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Turbotax Free State File

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Turbotax Free State File

Turbotax free state file Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Turbotax free state file Property not disposed of or abandoned. Turbotax free state file Special rule for normal retirements from item accounts. Turbotax free state file Abandoned property. Turbotax free state file Single item accounts. Turbotax free state file Multiple property account. Turbotax free state file Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Turbotax free state file If your property qualified for MACRS, you must depreciate it under MACRS. Turbotax free state file See Publication 946. Turbotax free state file However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Turbotax free state file Also, you can elect to exclude certain property from being depreciated under MACRS. Turbotax free state file Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Turbotax free state file Intangible property. Turbotax free state file   You cannot depreciate intangible property under ACRS or MACRS. Turbotax free state file You depreciate intangible property using any other reasonable method, usually, the straight line method. Turbotax free state file Note. Turbotax free state file The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Turbotax free state file For more information, see chapter 12 of Publication 535. Turbotax free state file Public utility property. Turbotax free state file   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Turbotax free state file This type of property is subject to depreciation under a special rule. Turbotax free state file Videocassettes. Turbotax free state file   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Turbotax free state file You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Turbotax free state file The straight line method, salvage value, and useful life are discussed later under Methods To Use. Turbotax free state file You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Turbotax free state file How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Turbotax free state file These methods are straight line and declining balance. Turbotax free state file To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Turbotax free state file They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Turbotax free state file The amount of the deduction in any year also depends on which method of depreciation you choose. Turbotax free state file Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Turbotax free state file The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Turbotax free state file Your original basis is usually the purchase price. Turbotax free state file However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Turbotax free state file Adjusted basis. Turbotax free state file   Events will often change the basis of property. Turbotax free state file When this occurs, the changed basis is called the adjusted basis. Turbotax free state file Some events, such as improvements you make, increase basis. Turbotax free state file Events such as deducting casualty losses and depreciation decrease basis. Turbotax free state file If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Turbotax free state file   Publication 551 explains how to figure basis for property acquired in different ways. Turbotax free state file It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Turbotax free state file Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Turbotax free state file It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Turbotax free state file It is how long it will continue to be useful to you, not how long the property will last. Turbotax free state file Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Turbotax free state file The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Turbotax free state file Consider all these factors before you arrive at a useful life for your property. Turbotax free state file The useful life of the same type of property varies from user to user. Turbotax free state file When you determine the useful life of your property, keep in mind your own experience with similar property. Turbotax free state file You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Turbotax free state file Change in useful life. Turbotax free state file   You base your estimate of useful life on certain facts. Turbotax free state file If these facts change significantly, you can adjust your estimate of the remaining useful life. Turbotax free state file However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Turbotax free state file Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Turbotax free state file You generally cannot depreciate property below a reasonable salvage value. Turbotax free state file Determining salvage value. Turbotax free state file   Salvage value is the estimated value of property at the end of its useful life. Turbotax free state file It is what you expect to get for the property if you sell it after you can no longer use it productively. Turbotax free state file You must estimate the salvage value of a piece of property when you first acquire it. Turbotax free state file   Salvage value is affected both by how you use the property and how long you use it. Turbotax free state file If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Turbotax free state file However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Turbotax free state file Changing salvage value. Turbotax free state file   Once you determine the salvage value for property, you should not change it merely because prices have changed. Turbotax free state file However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Turbotax free state file When you redetermine the salvage value, take into account the facts that exist at the time. Turbotax free state file Net salvage. Turbotax free state file   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Turbotax free state file You can choose either salvage value or net salvage when you figure depreciation. Turbotax free state file You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Turbotax free state file However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Turbotax free state file Your salvage value can never be less than zero. Turbotax free state file Ten percent rule. Turbotax free state file   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Turbotax free state file You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Turbotax free state file If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Turbotax free state file Methods To Use Two methods of depreciation are the straight line and declining balance methods. Turbotax free state file If ACRS or MACRS does not apply, you can use one of these methods. Turbotax free state file The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Turbotax free state file Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Turbotax free state file One of these methods was the straight line method. Turbotax free state file This method was also used for intangible property. Turbotax free state file It lets you deduct the same amount of depreciation each year. Turbotax free state file To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Turbotax free state file Subtract the salvage value, if any, from the adjusted basis. Turbotax free state file The balance is the total amount of depreciation you can take over the useful life of the property. Turbotax free state file Divide the balance by the number of years remaining in the useful life. Turbotax free state file This gives you the amount of your yearly depreciation deduction. Turbotax free state file Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Turbotax free state file If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Turbotax free state file Example. Turbotax free state file In April 1994, Frank bought a franchise for $5,600. Turbotax free state file It expires in 10 years. Turbotax free state file This property is intangible property that cannot be depreciated under MACRS. Turbotax free state file Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Turbotax free state file He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Turbotax free state file He must prorate the $560 for his 9 months of use in 1994. Turbotax free state file This gives him a deduction of $420 ($560 ÷ 9/12). Turbotax free state file In 1995, Frank can deduct $560 for the full year. Turbotax free state file Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Turbotax free state file The rate cannot be more than twice the straight line rate. Turbotax free state file Rate of depreciation. Turbotax free state file   Under this method, you must determine your declining balance rate of depreciation. Turbotax free state file The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Turbotax free state file (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Turbotax free state file ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Turbotax free state file Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Turbotax free state file Depreciation deductions. Turbotax free state file   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Turbotax free state file This gives you the amount of your deduction. Turbotax free state file For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Turbotax free state file To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Turbotax free state file Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Turbotax free state file Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Turbotax free state file Your depreciation deduction for the second year is $1,600. Turbotax free state file   As you can see from this example, your adjusted basis in the property gets smaller each year. Turbotax free state file Also, under this method, deductions are larger in the earlier years and smaller in the later years. Turbotax free state file You can make a change to the straight line method without consent. Turbotax free state file Salvage value. Turbotax free state file   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Turbotax free state file However, you cannot depreciate the property below its reasonable salvage value. Turbotax free state file Determine salvage value using the rules discussed earlier, including the special 10% rule. Turbotax free state file Example. Turbotax free state file If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Turbotax free state file But if your estimate of salvage value was $900, you can only deduct $100. Turbotax free state file This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Turbotax free state file Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Turbotax free state file You can group the videocassettes by title for making this projection. Turbotax free state file You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Turbotax free state file The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Turbotax free state file For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Turbotax free state file How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Turbotax free state file If you change your method of depreciation, it is generally a change in your method of accounting. Turbotax free state file You must get IRS consent before making the change. Turbotax free state file However, you do not need permission for certain changes in your method of depreciation. Turbotax free state file The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Turbotax free state file For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Turbotax free state file Change to the straight line method. Turbotax free state file   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Turbotax free state file However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Turbotax free state file When the change is made, figure depreciation based on your adjusted basis in the property at that time. Turbotax free state file Your adjusted basis takes into account all previous depreciation deductions. Turbotax free state file Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Turbotax free state file   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Turbotax free state file You cannot make the change on an amended return filed after the due date of the original return (including extensions). Turbotax free state file   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Turbotax free state file   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Turbotax free state file Changes that require permission. Turbotax free state file   For most other changes in method of depreciation, you must get permission from the IRS. Turbotax free state file To request a change in method of depreciation, file Form 3115. Turbotax free state file File the application within the first 180 days of the tax year the change is to become effective. Turbotax free state file In most cases, there is a user fee that must accompany Form 3115. Turbotax free state file See the instructions for Form 3115 to determine if a fee is required. Turbotax free state file Changes granted automatically. Turbotax free state file   The IRS automatically approves certain changes of a method of depreciation. Turbotax free state file But, you must file Form 3115 for these automatic changes. Turbotax free state file   However, IRS can deny permission if Form 3115 is not filed on time. Turbotax free state file For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Turbotax free state file B. Turbotax free state file 420. Turbotax free state file Changes for which approval is not automatic. Turbotax free state file   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Turbotax free state file   You must request and receive permission for these changes. Turbotax free state file To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Turbotax free state file Change from an improper method. Turbotax free state file   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Turbotax free state file You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Turbotax free state file If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Turbotax free state file However, you must file the amended return before the filing date for the next tax year. Turbotax free state file Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Turbotax free state file You can do this by selling, exchanging, or abandoning the item of property. Turbotax free state file You can also withdraw it from use without disposing of it. Turbotax free state file For example, you could place it in a supplies or scrap account. Turbotax free state file Retirements can be either normal or abnormal depending on all facts and circumstances. Turbotax free state file The rules discussed next do not apply to MACRS and ACRS property. Turbotax free state file Normal retirement. Turbotax free state file   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Turbotax free state file A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Turbotax free state file Abnormal retirement. Turbotax free state file   A retirement can be abnormal if you withdraw the property early or under other circumstances. Turbotax free state file For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Turbotax free state file Gain or loss on retirement. Turbotax free state file   There are special rules for figuring the gain or loss on retirement of property. Turbotax free state file The gain or loss will depend on several factors. Turbotax free state file These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Turbotax free state file A single property account contains only one item of property. Turbotax free state file A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Turbotax free state file Sale or exchange. Turbotax free state file   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Turbotax free state file See Publication 544. Turbotax free state file Property not disposed of or abandoned. Turbotax free state file   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Turbotax free state file You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Turbotax free state file However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Turbotax free state file   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Turbotax free state file Special rule for normal retirements from item accounts. Turbotax free state file   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Turbotax free state file However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Turbotax free state file   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Turbotax free state file Abandoned property. Turbotax free state file   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Turbotax free state file However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Turbotax free state file Basis of property retired. Turbotax free state file   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Turbotax free state file Single item accounts. Turbotax free state file   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Turbotax free state file This is generally the cost or other basis of the item of property less depreciation. Turbotax free state file See Publication 551. Turbotax free state file Multiple property account. Turbotax free state file   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Turbotax free state file If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Turbotax free state file   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Turbotax free state file The method of depreciation used for the multiple property account is used. Turbotax free state file You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Turbotax free state file Prev  Up  Next   Home   More Online Publications
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The Turbotax Free State File

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