Table of Contents
- Preparing the Return
- Schedule F (Form 1040), Profit or Loss From Farming
- Form 4562 Depreciation and Amortization
- Form 8903 Domestic Production Activities Deduction
- Schedule SE (Form 1040) Self-Employment Tax
- Form 4684 Casualties and Thefts
- Form 4797 Sales of Business Property
- Schedule D (Form 1040) Capital Gains and Losses
- Form 1040, Page 1
- Form 1040, Page 2
- Schedule J (Form 1040) Income Averaging for Farmers and Fishermen
- Completing the Return
This sample return uses actual forms to show you how to prepare your income tax return. However, the information shown on the filled-in forms is not from any actual farming operation.
Walter Brown is a dairy farmer filing jointly with his wife, Jane. Their return has been prepared using the cash method of accounting. See chapter 2 for an explanation of the cash method and other methods of accounting.
The first step in preparing Mr. Brown's income tax return is to determine his net farm profit or loss on Schedule F (1040). The income and expenses shown on this Schedule F (1040) are taken from his farm receipt and expense records. Data for the depreciation and section 179 deductions are taken from Form 4562, Depreciation and Amortization, and the illustrated Depreciation Worksheet that follows Form 4562. Mr. Brown has filed all required Form 1099 information returns.
On line B, he writes the number “112120” from the list of Principal Agricultural Activity Codes on page 2 of Schedule F (1040)(not shown). This indicates that his principal source of farm income is from dairy farming.
Mr. Brown keeps records of the various types of farm income he receives during the year. (Farm income is discussed in chapter 3.) He uses this information to complete Part I of Schedule F (1040).
Milk | $233,874 |
Steers and calves he raised * | 2,914 |
Vegetables he grew | 1,457 |
Corn ($7,286), hay ($8,944), and wheat ($8,543) he raised | 24,773 |
Total reported on line 4 | $263,018 |
* Raised other than for draft, breeding, sport, or dairy purposes. |
Mr. Brown records his farm expenses during the year for tax purposes and summarizes these expenses at the end of the year. (Farm business expenses are discussed in chapter 4.) This gives him his deductible expenses, which he enters in Part II of Schedule F (1040).
Mr. Brown follows the instructions and lists the information called for in Parts I through IV. He also completes Part V on page 2 to provide information on listed property used in his farming business. The two vehicles used in his business are listed property. The truck, sold in July and shown on Form 4797, was placed in service in 1997 and fully depreciated in 2002. No depreciation is allowed for 2007.
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2003 - straight line Alternative Depreciation System (ADS).
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2004, 2005, and 2007 -150% declining balance General Depreciation System (GDS).
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In January, he completed and placed in service a dairy facility designed specifically for the production of milk and to house, feed, and care for dairy cattle (single purpose livestock structure). The construction of the dairy facility began in 2006. The building is depreciated separately from the milking equipment it houses. The cost of the building is $28,250 and it is 10-year property under MACRS. The cost of the equipment is $72,000 and it is 7-year property under MACRS.
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In February, he made improvements to his machine shed for a total cost of $650. The improvements are depreciated as if they were a separate building with a 20-year recovery period.
The following example of Form 8903 was prepared using the small business simplified overall method. See the instructions for Form 8903 for more information.
The domestic production activities deduction (DPAD) is generally 6% of the lesser of a taxpayer's qualified production activities income for the tax year or an individual taxpayer's adjusted gross income (also adjusted gross income for an estate or trust; taxable income for all other taxpayers) for the tax year. However, the DPAD generally cannot be more than 50% of the Form W-2 wages paid to employees of the taxpayer that are properly allocable to domestic production gross receipts.
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$280,082 from line 11 of his Schedule F.
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Plus his cost or other basis, $6,523 from line 2 of his Schedule F.
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Plus $15,158 ($13,160 + 303 + 255 + 700 + 70 + 670) from Form 4797 (total gross sales price).
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His total expenses of $216,425, from line 35 of his Schedule F.
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Plus his total cost or other basis of items bought for resale, $6,523, from line 2 of his Schedule F.
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Plus his total cost or other basis of other items sold, $1,316 ($325 + (912-514) + 5 + 588), from Form 4797.
After figuring his net farm profit on page 1 of Schedule F (1040), Mr. Brown figures his self-employment tax. To do this, he figures his net earnings from farm self-employment on Short Schedule SE (1040), Section A. He is not required to use Long Schedule SE (1040), Section B. First he prints his name (as shown on his Form 1040) and his social security number at the top of Schedule SE (1040). Only his name and social security number go on Schedule SE (1040). His wife does not have self-employment income. If she had self-employment income, she would file her own Schedule SE (1040).
Mr. Brown's only business casualty occurred on July 7 when a dairy cow he purchased 4 years ago was killed by lightning. He shows the loss from the casualty on page 2 of Form 4684. Only page 2 is shown, because page 1 is for nonbusiness casualties.
He prints his name, his wife's name, and his identifying number at the top of page 2.
After completing Schedule F (1040) and Section B of Form 4684, Mr. Brown fills in Form 4797 to report the sales of business property. See Table 9-1 in chapter 9 for the types of property reported on Form 4797.
He prints his name, his wife's name, and his identifying number at the top of Form 4797.
Before he can complete Parts I and II, he must complete Part III to report the sale of certain depreciable property.
After completing Form 4797, Mr. Brown fills in Schedule D (1040) to report gains and losses on capital assets. He prints his name, his wife's name, and his social security number at the top of Schedule D (1040).
Mr. Brown is filing a joint return with his wife.
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His capital loss on line 13 from Schedule D (1040), line 21.
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His other gain on line 14 from Form 4797, line 18b.
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His net farm profit on line 18 from Schedule F (1040), line 36.
Mr. Brown fills in the following lines on page 2 of Form 1040.
In 2007, Mr. Brown's taxable income, $37,716, is substantially higher than in each of the 3 previous years. His taxable income amounts were only $1,112, $667, and $3,968, for 2004, 2005, and 2006, respectively. He elects to use income averaging by completing Schedule J to figure his tax.
He prints his name, his wife's name, and his identifying number at the top of Schedule J (1040).
The Browns sign their names and enter the date signed, their occupations, and their telephone number at the bottom of page 2 of Form 1040. If they had paid a preparer to do their tax return, the preparer would also sign the return and provide the information requested at the bottom of the page. Mr. Brown prints his name, his wife's name, and their address in the label section. He writes his and his wife's social security numbers in the boxes next to the label section.
He writes a check payable to the United States Treasury for the full amount on line 76 of Form 1040. On the check, he writes his social security number, their telephone number, and “2007 Form 1040.” His name and address are printed on the check. Mr. Brown could have chosen instead to pay his taxes by credit card (American Express® Card, Discover® Card, MasterCard® card, or Visa® card). For information about how to pay by credit card, see the Form 1040 Instructions.
After making a copy of their complete return for his records, he assembles the various forms and schedules behind Form 1040 in the following order, based on the Attachment Sequence Number shown in the upper right corner of each schedule or form and included after each item listed below.
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Schedule A. (07) (not shown)
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Schedule D. (12)
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Schedule F. (14)
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Schedule SE. (17)
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Schedule J. (20)
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Form 4136. (23) (not shown)
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Form 4684. (26)
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Form 4797. (27)
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Form 4562. (67)
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Form 8903. (143)
He completes Form 1040-V, Payment Voucher, which was included in his tax package. He carefully follows the instructions for mailing his return and paying the tax due.
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