Table of Contents
- What's New
- Introduction
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Deductible Expenses
- Reasonable allocation.
- 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 Expenses
- Nondeductible Expenses
- Losses From Operating a Farm
- Not-for-Profit Farming
Standard mileage rate. For 2008, the standard mileage rate for each mile of business use is:
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50.5 cents per mile for the period January 1 through June 30, 2008, and
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58.5 cents per mile for the period July 1 through December 31, 2008.
See Truck and Car Expenses, later.
You can generally deduct the current costs of operating your farm. Current costs are expenses you do not have to capitalize or include in inventory costs. However, your deduction for the cost of livestock feed and certain other supplies may be limited. If you have an operating loss, you may not be able to deduct all of it.
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Deductible expenses
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Domestic production activities deduction
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Capital expenses
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Nondeductible expenses
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Losses from operating a farm
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Not-for-profit farming
Publication
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463 Travel, Entertainment, Gift, and Car Expenses
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535 Business Expenses
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587 Business Use of Your Home
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925 Passive Activity and At-Risk Rules
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936 Home Mortgage Interest Deduction
Form (and Instructions)
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Sch A (Form 1040) Itemized
Deductions -
Sch F (Form 1040) Profit or Loss From Farming
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1045 Application for Tentative Refund
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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.
The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Part II of Schedule F lists expenses common to farming operations. This chapter discusses many of these expenses, as well as others not listed on Schedule F.
Prepaid farm supplies are amounts paid during the tax year for the following items.
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Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year. However, do not include amounts paid for farm supplies that you would have consumed if not for a fire, storm, flood, other casualty, disease, or drought.
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Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. 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.
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Poultry bought for resale and not resold during the year.
Example.
During 2008, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Your total prepaid farm supplies expense for 2008 is $5,500. Your other deductible farm expenses totaled $10,000 for 2008. Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2008. The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in the later tax year you use or consume the supplies.
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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.
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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.
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Your main home is on a farm.
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Your principal business is farming.
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A member of your family meets (1) or (2).
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.
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The payment is for the purchase of feed rather than a deposit.
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The prepayment has a business purpose and is not merely for tax avoidance.
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Deducting the prepayment does not result in a material distortion of your income.
If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier.
If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed.
This rule does not apply to the purchase of commodity futures contracts.-
The absence of specific quantity terms.
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The right to a refund of any unapplied payment credit at the end of the contract.
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The seller's treatment of the payment as a deposit.
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The right to substitute other goods or products for those specified in the contract.
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Fixing maximum prices and securing an assured feed supply.
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Securing preferential treatment in anticipation of a feed shortage.
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Your customary business practice in conducting your livestock operations.
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The expense in relation to past purchases.
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The time of year you made the purchase.
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The expense in relation to your income for the year.
You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. The cost of boarding farm labor is a deductible labor cost. Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits.
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. See chapter 13 for more information on employment taxes. 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 the Taxes line of Schedule F (line 31). See Taxes, later.
You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. However, those wages may be subject to the employment taxes discussed in chapter 13.
Reduce your deduction for wages by the amount of any employment credits you claim. The following are employment credits and their related forms.
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Credit for affected Midwestern disaster area employers (Form 5884-A).
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Credit for employer differential wage payments (Form 8932).
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Empowerment zone and renewal community employment credit (Form 8844).
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Indian employment credit (Form 8845).
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Welfare-to-work credit (Form 8861).
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Work opportunity credit (Form 5884).
For more information, see the forms and their instructions.
You can deduct most expenses for the repair and maintenance of your farm property. 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. 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. For example, if you repair the barn roof, the cost is deductible. But if you replace the roof, it is a capital expense. For more information, see Capital Expenses, later.
You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business.
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Trade or business interest.
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Passive activity interest.
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Investment interest.
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Portfolio interest.
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Personal interest.
You can deduct breeding fees as a farm business expense. 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. For more information on who must use an accrual method of accounting, see Accrual method required under Accounting Methods in chapter 2.
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. You can also deduct the cost of applying these materials in the year you pay or incur it. However, see Prepaid Farm Supplies, earlier, for a rule that may limit your deduction for these materials.
If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally must capitalize their cost and deduct a part each year the benefits last. However, you can choose to deduct these expenses in the year paid or incurred. If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items.
Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. It does not include land you have never used previously for producing crops or sustaining livestock. You cannot deduct initial land preparation costs. (See Capital Expenses, later.)
Include government payments you receive for lime or fertilizer in income. See Fertilizer and Lime under Agricultural Program Payments in chapter 3.
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. 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. For information on employment taxes, see chapter 13.
You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. This includes premiums you pay for the following types of insurance.
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Fire, storm, crop, theft, liability, and other insurance on farm business assets.
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Health and accident insurance on your farm employees.
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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.
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Business interruption insurance.
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State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law).
Example.
On June 28, 2008, you paid a premium of $3,000 for fire insurance on your barn. The policy will cover a period of 3 years beginning on July 1, 2008. Only the cost for the 6 months in 2008 is deductible as an insurance expense on your 2008 calendar year tax return. Deduct $500, which is the premium for 6 months of the 36-month premium period, or of $3,000. In both 2009 and 2010, deduct $1,000 ( of $3,000). Deduct the remaining $500 in 2011. Had the policy been effective on January 1, 2008, the deductible expense would have been $1,000 for each of the years 2008, 2009, and 2010, based on one-third of the premium used each year.
If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses.
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. 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. Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation.
Example.
You lease new farm equipment from a dealer who both sells and leases. The agreement includes an option to purchase the equipment for a specified price. The lease payments and the specified option price equal the sales price of the equipment plus interest. Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. For federal income tax purposes, the agreement is a conditional sales contract. You cannot deduct any of the lease payments as rent. You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment.
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The agreement applies part of each payment toward an equity interest you will receive.
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You get title to the property after you make a stated amount of required payments.
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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.
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You pay much more than the current fair rental value of the property.
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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. Determine this value when you make the agreement.
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You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement.
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The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest.
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Revenue Procedure 2001-28 in Internal Revenue Bulletin 2001-19.
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Revenue Procedure 2001-29 in Internal Revenue Bulletin 2001-19.
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. You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. 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.
Depreciation, amortization, and the section 179 deduction are discussed in chapter 7.
You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly:
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As the principal place of business for any trade or business in which you engage,
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As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or
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In connection with your trade or business, if you are using a separate structure that is not attached to your home.
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.
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You use it exclusively and regularly for the administrative or management activities of your trade or business.
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You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
If you use part of your home for business, you must divide the expenses of operating your home between personal and business use.
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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).
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Farm expenses other than expenses that relate to the use of your home. If you are self-employed, do not include your deduction for half of your self-employment tax.
You can deduct the actual cost of operating a truck or car in your farm business. Only expenses for business use are deductible. These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits).
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50.5 cents per mile for the period January 1 through June 30, 2008, and
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58.5 cents per mile for the period July 1 through December 31, 2008.
Example.
Maureen owns a car and four pickup trucks that are used in her farm business. Her farm employees use the trucks and she uses the car for business. Maureen cannot use the standard mileage rate for the car or the trucks. This is because all five vehicles are used in Maureen's farm business at the same time. She must use actual expenses for all vehicles.
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Cultivating land.
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Raising or harvesting any agricultural or horticultural commodity.
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Raising, shearing, feeding, caring for, training, and managing animals.
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Driving to the feed or supply store.
You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. You cannot deduct lavish or extravagant expenses. Usually, the location of your farm business is considered your home for tax purposes. You are traveling away from home if:
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Your duties require you to be absent from your farm substantially longer than an ordinary work day, and
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You need to get sleep or rest to meet the demands of your work while away from home.
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.
The following are some types of deductible travel expenses.
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Air, rail, bus, and car transportation.
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Meals and lodging.
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Dry cleaning and laundry.
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Telephone and fax.
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Transportation between your hotel and your temporary work or business meeting location.
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Tips for any of the above expenses.
You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. 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. Do not take a separate deduction for the penalty.
You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. These costs include repairs, utilities, insurance, and depreciation.
The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant.
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. You deduct this cost, including freight charges for transporting the livestock to the farm, in Part I of Schedule F. However, see Chickens, seeds, and young plants, below.
Example.
You use the cash method of accounting. In 2008, you buy 50 steers you will sell in 2009. You cannot deduct the cost of the steers on your 2008 tax return. You deduct their cost in Part I of your 2009 Schedule F.
Example.
You use the cash method of accounting. In 2008, you buy 500 baby chicks to raise for resale in 2009. You also buy 50 bushels of winter wheat seed in 2008 that you sow in the fall. 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 2008.
The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses in Part II of Schedule F. 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.
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Accounting fees.
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Advertising.
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Business travel and meals.
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Commissions.
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Consultant fees.
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Crop scouting expenses.
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Dues to cooperatives.
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Educational expenses (to maintain and improve farming skills).
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Farm-related attorney fees.
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Farm magazines.
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Ginning.
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Insect sprays and dusts.
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Litter and bedding.
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Livestock fees.
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Marketing fees.
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Milk assessment.
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Recordkeeping expenses.
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Service charges.
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Small tools expected to last one year or less.
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Stamps and stationery.
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Subscriptions to professional, technical, and trade journals that deal with farming.
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Tying material and containers.
You are allowed a deduction for income attributable to domestic production activities. You can deduct 6% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. 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.
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The lease, license, or rental of property by you for use by any related person.
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The lease, license, rental, sale, exchange, or other disposition of land.
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. You include the expense in the basis of the asset. Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. See chapters 2 and 6.
Capital expenses are generally not deductible, but they may be depreciable. However, you can elect to deduct certain capital expenses, such as the following.
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The cost of fertilizer, lime, etc. (See Fertilizer and Lime under Deductible Expenses, earlier.)
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Soil and water conservation expenses. (See chapter 5.)
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The cost of property that qualifies for a deduction under section 179. (See chapter 7.)
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Business start-up costs. (See Business start-up costs, below.)
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Forestation and reforestation costs. (See Forestation and reforestation costs, later.)
Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses.
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Land and buildings.
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Additions, alterations, and improvements to buildings, etc.
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Cars and trucks.
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Equipment and machinery.
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Fences.
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Draft, breeding, sport, and dairy livestock.
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Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use.
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Water wells, including drilling and equipping costs.
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Land preparation costs, such as:
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Clearing land for farming,
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Leveling and conditioning land,
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Purchasing and planting trees,
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Building irrigation canals and ditches,
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Laying irrigation pipes,
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Installing drain tile,
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Modifying channels or streams,
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Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and
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Building roads.
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Site preparation costs, such as:
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Girdling,
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Applying herbicide,
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Baiting rodents, and
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Clearing and controlling brush.
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The cost of seed or seedlings.
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Labor and tool expenses.
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Depreciation on equipment used in planting or seeding.
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Costs incurred in replanting to replace lost seedlings.
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The unique stand identification numbers.
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The total number of acres reforested during the tax year.
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The nature of the reforestation treatments.
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The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted.
You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm.
You cannot deduct certain personal, living, and family expenses as business expenses. 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. Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible.
You cannot deduct the following items on your tax return.
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Boards of trade.
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Business leagues.
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Chambers of commerce.
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Civic or public service organizations.
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Professional associations.
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Trade associations.
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Real estate boards.
If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. The amount of the loss you can deduct when figuring your taxable income may be limited. To figure your deductible loss, you must apply the following limits.
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The at-risk limits.
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The passive activity limits.
The following discussions explain these limits.
If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
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. See Not-for-Profit Farming, later.The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. These rules limit the losses you can deduct when figuring your taxable income. The deductible loss from an activity is limited to the amount you have at risk in the activity.
You are at risk in any activity for:
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The money and adjusted basis of property you contribute to the activity, and
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Amounts you borrow for use in the activity if:
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You are personally liable for repayment, or
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You pledge property (other than property used in the activity) as security for the loan.
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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.
For more information, see Publication 925.
A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. Generally, a rental activity is a passive activity.
If you have a passive activity, special rules limit the loss you can deduct in the tax year. You generally can deduct losses from passive activities only up to income from passive activities. Credits are similarly limited.
For more information, see Publication 925.
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. 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 line 21 of Form 1040 and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). Also, there is a limit on the deductions you can take. You cannot use a loss from that activity to offset income from other activities.
Activities you do as a hobby, or mainly for sport or recreation, come under this limit. An investment activity intended only to produce tax losses for the investors also comes under this limit.
The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
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You operate your farm in a businesslike manner,
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The time and effort you spend on farming indicate you intend to make it profitable,
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You depend on income from farming for your livelihood,
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Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming,
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You change your methods of operation in an attempt to improve profitability,
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You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business,
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You were successful in making a profit in similar activities in the past,
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You make a profit from farming in some years and the amount of profit you make, and
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You can expect to make a future profit from the appreciation of the assets used in the farming activity.
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