Hr block For more information, see chapter 12. Hr block Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Hr block This includes premiums you pay for the following types of insurance. Hr block Fire, storm, crop, theft, liability, and other insurance on farm business assets. Hr block Health and accident insurance on your farm employees. Hr block 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. Hr block Business interruption insurance. Hr block State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Hr block Insurance to secure a loan. Hr block   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. Hr block In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Hr block Advance premiums. Hr block   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Hr block Example. Hr block On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Hr block The policy will cover a period of 3 years beginning on July 1, 2013. Hr block Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Hr block Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Hr block In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Hr block Deduct the remaining $500 in 2016. Hr block 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. Hr block Business interruption insurance. Hr block   Use and occupancy and business interruption insurance premiums are deductible as a business expense. Hr block This insurance pays for lost profits if your business is shut down due to a fire or other cause. Hr block Report any proceeds in full on Schedule F, Part I. Hr block Self-employed health insurance deduction. Hr block   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. Hr block 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. Hr block Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Hr block   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. Hr block   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Hr block Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Hr block   For more information, see Deductible Premiums in Publication 535, chapter 6. Hr block Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Hr block However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Hr block Advance payments. Hr block   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Hr block Farm home. Hr block   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. Hr block 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. Hr block 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. Hr block Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Hr block Conditional sales contract. Hr block   Whether an agreement is a conditional sales contract depends on the intent of the parties. Hr block Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Hr block No single test, or special combination of tests, always applies. Hr block However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Hr block The agreement applies part of each payment toward an equity interest you will receive. Hr block You get title to the property after you make a stated amount of required payments. Hr block 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. Hr block You pay much more than the current fair rental value of the property. Hr block 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. Hr block Determine this value when you make the agreement. Hr block You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Hr block The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Hr block Example. Hr block You lease new farm equipment from a dealer who both sells and leases. Hr block The agreement includes an option to purchase the equipment for a specified price. Hr block The lease payments and the specified option price equal the sales price of the equipment plus interest. Hr block Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Hr block For federal income tax purposes, the agreement is a conditional sales contract. Hr block You cannot deduct any of the lease payments as rent. Hr block You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Hr block Motor vehicle leases. Hr block   Special rules apply to lease agreements that have a terminal rental adjustment clause. Hr block 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. Hr block If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Hr block For more information, see Internal Revenue Code (IRC) section 7701(h). Hr block Leveraged leases. Hr block   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Hr block 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. Hr block irs. Hr block gov/pub/irs-irbs/irb01-19. Hr block pdf. Hr block 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. Hr block You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Hr block 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. Hr block Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Hr block 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. Hr block 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. Hr block You use it exclusively and regularly for the administrative or management activities of your trade or business. Hr block You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Hr block If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Hr block The IRS now provides a simplified method to determine your expenses for business use of your home. Hr block For more information, see Schedule C (Form 1040), Part II, and its instructions. Hr block Deduction limit. Hr block   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. Hr block 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. Hr block   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. Hr block 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). Hr block Farm expenses other than expenses that relate to the use of your home. Hr block If you are self-employed, do not include your deduction for half of your self-employment tax. Hr block   Deductions over the current year's limit can be carried over to your next tax year. Hr block They are subject to the deduction limit for the next tax year. Hr block More information. Hr block   See Publication 587 for more information on deducting expenses for the business use of your home. Hr block Telephone expense. Hr block   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. Hr block 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. Hr block Cell phone charges for calls relating to your farm business are deductible. Hr block 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. Hr block Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Hr block Only expenses for business use are deductible. Hr block These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Hr block Standard mileage rate. Hr block   Instead of using actual costs, under certain conditions you can use the standard mileage rate. Hr block The standard mileage rate for each mile of business use is 56. Hr block 5 cents in 2013. Hr block 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. Hr block   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Hr block 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. Hr block Example. Hr block Maureen owns a car and four pickup trucks that are used in her farm business. Hr block Her farm employees use the trucks and she uses the car for business. Hr block Maureen cannot use the standard mileage rate for the car or the trucks. Hr block This is because all five vehicles are used in Maureen's farm business at the same time. Hr block She must use actual expenses for all vehicles. Hr block Business use percentage. Hr block   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. Hr block You choose this method of substantiating business use the first year the vehicle is placed in service. Hr block Once you make this choice, you may not change to another method later. Hr block The following are uses directly connected with the business of farming. Hr block Cultivating land. Hr block Raising or harvesting any agricultural or horticultural commodity. Hr block Raising, shearing, feeding, caring for, training, and managing animals. Hr block Driving to the feed or supply store. Hr block   If you keep records and they show that your business use was more than 75%, you may be able to claim more. Hr block See Recordkeeping requirements under Travel Expenses , below. Hr block More information. Hr block   For more information on deductible truck and car expenses, see Publication 463, chapter 4. Hr block 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. Hr block Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Hr block You cannot deduct lavish or extravagant expenses. Hr block Usually, the location of your farm business is considered your home for tax purposes. Hr block 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. Hr block 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. Hr block The following are some types of deductible travel expenses. Hr block 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. Hr block Meals. Hr block   You ordinarily can deduct only 50% of your business-related meals expenses. Hr block 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. Hr block 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. Hr block For information on entertainment expenses, see Publication 463, chapter 2. Hr block   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Hr block You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Hr block    Recordkeeping requirements. Hr block You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Hr block Estimates or approximations do not qualify as proof of an expense. Hr block   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. Hr block Generally, it is best to record the expense and get documentation of it at the time you pay it. Hr block   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. Hr block 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. Hr block More information. Hr block   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Hr block Reimbursements to employees. Hr block   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Hr block Employees may be reimbursed under an accountable or nonaccountable plan. Hr block Under an accountable plan, the employee must provide evidence of expenses. Hr block Under a nonaccountable plan, no evidence of expenses is required. Hr block If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Hr block If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Hr block For more information, see Publication 535, chapter 11. Hr block Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Hr block 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. Hr block Do not take a separate deduction for the penalty. Hr block Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Hr block These costs include repairs, utilities, insurance, and depreciation. Hr block The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Hr block 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. Hr block You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Hr block However, see Chickens, seeds, and young plants , below. Hr block Example. Hr block You use the cash method of accounting. Hr block In 2013, you buy 50 steers you will sell in 2014. Hr block You cannot deduct the cost of the steers on your 2013 tax return. Hr block You deduct their cost on your 2014 Schedule F, Part I. Hr block Chickens, seeds, and young plants. Hr block   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. Hr block 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. Hr block However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Hr block   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Hr block You cannot also deduct the cost from the selling price. Hr block   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Hr block Deduct the cost of these seeds and plants through depletion allowances. Hr block For more information, see Depletion in chapter 7. Hr block   The cost of chickens and plants used as food for your family is never deductible. Hr block   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Hr block These rules are discussed in chapter 6. Hr block Example. Hr block You use the cash method of accounting. Hr block In 2013, you buy 500 baby chicks to raise for resale in 2014. Hr block You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Hr block 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. Hr block Election to use crop method. Hr block   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Hr block You must get IRS approval to use the crop method. Hr block If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Hr block For more information, see Crop method under Special Methods of Accounting in chapter 2. Hr block Choosing a method. Hr block   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. Hr block   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. Hr block 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. Hr block For more information, see Change in Accounting Method in chapter 2. Hr block Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Hr block 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. Hr block Accounting fees. Hr block Advertising. Hr block Business travel and meals. Hr block Commissions. Hr block Consultant fees. Hr block Crop scouting expenses. Hr block Dues to cooperatives. Hr block Educational expenses (to maintain and improve farming skills). Hr block Farm-related attorney fees. Hr block Farm magazines. Hr block Ginning. Hr block Insect sprays and dusts. Hr block Litter and bedding. Hr block Livestock fees. Hr block Marketing fees. Hr block Milk assessment. Hr block Recordkeeping expenses. Hr block Service charges. Hr block Small tools expected to last one year or less. Hr block Stamps and stationery. Hr block Subscriptions to professional, technical, and trade journals that deal with farming. Hr block Tying material and containers. Hr block Loan expenses. Hr block   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. Hr block Tax preparation fees. Hr block   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. Hr block You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Hr block   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Hr block Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Hr block 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. Hr block 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. Hr block For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Hr block Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Hr block Income from cooperatives. Hr block   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. Hr block This deduction amount is reported on Form 1099-PATR, box 6. Hr block 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. Hr block More information. Hr block   For more information on the domestic production activities deduction, see the Instructions for Form 8903. Hr block 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. Hr block You include the expense in the basis of the asset. Hr block Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Hr block See chapters 2  and 6. Hr block Capital expenses are generally not deductible, but they may be depreciable. Hr block However, you can elect to deduct certain capital expenses, such as the following. Hr block The cost of fertilizer, lime, etc. Hr block (See Fertilizer and Lime under Deductible Expenses , earlier. Hr block ) Soil and water conservation expenses. Hr block (See chapter 5. Hr block ) The cost of property that qualifies for a deduction under section 179. Hr block (See chapter 7. Hr block ) Business start-up costs. Hr block (See Business start-up and organizational costs , later. Hr block ) Forestation and reforestation costs. Hr block (See Forestation and reforestation costs , later. Hr block ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Hr block Land and buildings. Hr block Additions, alterations, and improvements to buildings, etc. Hr block Cars and trucks. Hr block Equipment and machinery. Hr block Fences. Hr block Draft, breeding, sport, and dairy livestock. Hr block Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Hr block Water wells, including drilling and equipping costs. Hr block 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. Hr block Business start-up and organizational costs. Hr block   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. Hr block The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Hr block Any remaining costs must be amortized. Hr block See chapter 7. Hr block   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. Hr block 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). Hr block Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Hr block 9100-2” at the top of the amended return. Hr block File the amended return at the same address you filed the original return. Hr block The election applies when figuring taxable income for the current tax year and all subsequent years. Hr block   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. Hr block For more information about start-up and organizational costs, see chapter 7. Hr block Crop production expenses. Hr block   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Hr block 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. Hr block For more information, see Uniform Capitalization Rules in chapter 6. Hr block Timber. Hr block   Capitalize the cost of acquiring timber. Hr block Do not include the cost of land in the cost of the timber. Hr block You must generally capitalize direct costs incurred in reforestation. Hr block However, you can elect to deduct some forestation and reforestation costs. Hr block See Forestation and reforestation costs next. Hr block Reforestation costs include the following. Hr block Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Hr block The cost of seed or seedlings. Hr block Labor and tool expenses. Hr block Depreciation on equipment used in planting or seeding. Hr block Costs incurred in replanting to replace lost seedlings. Hr block You can choose to capitalize certain indirect reforestation costs. Hr block   These capitalized amounts are your basis for the timber. Hr block Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Hr block See Depletion in chapter 7. Hr block Forestation and reforestation costs. Hr block   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. Hr block Any remaining costs can be amortized over an 84-month period. Hr block See chapter 7. Hr block 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. Hr block The accounts should include all reforestation treatments and the dates they were applied. Hr block 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. Hr block The timber account should be maintained until the timber is disposed of. Hr block For more information, see Notice 2006-47, 2006-20 I. Hr block R. Hr block B. Hr block 892, available at  www. Hr block irs. Hr block gov/irb/2006-20_IRB/ar11. Hr block html. Hr block   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. Hr block If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Hr block If you are not filing Form T (Timber), attach a statement to your return with the following information. Hr block The unique stand identification numbers. Hr block The total number of acres reforested during the tax year. Hr block The nature of the reforestation treatments. Hr block The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Hr block   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). Hr block Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Hr block 9100-2” at the top of the amended return. Hr block File the amended return at the same address you filed the original return. Hr block    For more information about forestation and reforestation costs, see chapter 7. Hr block    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Hr block You can view this publication on the Internet at  www. Hr block fs. Hr block fed. Hr block us/publications. Hr block Christmas tree cultivation. Hr block   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. Hr block Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Hr block For more information, see Timber Depletion under Depletion in chapter 7. Hr block   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Hr block Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Hr block   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Hr block If the improvements do not have a determinable useful life, add their cost to the basis of the land. Hr block The cost is recovered when you sell or otherwise dispose of it. Hr block If the improvements have a determinable useful life, recover their cost through depreciation. Hr block 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. Hr block Recover these costs through depreciation. Hr block Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Hr block Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Hr block 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. Hr block Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Hr block Other Nondeductible Items You cannot deduct the following items on your tax return. Hr block Loss of growing plants, produce, and crops. Hr block   Losses of plants, produce, and crops raised for sale are generally not deductible. Hr block However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Hr block See chapter 11 for more information. Hr block Repayment of loans. Hr block   You cannot deduct the repayment of a loan. Hr block However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Hr block See Interest , earlier. Hr block Estate, inheritance, legacy, succession, and gift taxes. Hr block   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Hr block Loss of livestock. Hr block   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Hr block Losses from sales or exchanges between related persons. Hr block   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. Hr block For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Hr block Cost of raising unharvested crops. Hr block   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. Hr block Add these costs to the basis of the land to determine the gain or loss on the sale. Hr block For more information, see Section 1231 Gains and Losses in chapter 9. Hr block Cost of unharvested crops bought with land. Hr block   Capitalize the purchase price of land, including the cost allocable to unharvested crops. Hr block You cannot deduct the cost of the crops at the time of purchase. Hr block However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Hr block Cost related to gifts. Hr block   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Hr block The costs are not deductible in the year of the gift or any later year. Hr block 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. Hr block Club dues and membership fees. Hr block   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Hr block 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. Hr block Exception. Hr block   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. Hr block Boards of trade. Hr block Business leagues. Hr block Chambers of commerce. Hr block Civic or public service organizations. Hr block Professional associations. Hr block Trade associations. Hr block Real estate boards. Hr block Fines and penalties. Hr block   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Hr block 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. Hr block The amount of the loss you can deduct when figuring your taxable income may be limited. Hr block To figure your deductible loss, you must apply the following limits. Hr block The at-risk limits. Hr block The passive activity limits. Hr block The following discussions explain these limits. Hr block If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Hr block See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Hr block 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. Hr block See Not-for-Profit Farming, later. Hr block At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Hr block These rules limit the losses you can deduct when figuring your taxable income. Hr block The deductible loss from an activity is limited to the amount you have at risk in the activity. Hr block 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. Hr block 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. Hr block For more information, see Publication 925. Hr block 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. Hr block Generally, a rental activity is a passive activity. Hr block If you have a passive activity, special rules limit the loss you can deduct in the tax year. Hr block You generally can deduct losses from passive activities only up to income from passive activities. Hr block Credits are similarly limited. Hr block For more information, see Publication 925. Hr block Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Hr block 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. Hr block 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. Hr block Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Hr block Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Hr block For more details, see IRC section 461(j). Hr block Excess farm loss. Hr block   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Hr block 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. Hr block   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Hr block 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. Hr block 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). Hr block Also, there is a limit on the deductions you can take. Hr block You cannot use a loss from that activity to offset income from other activities. Hr block Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Hr block An investment activity intended only to produce tax losses for the investors also comes under this limit. Hr block The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Hr block It does not apply to corporations other than S corporations. Hr block In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Hr block No one factor alone is decisive. Hr block 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. Hr block Presumption of profit. Hr block   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. Hr block 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. Hr block The activity must be substantially the same for each year within this period. Hr block You have a profit when the gross income from an activity is more than the deductions for it. Hr block   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. Hr block   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Hr block This means the limits discussed here do not apply. Hr block You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Hr block You can rely on this presumption in every case, unless the IRS shows it is not valid. Hr block   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. Hr block Using the presumption later. Hr block   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. Hr block   You can choose to do this by filing Form 5213. Hr block 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. Hr block 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. Hr block   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Hr block Accordingly, it will not limit your deductions. Hr block 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. Hr block If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Hr block 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. Hr block   Filing Form 5213 automatically extends the period of limitations on any year