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Publication 225 Cat. No. 11049L Contents

Introduction ...... 1 Department of the Farmer's What's New for 2020 ...... 2 Treasury Internal What's New for 2021 ...... 3 Revenue Tax Guide Service Reminders ...... 3 Chapter 1. Importance of Records .... 3

For use in preparing Chapter 2. Accounting Methods ..... 5 2020 Returns Chapter 3. Farm Income ...... 8 Chapter 4. Farm Business Expenses ...... 18

Acknowledgment: The valuable advice and assistance given us each Chapter 5. Soil and Water year by the National Farm Income Tax Extension Committee is Conservation Expenses ...... 27 gratefully acknowledged. Chapter 6. Basis of Assets ...... 30

Chapter 7. Depreciation, Depletion, and Amortization ...... 36

Chapter 8. Gains and Losses ...... 48

Chapter 9. Dispositions of Property Used in Farming ..... 56

Chapter 10. Installment Sales ..... 59

Chapter 11. Casualties, Thefts, and Condemnations ...... 65

Chapter 12. Self-Employment Tax ... 73

Chapter 13. Employment Taxes .... 78

Chapter 14. Fuel Excise Tax Credits and Refunds ...... 84

Chapter 15. Estimated Tax ...... 87

Chapter 16. How To Get Tax Help ... 89

Index ...... 92 Introduction You are in the business of farming if you culti- vate, operate, or manage a farm for profit, either as owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and or- chards and groves. This publication explains how the federal tax laws apply to farming. Use this publication as a guide to figure your taxes and complete your farm tax return. If you need more information on a subject, get the specific IRS tax publication covering that subject. We refer to many of these free publications throughout this publication. See chapter 16 for information on ordering these publications. The explanations and examples in this publi- Get forms and other information faster and easier at: cation reflect the Internal Revenue Service's in- • IRS.gov (English) • IRS.gov/Korean (한국어) terpretation of tax laws enacted by Congress, • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) Treasury regulations, and court decisions. How- • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (TiếngViệt) ever, the information given does not cover ev- ery situation and is not intended to replace the

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law or change its meaning. This publication Farm tax classes. Many state Cooperative This limit is reduced by the amount by which the covers subjects on which a court may have ren- Extension Services conduct farm tax work- cost of the property placed in service during the dered a decision more favorable to taxpayers shops in conjunction with the IRS. Contact your tax year exceeds $2,590,000. Also, the maxi- than the interpretation by the IRS. Until these county or regional extension office for more in- mum section 179 expense deduction for sport differing interpretations are resolved by higher formation. utility vehicles placed in service in tax years be- court decisions, or in some other way, this pub- ginning in 2020 is $25,900. See chapter 7. lication will continue to present the interpreta- Rural Tax Education website. The Rural Tax Expiration of the treatment for certain race tion by the IRS. Education website is a source for information horses. The 3-year recovery period for race concerning agriculturally related income and horses 2 years old or younger will not apply to The IRS Mission. Provide America's taxpay- deductions and self-employment tax. The web- horses placed in service after December 31, ers top-quality service by helping them under- site is available for farmers and ranchers, other 2020. See chapter 7. stand and meet their tax responsibilities and en- agricultural producers, Extension educators, force the tax law with integrity and fairness to and anyone interested in learning about the tax Qualified improvement property. The all. side of the agricultural community. Members of CARES Act revised the provision in the Tax the National Farm Income Tax Extension Com- Cuts and Jobs Act (TCJA) to change the treat- Comments and suggestions. We welcome mittee are contributors for the website and the ment of qualified improvement property (as de- your comments about this publication and your website is hosted by Utah State University Co- fined in section 168(e)(6) of the Internal Reve- suggestions for future editions. operative Extension. You can visit the website nue Code) placed in service after December 31, You can send us comments through at www.ruraltax.org. 2017, to 15-year property under MACRS. See IRS.gov/FormComments. Or you can write to: chapter 7. Internal Revenue Service, Tax Forms and Pub- New rules for net operating loss (NOL) car- lications, 1111 Constitution Ave. NW, IR-6526, rybacks. The CARES Act revised the provi- Washington, DC 20224. Future Developments sions of the TCJA related to NOL carrybacks to allow taxpayers to carryback NOLs including Although we can’t respond individually to The IRS has created a page on IRS.gov for each comment received, we do appreciate your non-farm NOLs arising from tax years 2018, information about Pub. 225 at 2019, and 2020 for 5 years. See chapter 11. feedback and will consider your comments as IRS.gov/Pub225. Information about recent we revise our tax forms, instructions, and publi- developments affecting Pub. 225 will be posted Maximum net earnings. The maximum net cations. We can’t answer tax questions sent to on that page. self-employment earnings subject to the social the above address. security part (12.4%) of the self-employment tax Tax questions. If you have a tax question is $137,700 for 2020, up from $132,900 for not answered by this publication or the How To 2019. There is no maximum limit on earnings Get Tax Help at the end of this publication, go What's New for 2020 subject to the Medicare part (2.9%) or, if appli- to the IRS Interactive Tax Assistant page at cable, the Additional Medicare Tax (0.9%). See The following items highlight a number of chapter 12. IRS.gov/help/ITA where you can find topics us- administrative and tax law changes for 2020. ing the search feature or by viewing the catego- They are discussed in more detail throughout Changes to Schedule SE (Form 1040). ries listed. the publication. Schedule SE (Form 1040) has a new Part II to allow self-employed persons to figure a maxi- Ordering forms and publications. Visit Coronavirus Food Assistance Program mum amount of self-employment tax payments IRS.gov/FormsPubs to download forms and (CFAP). The CFAP provides direct payments which may be deferred. Schedule SE (Form publications. Otherwise, you can go to IRS.gov/ to producers of eligible agricultural commodities 1040) has also been revised into a single form OrderForms to order current and prior-year adversely affected by the conronavirus format and each person with net earnings from forms and instructions. Your order should arrive (COVID-19) pandemic to help offset sales los- self-employment will use a separate Sched- within 10 business days. ses and increased marketing costs associated ule SE (Form 1040). See the Instructions for with the COVID-19 pandemic. Schedule SE (Form 1040) for more information. Comments on IRS enforcement actions. CFAP payments are agricultural program Credits for self-employed persons. New re- The Small Business and Agricultural Regulatory payments that you must include in gross in- fundable credits are available to certain Enforcement Ombudsman and 10 Regional come. Report the full amount of your CFAP pay- self-employed persons impacted by the corona- Fairness Boards were established to receive ments on Schedule F (Form 1040), lines 4a and virus. See the Instructions for Form 7202 for comments from small business about federal 4b. See the Instructions for Schedule F (Form more information. agency enforcement actions. The Ombudsman 1040). will annually evaluate the enforcement activities Standard mileage rate. For 2020, the stand- COVID-19 related employment tax credits of each agency and rate its responsiveness to ard mileage rate for the cost of operating your and other tax relief. small business. If you wish to comment on the car, van, pickup, or panel truck for each mile of • The Families First Coronavirus Response enforcement actions of the IRS, you can: business use is 57.5 cents. See chapter 4. Act (the “FFCRA”), enacted on March 18, • Call 888-734-3247, 2020, provides small and midsize employ- Increase business interest expense. The • Fax your comments to 202-481-5719, ers refundable tax credits that reimburse Coronavirus Aid, Relief, and Economic Security • Write to: them for the cost of providing paid sick and Act (CARES Act) retroactively increases the Office of the National Ombudsman family leave wages to their employees for amount of business interest expense that may U.S. Small Business Administration leave related to COVID-19. be deducted for tax years beginning in 2019 409 3rd Street SW • The CARES Act, enacted on March 27, and 2020 by computing the section 163(j) limi- Washington, DC 20416, 2020, provides eligible employers with an tation using 50% (instead of 30%) of your ad- • Send an email to [email protected], employee retention tax credit if they keep justable taxable income. The limitation doesn’t or employees on their payroll, despite experi- apply to most farms. See chapter 4. • Complete and submit a Federal Agency encing economic hardship related to Comment Form online at Payroll Protection Program (PPP) Loan and COVID-19. www.sba.gov/ombudsman/comment. Forgiven Debt. Generally, you can’t deduct • The CARES Act also allows employers to expenses that are allocable to a PPP loan you defer the deposit and payment of the em- Treasury Inspector General for Tax Admin- receive that’s later forgiven. For more informa- ployer share of social security taxes. istration (TIGTA). If you want to confidentially tion, see Notice 2020-32 available at • The Presidential Memorandum on Defer- report misconduct, waste, fraud, or abuse by an IRS.gov/irb/2020-21_IRB#NOT-2020-32. ring Payroll Tax Obligations in Light of the IRS employee, you can call 800-366-4484 Increased section 179 expense deduction Ongoing COVID-19 Disaster, issued on (800-877-8339 for TTY/TDD users). You can re- dollar limits. The maximum amount you can August 8, 2020, directs the Secretary of main anonymous. elect to deduct for most section 179 property the Treasury to defer the whholding, de- you placed in service in 2020 is $1,040,000. posit, and payment of the employee share

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of social security tax on wages paid during Reportable transactions. You must file Form the period of September 1, 2020, through 8886, Reportable Transaction Disclosure State- December 31, 2020. The deferral is availa- ment, to report certain transactions. You may ble to employees whose social security have to pay a penalty if you are required to file 1. wages paid for a bi-weekly pay period are Form 8886 but do not do so. Reportable trans- less than $4,000, or the equivalent thresh- actions include (1) transactions the same as, or old amount for other pay periods. substantially similar to, tax avoidance transac- Importance of See chapter 13. tions identified by the IRS; (2) transactions of- fered to you under conditions of confidentiality Social security and Medicare tax for 2020. and for which you paid an advisor a minimum Records The social security tax rate is 6.2% each for the fee; (3) transactions for which you have, or a re- employee and employer, unchanged from lated party has, a right to a full or partial refund 2019. The social security wage base limit is of fees if all or part of the intended tax conse- $137,700. quences from the transaction are not sustained; Introduction The Medicare tax rate is 1.45% each for the (4) transactions that result in losses of at least A farmer, like other taxpayers, must keep re- employee and employer, unchanged from $2 million in any single year or $4 million in any cords to prepare an accurate income tax return 2019. There is no wage base limit for Medicare combination of years; and (5) transactions with and determine the correct amount of tax. This tax. See chapter 13. asset holding periods of 45 days or less and chapter explains the benefits of keeping re- that result in a tax credit of more than $250,000. 2020 withholding tables. The federal income cords, what kinds of records you must keep, For more information, see the Instructions for and how long you must keep them for federal tax withholding tables are now included in Pub. Form 8886. 15T, Federal Income Tax Withholding Methods. tax purposes. Form W-4 for 2020. You should make new While this publication only discusses tax re- Redesigned Form W-4 for 2020. The IRS Forms W-4 available to your employees and en- cords, the records you keep as a farm business has redesigned Form W-4 for 2020. See chap- courage them to check their income tax with- owner should allow you to accurately measure ter 13. holding for 2020. Those employees who owed your farm’s financial performance, create finan- New Form 1099-NEC. There is a new Form a large amount of tax or received a large refund cial statements, and help you make manage- 1099-NEC to report nonemployee compensa- for 2019 may need to submit a new Form W-4. ment decisions in addition to calculating taxable tion paid in 2020. The 2020 Form 1099-NEC Form 1099-MISC. Generally, file Form farm income. will be due February 1, 2021. See chapter 13. 1099-MISC if you pay at least $600 in rents, Records that provide information beyond services, and other miscellaneous payments in your tax return require additional information your farming business to an individual (for ex- and effort on the part of the record keeper. To ample, an accountant, an attorney, or a veteri- assist you in developing or improving your re- What's New for 2021 narian) who is not your employee. Payments cordkeeping system, the Farm Financial Stand- made to corporations for medical and health ards Council produces publications that provide Social security and Medicare tax for 2021. care payments, including payments made to recommendations for financial reporting and The employee and employer tax rates for social veterinarians, must generally be reported on analysis. You can download the Implementation security and the maximum amount of wages Form 1099. Guidelines at https://ffsc.org. For more informa- subject to social security tax for 2021 will be tion, contact the Farm Financial Standards Limited liability company (LLC). For purpo- discussed in Pub. 51 (for use in 2021). Council in the following manner. ses of this publication, a limited liability com- The Medicare tax rate for 2021 will also be • Call 262-253-6902. pany (LLC) is a business entity organized in the discussed in Pub. 51 (for use in 2021). There is • Send a fax to 262-253-6903. United States under state law. Unlike a partner- no limit on the amount of wages subject to Med- • Write to: ship, all of the members of an LLC have limited icare tax. See chapter 13. Farm Financial Standards Council personal liability for its debts. An LLC may be N78 W14573 Appleton Ave., #287 classified for federal income tax purposes as a Menomonee Falls, WI 53051. partnership, corporation, or an entity disregar- Reminders ded as separate from its owner by applying the rules in Regulations section 301.7701-3. See Topics The following reminders and other items may Pub. 3402 for more details. This chapter discusses: help you file your tax return. Photographs of missing children. The IRS is Benefits of recordkeeping Principal agricultural activity codes. You a proud partner with the National Center for • Kinds of records to keep must enter on line B of Schedule F (Form 1040) Missing & Exploited Children® (NCMEC). Pho- • How long to keep records a code that identifies your principal agricultural tographs of missing children selected by the • activity. It is important to use the correct code Center may appear in this publication on pages because this information will identify market that would otherwise be blank. You can help Useful Items segments of the public for IRS Taxpayer Educa- bring these children home by looking at the You may want to see: tion programs. The U.S. Census Bureau also photographs and calling 1-800-THE-LOST uses this information for its economic census. (1-800-843-5678) (24 hours a day, 7 days a Publication See the list of Principal Agricultural Activity Co- week) if you recognize a child.

des on page 2 of Schedule F (Form 1040). 51 51 (Circular A), Agricultural Employer's Tax Guide Publication on employer identification num- bers (EINs). Pub. 1635, Understanding Your 463 463 Travel, Gift, and Car Expenses Employer Identification Number, provides gen-

eral information on EINs. Topics include how to 535 535 Business Expenses apply for an EIN and how to complete Form

SS-4. 544 544 Sales and Other Dispositions of Assets Change of address. If you change your home address, you should use Form 8822, Change of 946 946 How To Depreciate Property Address, to notify the IRS. If you change your business address, you should use Form See chapter 16 for information about getting 8822-B, Change of Address or Responsible publications. Party—Business, to notify the IRS. Be sure to include your suite, room, or other unit number.

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complete and separate set of records for each Employment taxes. There are specific em- business. A corporation’s recordkeeping sys- ployment tax records you must keep. For a list, Benefits of tem should include board of directors meeting see Pub. 51 (Circular A). minutes. See chapter 2 for more information. Recordkeeping Excise taxes. See How To Claim a Credit or Your recordkeeping system should include a Refund in chapter 14 for the specific records Everyone in business, including farmers, must summary of your business transactions, which you must keep to verify your claim for credit or keep appropriate records. Recordkeeping will shows your gross income, as well as any ex- refund of excise taxes on certain fuels. help you do the following. penses, deductions, and credits you are report- ing. In addition, you must keep supporting Assets. Assets are the property, such as ma- Monitor the progress of your farming busi- documents, such as invoices and receipts, for chinery and equipment, you own and use in ness. You need records to monitor the pro- purchases, sales, payroll, and other business your business. You must keep records to verify gress of your business. In addition to measuring transactions. certain information about your business assets. overall profitability, detailed records can help You need records to figure your annual depreci- you identify which crop or livestock enterprises It is important to keep these documents be- cause they support the entries in your journals ation deduction and the gain or (loss) when you are most profitable or indicate where manage- sell the assets. Your records should show all ment changes may be needed to improve profit- and ledgers and on your tax return. Keep them in an orderly fashion and in a safe place. For in- the following. ability. Records that help you make better deci- • When and how you acquired the asset sions should also increase the likelihood of stance, organize them by year and type of in- come or expense. (whether the asset was new or used). business success. • Full purchase cost of the asset. • Cost of any improvements. Prepare your financial statements. You will Electronic records. All requirements that ap- • Section 179 deduction taken. need records to prepare accurate financial ply to hard copy books and records also apply • Deductions taken for depreciation. statements. These include income (profit and to electronic storage systems that maintain tax • Deductions taken for casualty losses, such loss) statements, cash flow statements, bal- books and records. When you replace hard as losses resulting from fires or storms. ance sheets, and statements of owner’s equity. copy books and records, you must maintain the • How you used the asset. These statements will be required and helpful electronic storage systems for as long as they • When and how you disposed of the asset. when working with your bank or creditors and are material to the administration of tax law. • Fair market value of property when traded. may also help you manage your farm business. An electronic storage system is any system for preparing or keeping your records either by • Selling price. Expenses of sale. Identify source of receipts. You will receive electronic imaging or by transfer to electronic • money, property, and/or services from many storage media. The electronic storage system The following are examples of records that sources. Your records can identify the source of must index, store, preserve, retrieve, and repro- may show this information. your receipts. You need this information to sep- duce the electronically stored books and re- • Purchase and sales invoices. arate farm from nonfarm receipts and taxable cords in legible format. All electronic storage • Real estate closing statements. from nontaxable income. systems must provide a complete and accurate • Canceled checks. record of your data that is accessible to the IRS. • Bank statements. Keep track of deductible expenses. You Electronic storage systems are also subject may forget expenses when you prepare your to the same controls and retention guidelines as Financial account statements as proof of tax return unless you record them when they those imposed on your original hard copy payment. If you do not have a canceled check, occur. books and records. The original hard copy you may be able to prove payment with certain books and records may be destroyed, provided financial account statements prepared by finan- Prepare your tax returns. You need records that the electronic storage system has been cial institutions. These include account state- to prepare your tax return. These records must tested to establish that the hard copy books and ments prepared for the financial institution by a accurately support the income, expenses, and records are being reproduced in compliance third party. These account statements must be credits you report. Generally, these are the with IRS requirements for an electronic storage legible. The following table lists acceptable ac- same records you use to monitor your farming system and procedures are established to en- count statements. business and prepare your financial statements. sure continued compliance with all applicable You will also need records to prepare informa- rules and regulations. You still have the respon- THEN the statement must tion returns such as a Form 1099-MISC provi- sibility of retaining any other books and records IF payment is by... show the... ded to a vendor or a Form W-2 provided to an that are required to be retained. employee. The IRS may test your electronic storage Check • Check number. • Amount. system, including the equipment used, indexing • Payee's name. Support items reported on tax returns. You methodology, software, and retrieval capabili- must keep your business records available at all • Date the check amount ties. This test is not considered an examination was posted to the times for inspection by the IRS. If the IRS exam- and the results must be shared with you. If your account by the financial ines any of your tax returns, you may be asked electronic storage system meets the require- institution. to explain the items reported. A complete set of ments mentioned earlier, you will be in compli- records will assist in the examination. ance. If not, you may be subject to penalties for Electronic funds • Amount transferred. transfer • Payee's name. noncompliance, unless you continue to main- • Date the transfer was tain your original hard copy books and records posted to the account by Kinds of Records in a manner that allows you and the IRS to de- the financial institution. termine your correct tax. For details on elec- To Keep tronic storage system requirements, see Reve- Credit card • Amount charged. nue Procedure 97-22. You can find Revenue • Payee's name. Except in a few cases, the law does not require Procedure 97-22 on page 9 of Internal Revenue • Transaction date. any specific kind of records. You can choose Bulletin 1997-13 at any recordkeeping system suited to your farm- IRS.gov/pub/irs-irbs/irb97-13.pdf. Proof of payment of an amount, by it- ing business that clearly shows, for example, ! self, does not establish you are entitled your income and expenses. Travel, transportation, entertainment, and CAUTION to a tax deduction. You should also gift expenses. Specific recordkeeping rules keep other documents, such as credit card You should set up your recordkeeping sys- apply to these expenses. For more information, sales slips and invoices, to show that you also tem using an accounting method that clearly see Pub. 463. incurred the cost. shows your income for your tax year. If you are in more than one business, you should keep a

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Tax returns. Keep copies of your filed tax re- You generally choose an accounting turns. They help in preparing future tax returns method for your farm business when you file and making computations if you file an amen- your first income tax return that includes a ded return. Keep copies of your information re- 2. Schedule F (Form 1040), Profit or Loss From turns such as Form 1099, Schedule K-1, and Farming. If you later want to change your ac- Form W-2. counting method, you must generally get IRS approval. How to obtain IRS approval is dis- Accounting cussed later under Changes in Methods of Ac- How Long To Keep Methods counting. Records Types of accounting methods. Generally, you can use any of the following accounting You must keep your records as long as they methods. Each method is discussed in detail may be needed for the administration of any Introduction below. provision of the Internal Revenue Code. Keep • Cash method. records that support an item of income or a de- Accrual method. You must use an accounting method that • duction appearing on a return until the period of Special methods of accounting for certain clearly shows the income and expenses used to • limitations for the return runs out. A period of items of income and expenses. figure your taxable income. You must also file limitations is the period of time after which no le- Combination (hybrid) method using ele- an income tax return for an annual accounting • gal action can be brought. Generally, that ments of two or more of the above meth- period called a “tax year.” means you must keep your records for at least ods. This chapter discusses accounting meth- 3 years from when your tax return was due or ods. For information on accounting periods, see filed or within 2 years of the date the tax was Business and other items. You can account Pub. 538, Accounting Periods and Methods, paid, whichever is later. However, certain re- for business and personal items using different and the Instructions for Form 1128, Application cords must be kept for a longer period of time, accounting methods. For example, you can fig- To Adopt, Change, or Retain a Tax Year. as discussed below. ure your business income under an accrual method, even if you use the cash method to fig- Employment taxes. If you have employees, Topics ure personal items. you must keep all employment tax records for at This chapter discusses: least 4 years after the date the tax becomes Two or more businesses. If you operate two due or is paid, whichever is later. • Cash method or more separate and distinct businesses, you • Accrual method can use a different accounting method for each Assets. Keep records relating to property until • Farm inventory business. Generally, no business is separate the period of limitations expires for the year in • Special methods of accounting and distinct unless a complete and separate set which you dispose of the property in a taxable • Changes in methods of accounting of books and records is maintained for each disposition. You must keep these records to fig- business. ure any depreciation, amortization, or depletion Useful Items deduction and to figure your basis for comput- You may want to see: ing gain or (loss) when you sell or otherwise dis- Cash Method pose of the property. Publication Most farmers use the cash method because You may need to keep records relating to they find it easier to keep records using the the basis of property longer than the period of 538 538 Accounting Periods and Methods cash method. Certain farm corporations and limitation. Keep those records as long as they partnerships and all tax shelters are generally 535 535 Business Expenses are important in figuring the basis of the original required to use an accrual method of account- or replacement property. Generally, this means Form (and Instructions) ing. However, for tax years beginning in 2020, as long as you own the property and, after you farm corporations or partnerships that have dispose of it, for the period of limitations that ap- 1128 1128 Application To Adopt, Change, or average annual gross receipts of $26 million or plies to you. For example, if you received prop- Retain a Tax Year less for the 3 preceding tax years and are not erty in a nontaxable exchange, you must keep tax shelters can use the cash method instead of

3115 3115 Application for Change in the records for the old property, as well as for the accrual method. See Accrual Method Re- Accounting Method the new property, until the period of limitations quired, later. Also, see Inventory, later. expires for the year in which you dispose of the See chapter 16 for information about getting new property in a taxable disposition. For more publications and forms. information on basis, see chapter 6. Income

Records for nontax purposes. When your Under the cash method, include in your gross records are no longer needed for tax purposes, Accounting Methods income all items of income you actually or con- do not discard them until you check to see if structively received during the tax year. Items of you have to keep them longer for other purpo- An accounting method is a set of rules used to income include money received as well as ses. For example, your insurance company or determine when and how your income and ex- property or services received. If you receive creditors may require you to keep them longer penses are reported on your tax return. Your property or services, you must include the fair than the IRS does. accounting method includes not only your over- market value (FMV) of the property or services all method of accounting, but also the account- in income. See chapter 3 for information on how ing treatment you use for any material item. to report farm income on your income tax re- turn. Facts and circumstances affect whether an item is material. Factors to consider in deter- Constructive receipt. Income is construc- mining the materiality of an item include the size tively received when an amount is credited to of the item (both in absolute terms and in rela- your account or made available to you without tion to income and other expenses) and the restriction. You do not need to have possession treatment of the item on your financial state- of the income for it to be treated as income for ments. Generally, an item considered material the tax year. You need to have the ability to re- for financial statement purposes is also consid- ceive the income. If you authorize someone to ered material for income tax purposes. See be your agent and receive income for you, you Pub. 538 for more information.

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are considered to have received the income chapter 6. See chapter 4 for information on how Inventory when your agent receives it. Income is not con- to deduct farm business expenses on your in- structively received if your receipt of the income come tax return. Generally, if you keep an inventory, you must is subject to substantial restrictions or limita- use an accrual method of accounting to deter- tions. Prepayment. Generally, you cannot deduct mine your gross income. However, see Excep- expenses paid in advance. This rule applies to tion below. An inventory is necessary to clearly Delaying receipt of income. You cannot any expense paid far enough in advance to, in show income when the production, purchase, hold checks or postpone taking possession of effect, create an asset with a useful life extend- or sale of merchandise is an income-producing similar property from one tax year to another to ing substantially beyond the end of the current factor. See Pub. 538 for more information. Also, avoid paying tax on the income. You must re- tax year. see Farm Inventory, later, for more information port the income in the year the money or prop- on items that must be included in inventory by erty is received or made available to you with- Example. On November 1, 2020, you farmers, and inventory valuation methods for out restriction. signed and paid $3,600 for a 3-year (36-month) farmers. insurance contract for equipment. In 2020, you Example. Frances Jones, a farmer who are allowed to deduct only $200 (2/36 x $3,600) Exception. For tax years beginning in 2020, uses the cash method of accounting, was enti- of the cost of the policy that is attributable to you are not required to maintain an inventory if tled to receive a $10,000 payment on a grain 2020. In 2021, you'll be able to deduct $1,200 the average annual gross receipts for the 3 pre- contract in December 2020. She was told in De- (12/36 x $3,600); in 2022, you'll be able to de- ceding tax years for the farm is $26 million or cember that her payment was available. She re- duct $1,200 (12/36 x $3,600); and in 2023, less and the farm is not a tax shelter. In this quested not to be paid until January 2021. Fran- you'll be able to deduct the remaining balance case, the farm can use a method of accounting ces must include this payment in her 2020 of $1,000. that (1) treats inventory as nonincidental materi- income because it was made available to her in An exception applies if the expense qualifies als and supplies, or (2) accounts for the inven- 2020. for the 12-month rule. Under the 12-month rule, tory in the same manner as the applicable finan- Debts paid by another person or can- a taxpayer is not required to capitalize amounts cial statements, or books and records if there celed. If your debts are paid by another person paid to create certain rights or benefits for the are no financial statements. or are canceled by your creditors, you may earlier of the following: have to report part or all of this debt relief as in- • 12 months after the right or benefit begins, Expenses come. If you receive income in this way, you or constructively receive the income when the • The end of the tax year after the tax year in Under an accrual method of accounting, you debt is canceled or paid. See Cancellation of which payment is made. generally deduct or capitalize a business ex- Debt in chapter 3 for more information. See Pub. 538 for more information and exam- pense when both of the following apply. ples. Deferred payment contract. If you sell an 1. The all-events test has been met. This test See chapter 4 for special rules for prepaid item under a deferred payment contract that is met when: farm supplies and prepaid livestock feed. calls for payment in a future year, there is no a. All events have occurred that fix the constructive receipt in the year of sale. How- fact that you have a liability, and ever, if the sales contract states that you have Accrual Method the right to the proceeds of the sale from the b. The amount of the liability can be de- buyer at any time after delivery of the item, then Under an accrual method of accounting, you termined with reasonable accuracy. generally report income in the year earned and you must include the sales price in income in 2. Economic performance has occurred. the year of the sale, regardless of when you ac- deduct or capitalize expenses in the year incur- tually receive payment. red. The purpose of an accrual method of ac- Economic performance. Generally, you can- counting is to correctly match income and ex- not deduct or capitalize a business expense un- Example. You are a farmer who uses the penses in the correct tax year. Certain large til economic performance occurs. If your ex- cash method and a calendar tax year. You sell farm businesses must use an accrual method of pense is for property or services provided to grain in December 2020 under a bona fide accounting for its farm activities and for sales you, or for your use of property, economic per- arm's-length contract that calls for payment in and purchases of inventory items. See Accrual formance occurs as the property or services are 2021. You include the proceeds from the sale in Method Required and Farm Inventory, later. provided or as the property is used. If your ex- your 2021 gross income since that is the year pense is for property or services you provide to payment is received. However, if the contract Income others, economic performance occurs as you states that you have the right to the proceeds provide the property or services. from the buyer at any time after the grain is de- Generally, you include an amount in income for livered, you must include the sales price in your the tax year in which all events that fix your right Example. Jane, who is a farmer, uses a 2020 income, even if payment is received in the to receive the income have occurred, and you calendar tax year and an accrual method of ac- following year. can determine the amount with reasonable ac- counting. To take advantage of early payment curacy. Under this rule, include an amount in in- discounts, she paid for seed in October 2019. Repayment of income. If you include an come on the earliest of the following dates. The seed was delivered to her in March 2020. amount in income and in a later year you have • When you receive payment. Economic performance did not occur until the to repay all or part of it, then you can usually de- • When the income amount is due to you. seed was delivered and planted. Jane incurs duct the repayment in the year repaid. The type • When you earn the income. the expense in 2020. of deduction you are allowed in the year of re- • When title passes. An exception to the economic performance payment depends on the type of income you in- • When taken into account in an applicable rule allows certain recurring items to be treated cluded in the earlier year. See Repayments in financial statement (or such other state- as incurred during a tax year even though eco- chapter 11 of Pub. 535, Business Expenses. ment the IRS may specify). nomic performance has not occurred. For more information, see Economic Performance in Pub. Expenses If you use an accrual method of accounting, 538. complete Part III of Schedule F (Form 1040 or Under the cash method, generally you deduct 1040-SR) to report your income. Special rule for related persons. Business expenses in the tax year you pay them. This in- expenses and interest owed to a related person cludes business expenses for which you con- who uses the cash method of accounting are test liability. However, you may not be able to not deductible until you make the payment and deduct an expense paid in advance or you may the corresponding amount is includible in the be required to capitalize certain costs, as ex- related person's gross income. Determine the plained under Uniform Capitalization Rules in relationship for this rule as of the end of the tax

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year for which the expense or interest would of supplies in the year used or consumed in op- commissions, freight, hauling to market, and otherwise be deductible. erations. Do not include incidental supplies in other marketing costs. If you use this method, inventory as these are deductible in the year of you must use it for your entire inventory, except Accrual Method Required purchase. that livestock can be inventoried under the unit-livestock-price method. Generally, the following businesses, if engaged Livestock. Livestock held primarily for sale must be included in inventory. Livestock held Unit-livestock-price method. This method in farming, are generally required to use an ac- recognizes the difficulty of establishing the ex- crual method of accounting. for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Also, act costs of producing and raising each animal. 1. A corporation that has gross receipts of see Unit-livestock-price method, later. If you are You group or classify livestock according to more than $26 million. in the business of breeding and raising chinchil- type and age and use a standard unit price for each animal within a class or group. The unit 2. A partnership with a corporation as a part- las, mink, foxes, or other fur-bearing animals, price you assign should reasonably approxi- ner, if that corporation meets the require- these animals are livestock for inventory purpo- mate the normal costs incurred in producing the ments of (1) above. ses. animals in such classes. Unit prices and classi- 3. A tax shelter (discussed below). Growing crops. Generally, growing crops are fications are subject to approval by the IRS on not required to be included in inventory. How- examination of your return. You must annually Note. Items (1) and (2) above do not apply ever, if the crop has a preproductive period of reevaluate your unit livestock prices and adjust to an S corporation or a business operating a more than 2 years, you may have to capitalize the prices upward or downward to reflect in- nursery or sod farm, or the raising or harvesting (or include in inventory) costs associated with creases or decreases in the costs of raising of trees (other than fruit and nut trees). the crop. See Uniform capitalization rules be- livestock. IRS approval is not required for these low. Also, see Uniform Capitalization Rules in adjustments. Any other changes in unit prices Tax shelter. A tax shelter is a partnership, chapter 6. or classifications do require IRS approval. noncorporate enterprise, or S corporation that If you use this method, include all raised meets either of the following tests. Items to include in inventory. Your inventory livestock in inventory, regardless of whether 1. Its principal purpose is the avoidance or should include all items held for sale, or for use they are held for sale or for draft, breeding, evasion of federal income tax. as feed, seed, etc., whether raised or pur- sport, or dairy purposes. This method accounts chased, that are unsold at the end of the year. only for the increase in cost of raising an animal 2. It is a farming syndicate. A farming syndi- to maturity. It does not provide for any decrease cate is an entity that meets either of the Uniform capitalization rules. The following in the animal's market value after it reaches ma- following tests. applies if you are required to use an accrual turity. Also, if you raise cattle, you are not re- a. Interests in the activity have been of- method of accounting. quired to inventory hay you grow to feed your fered for sale in an offering required to • The uniform capitalization rules apply to all herd. be registered with a federal or state costs of raising a plant, even if the prepro- Do not include sold or lost animals in the agency with the authority to regulate ductive period of raising a plant is 2 years year-end inventory. If your records do not show the offering of securities for sale. or less. which animals were sold or lost, treat the first • The costs of animals are subject to the uni- animals acquired as sold or lost. The animals b. More than 35% of the losses during form capitalization rules. on hand at the end of the year are considered the tax year are allocable to limited those most recently acquired. partners or limited entrepreneurs. Note. If a farming business has average an- You must include in inventory all livestock A “limited partner” is one whose personal li- nual gross receipts of $26 million or less for the purchased primarily for sale. You can choose ability for partnership debts is limited to the 3 preceding tax years and is not a tax shelter, either to include in inventory or depreciate live- money or other property the partner contributed the farm is not subject to the uniform capitaliza- stock purchased for draft, breeding, sport, or or is required to contribute to the partnership. tion rules. dairy purposes. However, you must be consis- tent from year to year, regardless of the method A “limited entrepreneur” is one who has an you have chosen. You cannot change your interest in an enterprise other than as a limited Inventory valuation methods. The following method without obtaining approval from the partner and does not actively participate in the methods, described below, are those generally IRS. management of the enterprise. available for valuing inventory. The method you use must conform to generally accepted ac- You must include in inventory animals pur- counting principles for similar businesses and chased after maturity or capitalize them at their Farm Inventory must clearly reflect income. purchase price. If the animals are not mature at • Cost. purchase, increase the cost at the end of each If you are required to keep an inventory, you • Lower of cost or market. tax year according to the established unit price. should keep a complete record of your inven- • Farm-price method. However, in the year of purchase, do not in- tory as part of your farm records. This record • Unit-livestock-price method. crease the cost of any animal purchased during should show the actual count or measurement the last 6 months of the year. This “no increase” of the inventory. It should also show all factors Cost and lower of cost or market meth- rule does not apply to tax shelters, which must that enter into its valuation, including quality and ods. See Pub. 538 for information on these val- make an adjustment for any animal purchased weight, if applicable. Below are some items that uation methods. during the year. It also does not apply to taxpay- could be included in inventory. If you value your livestock inventory at ers that must make an adjustment to reasona- TIP cost or the lower of cost or market, you bly reflect the particular period in the year in Hatchery business. If you are in the hatchery do not need IRS approval to change to which animals are purchased, if necessary to business, and use an accrual method of ac- the unit-livestock-price method. However, if you avoid significant distortions in income. counting, you must include in inventory eggs in value your livestock inventory using the the process of incubation. Uniform capitalization rules. A farmer farm-price method, then you must obtain per- can determine costs required to be allocated mission from the IRS to change to the unit-live- under the uniform capitalization rules by using Products held for sale. All harvested and pur- stock-price method. chased farm products held for sale or for feed the farm-price or unit-livestock-price inventory or seed, such as grain, hay, silage, concen- method. This applies to any plant or animal, Farm-price method. Under this method, trates, cotton, tobacco, etc., must be included in even if the farmer does not hold or treat the each item, whether raised or purchased, is val- inventory. plant or animal as inventory property. ued at its market price less the direct cost of disposition. Market price is the current price at Supplies. Supplies acquired for sale or that the nearest market in the quantities you usually become a physical part of items held for sale sell. Cost of disposition includes broker's must be included in inventory. Deduct the cost

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Cash Versus Accrual Method Changes in Methods of come in the year you receive it. See Cash Accounting Method in chapter 2. The following examples compare the cash and If you use an accrual method of accounting, accrual methods of accounting. different rules may apply to your situation. See A change in your method of accounting in- Accrual Method in chapter 2. Example 1. You are a farmer who uses an cludes a change in: accrual method of accounting. You keep your • Your overall method, such as from the cash method to an accrual method, and Topics books on the calendar year basis. You sell grain This chapter discusses: in December 2020 but you are not paid until • Your treatment of any material item, such January 2021. Because you use the accrual as a change in your method of valuing in- Schedule F (Form 1040) method, you report the grain sale in 2020 be- ventory (for example, a change from the • Sales of farm products cause that is when the income was earned, farm-price method to the unit-live- • Rents (including crop shares) even though you did not receive the income un- stock-price method, discussed earlier). • • Agricultural program payments til 2021. Generally, once you have set up your account- • Income from cooperatives ing method, you must receive approval from the • Cancellation of debt Example 2. Assume the same facts as in IRS before you can change either an overall • Income from other sources Example 1 except that you use the cash method of accounting or the accounting treat- • Income averaging for farmers method and there was no constructive receipt ment of any material item. A user fee may be re- of the sales proceeds in 2020. Under the cash quired for any non-automatic change requests. method, you include the sales proceeds in in- Useful Items come in 2021, the year you receive payment. To obtain approval, you must generally file You may want to see: Deduct the costs of producing the grain in the Form 3115. However, there are instances when year you pay for them. you can obtain automatic consent to change Publication certain methods of accounting. For more infor-

525 525 Taxable and Nontaxable Income Special Methods mation, see the Instructions for Form 3115.

Also, see Pub. 538. 544 544 Sales and Other Dispositions of of Accounting Assets

There are special methods of accounting for 550 550 Investment Income and Expenses certain items of income and expense.

908 908 Bankruptcy Tax Guide Crop method. If you do not harvest and dis- 925 925 Passive Activity and At-Risk Rules pose of your crop in the same tax year that you plant it, you can, with IRS approval, use the 3. 4681 4681 Canceled Debts, Foreclosures, crop method of accounting. You cannot use the Repossessions, and Abandonments crop method for any tax return, including your first tax return, unless you receive approval Form (and Instructions) from the IRS. Under this method, you deduct Farm Income 982 982 Reduction of Tax Attributes Due to the entire cost of producing the crop, including Discharge of Indebtedness the expense of seed or young plants, in the year you realize income from the crop. What’s New for 2020 Sch E (Form 1040) Sch E (Form 1040) Supplemental See chapter 4 for details on deducting the Income and Loss costs of operating a farm. Also, see Regulations Coronavirus Food Assistance Program Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From section 1.162-12. (CFAP). The CFAP provides direct payments Farming to producers of eligible agricultural commodities

Sch J (Form 1040) Sch J (Form 1040) Income Averaging for Other special methods. Other special meth- adversely affected by the coronavirus (COVID– Farmers and Fishermen ods of accounting apply to the following items. 19) pandemic to help offset sales losses and in- • Amortization, see chapter 7. creased marketing costs associated with the 1099-G 1099-G Certain Government Payments • Casualties, see chapter 11. COVID-19 pandemic.

• Condemnations, see chapter 11. 1099-PATR 1099-PATR Taxable Distributions CFAP payments are agricultural program • Depletion, see chapter 7. Received From Cooperatives payments that you must include in gross in- • Depreciation, see chapter 7. come. Report the full amount of your CFAP pay- 4797 4797 Sales of Business Property • Farm business expenses, see chapter 4. ments on Schedule F (Form 1040), lines 4a and

• Farm income, see chapter 3. 4835 4835 Farm Rental Income and 4b. Go to USDA.gov for more information. • Installment sales, see chapter 10. Expenses • Soil and water conservation expenses, see chapter 5. See chapter 16 for information about getting • Thefts, see chapter 11. Introduction publications and forms. You may receive income from many sources. Combination Method You must report the income from all the differ- Schedule F (Form 1040) ent sources on your tax return, unless it is ex- Generally, you can use any combination of cluded by law. Where you report the income on Individuals, trusts, partnerships, S corporations, cash, accrual, and special methods of account- your tax return depends on its source. LLCs taxed as partnerships, and sole members ing if the combination clearly shows your in- This chapter discusses farm income you re- of a domestic LLC engaged in the business of come and expenses and you use it consistently. port on Schedule F (Form 1040), Profit or Loss farming report farm income on Schedule F However, the following restrictions apply. From Farming. For information on where to re- (Form 1040). Use this schedule to figure the net If you use the cash method for figuring • port other income, see the Instructions for profit or loss from regular farming operations. your income, you must use the cash Forms 1040 and 1040-SR, U.S. Individual In- method for reporting your expenses. come Tax Return. Corporations use Form 1120 to report • If you use an accrual method for reporting TIP the income or loss from regular farming your expenses, you must use an accrual Accounting method. The rules discussed in operations. method for figuring your income. this chapter assume you use the cash method of accounting. Under the cash method, you Income from farming reported on Sched- generally include an item of income in gross in- ule F includes amounts you receive from

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cultivating, operating, or managing a farm for Table 3-1. Where To Report Sales of Farm Products gain or profit, either as owner or tenant. This in- cludes income from operating a stock, dairy, Item Sold Schedule F* Form 4797** poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, orchard, or Farm products raised for sale X grove. It also includes income from the sale of Farm products bought for resale X crop shares if you materially participate in pro- ducing the crop. See Rents (Including Crop Farm assets not held primarily for sale, such as Shares), later. livestock held for draft, breeding, sport, or dairy purposes (bought or raised), and equipment X Income received from operating a nursery, which specializes in growing ornamental plants, * See the Instructions for Schedule F for more information. is considered to be income from farming. ** See the Instructions for Form 4797 for more information. Income reported on Schedule F doesn't in- structive receipt of income, see Cash Method postponed the gain. If you haven't yet estab- clude gains or losses from sales or other dispo- under Accounting Methods in chapter 2. lished a usual business practice, rely on the sitions of the following farm assets. usual business practices of similarly situated • Land. Sales Caused by farmers in your general region. • Depreciable farm equipment. • Buildings and structures. Weather-Related Conditions Connection with affected area. The livestock • Livestock held for draft, breeding, sport, or doesn't have to be raised or sold in an area af- dairy purposes. If you sell or exchange more livestock, including fected by a weather-related condition for the poultry, than you normally would in a year be- postponement to apply. However, the sale must Gains and losses from most dispositions of cause of a drought, flood, or other weather-rela- occur solely because of a weather-related con- farm assets are discussed in chapters 8 and 9. ted condition, you may be able to postpone re- dition that affected the water, grazing, or other Gains and losses from casualties, thefts, and porting the gain from the additional animals until requirements of the livestock. This requirement condemnations are discussed in chapter 11. the next year. You must meet all the following generally won't be met if the costs of feed, wa- conditions to qualify. ter, or other requirements of the livestock affec- • Your principal trade or business is farming. ted by the weather-related condition aren't sub- Sales of Farm Products • You use the cash method of accounting. stantial in relation to the total costs of holding • You can show that, under your usual busi- the livestock. Where to report. Table 3-1 shows where to ness practices, you wouldn't have sold or report the sale of farm products on your tax re- exchanged the additional animals this year Classes of livestock. You must figure the turn. except for the weather-related condition. amount to be postponed separately for each • The weather-related condition caused an generic class of animals—for example, hogs, area to be designated as eligible for assis- sheep, and cattle. Don’t separate animals into Schedule F. Amounts received from the tance by the federal government. classes based on age, sex, or breed. sales of products you raised on your farm for Disaster assistance and emergency sale (or bought for resale), such as livestock, Amount to be postponed. Follow these steps TIP relief for individuals and busi- produce, or grains, are reported on Schedule F. to figure the amount of gain to be postponed for nesses. Special tax law provisions This includes money and the fair market value each class of animals. of any property or services you receive. When may help taxpayers and businesses recover fi- you sell farm products bought for resale, your nancially from the impact of a disaster, espe- 1. Divide the total income realized from the profit or loss is the difference between your sell- cially when the federal government declares sale of all livestock in the class during the ing price (money plus the fair market value of their location to be a major disaster area. Get tax year by the total number of such live- any property) and your basis in the item (usually the latest tax relief guidance in disaster situa- stock sold. For this purpose, don't treat the cost). See chapter 6 for information on the tions at IRS.gov/uac/Tax-Relief-in-Disaster- any postponed gain from the previous basis of assets. You generally report these Situations and in disaster area losses-agricul- year as income received from the sale of amounts on Schedule F for the year you receive ture tax tips at IRS.gov/businesses/Small- livestock. payment. Businesses-Self-Employed/Disaster- Assistance-and-Emergency-Relief-for- 2. Multiply the result in (1) by the excess Individuals-and-Businesses. number of such livestock sold solely be- Example. In 2019, you bought 20 feeder cause of weather-related conditions. calves for $27,000 for resale. You sold them in Sales or exchanges made before an area 2020 for $35,000. You report the $35,000 sales Example. You're a calendar year taxpayer price on Schedule F, line 1a, subtract your became eligible for federal assistance qualify if the weather-related condition that caused the and you normally wean 100 beef calves in the $27,000 basis on line 1b, and report the result- fall and feed them through the winter, selling in ing $8,000 profit on line 1c. sale or exchange also caused the area to be designated as eligible for federal assistance. January or February. As a result of drought, you Form 4797. Sales of livestock held for The designation can be made by the President, decide you don't have enough feed for all of draft, breeding, sport, or dairy purposes may re- the Department of Agriculture (or any of its your calves, so you sell 35 head in the fall at sult in ordinary or capital gains or losses, de- agencies), or by other federal departments or weaning in addition to the 100 calves sold in pending on the circumstances. In either case, agencies. January. As a result, you sold 135 head during you should not report these sales on Sched- 2019. You realized $175,500 from the sale ule F. Instead, report these sales on Form 4797. A weather-related sale or exchange of ($175,500 ÷ 135 = $1,300 per head). On Au- See Livestock under Ordinary or Capital Gain or livestock (other than poultry) held for gust 10, 2019, as a result of drought, the affec- Loss in chapter 8. Animals that you don't hold draft, breeding, or dairy purposes may ted area was declared a disaster area eligible primarily for sale are considered business as- be an involuntary conversion. See Other Invol- for federal assistance. The income you can sets of your farm. untary Conversions in chapter 11. postpone until 2020 is $45,500 [($175,500 ÷ 135) × 35]. Sale by agent. If your agent sells your farm Usual business practice. You must deter- products, you have constructive receipt of the mine the number of animals you would have How to postpone gain. To postpone gain, at- income when your agent receives payment and sold had you followed your usual business tach a statement to your tax return for the year you must include the net proceeds from the sale practice in the absence of the weather-related of the sale. The statement must include your in gross income for the year the agent receives condition. Do this by considering all the facts payment. This applies even if your agent pays and circumstances, but don't take into account you in a later year. For a discussion on con- your sales in any earlier year for which you

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name and address and give the following infor- without providing services, report the income as elevator company makes payments directly to mation for each class of livestock for which rent on Schedule E (Form 1040), Part I. your children. you're postponing gain. In this situation, you're considered to have • A statement that you're postponing gain received rental income and then made a gift of under section 451(e). Crop Shares that income. You must include the fair market • Evidence of the weather-related conditions value of the crop shares in your income for the that forced the early sale or exchange of You must include rent you receive in the form of tax year you gave the crop shares to your chil- the livestock and the date, if known, on crop shares in income in the year you convert dren. which an area was designated as eligible the shares to money or the equivalent of for assistance by the federal government money. It doesn't matter whether you use the Crop share loss. If you're involved in a rental because of weather-related conditions. cash method of accounting or an accrual or crop-share lease arrangement, any loss from • A statement explaining the relationship of method of accounting. these activities may be subject to the limits un- the area affected by the weather-related der the passive loss rules. See Pub. 925 for in- If you receive rent in the form of crop shares condition to your early sale or exchange of formation on these rules. or livestock, the rental income is included in the livestock. self-employment income if: • The number of animals sold in each of the 3 preceding years. 1. Your arrangement with your tenant pro- Agricultural Program • The number of animals you would have vides that the you will materially partici- sold in the tax year had you followed your pate in the production or management of Payments normal business practice in the absence of production of the farm products on the weather-related conditions. land, and You must include in income most government The total number of animals sold and the payments, such as those for approved conser- • 2. You materially participate. number sold because of weather-related vation practices, livestock indemnity payments, conditions during the tax year. See Landlord Participation in Farming in chap- or livestock forage disaster payments whether • A computation, as described above, of the ter 12. Report the rental income on Schedule F. you receive them in cash, materials, services, income to be postponed for each class of or commodity certificates. However, you can livestock. Report this income on Form 4835 and carry exclude from income some payments you re- the net income or loss to Schedule E (Form ceive under certain cost-sharing conservation Generally, you must file the statement and 1040), page 2, if: programs. See Cost-Sharing Exclusion (Im- the return by the due date of the return, includ- provements), later. ing extensions. However, for sales or ex- 1. Your arrangement with your tenant doesn’t changes treated as an involuntary conversion provide that you will materially participate Report the agricultural program payment on from weather-related sales of livestock in an in the production or management of pro- the appropriate line of Schedule F, Part I. Re- area eligible for federal assistance (discussed duction of the farm products on the land, port the full amount even if you return a govern- in chapter 11), you can file this statement at any or ment check for cancellation, refund any of the time during the replacement period. For other 2. You don't materially participate in operat- payment you receive, or the government col- sales or exchanges, if you timely filed your re- ing the farm. lects all or part of the payment from you by re- turn for the year without postponing gain, you ducing the amount of some other payment or can still postpone gain by filing an amended re- The income isn't included in self-employment Commodity Credit Corporation (CCC) loan. turn within 6 months of the due date of the re- income. However, you can deduct the amount you re- turn (excluding extensions). Attach the state- fund or return or that reduces some other pay- ment to the amended return and write “Filed Crop shares you use to feed livestock. ment or loan to you. Claim the deduction on pursuant to section 301.9100-2” at the top of Crop shares you receive as a landlord and feed Schedule F, Part II, for the year of repayment or the amended return. File the amended return at to your livestock are considered converted to reduction. the same address you filed the original return. money when fed to the livestock. You must in- Once you have filed the statement, you can clude the fair market value of the crop shares in cancel your postponement of gain only with the income at that time. You're entitled to a busi- Commodity Credit approval of the IRS. ness expense deduction for the livestock feed Corporation (CCC) Loans in the same amount and at the same time you include the fair market value of the crop share Generally, you don't report loans you receive as Rents (Including Crop as rental income. Although these two transac- income. However, if you pledge part or all of tions cancel each other for figuring adjusted your production to secure a CCC loan, you can Shares) gross income on Form 1040 or 1040-SR, they treat the loan as if it were a sale of the crop and may be necessary to figure your self-employ- report the loan proceeds as income in the year The rent you receive for the use of your farm- ment tax. See Landlord Participation in Farming you receive them. You don't need approval from land by another person or entity is generally and Farm Optional Method in chapter 12. the IRS to adopt this method of reporting CCC rental income, not farm income. However, the loans. rent is farm income if: Crop shares you give to others (gift). Crop Once you report a CCC loan as income for 1. Your arrangement with your tenant pro- shares you receive as a landlord and give to the year received, you must generally report all vides that the you will materially partici- others are considered converted to money CCC loans in that year and later years in the pate in the production or management of when you make the gift. You must report the fair same way. However, you can obtain for your production of the farm products on the market value of the crop share as income, even tax year an automatic consent to change your land, and though someone else receives payment for the method of accounting for loans received from crop share. This applies even if the gift is made the CCC, from including the loan amount in 2. You materially participate. to a qualified charitable organization. gross income for the tax year in which the loan is received to treating the loan amount as a See Landlord Participation in Farming in chap- Example. A tenant farmed part of your land loan. For more information, see Part I of the In- ter 12. under a crop-share arrangement. The tenant structions for Form 3115 and Revenue Proce- harvested and delivered the crop in your name Pasture income and rental. If you pasture dure 2008-52. Revenue Procedure 2008-52, to an elevator company. Before selling any of someone else's livestock and take care of them 2008-36 I.R.B. 587, is available at the crop, you instructed the elevator company for a fee, the income is from your farming busi- IRS.gov/irb/2008-36_IRB#NOT-2008-52. to cancel your warehouse receipt and make out ness. You must enter it as “Other Income” on new warehouse receipts in equal amounts of Schedule F. If you simply rent your pasture or the crop in the names of your children. They sell other farm real estate for a flat cash amount their crop shares in the following year and the

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You can request income tax withhold- Example 1. Mike Green is a cotton farmer. Excluded CCC loan. As in Example 1, TIP ing from CCC loan payments you re- He uses the cash method of accounting and Mike didn't report the $2,000 loan as income in ceive. Use Form W-4V. See chapter 16 files his tax return on a calendar year basis. He 2019 and must recognize $500 of income from for information about ordering the form. has deducted all expenses incurred in produc- market gain in 2020. ing the cotton and has a zero basis in the com- To elect to report a CCC loan as income, in- modity. In 2019, Mike pledged 1,000 pounds of Conservation Reserve clude the loan proceeds as income on Sched- cotton as collateral for a CCC loan of $2,000 (a ule F for the year you receive it. Attach a state- loan rate of $2.00 per pound). In 2020, he re- Program (CRP) ment to your return showing the details of the paid the loan and redeemed the cotton for loan. $1,500 when the world price was $1.50 per Under the CRP, if you own or operate highly pound (lower than the loan amount). Later in erodible or other specified cropland, you may You must file the statement and the return 2020, he sold the cotton for $2,500. enter into a long-term contract with the USDA, by the due date of the return, including exten- The market gain on the redemption was agreeing to convert to a less intensive use of sions. If you timely filed your return for the year $0.50 ($2.00 – $1.50) per pound. Mike realized that cropland. You must include the annual without making the election, you can still make total market gain of $500 ($0.50 x 1,000 rental payments and any one-time incentive the election by filing an amended return within 6 pounds). How he reports this market gain and payment you receive under the program on the months of the due date of the return (excluding figures his gain or loss from the sale of the cot- appropriate lines of Schedule F. Cost-share extensions). Attach the statement to the amen- ton depends on whether he included CCC payments you receive may qualify for the ded return and write “Filed pursuant to section loans in income in 2019. cost-sharing exclusion. See Cost-Sharing Ex- 301.9100-2” at the top of the return. File the clusion (Improvements), later. CRP payments amended return at the same address you filed Included CCC loan. Mike reported the are reported to you on Form 1099-G. the original return. $2,000 CCC loan as income for 2019 on Schedule F, line 5a, so he is treated as if he Individuals who are receiving social se- When you make this election, the amount sold the cotton for $2,000 when he pledged it curity retirement or disability benefits you report as income becomes your basis in the and repurchased the cotton for $1,500 when he may exclude CRP payments when cal- commodity. See chapter 6 for information on redeemed it. The $500 market gain isn’t recog- culating self-employment tax. See the Instruc- the basis of assets. If you later repay the loan, nized on the redemption. He reports it for 2020 tions for Schedule SE (Form 1040). redeem the pledged commodity, and sell it, you as an agricultural program payment on Sched- report as income at the time of sale the sale ule F, line 4a, but doesn't include it as a taxable proceeds minus your basis in the commodity. If amount on line 4b. Crop Insurance and Crop the sale proceeds are less than your basis in Mike's basis in the cotton after he redeemed Disaster Payments the commodity, you can report the difference as it was $1,500, which is the redemption (re- a loss on Schedule F. purchase) price paid for the cotton. His gain You must include in income any crop insurance from the sale is $1,000 ($2,500 – $1,500). He proceeds you receive as the result of physical If you forfeit the pledged crops to the CCC in reports the $2,500 sale on line 1a and the crop damage or reduction of crop revenue, or full payment of the loan, the forfeiture is treated $1,500 basis on line 1b. After subtracting his both. You generally include them in the year for tax purposes as a sale of the crops. If you basis from the sale, Mike will have a $1,000 you receive them. Treat as crop insurance pro- didn't report the loan proceeds as income for gain for 2020 on Schedule F, line 1c. ceeds the crop disaster payments you receive the year you received them, you must include from the federal government as the result of de- them in your income for the year of the forfei- Excluded CCC loan. Mike didn’t elect to struction or damage to crops, or the inability to ture. report the $2,000 CCC loan as income and plant crops, because of drought, flood, or any therefore didn’t include it on his 2019 Sched- other natural disaster. Form 1099-A. If you forfeit pledged crops to ule F. When he paid $1,500 to pay off the loan the CCC in full payment of a loan, you may re- in 2020, he must recognize $500 of income You can request income tax withhold- ceive a Form 1099-A “CCC” should be shown in from market gain. ing from crop disaster payments you box 6. The amount of any CCC loan outstand- receive from the federal government. ing when you forfeited your commodity should Example 2. The facts are the same as in Use Form W-4V. See chapter 16 for information also be indicated on the form. Example 1, except that, instead of selling the about ordering the form. cotton for $2,500 after redeeming it, Mike en- Market Gain tered into an option-to-purchase contract with a Election to postpone reporting until the fol- cotton buyer before redeeming the cotton. Un- lowing year. You can postpone reporting Under the CCC nonrecourse marketing assis- der that contract, Mike authorized the cotton some or all crop insurance proceeds as income tance loan program, your repayment amount for buyer to pay the CCC loan on Mike's behalf. In until the year following the year the physical a loan secured by your pledge of an eligible 2020, the cotton buyer repaid the loan for damage occurred if you meet all the following commodity is generally based on the lower of $1,500 and immediately exercised his option, conditions. the loan rate or the prevailing world market buying the cotton for $1,500. How Mike reports • You use the cash method of accounting. price for the commodity on the date of repay- the $500 market gain on the redemption of the • You receive the crop insurance proceeds ment. If you repay the loan when the world price cotton and figures his gain or loss from its sale in the same tax year the crops are dam- is lower, the difference between that repayment depends on whether he included CCC loans in aged. amount and the original loan amount is market income in 2019. • You can show that under your normal busi- gain. Whether you use cash or CCC certificates ness practice you would have included in- Included CCC loan. As in Example 1, Mike to repay the loan, you will receive a Form come from the damaged crops in any tax is treated as though he sold the cotton for 1099-G showing the market gain you realized. year following the year the damage occur- $2,000 when he pledged it and repurchased the Market gain should be reported as follows. red. cotton for $1,500 when the cotton buyer re- If you elected to include the CCC loan in • deemed it for him. The $500 market gain isn’t Deferral isn't permitted for proceeds re- income in the year you received it, don’t in- recognized on the redemption. Mike reports it ceived from revenue insurance policies. clude the market gain in income. However, for 2020 as an agricultural program payment on To postpone reporting some or all crop in- reduce (adjust) the basis of the commodity Schedule F, line 4a, but doesn't include it as a surance proceeds received in 2020, report the for the amount of the market gain. taxable amount on line 4b. amount you received on Schedule F, line 6a, If you didn’t include the CCC loan in in- • Also, as in Example 1, Mike's basis in the but don't include it as a taxable amount on come in the year received, include the cotton when the cotton buyer redeemed it for line 6b. Check the box on line 6c and attach a market gain in your income. him was $1,500. Mike has no gain or loss on its statement to your tax return. The statement sale to the cotton buyer for that amount. The following examples show how to report market gain.

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must include your name and address and con- Cost-Sharing Exclusion proved. For information about the status of tain the following information. (Improvements) those programs, contact the state offices • A statement that you're making an election of the Farm Service Agency (FSA) and the under section 451(d) and Regulations sec- Natural Resources and Conservation Serv- tion 1.451-6. You can exclude from your income part or all of ice (NRCS). • The specific crop or crops physically de- a payment you receive under certain federal or stroyed or damaged. state cost-sharing conservation, reclamation, Small watershed programs. If the three • A statement that under your normal busi- and restoration programs. However, see Effects tests listed earlier are met, you can exclude part ness practice you would have included in- of the exclusion, later. A payment is any eco- or all of the payments you receive under the fol- come from some or all of the destroyed or nomic benefit you get as a result of an improve- lowing programs for improvements made in damaged crops in gross income for a tax ment. However, this exclusion applies only to connection with a watershed. year following the year the crops were de- that part of a payment that meets all three of the • The programs under the Watershed Pro- stroyed or damaged. following tests. tection and Flood Prevention Act. • The flood prevention projects under the • The cause of the physical destruction or 1. It was for a capital expense. You can't ex- damage and the date or dates it occurred. Flood Control Act of 1944. clude any part of a payment for an ex- • The Emergency Watershed Protection • The total payments you received from in- pense you can deduct in the year you pay surance carriers, itemized for each specific Program under the Flood Control Act of or incur it. You must include the payment 1950. crop, and the date you received each pay- for a deductible expense in income, and ment. • Certain programs under the Colorado you can take any offsetting deduction. See River Basin Salinity Control Act. • The name of each insurance carrier from chapter 5 for information on deducting soil whom you received payments. • The Wetlands Reserve Program author- and water conservation expenses. ized by the Food Security Act of 1985, the One election covers all crops representing a 2. It doesn't substantially increase your an- Federal Agriculture Improvement and Re- single trade or business. If you have more than nual income from the property for which form Act of 1996, and the Farm Security one farming business, make a separate election it's made. An increase in annual income is and Rural Investment Act of 2002. for each one. For example, if you operate two substantial if it's more than the greater of • The Environmental Quality Incentives Pro- separate farms on which you grow different the following amounts. gram (EQIP) authorized by the Federal Ag- crops and you keep separate books for each riculture Improvement and Reform Act of farm, you should make two separate elections a. 10% of the average annual income 1996. to postpone reporting insurance proceeds you derived from the affected property be- • The Wildlife Habitat Incentives Program receive for crops grown on each of your farms. fore receiving the improvement. (WHIP) authorized by the Federal Agricul- An election is binding for the year unless the b. $2.50 times the number of affected ture Improvement and Reform Act of 1996. IRS approves your request to change it. To re- acres. • The Soil and Water Conservation Assis- quest IRS approval to change your election, tance Program authorized by the Agricul- write to the IRS at the following address, giving 3. The Secretary of Agriculture certified that tural Risk Protection Act of 2000. your name, address, identification number, the the payment was primarily made for con- • The Agricultural Management Assistance year you made the election, and your reasons serving soil and water resources, protect- Program authorized by the Agricultural for wanting to change it. ing or restoring the environment, improv- Risk Protection Act of 2000. ing forests, or providing a habitat for • The Conservation Reserve Program au- Ogden Submission Processing Center wildlife. thorized by the Food Security Act of 1985 P. O. Box 9941 and the Federal Agriculture Improvement Ogden, UT 84409 Qualifying programs. If the three tests listed and Reform Act of 1996. above are met, you can exclude part or all of • The Forest Land Enhancement Program Feed Assistance and the payments from the following programs. authorized under the Farm Security and • The rural clean water program authorized Rural Investment Act of 2002. Payments by the Federal Water Pollution Control Act. • The Conservation Security Program au- • The rural abandoned mine program au- thorized by the Food Security Act of 1985. The Disaster Assistance Act of 1988 authorizes thorized by the Surface Mining Control and • The Forest Health Protection Program programs to provide feed assistance, reim- Reclamation Act of 1977. (FHPP) authorized by the Cooperative For- bursement payments, and other benefits to • The water bank program authorized by the estry Assistance Act of 1978. qualifying livestock producers if the Secretary of Water Bank Act. Agriculture determines that, because of a natu- • The emergency conservation measures Income realized. The gross income you real- ral disaster, a livestock emergency exists. program authorized by title IV of the Agri- ize upon getting an improvement under these These programs include partial reimbursement cultural Credit Act of 1978. cost-sharing programs is the value of the im- for the cost of purchased feed and for certain • The agricultural conservation program au- provement reduced by the sum of the excluda- transportation expenses. They also include the thorized by the Soil Conservation and Do- ble portion and your share of the cost of the im- donation or sale at a below-market price of feed mestic Allotment Act. provement (if any). owned by the CCC. • The great plains conservation program au- thorized by the Soil Conservation and Do- Value of the improvement. You deter- Include in income: mestic Policy Act. mine the value of the improvement by multiply- The market value of donated feed re- • • The resource conservation and develop- ing its fair market value (defined in chapter 6) by ceived, ment program authorized by the Bank- a fraction. The numerator of the fraction is the The difference between the market value • head-Jones Farm Tenant Act and by the total cost of the improvement (all amounts paid and the price you paid for feed you buy at Soil Conservation and Domestic Allotment either by you or by the government for the im- below-market prices, and Act. provement) reduced by the sum of the following Any cost reimbursement you receive. • • Certain small watershed programs, listed items. You must include these benefits in income later. • Any government payments under a pro- in the year you receive them. You can't post- • Any program of a state, possession of the gram not listed earlier. pone reporting them under the rules explained United States, a political subdivision of any • Any part of a government payment under a earlier for weather-related sales of livestock or of these, or of the District of Columbia, un- program listed earlier that the Secretary of crop insurance proceeds. Report the benefits der which payments are made to individu- Agriculture hasn't certified as primarily for on Schedule F, Part I, as agricultural program als primarily for conserving soil, protecting conservation. payments. You can usually take a current de- or restoring the environment, improving • Any government payment to you for rent or duction for the same amount as a feed forests, or providing a habitat for wildlife. for your services. expense. Several state programs have been ap-

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The denominator of the fraction is the total cost Recapture. If you dispose of the property don't report as a taxable amount any amount of the improvement. within 20 years after you received the excluded belonging to someone else. payments, you must treat as ordinary income Excludable portion. The excludable por- part or all of the cost-sharing payments you ex- See chapter 16 for information about order- tion is the present fair market value of the right cluded. In the above example, if the 100 acres ing Form 1099-G. to receive annual income from the affected were sold within 20 years of the exclusion for a acreage of the greater of the following amounts. gain of $2,000, $1,550 of that amount would be 1. 10% of the prior average annual income included in ordinary income. You must report Income From from the affected acreage. The prior aver- the recapture on Form 4797. See Section 1255 Cooperatives age annual income is the average of the property under Other Gains in chapter 9. gross receipts from the affected acreage If you buy farm supplies through a cooperative, for the last 3 tax years before the tax year Electing not to exclude payments. You can elect not to exclude all or part of any payments you may receive income from the cooperative in in which you started to install the improve- the form of patronage dividends (refunds). If ment. you receive under these programs. If you make this election for all of these payments, none of you sell your farm products through a coopera- 2. $2.50 times the number of affected acres. the above restrictions and rules apply. You tive, you may receive either patronage divi- must make this election by the due date, includ- dends or a per-unit retain certificate, explained The calculation of present fair market later, from the cooperative. value of the right to receive annual in- ing extensions, for filing your return. In the ex- ! ample above, an election not to exclude pay- CAUTION come is too complex to discuss in this Form 1099-PATR. The cooperative will report ments results in $5,000 included in income and publication. You may need to consult your tax the income to you on Form 1099-PATR or a a $15,000 increase in basis. If you timely filed advisor for assistance. similar form and send a copy to the IRS. Form your return for the year without making the elec- 1099-PATR may also show an alternative mini- tion, you can still make the election by filing an mum tax adjustment that you must include on Example. One hundred acres of your land amended return within 6 months of the due date Form 6251 if you're required to file the form. For was reclaimed under a rural abandoned mine of the return (excluding extensions). Write information on the alternative minimum tax, see program contract with the NRCS of the USDA. “Filed pursuant to section 301.9100-2” at the the Instructions for Form 6251. The total cost of the improvement was top of the amended return and file it at the same $500,000. The USDA paid $490,000. You paid address you filed the original return. $10,000. The value of the cost-sharing improve- Patronage Dividends ment is $15,000. The present fair market value of the right to Other Payments You generally report patronage dividends as in- receive the annual income described in (1) come on Schedule F for the tax year you re- You must include most other government pro- above is $1,380, and the present fair market ceive them. They include the following items. gram payments in income. value of the right to receive the annual income • Money paid as a patronage dividend, in- described in (2) is $1,550. The excludable por- cluding cash advances received (for exam- tion is the greater amount, $1,550. Fertilizer and Lime ple, from a marketing cooperative). You figure the amount to include in gross in- • The stated dollar value of qualified written come as follows: Include in income the value of fertilizer or lime notices of allocation. you receive under a government program. How • The fair market value of other property. to claim the offsetting deduction is explained Value of cost-sharing under Fertilizer and Lime in chapter 4. Don’t report as income any patronage divi- improvement ...... $15,000 dends you receive from expenditures that Minus: Your share .....$10,000 weren't deductible, such as buying personal or Excludable Improvements family items, capital assets, or depreciable portion ...... 1,550 11,550 property. You must reduce the cost or other ba- If government payments are based on improve- sis of these items by the amount of such patron- Amount included in income ....$ 3,450 ments, such as a pollution control facility, you age dividends received. Personal items include must include them in income. You must also fuel purchased for personal use and basic local capitalize the full cost of the improvement. Effects of the exclusion. When you figure the telephone service. Since you have included the payments in in- basis of property you acquire or improve using come, they don't reduce your basis. However, If you can't determine what the dividend is cost-sharing payments excluded from income, see Cost-Sharing Exclusion (Improvements), for, report it as income on Schedule F, lines 3a subtract the excluded payments from your capi- earlier, for additional information. and 3b. tal costs. Any payment excluded from income isn't part of your basis. In the example above, Qualified written notice of allocation. If you the increase in basis is $500,000 – $490,000 + Payment to More Than One receive a qualified written notice of allocation as $3,450 = $13,450. Person part of a patronage dividend, you must gener- In addition, you can't take depreciation, am- ally include its stated dollar value in your in- ortization, or depletion deductions for the part of The USDA reports program payments to the come on Schedule F in the year you receive it. the cost of the property for which you receive IRS. It reports a program payment intended for A written notice of allocation is qualified if at cost-sharing payments you exclude from in- more than one person as having been paid to least 20% of the patronage dividend is paid in come. the person whose identification number is on money or by qualified check and either of the record for that payment (payee of record). If following conditions is met. How to report the exclusion. Attach a state- you, as the payee of record, receive a program ment to your tax return (or amended return) for payment belonging to someone else, such as 1. The notice must be redeemable in cash the tax year you receive the last government your landlord, the amount belonging to the for at least 90 days after it's issued, and payment for the improvement. The statement other person is a nominee distribution. You you must have received a written notice of must include the following information. should file Form 1099-G to report the identity of your right of redemption at the same time • The dollar amount of the cost funded by the actual recipient to the IRS. You should also as the written notice of allocation. the government payment. give this information to the recipient. You can 2. You must have agreed to include the sta- • The value of the improvement. avoid the inconvenience of unnecessary inqui- ted dollar value in income in the year you • The amount you're excluding. ries about the identity of the recipient if you file receive the notice by doing one of the fol- Report the total cost-sharing payments you this form. lowing. receive on Schedule F, line 4a, and the taxable Report the total amount reported to you as a. Signing and giving a written agree- amount on line 4b. the payee of record on Schedule F. However, ment to the cooperative.

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b. Getting or keeping membership in the Example. On July 1, 2019, Mr. Brown, a be paid in money, other property, or qualified cooperative after it adopted a bylaw patron of a cooperative association, bought a certificates. providing that membership constitutes machine for his dairy farm business from the as- agreement. The cooperative must no- sociation for $2,900. The machine has a life of 7 Per-unit retain certificates issued by a coop- tify you in writing of this bylaw and years under MACRS (as provided in the Table erative generally receive the same tax treat- give you a copy. of Class Lives and Recovery Periods in Appen- ment as patronage dividends, discussed ear- dix B of Pub. 946). Mr. Brown files his return on lier. c. Endorsing and cashing a qualified a calendar year basis. For 2019, he claimed a check paid as part of the same pa- Qualified certificates. Qualified per-unit retain depreciation deduction of $311, using the tronage dividend. You must cash the certificates are those issued to patrons who 10.71% depreciation rate from the 150% declin- check by the 90th day after the close have agreed to include the stated dollar amount ing balance, half-year convention table (shown of the payment period for the cooper- of these certificates in income in the year of re- in Table A-14 in Appendix A of Pub. 946). On ative's tax year for which the patron- July 2, 2020, the cooperative association paid ceipt. The agreement may be made in writing or age dividend was paid. Mr. Brown a $300 cash patronage dividend for by getting or keeping membership in a coopera- tive whose bylaws or charter states that mem- Qualified check. A qualified check is any buying the machine. Mr. Brown adjusts the ba- bership constitutes agreement. If you receive instrument that's redeemable in money and sis of the machine and figures his depreciation qualified per-unit retain certificates, include the meets both of the following requirements. deduction for 2019 (and later years) as follows. stated dollar amount of the certificates in in- It's part of a patronage dividend that also • come on Schedule F, for the tax year you re- includes a qualified written notice of alloca- ...... Cost of machine on July 1, 2019 $2,900 ceive them. tion for which you met condition 2c above. Minus: 2019 depreciation ...... $311 2020 cash dividend ...... 300 611 • It's imprinted with a statement that endors- Nonqualified certificates. Don't include the ing and cashing it constitutes the payee's Adjusted basis for stated dollar value of a nonqualified per-unit re- consent to include in income the stated depreciation for 2020: ...... $2,289 tain certificate in income when you receive it. dollar value of any written notices of alloca- Your basis in the certificate is zero. You must in- tion paid as part of the same patronage Depreciation rate: 1.0 ÷ 61/2 (remaining recovery period clude in income any amount you receive from dividend. as of 1/1/2020) = (0.1538) × 1.5 = 23.07% its sale, redemption, or other disposition. Re- port the amount you receive from the disposi- Loss on redemption. You can deduct on Depreciation deduction for 2020 tion as ordinary income on Schedule F, lines 3a Schedule F, Part II, any loss incurred on the re- ($2,289 × 0.2307) ...... $528 demption of a qualified written notice of alloca- and 3b, for the tax year of disposition. tion you received in the ordinary course of your Exceptions. If the dividends are for buying farming business. The loss is the difference be- or selling capital assets or depreciable property tween the stated dollar amount of the qualified you didn't own at any time during the year you Cancellation of Debt written notice you included in income and the received the dividends, you must include them amount you received when you redeemed it. on Schedule F, unless one of the following rules This section explains the general rule for includ- applies. ing canceled debt in income and the exceptions Nonqualified notice of allocation. Don’t in- • If the dividends relate to a capital asset you to the general rule. For more information on clude the stated dollar value of any nonqualified held for more than 1 year for which a loss canceled debt, see Pub. 4681. notice of allocation in income when you receive was or would have been deductible, treat it. Your basis in the notice is zero. You must in- Under section 1106 of the CARES Act, them as gain from the sale or exchange of TIP an eligible recipient of a Paycheck Pro- clude in income for the tax year of disposition a capital asset held for more than 1 year. any amount you receive from its sale, redemp- tection Program loan is eligible for for- • If the dividends relate to a capital asset for giveness of indebtedness for all or a portion of tion, or other disposition. Report that amount, which a loss wasn't or wouldn't have been up to the stated dollar value of the notice, on the stated principal amount of a covered loan if deductible, don't report them as income certain conditions are satisfied (qualifying for- Schedule F. However, don't include that (ordinary or capital gain). amount in your income if the notice resulted giveness); in addition, the forgiven debt isn’t from buying or selling capital assets or depreci- If the dividends are for selling capital assets taxable. See Announcement 2020-12. able property or from buying personal items, as or depreciable property during the year you re- explained in the following discussions. ceived the dividends, treat them as an addi- tional amount received on the sale. General Rule If the amount you receive is more than the stated dollar value of the notice, report the ex- Personal purchases. Because you can't de- Generally, if your debt is canceled or forgiven, cess as the type of income it represents. For duct the cost of personal, living, or family items, other than as a gift or bequest to you, you must example, if it represents interest income, report such as supplies, equipment, or services not re- include the canceled amount in gross income it on your return as interest. lated to the production of farm income, you can for tax purposes. Report the canceled amount omit from the taxable amount of patronage divi- on Schedule F if you incurred the debt in your Buying or selling capital assets or depreci- dends on Schedule F any dividends from buy- farming business. If the debt is a nonbusiness able property. Don't include in income patron- ing those items (and you must reduce the cost debt, report the canceled amount as “Other in- age dividends from buying capital assets or de- or other basis of those items by the amount of come” on Schedule 1 (Form 1040), line 8. preciable property used in your business. You the dividends). This rule also applies to must, however, reduce the basis of these as- amounts you receive from the sale, redemption, Special rules apply to C and S corporations sets by the dividends. This reduction is taken or other disposition of a nonqualified written no- and partnerships. See section 108(i), Regula- into account as of the first day of the tax year in tice of allocation resulting from these purcha- tions sections 1.108(i)-0 and 1.108(i)-2, and which the dividends are received. If the divi- ses. Pub. 4681 for details. dends are more than your unrecovered basis, reduce the unrecovered basis to zero and in- Form 1099-C. If a federal agency, financial in- clude the difference on Schedule F for the tax Per-Unit Retain Certificates stitution, credit union, finance company, or year you receive them. credit card company cancels or forgives your This rule and the exceptions explained be- A per-unit retain certificate is any written notice debt of $600 or more, you may receive a Form low also apply to amounts you receive from the that shows the stated dollar amount of a 1099-C, Cancellation of Debt. The amount of sale, redemption, or other disposition of a non- per-unit retain allocation made to you by the co- debt canceled is shown in box 2. qualified notice of allocation that resulted from operative. A per-unit retain allocation is an buying or selling capital assets or depreciable amount paid to patrons for products sold for property. them that's fixed without regard to the net earn- ings of the cooperative. These allocations can

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Exceptions • If a canceled debt is excluded from income tax attributes in the order listed unless you elect because it takes place when you're insol- to reduce the basis of depreciable property first, vent, the exclusions in situations (3) and as explained later. The following discussion covers some excep- (4) don't apply to the extent you're insol- tions to the general rule for canceled debt. 1. Net operating loss (NOL). Reduce any vent. These exceptions apply before the exclusions NOL for the tax year of the debt cancella- • If a canceled debt is excluded from income discussed below. tion, and then any NOL carryover to that because it’s qualified principal residence year. Reduce the NOL or NOL carryover indebtedness, the exclusion in situation (2) Price reduced after purchase. If your pur- one dollar for each dollar of excluded can- doesn't apply unless you elect to apply sit- chase of property was financed by the seller celed debt. uation (2) instead of the exclusion for quali- and the seller reduces the amount of the debt at fied principal residence indebtedness. 2. General business credit carryover. Re- a time when you aren't insolvent and the reduc- duce the credit carryover to or from the tax tion doesn't occur in a chapter 11 bankruptcy See Form 982, later, for information on how year of the debt cancellation. Reduce the case, the amount of the debt reduction will be to claim an exclusion for a canceled debt. carryover 331/3 cents for each dollar of ex- treated as a reduction in the purchase price of cluded canceled debt. the property. Reduce your basis in the property Debt. For this discussion, debt includes any by the amount of the reduction in the debt. The debt for which you're liable or that attaches to 3. Minimum tax credit. Reduce the mini- rules that apply to bankruptcy and insolvency property you hold. mum tax credit available at the beginning are explained below under Exclusions. of the tax year following the tax year of the Bankruptcy and Insolvency debt cancellation. Reduce the credit 331/3 Deductible debt. You don't realize income cents for each dollar of excluded canceled from a canceled debt to the extent the payment You can exclude a canceled debt from income debt. of the debt would have been a deductible ex- if you're bankrupt or to the extent you're insol- 4. Capital loss. Reduce any net capital loss pense. This exception applies before the price vent. for the tax year of the debt cancellation, reduction exception discussed above and the and then any capital loss carryover to that bankruptcy and insolvency exclusions dis- Bankruptcy. A bankruptcy case is a case un- year. Reduce the capital loss or loss carry- cussed next. der title 11 of the U.S. Code if you're under the over one dollar for each dollar of excluded jurisdiction of the court and the cancellation of canceled debt. Example. You get accounting services for the debt is granted by the court or is the result your farm on credit. Later, you have trouble pay- of a plan approved by the court. 5. Basis. Reduce the basis of the property ing your farm debts, but you aren't bankrupt or you hold at the beginning of the tax year Don't include debt canceled in a bankruptcy insolvent. Your accountant forgives part of the following the tax year of the debt cancella- case in your income in the year it's canceled. In- amount you owe for the accounting services. tion in the following order. stead, you must use the amount canceled to re- How you treat the canceled debt depends on duce your tax attributes, explained below under a. Real property (except inventory) used your method of accounting. Reduction of tax attributes. in your trade or business or held for • Cash method—You don't include the can- investment that secured the canceled celed debt in income because payment of Insolvency. You're insolvent to the extent your debt. the debt would have been deductible as a liabilities are more than the fair market value of business expense. your assets immediately before the cancellation b. Personal property (except inventory • Accrual method—You include the can- of debt. and accounts and notes receivable) celed debt in income because the expense used in your trade or business or held You can exclude canceled debt from gross was deductible when you incurred the for investment that secured the can- income up to the amount by which you're insol- debt. celed debt. vent. If the canceled debt is more than this amount and the debt qualifies, you can apply c. Other property (except inventory and Exclusions the rules for qualified farm debt or qualified real accounts and notes receivable) used property business debt to the difference. Other- in your trade or business or held for Don't include canceled debt in income in the fol- wise, you include the difference in gross in- investment. come. Use the amount excluded because of in- lowing situations. d. Inventory and accounts and notes re- solvency to reduce any tax attributes, as ceivable. 1. The cancellation takes place in a bank- explained below under Reduction of tax attrib- ruptcy case under title 11 of the U.S. utes. You must reduce the tax attributes under e. Other property. Code. the insolvency rules before applying the rules Reduce the basis one dollar for each for qualified farm debt or for qualified real prop- 2. The cancellation takes place when you're dollar of excluded canceled debt. How- erty business debt. insolvent. ever, the reduction can't be more than the 3. The canceled debt is a qualified farm debt. Example. You had a $15,000 debt that total basis of property and the amount of wasn't qualified principal residence debt can- money you hold immediately after the debt 4. The canceled debt is a qualified real prop- cancellation minus your total liabilities im- erty business debt (in the case of a tax- celed outside of bankruptcy. Immediately be- fore the cancellation, your liabilities totaled mediately after the cancellation. payer other than a C corporation). See For allocation rules that apply to basis chapter 5 of Pub. 334. $80,000 and your assets totaled $75,000. Since your liabilities were more than your assets, you reductions for multiple canceled debts, 5. The canceled debt is qualified principal were insolvent to the extent of $5,000 ($80,000 see Regulations section 1.1017-1(b)(2). residence indebtedness which is: − $75,000). You can exclude this amount from Also see Electing to reduce the basis of depreciable property first, later. a. Discharged before 2021, or income. The remaining canceled debt ($10,000) may be subject to the qualified farm 6. Passive activity loss and credit carry- b. Subject to an arrangement that is en- debt or qualified real property business debt overs. Reduce the passive activity loss tered into and evidenced in writing be- rules. If not, you must include it in income. and credit carryovers from the tax year of fore January 1, 2021. the debt cancellation. Reduce the loss Reduction of tax attributes. If you exclude The exclusions don't apply in the following carryover one dollar for each dollar of ex- canceled debt from income in a bankruptcy situations. cluded canceled debt. Reduce the credit case or during insolvency, you must use the ex- 1 If a canceled debt is excluded from income carryover 33 /3 cents for each dollar of ex- • cluded debt to reduce certain tax attributes. because it takes place in a bankruptcy cluded canceled debt. case, the exclusions in situations (2), (3), Order of reduction. You must use the ex- 7. Foreign tax credit. Reduce the credit (4), and (5) don't apply. cluded canceled debt to reduce the following carryover to or from the tax year of the

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debt cancellation. Reduce the carryover and 1250 property and the recapture of gain as year of the debt cancellation, multiplied by 331/3 cents for each dollar of excluded ordinary income are explained in chapter 9. 3. canceled debt. 4. Any net capital loss for the tax year of the More information. For more information on debt cancellation and any capital loss car- How to make tax attribute reductions. debt cancellation in bankruptcy proceedings or ryover to that year. Always make the required reductions in tax at- during insolvency, see Pub. 908. tributes after figuring your tax for the year of the 5. Any passive activity loss and credit carry- debt cancellation. In making the reductions in Qualified Farm Debt overs from the tax year of the debt cancel- (1) and (4) earlier, first reduce the loss for the lation. Any credit carryover is multiplied by tax year of the debt cancellation. Then reduce You can exclude from income a canceled debt 3. any loss carryovers to that year in the order of that's qualified farm debt owed to a qualified the tax years from which the carryovers arose, 6. Any foreign tax credit carryovers to or from person. This exclusion applies only if you were starting with the earliest year. In making the re- the tax year of the debt cancellation, multi- solvent when the debt was canceled or, if you ductions in (2) and (7) earlier, reduce the credit plied by 3. were insolvent, only to the extent the canceled carryovers to the tax year of the debt cancella- debt is more than the amount by which you Qualified property. This is any property tion in the order in which they are taken into ac- were insolvent. This exclusion doesn't apply to you use or hold for use in your trade or business count for that year. a canceled debt excluded from income be- or for the production of income. Electing to reduce the basis of depreciable cause it relates to your principal residence or it Reduction of tax attributes. If you exclude property first. You can elect to apply any por- takes place in a bankruptcy case. canceled debt from income under the qualified tion of the excluded canceled debt first to re- farm debt rules, you must use the excluded duce the basis of depreciable property you hold Your debt is qualified farm debt if both the debt to reduce tax attributes. (If you also exclu- at the beginning of the tax year following the tax following requirements are met. ded canceled debt under the insolvency rules, year of the debt cancellation in the following or- • You incurred it directly in operating a farm- you reduce the amount of the tax attributes re- der. ing business. • At least 50% of your total gross receipts for maining after reduction for the exclusion al- 1. Depreciable real property used in your the 3 tax years preceding the year of debt lowed under the insolvency rules.) You must trade or business or held for investment cancellation were from your farming busi- generally follow the reduction rules previously that secured the canceled debt. ness. explained under Bankruptcy and Insolvency. However, don't follow the rules in (5) under Or- 2. Depreciable personal property used in For more information, see Pub. 4681. der of reduction, earlier. Instead, follow the spe- your trade or business or held for invest- cial rules explained next. ment that secured the canceled debt. Qualified person. This is a person who is ac- 3. Other depreciable property used in your tively and regularly engaged in the business of Special rules for reducing the basis of trade or business or held for investment. lending money. A qualified person includes any property. You must use special rules to re- federal, state, or local government, or any of duce the basis of property for excluded can- 4. Real property held as inventory if you elect their agencies or subdivisions. The USDA is a celed qualified farm debt. Under these special to treat it as depreciable property on Form qualified person. A qualified person doesn't in- rules, you only reduce the basis of qualified 982. clude any of the following. property (defined earlier). Reduce it in the fol- A person related to you. lowing order. The amount you apply can't be more than • A person from whom you acquired the the total adjusted basis of all the depreciable • 1. Depreciable qualified property. You may property (or a person related to this per- properties. Depreciable property for this pur- elect on Form 982 to treat real property son). pose means any property subject to deprecia- held as inventory as depreciable property. A person who receives a fee from your in- tion, but only if a reduction of basis will reduce • vestment in the property (or a person rela- 2. Land that's qualified property and is used the depreciation or amortization otherwise al- ted to this person). or held for use in your farming business. lowable for the period immediately following the basis reduction. For the definition of a related person, see 3. Other qualified property. You make this reduction before reducing the Related persons under At-Risk Amounts in Pub. other tax attributes listed earlier. If the excluded 925. Form 982 canceled debt is more than the depreciable ba- sis you elect to reduce first, use the difference Exclusion limit. The amount of canceled Use Form 982 to show the amounts of canceled to reduce the other tax attributes. In figuring the qualified farm debt you can exclude from in- debt excluded from income and the reduction of limit on the basis reduction in (5) under Order of come is limited. It can't be more than the sum of tax attributes in the order listed on the form. reduction, earlier, use the remaining adjusted your adjusted tax attributes and the total adjus- Also use it if you're electing to apply the exclu- basis of your properties after making this elec- ted basis of the qualified property you hold at ded canceled debt to reduce the basis of depre- tion. the beginning of the tax year following the tax ciable property before reducing tax attributes. See Form 982, later, for information on how year of the debt cancellation. Figure this limit af- You make this election by showing the amount to make this election. If you make this election, ter taking into account any reduction of tax at- you elect to apply on line 5 of the form. you can revoke it only with the consent of the tributes because of the exclusion of canceled IRS. debt from gross income during insolvency. When to file. You must file Form 982 with your If the canceled debt is more than this limit, timely filed income tax return (including exten- Recapture of basis reductions. If you reduce you must include the difference in gross in- sions) for the tax year in which the cancellation the basis of property under these provisions (ei- come. of debt occurred. If you timely filed your return ther the election to reduce basis first or the ba- for the year without electing to apply the exclu- Adjusted tax attributes. Adjusted tax at- sis reduction without that election) and later sell ded canceled debt to reduce the basis of depre- tributes means the sum of the following items. or otherwise dispose of the property at a gain, ciable property first, you can still make the elec- the part of the gain due to this basis reduction is 1. Any NOL for the tax year of the debt can- tion by filing an amended return within 6 months taxable as ordinary income under the deprecia- cellation and any NOL carryover to that of the due date of the return (excluding exten- tion recapture provisions. Treat any property year. sions). For more information, see When To File that isn't section 1245 or section 1250 property in the Form 982 instructions. 2. Any general business credit carryover to as section 1245 property. For section 1250 or from the year of the debt cancellation, property, determine the straight-line deprecia- multiplied by 3. tion adjustments as though there were no basis reduction for debt cancellation. Sections 1245 3. Any minimum tax credit available at the beginning of the tax year following the tax

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is gain from a sale. The gain is reported on period you don't use it more than 50% in your Form 4797 and is treated as section 1231 business, you must include part of the deduc- Income From Other gain if you held the land for more than 1 tion in income. See chapter 7 for information on Sources year. See chapter 9. the section 179 expense deduction and when to recapture that deduction. The contract also contained a provision for a In addition, if the percentage of business This section discusses other types of income temporary workspace (temporary easement) to use of listed property (see chapter 7) falls to you may receive. allow for the collection of topsoil and for equip- 50% or less in any tax year during the recovery ment movement. This temporary easement is period, you must include in income any excess Barter income. If you're paid for your work in only for the construction period (usually a pe- section 179 expense deduction you took on the farm products, other property, or services, you riod of months). The gain is reported on Sched- property. must report as income the fair market value of ule E and does not affect the basis of the land. what you receive. The same rule applies if you Both of these amounts are farm income. trade farm products for other farm products, Easement contracts usually describe Use Form 4797, Part IV, to figure how much to property, or someone else's labor. This is called TIP the affected land using square feet. include in income. barter income. For example, if you help a neigh- Your basis may be figured per acre. bor build a barn and receive a cow for your One acre equals 43,560 square feet. Refund or reimbursement. You must gener- work, you must report the fair market value of If construction of the pipeline damaged ally include in income a reimbursement, refund, the cow as ordinary income. Your basis for growing crops and you later receive a settle- or recovery of an item for which you took a de- property you receive in a barter transaction is ment of $250 for this damage, the $250 is in- duction in an earlier year. Include it for the tax usually the fair market value that you include in come and is included on Schedule F. It doesn't year you receive it. However, if any part of the income. If you pay someone with property, see affect the basis of your land. earlier deduction didn't decrease your income Property for services under Labor Hired in tax, you don't have to include that part of the re- chapter 4. Fuel tax credit and refund. Include any credit imbursement, refund, or recovery. or refund of federal excise taxes on fuels in your Example. A tenant farmer purchased fertil- Below-market loans. A below-market loan is gross income if you deducted the cost of the a loan on which either no interest is charged or fuel (including excise tax) as an expense that izer for $1,000 in April 2019. He deducted $1,000 on his 2019 Schedule F and the entire interest is charged at a rate below the applica- reduced your income tax. See chapter 14 for deduction reduced his tax. The landowner reim- ble federal rate. If you make a below-market more information about fuel tax credits and re- bursed him $500 of the cost of the fertilizer in loan, you may have to report income from the funds. loan in addition to any stated interest you re- February 2020. The tenant farmer must include ceive from the borrower. See chapter 1 of Pub. Illegal federal irrigation subsidy. The federal $500 in income on his 2020 tax return because 550 for more information on below-market government, operating through the Bureau of the entire deduction decreased his 2019 tax. loans. Reclamation, has made irrigation water from certain reclamation and irrigation projects avail- Sale of soil and other natural deposits. If Commodity futures and options. See Hedg- able for agricultural purposes. The excess of you remove and sell topsoil, loam, fill dirt, sand, ing in chapter 8 for information on gains and the amount required to be paid for water from gravel, or other natural deposits from your prop- losses from commodity futures and options these projects over the amount you actually erty, the proceeds are ordinary income. A rea- transactions. paid is an illegal subsidy. sonable allowance for depletion of the natural deposit sold may be claimed as a deduction. For example, if the amount required to be See Depletion in chapter 7. Custom hire (machine work). Pay you re- paid is full cost and you paid less than full cost, ceive for contract work or custom work that you the difference is an illegal subsidy and you must Sod. Report proceeds from the sale of sod or your hired help perform off your farm for oth- include it in income. Report this on Schedule F, on Schedule F. A deduction for cost depletion is ers, or for the use of your property or machines, line 8. You can't take a deduction for the allowed, but only for the topsoil removed with is income to you whether or not income tax was amount you must include in income. the sod. withheld. This rule applies whether you receive For more information on reclamation and irri- the pay in cash, services, or merchandise. Re- gation projects, contact your local Bureau of Granting the right to remove deposits. If port this income on Schedule F. Reclamation. you enter into a legal relationship granting someone else the right to excavate and remove Easements and rights-of-way. Income you Prizes. Report prizes you win on farm livestock natural deposits from your property, you must receive for granting easements or rights-of-way or products at contests, exhibitions, fairs, etc., determine whether the transaction is a sale or on your farm or ranch for flooding land, laying on Schedule F, line 8. If you receive a prize in another type of transaction (for example, a pipelines, constructing electric or telephone cash, include the full amount in income. If you lease). lines, etc., may result in income, a reduction in receive a prize in produce or other property, in- If you receive a specified sum or an amount the basis of all or part of your farmland, or both. clude the fair market value of the property. For fixed without regard to the quantity produced Income you received for granting a tempo- prizes of $600 or more, you should receive a and sold from the deposit and you retain no rary construction easement is rental income. Form 1099-MISC. economic interest in the deposit, your transac- tion is a sale. You're considered to retain an Report the income as rent on Part I of Sched- See chapter 12 for information about prizes economic interest if, under the terms of the le- ule E (Form 1040). related to 4-H Club or FFA projects. See Pub. gal relationship, you depend on the income de- 525 for information about other prizes. Example. You granted a permanent rived from extraction of the deposit for a return right-of-way for a gas pipeline through your Property sold, destroyed, stolen, or con- of your capital investment in the deposit. property for $10,000. Only a specific part of demned. You may have an ordinary or capital Your income from the deposit is capital gain your farmland was affected. You reserved the gain if property you own is sold or exchanged; if the transaction is a sale. Otherwise, it's ordi- right to continue farming the surface land after stolen; destroyed by fire, flood, or other casu- nary income subject to an allowance for deple- the pipe was laid. Treat the payment for the alty; or condemned by a public authority. In tion. See chapter 7 for information on depletion right-of-way in one of the following ways. some situations, you can postpone the tax on and chapter 8 for the tax treatment of capital gains. 1. If the payment is less than the basis prop- the gain to a later year. See chapters 8 through erly allocated to the part of your land affec- 11. Timber sales. Timber sales, including sales of ted by the right-of-way, reduce the basis logs, firewood, and pulpwood, are discussed in by $10,000. Recapture of section 179 expense deduc- tion. If you took a section 179 expense deduc- chapter 8. 2. If the payment is equal to or more than the tion for property used in your farming business basis of the affected part of your land, re- and at any time during the property's recovery duce the basis to zero and the rest, if any,

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Tree farmers, in the business of tree development rights, grazing rights, and other Tax for Certain Children Who TIP farming, may use section 631(a) to similar rights. capture favorable income tax treatment Have Unearned Income of timber sales and then report the actual cash Gains or losses from the sale or other dis- sale of timber on Schedule F. Section 2032A position of farm property. Gains or losses If your child was under age 19 (24 if a full-time defines sale of trees as farm income (under the from the sale or other disposition of farm prop- student) at the end of the tax year and had un- special use valuation for estate tax purposes). erty other than land can be designated as EFI if earned income of more than $2,650, this in- However, land owners who make frequent you (or your partnership or S corporation) used come will be taxed at the same rates as trusts sales (for example, two to three within 5 years, the property regularly for a substantial period in and estates. For more information, see the In- per case law) may use Schedule F to report this a farming business. Whether the property has structions for Form 8615. business income. been regularly used for a substantial period de- pends on all the facts and circumstances. Alternative Minimum Tax Liquidation of a farming business. If you (AMT) Income Averaging for (or your partnership or S corporation) liquidate your farming business, gains or losses on prop- You can elect to use income averaging to com- Farmers erty sold within a reasonable time after opera- pute your regular tax liability. However, income tions stop can be designated as EFI. A period of averaging isn't used to determine your regular If you're engaged in a farming business, you 1 year after stopping operations is a reasonable tax or tentative minimum tax when figuring your may be able to average all or some of your farm time. After that, what is a reasonable time de- AMT. Using income averaging may reduce your income by using income tax rates from the 3 pends on the facts and circumstances. total tax even if you owe AMT. prior years (base years) to calculate the tax on that income. Income averaging may lower your EFI and base year rates. If your EFI includes Credit for prior year minimum tax. You may income tax liability in a year where farm income both ordinary income and capital gains, you be able to claim a nonrefundable tax credit if and taxable income are higher compared to one must use tax rates from each base year to com- you owed AMT in a prior year. See the Instruc- or more of the 3 prior years. See the Instruc- pute tax on an equal portion of each type of in- tions for Form 8801. tions for Schedule J (Form 1040) for the defini- come. For example, you can't tax all of the capi- tion of the term “farming business.” tal gains at the rate for capital gains from a Schedule J Farmers electing farm income averag- single base year. ing may want to include taxable income You can use income averaging by filing Sched- from the fair market value (trade value) How To Figure the Tax ule J (Form 1040) with your timely filed (includ- of traded farm assets as electable farm income. ing extensions) return for the year. You can also Under the Tax Cuts and Jobs Act, personal If you average your farm income, you will figure use income averaging on a late return, or use, property, such as tractors and equipment, no your tax on Schedule J (Form 1040). change, or cancel it on an amended return if the longer qualifies for a like-kind exchange and is time for filing a claim for refund hasn't expired now subject to depreciation recapture on the Negative taxable income for base year. If for that election year. You must generally file fair market value of the trade as if cash was ex- your taxable income for any base year was zero the claim for refund within 3 years from the date changed. because your deductions were more than your you filed your original return or 2 years from the income, you may have negative taxable income date you paid the tax, whichever is later. Who can use income averaging? You can for that year to combine with your EFI on use income averaging to figure your tax for any Schedule J. year in which you were engaged in a farming business as an individual, a partner in a partner- Filing status. You aren't prohibited from using ship, or a shareholder in an S corporation. Serv- income averaging solely because your filing ices performed as an employee are disregar- status isn't the same as your filing status in the ded in determining whether an individual is base years. For example, if you're married and 4. engaged in a farming business. However, if file jointly, but filed as single in all of the base you're a shareholder of an S corporation en- years, you may still average farm income. gaged in a farming business, you may treat compensation received from the corporation Effect on Other Tax Farm Business that's attributable to the farming business as farm income. You don't need to have been en- Determinations gaged in a farming business in any base year. Expenses Corporations, partnerships, S corporations, You subtract your EFI from your taxable income estates, and trusts can't use income averaging. and add one-third of it to the taxable income of each of the base years to determine the tax rate What's New for 2020 to use for income averaging. The allocation of Elected Farm Income (EFI) your EFI to the base years doesn't affect other tax determinations. For example, you make the Standard mileage rate. For 2020, the stand- EFI is the amount of income from your farming following determinations before subtracting ard mileage rate for the cost of operating your business that you elect to have taxed at base your EFI (or adding it to income in the base car, van, pickup, or panel truck for each mile of year rates. You can designate as EFI any type years). business use is 57.5 cents. See Truck and Car of income attributable to your farming business. • The amount of your self-employment tax. Expenses, later. However, your EFI can't be more than your tax- • Whether, in the aggregate, sales and other Increased business interest expense. The able income, and any EFI from a net capital dispositions of business property (section Coronavirus Aid, Relief, and Economic Security gain attributable to your farming business can't 1231 transactions) produce long-term cap- Act (CARES Act) retroactively increases the be more than your total net capital gain. ital gain or ordinary loss. amount of business interest expense that may • The amount of any NOL carryover or net be deducted for tax years beginning in 2019 Income from your farming business is the capital loss carryover applied and the and 2020 by computing the section 163(j) limi- sum of any farm income or gain minus any farm amount of any carryover to another year. tation using 50% (instead of 30%) of your adjus- expenses or losses allowed as deductions in • The limit on itemized deductions based on ted taxable income. The limitation doesn’t apply figuring your taxable income. However, it your adjusted gross income. to most farms, but for more information, see the doesn't include gain or loss from the sale or • The amount of any net capital loss or NOL Instructions for Form 8990, Limitation on Busi- other disposition of land, or from the sale of in a base year. ness Interest Expense Under Section 163(j).

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Payroll Protection Program (PPP) Loan and Personal and business expenses. Some ex- deduction for prepaid farm supplies can't be Forgiven Debt. Generally, you can’t deduct penses you pay during the tax year may be part more than $50,000 (50% of $100,000) for 2020. expenses that are allocable to a PPP loan you personal and part business. These may include The excess prepaid farm supplies expense of received that’s later forgiven. For more informa- expenses for gasoline, oil, fuel, water, rent, $5,000 ($55,000 − $50,000) is deductible in a tion, see Notice 2020-32 available at electricity, telephone, automobile upkeep, re- later tax year when you use or consume the IRS.gov/irb/2020-21_IRB#NOT-2020-32. pairs, insurance, interest, and taxes. supplies. However, the deduction limit doesn't You must allocate these mixed expenses apply if you qualify for the exceptions listed Topics between their business and personal parts. next. Generally, the personal part of these expenses This chapter discusses: Exceptions. This limit on the deduction for isn't deductible. The business portion of the ex- prepaid farm supplies expense doesn't apply if penses is deductible on Schedule F. • Deductible expenses you are a farm-related taxpayer and either of Domestic production activities deduction • Example. You paid $3,600 for electricity the following apply. • Capital expenses during the tax year. You used 1/3 of the electric- 1. Your prepaid farm supplies expense is • Nondeductible expenses ity for personal purposes and 2/3 for farming. more than 50% of your other deductible • Losses from operating a farm Under these circumstances, you can deduct farm expenses because of a change in • Not-for-profit farming $2,400 (2/3 of $3,600) of your electricity ex- business operations caused by unusual pense as a farm business expense. circumstances. Useful Items You may want to see: Reasonable allocation. It isn't always 2. Your total prepaid farm supplies expense easy to determine the business and nonbusi- for the preceding 3 tax years is less than ness parts of an expense. There is no method 50% of your total other deductible farm ex- Publication of allocation that applies to all mixed expenses. penses for those 3 tax years.

463 463 Travel, Gift, and Car Expenses Any reasonable allocation is acceptable. What is reasonable depends on the circumstances in You are a farm-related taxpayer if any of the

535 535 Business Expenses each case. following tests apply.

587 587 Business Use of Your Home 1. Your main home is on a farm.

925 925 Passive Activity and At-Risk Rules Prepaid Farm Supplies 2. Your principal business is farming.

936 936 Home Mortgage Interest Deduction 3. A member of your family meets (1) or (2). Prepaid farm supplies include the following Form (and Instructions) items if paid for during the year. For this purpose, your family includes your • Feed, seed, fertilizer, and similar farm sup- brothers and sisters, half brothers and half sis-

Sch A (Form 1040) Sch A (Form 1040) Itemized plies not used or consumed during the ters, spouse, parents, grandparents, children, Deductions year, but not including farm supplies that grandchildren, and aunts and uncles and their you would have consumed during the year children.

Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From if not for a fire, storm, flood, other casualty, Farming Whether or not the deduction limit for disease, or drought. prepaid farm supplies applies, your ex- 461 461 Limitation on Business Losses • Poultry (including egg-laying hens and ! CAUTION penses for prepaid livestock feed may baby chicks) bought for use (or for both

1045 1045 Application for Tentative Refund be subject to the rules for advance payment of use and resale) in your farm business. livestock feed, discussed next.

5213 5213 Election To Postpone However, include only the amount that Determination as To Whether the would be deductible in the following year if Presumption Applies That an you had capitalized the cost and deducted Prepaid Livestock Feed Activity Is Engaged in for Profit it ratably over the lesser of 12 months or the useful life of the poultry.

8903 If you report your income and expenses under 8903 Domestic Production Activities • Poultry bought for resale and not resold the cash method of accounting, you can't de- Deduction during the year. duct in the year paid the cost of feed your live- 8990 8990 Limitation on Business Interest stock will consume in a later year unless you Expense IRC 163(j) Deduction limit. If you use the cash method of accounting to report your income and expen- meet all the following tests. See chapter 16 for information about getting ses, your deduction for prepaid farm supplies in 1. The payment is for the purchase of feed publications and forms. the year you pay for them may be limited to rather than a deposit. 50% of your other deductible farm expenses for the year (all Schedule F deductions except pre- 2. The prepayment has a business purpose Deductible Expenses paid farm supplies). This limit doesn't apply if and isn't merely for tax avoidance. you meet one of the exceptions described later. 3. Deducting the prepayment doesn't result The ordinary and necessary costs of operating See chapter 2 for a discussion of the Cash in a material distortion of your income. a farm for profit are deductible business expen- Method of accounting. ses. “Ordinary” means what most farmers do, If the limit applies, you can deduct the ex- If you meet all three tests, you can deduct and “necessary” means what is useful and help- cess cost of farm supplies other than poultry in the prepaid feed, subject to the limit on prepaid ful in farming. Schedule F, Part II, lists some the year you use or consume the supplies. The farm supplies discussed earlier. common farm expenses that are typically de- excess cost of poultry bought for use (or for If you fail any of these tests, you can deduct ductible. This chapter discusses many of these both use and resale) in your farm business is the prepaid feed only in the year it is consumed. expenses, as well as others not listed on deductible in the year following the year you Schedule F. pay for it. The excess cost of poultry bought for This rule doesn't apply to the purchase resale is deductible in the year you sell or other- of commodity futures contracts. Reimbursed expenses. If the reimbursement wise dispose of that poultry. is received in the same year that the expense is claimed, reduce the expense by the amount of Example. During 2020, you bought fertilizer Payment for the purchase of feed. Whether the reimbursement. If the reimbursement is re- ($40,000), feed ($10,000), and seed ($5,000) a payment is for the purchase of feed or a de- ceived in a year after the expense is claimed, for use on your farm in the following year. Your posit depends on the facts and circumstances include the reimbursement amount in income. total prepaid farm supplies expense for 2020 is in each case. It is for the purchase of feed if you See Refund or reimbursement under Income $55,000. Your other deductible farm expenses can show you made it under a binding commit- From Other Sources in chapter 3. totaled $100,000 for 2020. Therefore, your ment to accept delivery of a specific quantity of

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feed at a fixed price and you aren't entitled, by of the property on the date of transfer. If the em- and the employee spends 5% of the time main- contract or business custom, to a refund or re- ployee pays you anything for the property, de- taining your home. The employee devotes the purchase. duct as wages the fair market value of the prop- remaining time to work on your farm. You can't The following are some factors that show a erty minus the payment by the employee for the deduct 5% of the wages and employment taxes payment is a deposit rather than for the pur- property. you pay for that employee. chase of feed. Treat the wages deducted as an amount re- • The absence of specific quantity terms. ceived for the property. You may have a gain or Employment Credits • The right to a refund of any unapplied pay- loss to report if the property's adjusted basis on ment credit at the end of the contract. the date of transfer is different from its fair mar- Reduce your deduction for wages by the • The seller's treatment of the payment as a ket value. Any gain or loss has the same char- amount of any employment credits you claim deposit. acter the exchanged property had in your such as the work opportunity credit (Form • The right to substitute other goods or prod- hands. For more information, see chapter 8. 5884). ucts for those specified in the contract. Child as an employee. You can deduct rea- A provision permitting substitution of ingredi- sonable wages or other compensation you pay Repairs and Maintenance ents to vary the particular feed mix to meet your to your child for doing farmwork if a true em- livestock's current diet requirements won't sug- ployer-employee relationship exists between You can deduct most expenses for the repair gest a deposit. Further, a price adjustment to you and your child. Include these wages in the and maintenance of your farm property. Com- reflect market value at the date of delivery isn't, child's income. The child may have to file an in- mon items of repair and maintenance are re- by itself, proof of a deposit. come tax return. These wages may also be painting, sealing cracks or replacing broken subject to social security and Medicare taxes if windows on a farm building, and routine mainte- Business purpose. The prepayment has a nance of trucks, tractors, and other farm machi- business purpose only if you have a reasonable your child is age 18 or older. Wages paid to mi- nor children become subject to social security nery. However, expenses for improvements to expectation of receiving some business benefit depreciable property are generally capital ex- from prepaying the cost of livestock feed. The and Medicare taxes in the month the dependent child turns 18 years of age. For more informa- penditures. Amounts are paid for improvements following are some examples of business bene- tion, see Family Employees in chapter 13. if they are for the betterment of your property, fits. are for a restoration of your property, such as • Fixing maximum prices and securing an A Form W-2 should be issued to the the replacement of major components and sub- assured feed supply. TIP child employee. stantial structural parts, or if your expenditures • Securing preferential treatment in anticipa- adapt your property to a new or different use. tion of a feed shortage. The fact that your child spends the wages to For example, if you replace a few shingles on Other factors considered in determining the buy clothes or other necessities you normally the barn roof, these expenses are generally de- existence of a business purpose are whether furnish doesn't prevent you from deducting your ductible as repairs and maintenance. If you re- the prepayment was a condition imposed by the child's wages as a farm expense. place the entire barn roof with a new roof, then this expense is generally a capital expenditure. seller and whether that condition was meaning- The amount of wages paid to the child For more information, see Capital Expenses, ful. could cause a loss of the dependency ! later. CAUTION exemption depending on how the child No material distortion of income. The fol- uses the money. lowing are some factors considered in deter- Under certain conditions, you can elect to mining whether deducting prepaid livestock capitalize amounts paid for repair and mainte- feed materially distorts income. Spouse as an employee. You can deduct nance. See Regulations section 1.263(a)-3(n) • Your customary business practice in con- reasonable wages or other compensation you for more information. ducting your livestock operations. pay to your spouse if a true employer-employee • The expense in relation to past purchases. relationship exists between you and your Interest • The time of year you made the purchase. spouse. Wages you pay to your spouse are • The expense in relation to your income for subject to social security and Medicare taxes. There may be a limit on the amount you can de- the year. For more information, see Family Employees in duct as farming business interest paid or ac- chapter 13. crued during the tax year related to your farming Labor Hired business, such as for farm mortgages and other Nondeductible Pay farm mortgages and other farm obligations. However, a small business taxpayer is not sub- You can deduct reasonable wages paid for reg- You can't deduct wages paid for certain house- ject to the business interest expense limitation ular farm labor, piecework, contract labor, and hold work, construction work, and maintenance and is not required to file Form 8990. A small other forms of labor hired to perform your farm- of your home. However, those wages may be business taxpayer is a taxpayer that is not a tax ing operations. You can pay wages in cash or in subject to the employment taxes discussed in shelter (as defined in section 448(d)(3)) and noncash items such as inventory, capital as- chapter 13. has average annual gross receipts of $25 mil- sets, or assets used in your business. The cost lion or less for the 3 prior tax years under the of boarding farm labor is a deductible labor Household workers. Do not deduct amounts gross receipts test of section 448(c). Gross re- cost. Other deductible costs you incur for farm paid to persons engaged in household work, ceipts include the aggregate gross receipts labor include health insurance, workers' com- except to the extent their services are used in from all persons treated as a single employer, pensation insurance, and other benefits. boarding or otherwise caring for farm laborers. such as a controlled group of corporations, commonly controlled partnerships or proprietor- If you must withhold social security, Medi- Construction labor. Do not deduct wages ships, and affiliated service groups. care, and income taxes from your employees' paid to hired help for the construction of new cash wages, you can still deduct the full amount buildings or other improvements. These wages The gross receipts test of section 448(c) ap- of wages before withholding. See chapter 13 for are part of the cost of the building or other im- plies only to corporations and partnerships, but more information on Employment Taxes. Also, provement. You must capitalize them. for purposes of the business interest limitation deduct the employer's share of the social secur- the gross receipts test applies to individuals as ity and Medicare taxes you must pay on your Maintaining your home. If your farm em- if they were corporations or partnerships. Thus, employees' wages as a farm business expense ployee spends time maintaining or repairing any individual with a farming trade or business on Schedule F, line 29. See Taxes, later. your home, the wages and employment taxes operating as a sole proprietorship is subject to you pay for that work are nondeductible per- the gross receipts test. Property for services. If you transfer property sonal expenses. For example, assume you to an employee in payment for services, you have a farm employee for the entire tax year Certain businesses subject to the business can deduct as wages paid the fair market value interest expense limitation may elect out of the

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limitation. Certain farming businesses and affected by the use of property that secures the Taxes specified agricultural or horticultural coopera- loan. tives (as defined in section 199A(g)(4) qualify to You can deduct as a farm business expense make an election not to limit business interest Example. You secure a loan with property the real estate and personal property taxes on expenses. This is an irrevocable election. If you used in your farming business. You use the loan farm business assets, such as farm equipment, make this election, you are required to use the proceeds to buy a car for personal use. You animals, farmland, and farm buildings. You can alternative depreciation system (ADS), dis- must allocate interest expense on the loan to also deduct the social security and Medicare cussed later in chapter 7, to depreciate any personal use (purchase of the car) even though taxes you pay to match the amount withheld farming property with a recovery period of 10 the loan is secured by farm business property. from the wages of farm employees and any fed- years or more. Also, you are not entitled to the eral unemployment tax you pay. For information special depreciation allowance for that prop- Allocation period. The period for which a on employment taxes, see chapter 13. erty. For an individual with more than one quali- loan is allocated to a particular use begins on fying business, the election is made with re- the date the proceeds are used and ends on the Allocation of taxes. The taxes on the part of spect to each business. If you are required to earlier of the following dates. your farm you use as your home (including the limit your business interest expense, the • The date the loan is repaid. furnishings and surrounding land not used for amount you cannot deduct for the tax year is • The date the loan is reallocated to another farming) are nonbusiness taxes. You may be generally carried forward to the next tax year. use. able to deduct these nonbusiness taxes as However, there are special rules for partnership More information. For more information on in- itemized deductions on Schedule A (Form treatment of disallowed business interest. See terest, see chapter 4 of Pub. 535. 1040). To determine the nonbusiness part, allo- the Instructions for Form 8990 for more informa- cate the taxes between the farm assets and tion. nonbusiness assets. The allocation can be Breeding Fees done from the assessed valuations. If your tax Subject to the preceding rules, and assum- statement doesn't show the assessed valua- ing other limitations do not apply, you can de- You can generally deduct breeding fees as a tions, you can usually get them from the tax as- duct as a farm business expense interest paid farm business expense. However, if the breeder sessor. or accrued during the tax year related to your guarantees live offspring as a result of the farming business, such as for farm mortgages breeding or other veterinary procedure, you State and local general sales taxes. State and other farm obligations. must capitalize these costs as the cost basis of and local general sales taxes on nondeprecia- the offspring. Also, if you use an accrual ble farm business expense items are deductible Cash method. If you use the cash method of method of accounting, you must capitalize as part of the cost of those items. Include state accounting, you can generally deduct interest breeding fees and allocate them to the cost ba- and local general sales taxes imposed on the paid during the tax year. You can't deduct inter- sis of the calf, foal, etc. For more information on purchase of assets for use in your farm busi- est paid with funds received from the original who must use an accrual method of accounting, ness as part of the cost you depreciate. Also lender through another loan, advance, or other see Accrual Method Required under Account- treat the taxes as part of your cost if they are im- arrangement similar to a loan. You can, how- ing Methods in chapter 2. posed on the seller and passed on to you. ever, deduct the interest when you start making payments on the new loan. For more informa- State and federal income taxes. Individuals tion, see Cash Method in chapter 2. Fertilizer and Lime can't deduct state and federal income taxes as farm business expenses. Individuals can de- Prepaid interest. Under the cash method, You can deduct in the year paid or incurred the duct state and local income taxes only as an you generally can't deduct any interest paid be- cost of fertilizer, lime, and other materials ap- itemized deduction on Schedule A (Form 1040). fore the year it is due. Interest paid in advance plied to farmland to enrich, neutralize, or condi- For tax years after 2017 and before 2026, the may be deducted only in the tax year in which it tion it if the benefits last a year or less. You can Schedule A (Form 1040) deduction for com- is due. also deduct the cost of applying these materials bined state and local income and property in the year you pay or incur it. However, see taxes is limited to $10,000 ($5,000 if married fil- Accrual method. If you use an accrual method Prepaid Farm Supplies, earlier, for a rule that ing separately). However, you can't deduct fed- of accounting, you can deduct only interest that may limit your deduction for these materials. has accrued during the tax year. However, you eral income tax. can't deduct interest owed to a related person If the benefits of the fertilizer, lime, or other who uses the cash method until payment is materials last substantially more than 1 year, Highway use tax. You can deduct the federal made and the interest is includible in the gross you generally capitalize their cost and deduct a use tax on highway motor vehicles paid on a income of that person. For more information, part each year the benefits last. However, you truck or truck tractor used in your farm busi- see Accrual Method in chapter 2. can choose to deduct these expenses in the ness. For information on the tax itself, including year paid or incurred. If you make this choice, information on vehicles subject to the tax, see Allocation of interest. If you use the proceeds you will need IRS approval if you later decide to the Instructions for Form 2290. of a loan for more than one purpose, you must capitalize the cost of previously deducted items. Self-employment tax. You cannot deduct the allocate the interest on that loan to each use. If you sell farmland on which fertilizer or lime self-employment tax you pay as a farm busi- Allocate the interest to the following categories. has been applied and if the selling price of the ness expense. However, you can deduct as an • Trade or business interest. land includes part or all of the cost of the fertil- adjustment to income on Schedule 1 (Form • Passive activity interest. izer or lime, you report the sale amount attribut- 1040), line 14, one-half of your self-employment • Investment interest. able to the fertilizer or lime as ordinary income. tax in figuring your adjusted gross income. For • Portfolio interest. See section 180 for more information. • Personal interest. more information, see chapter 12. You generally allocate interest on a loan the Farmland, for these purposes, is land used same way you allocate the loan proceeds. You for producing crops, fruits, or other agricultural Insurance allocate loan proceeds by tracing disburse- products or for sustaining livestock. It doesn't include land you have never used previously for ments to specific uses. You can generally deduct the ordinary and nec- producing crops or sustaining livestock. You essary cost of insurance for your farm business The easiest way to trace disburse- can't deduct initial land preparation costs. (See as a business expense. This includes premiums TIP ments to specific uses is to keep the Capital Expenses, later.) proceeds of a particular loan separate you pay for the following types of insurance. from any other funds. Include government payments you receive • Fire, storm, crop, theft, liability, and other for lime or fertilizer in income. See Fertilizer and insurance on farm business assets. Secured loan. The allocation of loan pro- Lime under Agricultural Program Payments in • Health and accident insurance on your ceeds and the related interest is generally not chapter 3. farm employees.

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• Workers' compensation insurance set by Schedule A (Form 1040) if you itemize your de- equipment for a specified price. The lease pay- state law that covers any claims for job-re- ductions. ments and the specified option price equal the lated bodily injuries or diseases suffered For more information, see Deductible Premi- sales price of the equipment plus interest. Un- by employees on your farm, regardless of ums chapter 6 of Pub 535. der the agreement, you are responsible for fault. maintenance, repairs, and the risk of loss. For • Business interruption insurance. federal income tax purposes, the agreement is • State unemployment insurance on your Rent and Leasing a conditional sales contract. You can't deduct farm employees (deductible as taxes if any of the lease payments as rent. You can de- If you lease property for use in your farm busi- they are considered taxes under state duct interest, repairs, insurance, depreciation, ness, you can generally deduct the rent you pay law). and other expenses related to the equipment. on Schedule F. However, you can't deduct rent Insurance to secure a loan. If you take out a you pay in crop shares if you deduct the cost of Motor vehicle leases. Special rules apply to policy on your life or on the life of another per- raising the crops as farm expenses. lease agreements that have a terminal rental son with a financial interest in your farm busi- adjustment clause. In general, this is a clause ness to get or protect a business loan, you can't Advance payments. Deduct advance pay- that provides for a rental price adjustment deduct the premiums as a business expense. In ments of rent only in the year to which they ap- based on the amount the lessor is able to sell the event of death, the proceeds of the policy ply, regardless of your accounting method. the vehicle for at the end of the lease. If your aren't taxed as income even if they are used to rental agreement contains a terminal rental ad- Farm home. If you rent a farm, don't deduct liquidate the debt. justment clause, treat the agreement as a lease the part of the rental expense that represents if the agreement otherwise qualifies as a lease. the fair rental value of the farm home in which Advance premiums. Deduct advance pay- For more information, see section 7701(h). ments of insurance premiums only in the year to you live. which they apply, regardless of your accounting Leveraged leases. Special rules apply to method. Lease or Purchase leveraged leases of equipment (arrangements in which the equipment is financed by a nonre- Example. On June 29, 2020, you paid a If you lease a farm building or equipment, you course loan from a third party). For more infor- premium of $3,000 for fire insurance on your must determine whether or not the agreement mation, see chapter 3 of Pub 535, and Revenue barn. The policy will cover a period of 3 years must be treated as a conditional sales contract Procedure 2001-28, which begins on beginning on July 1, 2020. Only the cost for the rather than a lease. If the agreement is treated page 1156 of Internal Revenue Bulletin 2001-19 6 months in 2020 is deductible as an insurance as a conditional sales contract, the payments at IRS.gov/pub/irs-irbs/irb01-19.pdf. expense on your 2020 calendar year tax return. under the agreement (so far as they don't repre- Deduct $500, which is the premium for 6 sent interest or other charges) are payments for Depreciation months of the 36-month premium period, or 6/36 the purchase of the property. Do not deduct of $3,000. In both 2021 and 2022, deduct these payments as rent, but capitalize the cost $1,000 (12/36 of $3,000). Deduct the remaining of the property and recover this cost through If property you acquire to use in your farm busi- $500 in 2022. Had the policy been effective on depreciation. ness is expected to last more than 1year, you January 1, 2020, the deductible expense would generally can't deduct the entire cost in the year have been $1,000 for each of the years 2020, Conditional sales contract. Whether an you acquire it. You must recover the cost over 2021, and 2022, based on one-third of the pre- agreement is a conditional sales contract de- more than 1 year and deduct part of it each year mium used each year. pends on the intent of the parties. Determine on Schedule F as depreciation or amortization. intent based on the provisions of the agreement However, you can choose to deduct part or all Business interruption insurance. Use and and the facts and circumstances that exist of the cost of certain qualifying property, up to a occupancy and business interruption insurance when you make the agreement. No single test, limit, as a section 179 deduction in the year you premiums are deductible as a business ex- or special combination of tests, always applies. place it in service. pense. This insurance pays for lost profits if However, in general, an agreement may be your business is shut down due to a fire or other considered a conditional sales contract rather Depreciation, amortization, and the section cause. Report any proceeds in full on Sched- than a lease if any of the following is true. 179 deduction are discussed in chapter 7. ule F, Part I. • The agreement applies part of each pay- ment toward an equity interest you will re- Business Use of Your Home Self-employed health insurance deduction. ceive. If you are self-employed, you can deduct as an • You get title to the property after you make adjustment to income on Schedule 1 (Form a stated amount of required payments. You can deduct expenses for the business use 1040) your payments for medical, dental, and • The amount you must pay to use the prop- of your home if you use part of your home ex- qualified long-term care insurance coverage for erty for a short time is a large part of the clusively and regularly: yourself, your spouse, and your dependents amount you would pay to get title to the • As the principal place of business for any when figuring your adjusted gross income on property. trade or business in which you engage; your Schedule 1 (Form 1040). Effective March • You pay much more than the current fair • As a place to meet or deal with patients, 30, 2010, the insurance can also cover any rental value of the property. clients, or customers in the normal course child of yours under age 27 at the end of 2020, • You have an option to buy the property at a of your trade or business; or even if the child was not your dependent. Gen- nominal price compared to the value of the • In connection with your trade or business, erally, this deduction can't be more than the net property when you may exercise the op- if you are using a separate structure that profit from the business under which the plan tion. Determine this value when you make isn't attached to your home. was established. the agreement. Your home office will qualify as your princi- If you or your spouse is also an employee of • You have an option to buy the property at a pal place of business for deducting expenses another person, you can't take the deduction for nominal price compared to the total for its use if you meet both of the following re- any month in which you are eligible to partici- amount you have to pay under the agree- quirements. pate in a subsidized health plan maintained by ment. You use it exclusively and regularly for the your employer or your spouse's employer. • The agreement designates part of the pay- • administrative or management activities of Generally, use the Self-Employed Health In- ments as interest, or part of the payments can be easily recognized as interest. your trade or business. surance Deduction Worksheet in the Instruc- • You have no other fixed location where tions for Schedule 1 (Form 1040) to figure your Example. You lease new farm equipment you conduct substantial administrative or deduction. Include the remaining part of the in- management activities of your trade or surance payment in your medical expenses on from a dealer who both sells and leases. The agreement includes an option to purchase the business.

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If you use part of your home for business, the vehicles (you use them at different times) Meals. You can ordinarily deduct only 50% of you must divide the expenses of operating your for business. your nonentertainment business-related meals home between personal and business use. expenses. You can deduct the cost of your Example. Maureen owns a car and four meals while traveling on business only if your The IRS now provides a simplified method pickup trucks that are used in her farm busi- business trip is overnight or long enough to re- to determine your expenses for business use of ness. Her farm employees use the trucks and quire you to stop for sleep or rest to properly your home. For more information, see Pub. 587. she uses the car for business. Maureen can't perform your duties. You can't deduct any of the use the standard mileage rate for the car or the cost of meals if it isn't necessary for you to rest. Deduction limit. If your gross income from trucks. This is because all five vehicles are For information on entertainment expenses, see farming equals or exceeds your total farm ex- used in Maureen's farm business at the same chapter 2 of Pub. 463. penses (including expenses for the business time. She must use actual expenses for all vehi- use of your home), you can deduct all your farm The expense of a meal includes amounts cles. expenses. But if your gross income from farm- you spend for your food, beverages, taxes, and ing is less than your total farm expenses, your tips relating to the meal. You can deduct either Business use percentage. You can claim 50% of the actual cost or 50% of a standard deduction for certain expenses for the use of 75% of the use of a car or light truck as busi- your home in your farming business is limited. meal allowance that covers your daily meal and ness use without any allocation records if you incidental expenses. Your deduction for otherwise nondeductible used the vehicle during most of the normal busi- expenses, such as utilities, insurance, and de- ness day directly in connection with the busi- Note. No deduction is allowed for certain preciation (with depreciation taken last), can't ness of farming. You choose this method of entertainment expenses, membership dues, be more than the gross income from farming substantiating business use the first year the and facilities used in connection with these ac- minus the following expenses. vehicle is placed in service. Once you make this tivities for amounts paid or incurred after De- The business part of expenses you could • choice, you may not change to another method cember 31, 2017. See section 274, as amen- deduct even if you didn't use your home for later. The following are uses directly connected ded by the Tax Cuts and Jobs Act, section business (such as deductible mortgage in- with the business of farming. 13304. terest, real estate taxes, and casualty and • Cultivating land. theft losses). • Raising or harvesting any agricultural or Recordkeeping requirements. You • Farm expenses other than expenses that horticultural commodity. must be able to prove your deductions relate to the use of your home. If you are • Raising, shearing, feeding, caring for, RECORDS for travel by adequate records or other self-employed, don't include your deduc- training, and managing animals. evidence that will support your own statement. tion for half of your self-employment tax. • Driving to the feed or supply store. Estimates or approximations don't qualify as proof of an expense. Deductions over the current year's limit can If you keep records and they show that your be carried over to your next tax year. They are business use was more than 75%, you may be You should keep an account book or similar subject to the deduction limit for the next tax able to claim more. See Recordkeeping require- record, supported by adequate documentary year. ments under Travel Expenses, later. evidence, such as receipts, that together sup- port each element of an expense. Generally, it More information. See Pub. 587 for more in- More information. For more information on is best to record the expense and get documen- formation on deducting expenses for the busi- deductible truck and car expenses, see chap- tation of it at the time you pay it. ness use of your home. ter 4 of Pub. 463. If you pay your employees for If you choose to deduct a standard meal al- the use of their truck or car in your farm busi- lowance rather than the actual expense, you Telephone expense. You can't deduct the ness, see Reimbursements to employees under don't have to keep records to prove amounts cost of basic local telephone service (including Travel Expenses next. spent for meals and incidental items. However, any taxes) for the first telephone line you have you must still keep records to prove the actual in your home, even if you have an office in your amount of other travel expenses, and the time, home. However, charges for business long-dis- Travel Expenses place, and business purpose of your travel. tance phone calls on that line, as well as the cost of a second line into your home used ex- You can deduct ordinary and necessary expen- More information. For detailed information on clusively for your farm business, are deductible ses you incur while traveling away from home travel, recordkeeping, and the standard meal al- business expenses. Cell phone charges for for your farm business. You can't deduct lavish lowance, see Pub. 463. calls relating to your farm business are deducti- or extravagant expenses. Usually, the location ble. If the cell phone you use for your farm busi- of your farm business is considered your home Reimbursements to employees. You can ness is part of a family cell phone plan, you for tax purposes. You are traveling away from generally deduct reimbursements you pay to must allocate and deduct only the portion of the home if: your employees for travel and transportation ex- charges attributable to farm business calls. • Your duties require you to be absent from penses they incur in the conduct of your busi- your farm substantially longer than an ordi- ness. Employees may be reimbursed under an Truck and Car Expenses nary workday, and accountable or nonaccountable plan. Under an • You need to get sleep or rest to meet the accountable plan, the employee must provide You can deduct the actual cost of operating a demands of your work while away from evidence of expenses. Under a nonaccountable truck or car in your farm business. Only expen- home. plan, no evidence of expenses is required. If ses for business use are deductible. These in- you reimburse expenses under an accountable clude such items as gasoline, oil, repairs, li- If you meet these requirements and can plan, deduct them as travel and transportation cense tags, insurance, and depreciation prove the time, place, and business purpose of expenses. If you reimburse expenses under a (subject to certain limits). your travel, you can deduct your ordinary and nonaccountable plan, you must report the reim- necessary travel expenses. bursements as wages on Form W-2 and deduct Standard mileage rate. Instead of using ac- them as wages. For more information, see tual costs, under certain conditions you can use The following are some types of deductible chapter 11 of Pub. 535. the standard mileage rate. The standard mile- travel expenses. age rate for each mile of business use is 57.5 • Air, rail, bus, and car transportation. Marketing Quota Penalties cents in 2020. You can use the standard mile- • Meals and lodging. • Dry cleaning and laundry. age rate for a car or a light truck, such as a van, You can deduct as Other expenses on Sched- pickup, or panel truck, you own or lease. • Telephone and fax. Transportation between your hotel and ule F penalties you pay for marketing crops in You can't use the standard mileage rate if • your temporary work or business meeting excess of farm marketing quotas. However, if you operate five or more cars or light trucks at location. you don't pay the penalty, but instead the pur- the same time. You aren't using five or more Tips for any of the above expenses. chaser of your crop deducts it from the payment vehicles at the same time if you alternate using •

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to you, include in gross income only the amount them. You must get IRS approval to use the You can also deduct on Schedule F the you received. Do not take a separate deduction crop method. If you follow this method, deduct amount you pay or incur in resolving tax issues for the penalty. the cost from the selling price to determine your relating to your farm business. profit on Schedule F, Part I. For more informa- Tenant House Expenses tion, see Crop method under Special Methods of Accounting in chapter 2. Capital Expenses You can deduct the costs of maintaining houses Choosing a method. You can adopt either and their furnishings for tenants or hired help as the crop method or the cash method for deduct- A capital expense is payment, or debt incurred, farm business expenses. These costs include ing the cost in the first year you buy egg-laying for the acquisition, production, or improvement repairs, utilities, insurance, and depreciation. hens, pullets, chicks, or seeds and young of a unit of property. You include the expense in the basis of the asset. Uniform capitalization The value of a dwelling you furnish to a ten- plants. Although you must use the same method for rules also require you to capitalize or include in ant under the usual tenant-farmer arrangement inventory certain other expenses. See chapters isn't taxable income to the tenant. egg-laying hens, pullets, and chicks, you can use a different method for seeds and young 2 and 6 for more information. plants. Once you use a particular method for Capital expenses are generally not deducti- Items Purchased for Resale any of these items, use it for those items until ble, but they may be depreciable. However, you you get IRS approval to change your method. can elect to deduct certain capital expenses, If you use the cash method of accounting, you For more information, see Change in Account- such as the following. ordinarily deduct the cost of livestock and other ing Method in chapter 2. • The cost of fertilizer, lime, etc. (See Fertil- items purchased for resale only in the year of izer and Lime under Deductible Expenses, sale. You deduct this cost, including freight Other Expenses earlier.) charges for transporting the livestock to the • Soil and water conservation expenses. farm, on Schedule F, Part I. However, see (See chapter 5.) Chickens, seeds, and young plants below. The following list, while not all-inclusive, shows some expenses you can deduct as other farm • The cost of property that qualifies for a de- duction under section 179. (See chap- Example. You use the cash method of ac- expenses on Schedule F, Part II. These expen- ses must be for business purposes and ter 7.) counting. In 2020, you buy 50 steers you will • Business start-up costs. (See Business sell in 2021. You can't deduct the cost of the (1) paid, if you use the cash method of account- ing; or (2) incurred, if you use an accrual start-up and organizational costs, later.) steers on your 2020 tax return. You deduct their • Forestation and reforestation costs. (See cost on your 2021 Schedule F, Part I. method of accounting. • Accounting fees. Forestation and reforestation costs, later.) Chickens, seeds, and young plants. If you • Advertising. Generally, the costs of the following items, are a cash method farmer, you can deduct the • Business travel and meals. including the costs of material, hired labor, and cost of hens and baby chicks bought for com- • Commissions. installation, are capital expenses. mercial egg production, or for raising and re- • Consultant fees. 1. Land and buildings. sale, as an expense on Schedule F, Part I, in • Crop scouting expenses. the year paid if you do it consistently and it • Dues to cooperatives. 2. Additions, alterations, and improvements doesn't distort income. You can also deduct the • Educational expenses (to maintain and im- to buildings, etc. cost of seeds and young plants bought for fur- prove farming skills). 3. Cars and trucks. ther development and cultivation before sale as • Farm-related attorney fees. an expense on Schedule F, Part I, when paid if • Farm magazines. 4. Equipment and machinery. you do this consistently and you don't figure • Ginning. 5. Fences. your income on the crop method. However, see • Insect sprays and dusts. Prepaid Farm Supplies, earlier, for a rule that • Litter and bedding. 6. Draft, breeding, sport, and dairy livestock. may limit your deduction for these items. • Livestock fees. 7. Repairs to machinery, equipment, trucks, If you deduct the cost of chickens, seeds, • Marketing fees. and cars that prolong their useful life, in- and young plants as an expense, report their • Milk assessment. crease their value, or adapt them to differ- entire selling price as income. You also can't • Recordkeeping expenses. ent use. deduct the cost from the selling price. • Service charges. • Small tools expected to last 1 year or less. You can't deduct the cost of seeds and 8. Water wells, including drilling and equip- • Stamps and stationery. young plants for Christmas trees and timber as ping costs. • Subscriptions to professional, technical, an expense. Deduct the cost of these seeds and trade journals that deal with farming. 9. Land preparation costs, such as: and plants through depletion allowances. For • Tying material and containers. more information, see Depletion in chapter 7. a. Clearing land for farming; The cost of chickens and plants used as De minimis safe harbor for tangible prop- b. Leveling and conditioning land; food for your family is never deductible. erty. If you elected to use the de minimis safe c. Purchasing and planting trees; Capitalize the cost of plants with a prepro- harbor for tangible property for the tax year, you ductive period of more than 2 years, unless you can deduct as a farm business expense on d. Building irrigation canals and ditches; can elect out of the uniform capitalization rules. Schedule F amounts paid for tangible property e. Laying irrigation pipes; These rules are discussed in chapter 6. qualifying under the de minimis safe harbor. For more information, see Capital Expenses, later. f. Installing drain tile; Example. You use the cash method of ac- g. Modifying channels or streams; counting. In 2020, you buy 500 baby chicks to Loan expenses. You prorate and deduct loan raise for resale in 2021. You also buy 50 bush- expenses, such as legal fees and commissions, h. Constructing earthen, masonry, or els of winter wheat seed in 2020 that you sow in you pay to get a farm loan over the term of the concrete tanks, reservoirs, or dams; the fall. Unless you previously adopted the loan. and method of deducting these costs in the year you i. Building roads. sell the chickens or the harvested crops, you Tax preparation fees. You can deduct as a can deduct the cost of both the baby chicks and farm business expense on Schedule F the cost Business start-up and organizational costs. the seed wheat in 2020. of preparing that part of your tax return relating You can elect to deduct up to $5,000 of busi- to your farm business. Election to use crop method. If you use ness start-up costs and $5,000 of organiza- the crop method, you can delay deducting the tional costs paid or incurred after October 22, cost of seeds and young plants until you sell 2004. The $5,000 deduction is reduced by the

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amount your total start-up or organizational You can choose to capitalize certain indirect re- You can deduct as business expenses the costs exceed $50,000. Any remaining costs forestation costs. costs incurred for shearing and basal pruning of must be amortized. See chapter 7 for more in- These capitalized amounts are your basis these trees. Expenses incurred for silviculture formation. for the timber. Recover your basis when you practices, such as weeding or cleaning, and You elect to deduct start-up or organiza- sell the timber or take depletion allowances noncommercial thinning are also deductible as tional costs by claiming the deduction on the in- when you cut the timber. See Depletion in chap- business expenses. come tax return filed by the due date (including ter 7. Capitalize the cost of land improvements, extensions) for the tax year in which the active such as road grading, ditching, and fire breaks, trade or business begins. However, if you timely Forestation and reforestation costs. You that have a useful life beyond the tax year. If the filed your return for the year without making the can elect to deduct up to $10,000 ($5,000 if improvements don't have a determinable useful election, you can still make the election by filing married filing separately; $0 for a trust) of quali- life, add their cost to the basis of the land. The an amended return within 6 months of the due fying reforestation costs paid or incurred after cost is recovered when you sell or otherwise date of the return (excluding extensions). October 22, 2004, for each qualified timber dispose of it. If the improvements have a deter- Clearly indicate the election on your amended property. Any remaining costs can be amortized minable useful life, recover their cost through return and write “Filed pursuant to section over an 84-month period. See chapter 7. If you depreciation. Capitalize the cost of equipment 301.9100-2” at the top of the amended return. make an election to deduct or amortize qualify- and other depreciable assets, such as culverts File the amended return at the same address ing reforestation costs, you should create and and fences, to the extent you don't use them in you filed the original return. The election applies maintain separate timber accounts for each planting Christmas trees. Recover these costs when figuring taxable income for the current tax qualified timber property. The accounts should through depreciation. year and all subsequent years. include all reforestation treatments and the dates they were applied. Any qualified timber You can choose to forgo the election by property that is subject to the deduction or am- clearly electing to capitalize your start-up or or- ortization election can't be included in any other Nondeductible ganizational costs on an income tax return filed timber account for which depletion is allowed. by the due date (including extensions) for the Expenses The timber account should be maintained until tax year in which the active trade or business the timber is disposed of. For more information, begins. For more information about start-up and You can't deduct personal expenses and cer- see Notice 2006-47, 2006-20 I.R.B. 892, availa- organizational costs, see chapter 7. tain other items on your tax return even if they ble at IRS.gov/irb/2006-20_IRB/ar11.html. relate to your farm. Exception for tangible real and personal You elect to deduct forestation and refores- tation costs by claiming the deduction on the in- property under the de minimis safe harbor. Personal, Living, and Family If you elect the de minimis safe harbor for your come tax return filed by the due date (including farming business for the tax year, you’re not re- extensions) for the tax year in which the expen- Expenses quired to capitalize the de minimis costs of ac- ses were paid or incurred. If you are filing Form quiring or producing certain real and tangible T (Timber), Forest Activities Schedule, also You can't deduct certain personal, living, and personal property and may deduct these complete Form T (Timber), Part IV. If you aren't family expenses as business expenses. These amounts as farm expenses on Schedule F. For filing Form T (Timber), attach a statement to include rent and insurance premiums paid on more information on electing and using the de your return with the following information. property used as your home; life insurance pre- minimis safe harbor, see chapter 1 of Pub. 535. • The unique stand identification numbers. miums on yourself or your family; the cost of • The total number of acres reforested dur- maintaining cars, trucks, or horses for personal Crop production expenses. The uniform ing the tax year. use; allowances to minor children; attorneys' capitalization rules generally require you to cap- • The nature of the reforestation treatments. fees and legal expenses incurred in personal italize expenses incurred in producing plants. • The total amounts of the qualified refores- matters; and household expenses. Likewise, However, except for certain taxpayers required tation expenditures eligible to be amortized the cost of purchasing or raising produce or to use an accrual method of accounting, the or deducted. livestock consumed by you or your family isn't capitalization rules don't apply to plants with a However, if you timely filed your return for deductible. preproductive period of 2 years or less. For the year without making the election, you can more information, see Uniform Capitalization still make the election by filing an amended re- Other Nondeductible Items Rules in chapter 6. turn within 6 months of the due date of the re- turn (excluding extensions). Clearly indicate the You can't deduct the following items on your tax Timber. Capitalize the cost of acquiring timber. election on your amended return and write return. Do not include the cost of land in the cost of the “Filed pursuant to section 301.9100-2” at the timber. You must generally capitalize direct top of the amended return. File the amended re- Loss of growing plants, produce, and costs incurred in reforestation. However, you turn at the same address you filed the original crops. Losses of plants, produce, and crops can elect to deduct some forestation and refor- return. raised for sale are generally not deductible. estation costs. See Forestation and reforesta- For more information about forestation and However, you may have a deductible loss on tion costs next. Reforestation costs include the reforestation costs, see chapter 7. plants with a preproductive period of more than following. For more information about timber, see 2 years. See chapter 11 for more information. 1. Site preparation costs, such as: Agriculture Handbook Number 731, Repayment of loans. You can't deduct the re- a. Girdling, Forest Landowners' Guide to the Fed- eral Income Tax. You can find this publication payment of a loan. However, if you use the pro- b. Applying herbicide, online at www.fs.fed.us/publications. ceeds of a loan for farm business expenses, you can deduct the interest on the loan. See In- c. Baiting rodents, and terest, earlier. Christmas tree cultivation. If you are in the d. Clearing and controlling brush. business of planting and cultivating Christmas Estate, inheritance, legacy, succession, 2. The cost of seed or seedlings. trees to sell when they are more than 6 years and gift taxes. You can't deduct estate, inheri- old, capitalize expenses incurred for planting 3. Labor and tool expenses. tance, legacy, succession, and gift taxes. and stump culture and add them to the basis of 4. Depreciation on equipment used in plant- the standing trees. Recover these expenses as Loss of livestock. You can't deduct as a loss ing or seeding. part of your adjusted basis when you sell the the value of raised livestock that die if you de- standing trees or as depletion allowances when 5. Costs incurred in replanting to replace lost ducted the cost of raising them as an expense. you cut the trees. For more information, see seedlings. Timber Depletion under Depletion in chapter 7. Losses from sales or exchanges between related persons. You can't deduct losses from

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sales or exchanges of property between you identified in the settlement agreement or court If you have a passive activity, special rules and certain related persons, including your order. Also, any amount paid or incurred as re- limit the loss you can deduct in the tax year. spouse, brother, sister, ancestor, or lineal de- imbursement to the government for the costs of You can generally deduct losses from passive scendant. For more information, see chapter 2 any investigation or litigation are not eligible for activities only up to income from passive activi- of Pub. 544. the exceptions and are nondeductible. ties. Credits are similarly limited.

Cost of raising unharvested crops. You See section 162(f), as amended by the Tax For more information, see Pub. 925. can't deduct the cost of raising unharvested Cuts and Jobs Act, section 13306. crops sold with land owned more than 1 year if For the deductibility of penalites for exceed- Excess Business Loss you sell both at the same time and to the same ing marketing quotas, see Marketing Quota Limitation person. Add these costs to the basis of the land Penalties, discussed earlier. to determine the gain or loss on the sale. For Noncorporate taxpayers may be subject to ex- more information, see Section 1231 Gains and cess business loss limitations. The at-risk limits Losses in chapter 9. Losses From Operating and the passive activity limits are applied before Cost of unharvested crops bought with a Farm calculating the amount of any excess business land. Capitalize the purchase price of land, in- loss. An excess business loss is the amount by cluding the cost allocable to unharvested crops. which the total deductions attributable to all of If your deductible farm expenses are more than your trades or businesses exceed your total You can't deduct the cost of the crops at the your farm income, you have a loss from the op- time of purchase. However, you can deduct this gross income and gains attributable to those eration of your farm. The amount of the loss you trades or businesses plus $250,000 (or cost in figuring net profit or loss in the tax year can deduct when figuring your taxable income you sell the crops. $500,000 in the case of a joint return). Business may be limited. To figure your deductible loss, gains and losses reported on Form 4797 and you must apply the following limits. Cost related to gifts. You can't deduct costs Form 8949 are included in the excess business • The at-risk limits. related to your gifts of agricultural products or loss calculation. This includes farming losses • The passive activity limits. property held for sale in the ordinary course of from casualty losses or losses by reason of dis- your business. The costs aren't deductible in The following discussions explain these limits. ease or drought. Excess business losses that the year of the gift or any later year. For exam- are disallowed are treated as a net operating If your deductible loss after applying these ple, you can't deduct the cost of raising cattle or loss carryover to the following tax year. See limits is more than your other income for the the cost of planting and raising unharvested Form 461 and its instructions for details. year, you may have a net operating loss. See wheat on parcels of land given as a gift to your Pub. 536. Excess farm losses that are disallowed can children. be carried forward to the next tax year and trea- If you don't carry on your farming activ- ted as a net operating loss deduction from that Club dues and membership fees. Generally, ! ity to make a profit, your loss deduction year. you can't deduct amounts you pay or incur for CAUTION may be limited by the not-for-profit membership in any club organized for business, rules. See Not-for-Profit Farming, later. pleasure, recreation, or any other social pur- pose. This includes country clubs, golf and ath- Net Operating Loss letic clubs, hotel clubs, sporting clubs, airline At-Risk Limits Limitation clubs, and clubs operated to provide meals un- der circumstances generally considered to be The at-risk rules limit your deduction for losses If you have a 2020 net operating loss attributa- conducive to business discussions. from most business or income-producing activi- ble to farming, you must carry it back to 2015, ties, including farming. These rules limit the los- Exception. The following organizations unless you elect to forgo the carryback. Farm- ses you can deduct when figuring your taxable won't be treated as a club organized for busi- ing businesses can elect to forgo the carryback income. The deductible loss from an activity is ness, pleasure, recreation, or other social pur- and carry over the farm net operating loss to limited to the amount you have at risk in the ac- poses, unless one of its main purposes is to 2021. See the Instructions for Form 1045 or tivity. conduct entertainment activities for members or Form 1138 for more information. their guests or to provide members or their You are at risk in any activity for: guests with access to entertainment facilities. • Boards of trade. 1. The money and adjusted basis of property Not-for-Profit Farming • Business leagues. you contribute to the activity; and • Chambers of commerce. 2. Amounts you borrow for use in the activity If you operate a farm for profit, you can deduct • Civic or public service organizations. if: all the ordinary and necessary expenses of car- • Professional associations. rying on the business of farming on Schedule F. • Trade associations. a. You are personally liable for repay- However, if you don't carry on your farming ac- • Real estate boards. ment, or tivity, or other activity you engage or invest in, to b. You pledge property (other than prop- make a profit, you report the income from the Fines and penalties. Generally, no deduction erty used in the activity) as security for activity on Schedule 1 (Form 1040), line 8. You is allowed for fines and penalties paid to a gov- the loan. can no longer deduct expenses of carrying on ernment or specified nongovernmental entity for the activity, even if you itemize your deductions the violation of any law except: You aren't at risk, however, for amounts you on Schedule A (Form 1040). • Amounts that constitute restitution, borrow for use in a farming activity from a per- • Amount paid to come into compliance with son who has an interest in the activity (other Activities you do as a hobby, or mainly for the law, than as a creditor) or a person related to some- sport or recreation can not be deducted. This • Amounts paid or incurred as the result of one (other than you) having such an interest. also applies to an investment activity intended certain court orders in which no govern- only to produce tax losses for the investors. For more information, see Pub. 925. ment or specified non-governmental The deductibility of not-for-profit losses ap- agency is a party, and plies to individuals, partnerships, estates, • Amounts paid or incurred for taxes due. Passive Activity Limits trusts, and S corporations. It doesn't apply to corporations other than S corporations. On or after December 22, 2017, no deduc- A passive activity is generally any activity in- tion is allowed for the restitution amount or volving the conduct of any trade or business in In determining whether you are carrying on amount paid to come into compliance with the which you don't materially participate. Gener- your farming activity for profit, all the facts are law unless the amounts are specifically ally, a rental activity is a passive activity. taken into account. No one factor alone is

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decisive. Among the factors to consider are in 3 (or 2) out of the first 5 (or 7) years you carry whether: on the farming activity. If you show 3 (or 2) • You operate your farm in a businesslike years of profit at the end of this period, your de- manner; ductions aren't limited under these rules. If you 5. • The time and effort you spend on farming don't have 3 (or 2) years of profit (and can't oth- indicate you intend to make it profitable; erwise show that you operated your farm for • You depend on income from farming for profit), the limit applies retroactively to any year your livelihood; in the 5-year (or 7-year) period with a loss. Soil and Water • Your losses are due to circumstances be- Filing Form 5213 automatically extends the yond your control or are normal in the period of limitations on any year in the 5-year Conservation start-up phase of farming; (or 7-year) period to 2 years after the due date • You change your methods of operation in of the return for the last year of the period. The an attempt to improve profitability; period is extended only for deductions of the Expenses • You, or your advisors, have the knowledge activity and any related deductions that might needed to carry on the farming activity as a be affected. successful business; Introduction • You were successful in making a profit in Limit on deductions and losses. If your ac- similar activities in the past; tivity isn't carried on for profit, take deductions If you are in the business of farming, you can • You make a profit from farming in some only in the following order, only to the extent choose to deduct certain expenses for: years and the amount of profit you make; stated in the three categories. • Soil or water conservation, and • Prevention of erosion of land used in farm- Category 1. Deductions you can take for • You can expect to make a future profit from ing, or personal as well as for business activities are the appreciation of the assets used in the • Endangered species recovery. farming activity. allowed in full. For individuals, all nonbusiness deductions, such as those for home mortgage Otherwise, these are capital expenses that must be added to the basis of the land. (See Presumption of profit. Your farming or other interest, taxes, and casualty losses (attributable chapter 6 for information on determining basis.) activity is presumed carried on for profit if it pro- to a federally declared disaster), belong in this Conservation expenses for land in a foreign duced a profit in at least 3 of the last 5 tax category. See chapter 11 for more information. country do not qualify for this special treatment. years, including the current year. Activities that For the limits that apply to mortgage interest, The deduction for conservation expenses consist primarily of breeding, training, showing, see Pub. 936. cannot be more than 25% of your gross income or racing horses are presumed carried on for Category 2. Deductions that don't result in from farming. See 25% Limit on Deduction, profit if they produced a profit in at least 2 of the an adjustment to the basis of property are al- later. last 7 tax years, including the current year. The lowed next, but only to the extent your gross in- Although some expenses are not deductible activity must be substantially the same for each come from the activity is more than the deduc- as soil and water conservation expenses, they year within this period. You have a profit when tions you take (or could take) under the first may be deductible as ordinary and necessary the gross income from an activity is more than category. Most business deductions, such as farm expenses. These include interest and the deductions for it. those for fertilizer, feed, insurance premiums, taxes, the cost of periodically clearing brush If a taxpayer dies before the end of the utilities, wages, etc., belong in this category. from productive land, the regular removal of 5-year (or 7-year) period, the period ends on Category 3. Business deductions that de- sediment from a drainage ditch, and expenses the date of the taxpayer's death. paid or incurred primarily to produce an agricul- If your business or investment activity crease the basis of property are allowed last, but only to the extent the gross income from the tural crop that may also conserve soil. passes this 3- (or 2-) years-of-profit test, pre- You must include in income most govern- sume it is carried on for profit. This means the activity is more than deductions you take (or could take) under the first two categories. The ment payments for approved conservation limits discussed here don't apply. You can take practices. However, you can exclude some all your business deductions from the activity on deductions for depreciation, amortization, and the part of a casualty loss an individual could payments you receive under certain cost-shar- Schedule F, even for the years that you have a ing conservation programs. For more informa- loss. You can rely on this presumption in every not deduct in category 1 belong in this category. Where more than one asset is involved, divide tion, see Agricultural Program Payments in case, unless the IRS shows it isn't valid. chapter 3. If you fail the 3- (or 2-) years-of-profit test, depreciation and these other deductions pro- you may still be considered to operate your portionally among those assets. To get the full deduction to which you farm for profit by considering the factors listed TIP are entitled, you should maintain your Partnerships and S corporations. If a part- earlier. records to clearly distinguish between nership or S corporation carries on a your ordinary and necessary farm business ex- Using the presumption later. If you are not-for-profit activity, these limits apply at the penses and your soil and water conservation starting out in farming and don't have 3 (or 2) partnership or S corporation level. They are re- expenses. years showing a profit, you may want to take flected in the individual shareholder's or part- advantage of this presumption later, after you ner's distributive shares. Topics. This chapter discusses the following. have had the 5 (or 7) years of experience al- • Business of farming, lowed by the test. More information. For more information on • Plan certification, You can choose to do this by filing Form not-for-profit activities, see Not-for-Profit Activi- • Conservation expenses, 5213. Filing this form postpones any determina- ties chapter 1 of Pub. 535. • Assessment by conservation district, tion that your farming activity isn't carried on for • 25% limit on deduction, profit until 5 (or 7) years have passed since you • When to deduct or capitalize, and first started farming. You must file Form 5213 • Sale of a farm. within 3 years after the due date of your return for the year in which you first carried on the ac- tivity, or, if earlier, within 60 days after receiving Business of Farming a written notice from the IRS proposing to disal- low deductions attributable to the activity. For purposes of soil and water conservation ex- The benefit gained by making this choice is penses, you are in the business of farming if that the IRS won't immediately question you cultivate, operate, or manage a farm for whether your farming activity is engaged in for profit, either as an owner or a tenant. You are profit. Accordingly, it won't limit your deduc- not in the business of farming if you cultivate or tions. Rather, you will gain time to earn a profit operate a farm for recreation or pleasure, rather

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than for profit. You are not farming if you are en- Individual site plans can be obtained from to allocate these expenses if you can clearly gaged only in forestry or the growing of timber. NRCS offices and the comparable state agen- show that your method is more reasonable. cies. Farm defined. A farm includes livestock, dairy, Depreciable conservation assets. You gen- poultry, fish, fruit, and truck farms. It also in- erally can't deduct your expenses for deprecia- cludes plantations, ranches, ranges, and or- Conservation Expenses ble conservation assets. However, you can de- chards. A fish farm is an area where fish and duct certain amounts you pay or incur for an other marine animals are grown or raised and You can deduct conservation expenses only for assessment for depreciable property that a soil artificially fed, protected, etc. It doesn't include land you or your tenant are using, or have used and water conservation or drainage district lev- an area where they are merely caught or har- in the past, for farming. These expenses in- ies against your farm. See Assessment for De- vested. A plant nursery is a farm for purposes of clude, but are not limited to, the following. preciable Property, later. deducting soil and water conservation expen- You must capitalize expenses to buy, build, ses. 1. The treatment or movement of earth, such install, or improve depreciable structures or fa- as: cilities. These expenses include those for mate- Farm rental. If you own a farm and receive a. Leveling, rials, tile (including drainage tile), pipe, pumps farm rental payments based on farm produc- (and other equipment), supplies, wages, fuel, tion, either in cash or crop shares, you are in the b. Conditioning, hauling, and moving dirt when making or instal- business of farming. If you get cash rental for a c. Grading, ling structures such as tanks, reservoirs, cul- farm you own that is not used in farm produc- verts, canals, dams, drainage systems, waste tion, you can't deduct soil and water conserva- d. Terracing, management systems or wells composed of tion expenses for that farm. e. Contour furrowing, and masonry, concrete, tile (including drainage tile), If you receive a fixed rental payment that is metal, or wood. You recover your capital invest- not based on farm production, you are in the f. Restoration of soil fertility. ment through annual allowances for deprecia- business of farming only if you materially partici- 2. The construction, control, and protection tion. pate in operating or managing the farm. of: You can deduct soil and water conservation expenses for nondepreciable earthen items. Example. You own a farm in Iowa and live a. Diversion channels; Nondepreciable earthen items include certain in California. You rent the farm for $250 in cash b. Drainage ditches; dams, ponds, and terraces described under per acre and don't materially participate in pro- Property Having a Determinable Useful Life in ducing or managing production of the crops c. Irrigation ditches; chapter 7. grown on the farm. You can't deduct your soil d. Earthen dams; and conservation expenses for this farm. You must Water well. You can't deduct the cost of capitalize the expenses and add them to the e. Watercourses, outlets, and ponds. drilling a water well for irrigation and other agri- cultural purposes as a soil and water conserva- basis of the land. 3. The eradication of brush. For more information, see Material participa- tion expense. It is a capital expense. You re- tion for landlords under Landlord Participation in 4. The planting of windbreaks. cover your cost through depreciation. You must Farming in chapter 12. also capitalize your cost for drilling a test hole. If You can't deduct expenses to drain or fill wet- the test hole produces no water and you con- lands, or to prepare land for center pivot irriga- tinue drilling, the cost of the test hole is added Plan Certification tion systems, as soil and water conservation ex- to the cost of the producing well. You can re- penses. These expenses are added to the cover the total cost through depreciation deduc- basis of the land. tions. You can deduct soil and water conservation ex- If a test hole, dry hole, or dried-up well (re- penses only if they are consistent with a plan If you choose to deduct soil and water sulting from prolonged lack of rain, for instance) approved by the Natural Resources Conserva- conservation expenses, you must in- ! is abandoned, you can deduct your unrecov- tion Service (NRCS) of the Department of Agri- CAUTION clude as gross income any cost-shar- ered cost in the year of abandonment. Aban- culture. If no such plan exists, the expenses ing payments you receive for those expenses. donment means that all economic benefits from must be consistent with a soil conservation plan See chapter 3 for information about payments the well are terminated. For example, filling or of a comparable state agency. Keep a copy of eligible for the cost-sharing exclusion. sealing a well excavation or casing so that all the plan with your books and records to support economic benefits from the well are terminated your deductions. New farm or farmland. If you acquire a new constitutes an abandonment. farm or new farmland from someone who was Conservation plan. A conservation plan in- using it in farming immediately before you ac- Endangered species recovery expenses. If cludes the farming conservation practices ap- quired the land, soil and water conservation ex- you are in the business of farming and meet proved for the area where your farmland is loca- penses you incur on it will be treated as made other specific requirements, you can choose to ted. There are three types of approved plans. on land used in farming at the time the expen- deduct the conservation expenses discussed NRCS individual site plans. These plans • ses were paid or incurred. You can deduct soil earlier as endangered species recovery expen- are issued individually to farmers who re- and water conservation expenses for this land if ses. Otherwise, these are capital expenses that quest assistance from NRCS to develop a your use of it is substantially a continuation of must be added to the basis of the land. conservation plan designed specifically for its use in farming. The new farming activity The expenses must be paid or incurred for their farmland. doesn't have to be the same as the old farming the purpose of achieving site-specific manage- • NRCS county plans. These plans include a activity. For example, if you buy land that was ment actions recommended in a recovery plan listing of farm conservation practices ap- used for grazing cattle and then prepare it for approved under section 4(f) of the Endangered proved for the county where the farmland use as an apple orchard, you can deduct your Species Act of 1973. See section 175 for more is located. You can deduct expenses for conservation expenses. conservation practices not included on the information. NRCS county plans only if the practice is a Land not used for farming. If your conserva- part of an individual site plan. tion expenses benefit both land that doesn’t • Comparable state agency plans. These qualify as land used for farming and land that Assessment by plans are approved by state agencies and does qualify, you must allocate the expenses Conservation District can be approved individual site plans or between the two types of land. For example, if county plans. the expenses benefit 200 acres of your land, In some localities, a soil or water conservation but only 120 acres of this land are used for A list of NRCS conservation programs is or drainage district incurs expenses for soil or farming, then you can deduct 60% (120 ÷ 200) available at NRCS.USDA.gov/programs. water conservation and levies an assessment of the expenses. You can use another method

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Table 5-1. Limits on Deducting an Assessment by a Conservation total amount assessed by the district against all District for Depreciable Property its members for the depreciable equipment is $7,000. Total Limit on Deduction Yearly Limit on Deduction The total amount you can deduct for the de- for Assessment for for Assessment for Yearly Limit for All preciable equipment is limited to 10% of the to- Depreciable Property Depreciable Property Conservation Expenses tal amount assessed by the district against all its members for depreciable equipment, or 10% of: $500 + 10% of: 25% of: $700. The $200 excess ($900 − $700) is a capi- Total assessment against all Your deductible share of the Your gross income from tal expense you must add to the basis of your farm. members of the district for the cost to the district for the farming. To figure the maximum amount you can de- property. property. duct for the depreciable equipment this year, • No one taxpayer can • If the amount you pay or • Limit for all conservation multiply your deductible share of the total as- deduct more than 10% of incur for any year is expenses, including sessment ($700) by 10% (0.10). Add $500 to the total assessment. more than the limit, you assessments for the result for a total of $570. Your deductible • Any amount over 10% is can deduct for that year depreciable property. share, $700, is greater than the maximum a capital expense and is only 10% of your • Amounts greater than amount deductible in 1 year, so you can deduct added to the basis of deductible share of the 25% can be carried to the only $70 of the amount you paid or incurred for your land. cost. following year and added depreciable property this year (10% of $700). • If an assessment is paid • You can deduct the to that year's expenses. You can deduct the balance at the rate of $70 a year over the next 9 years. in installments, each remainder in equal The total is then subject You add $70 to the $1,500 portion of the as- payment must be amounts over the next 9 to the 25% of gross sessment for drainage ditches. You can deduct prorated between the tax years. income from farming limit $1,570 of the $2,400 assessment as a soil and conservation expense in that year. water conservation expense this year, subject and the capital expense. to the 25% of gross income from farming limit on the deduction, discussed later. against the farmers who benefit from the expen- To ensure your deduction is within the ses. You can deduct as a conservation expense TIP deduction limits, keep records to show Example 2. Assume the same facts as in amounts you pay or incur for the part of an as- the following. Example 1 except that $1,850 of the $2,400 as- sessment that: • The total assessment against all members sessment is for digging drainage ditches and • Covers expenses you could deduct if you of the district for the depreciable property. $550 is for depreciable equipment. The total had paid them directly, or • Your deductible share of the cost to the amount assessed by the district against all its • Covers expenses for depreciable property district for the depreciable property. members for depreciable equipment is $5,500. used in the district's business. • Your gross income from farming. The total amount you can deduct for the depre- A water or drainage district assessment for ciable equipment is limited to 10% of this amount, or $550. repairs or maintenance of district property or for Total assessment limit. You can't deduct interest paid by the district for a loan to buy The maximum amount you can deduct this more than 10% of the total amount assessed to year for the depreciable equipment is $555 property may qualify as a business deduction. all members of the conservation or drainage See Regulations section 1.164-4(b)(1). (10% of your deductible share of the total as- district for the depreciable property. This ap- sessment, $55, plus $500). Since your deducti- plies whether you pay the assessment in one ble share is less than the maximum amount de- Assessment for Depreciable payment or in installments. If your assessment ductible in 1 year, you can deduct the entire Property is more than 10% of the total amount assessed, $550 this year. You can deduct the entire as- both the following rules apply. sessment, $2,400, as a soil and water conser- You can generally deduct as a conservation ex- • The amount over 10% is a capital expense vation expense this year, subject to the 25% of pense amounts you pay or incur for the part of a and is added to the basis of your land. gross income from farming limit on the deduc- conservation or drainage district assessment • If the assessment is paid in installments, tion, discussed below. that covers expenses for depreciable property. each payment must be prorated between This includes items such as pumps, locks, con- the conservation expense and the capital Sale or other disposal of land during 9-year crete structures (including dams and weir expense. period. If you dispose of the land during the gates), draglines, and similar equipment. The Yearly assessment limit. The maximum 9-year period for deducting conservation ex- depreciable property must be used in the dis- amount you can deduct in any 1 year is the total penses subject to the yearly limit, any amounts trict's soil and water conservation activities. of 10% of your deductible share of the cost as you have not yet deducted because of this limit However, the following limits apply to these as- explained earlier, plus $500. If the amount you are added to the basis of the property. sessments. pay or incur is equal to or less than the maxi- Death of farmer during 9-year period. If a • The total assessment limit. mum amount, you can deduct it in the year it is farmer dies during the 9-year period, any re- • The yearly assessment limit. paid or incurred. If the amount you pay or incur maining amounts not yet deducted are deduc- is more, you can deduct in that year only 10% of After you apply these limits, the amount you ted in the year of death. can deduct is added to your other conservation your deductible share of the cost. You can de- expenses for the year. The total for these ex- duct the remainder in equal amounts over the penses is then subject to the 25% of gross in- next 9 tax years. Your total conservation ex- 25% Limit on Deduction come from farming limit on the deduction, dis- pense deduction for each year is also subject to cussed later. See Table 5-1 for a brief summary the 25% of gross income from farming limit on The total deduction for conservation expenses of these limits. the deduction, discussed later. in any tax year is limited to 25% of your gross Example 1. This year, the soil conservation income from farming for the year. district levies, and you pay, an assessment of $2,400 against your farm. Of the assessment, Gross income from farming. Gross income $1,500 is for digging drainage ditches. You can from farming is the income you derive in the deduct this part as a soil or conservation ex- business of farming from the production of pense as if you had paid it directly. The remain- crops, fish, fruits, other agricultural products, or ing $900 is for depreciable equipment to be livestock. Gains from sales of draft, breeding, or used in the district's irrigation activities. The dairy livestock are included. Gains from sales of

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assets such as farm machinery, or from the dis- particular project or farm. If the method or example, if you make improvements to the position of land, are not included. change of method doesn't apply to all your property, increase your basis. If you take de- expenses, identify the project or farm to ductions for depreciation, or casualty losses, or The calculation of farm income for soil which the expenses apply. claim certain credits, reduce your basis. TIP and water conservation expenses dif- • The total expenses you paid or incurred in fers from the calculations for income Keep accurate records of all items that the first tax year the method or change of averaging and estimated tax payments. For affect the basis of your assets. For in- method is to apply. more information, see Income Averaging for RECORDS formation on keeping records, see • A statement that you will account sepa- Farmers in chapter 3 and Gross Income in chapter 1. rately in your books for the expenses to chapter 15. which this method or change of method re- lates. Topics Carryover of deduction. If your deductible This chapter discusses: conservation expenses in any year are more Send your request to the following ad- than 25% of your gross income from farming for dress. that year, you can carry the unused deduction • Cost basis over to later years. However, the deduction in • Adjusted basis any later year is limited to 25% of the gross in- Department of the Treasury • Basis other than cost come from farming for that year as well. Internal Revenue Service Center Cincinnati, OH 45999 Useful Items Example. In 2019, you have gross income You may want to see: of $32,000 from two farms. During the year, you For more information, see Change in incurred $10,000 of deductible soil and water Accounting Method in chapter 2. Publication conservation expenses for one of the farms.

However, your deduction is limited to 25% of 535 535 Business Expenses

$32,000, or $8,000. The $2,000 excess Sale of a Farm 544 544 Sales and Other Dispositions of ($10,000 − $8,000) is carried over to 2020 and Assets added to deductible soil and water conservation If you sell your farm, you can't adjust the basis

551 551 Basis of Assets expenses made in that year. The total of the of the land at the time of the sale for any unused

2019 carryover plus 2020 expenses is deducti- carryover of soil and water conservation expen- 946 946 How To Depreciate Property ble in 2020, subject to the limit of 25% of your ses (except for deductions of assessments for See chapter 16 for information about getting gross income from farming in 2020. Any expen- depreciable property, discussed earlier). How- publications and forms. ses over the limit in that year are carried to 2021 ever, if you acquire another farm and return to and later years. the business of farming, you can start taking de- Net operating loss (NOL). The deduction ductions again for the unused carryovers. Cost Basis for soil and water conservation expenses, after Gain on sale of farmland. If you held the land applying the 25% limit, is included when figuring 5 years or less before you sold it, gain on the The basis of property you buy is usually its cost. an NOL for the year. If the NOL is carried to an- sale of the land is treated as ordinary income up Cost is the amount you pay in cash, debt obli- other year, the soil and water conservation de- to the amount you previously deducted for soil gations, other property, or services. Your cost duction included in the NOL is not subject to the and water conservation expenses. If you held includes amounts you pay for sales tax, freight, 25% limit in the year to which it is carried. the land less than 10 but more than 5 years, the installation, and testing. The basis of real estate gain is treated as ordinary income up to a speci- and business assets will include other items, fied percentage of the previous deductions. See discussed later. Basis generally does not in- When To Deduct or Section 1252 property under Other Gains in clude interest payments. However, see Carry- chapter 9. ing charges and Capitalized interest in chap- Capitalize ter 4 of Pub. 535. If you choose to deduct soil and water conser- You may also have to capitalize (add to ba- vation expenses, you must deduct the total al- sis) certain other costs related to buying or pro- lowable amount on your tax return for the first ducing property. Under the uniform capitaliza- year you pay or incur these expenses. If you tion rules, discussed later, you may have to don't choose to deduct the expenses, you must capitalize direct costs and certain indirect costs capitalize them. 6. of producing property.

Change of method. If you want to change Loans with low or no interest. If you buy your method for the treatment of soil and water property on a time-payment plan that charges conservation expenses, or you want to treat the Basis of Assets little or no interest, the basis of your property is expenses for a particular project or a single your stated purchase price minus the amount farm in a different manner, you must get the ap- considered to be unstated interest. You gener- proval of the IRS. To get this approval, submit a Introduction ally have unstated interest if your interest rate is written request by the due date of your return less than the applicable federal rate. See the for the first tax year you want the new method to Your basis is the amount of your investment in discussion of unstated interest in Pub. 537, In- apply. You or your authorized representative property for tax purposes. Use basis to figure stallment Sales. must sign the request. Do not use Form 3115 the gain or loss on the sale, exchange, or other for this request. Use the procedure outlined be- disposition of property. Also use basis to figure Real Property low. depreciation, amortization, depletion, and casu- alty losses. You may have property that you use The request must include the following infor- Real property, also called real estate, is land for both business or the production of income mation. and generally anything built on, growing on, or purposes and for personal purposes. You must • Your name and address. attached to land. • The first tax year the method or change of allocate the basis of this property based on its method is to apply. use. Only the basis allocated to the business or If you buy real property, certain fees and • Whether the method or change of method the production of income use of the property other expenses related to the purchase of the applies to all your soil and water conserva- can be depreciated. property are part of your cost basis in the prop- tion expenses or only to those for a Your original basis in property is adjusted erty. Some of these expenses are discussed (increased or decreased) by certain events. For next.

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Lump-sum purchase. If you buy improve- • Inspection fees. goods sold when you use, sell, or otherwise dis- ments, such as buildings, and the land on which In addition, if you use your own employees, pose of the property. they stand for a lump sum, allocate your cost farm materials, and equipment to build an as- Any farming business that has average basis between the land and improvements. Al- set, do not deduct the following expenses. annual gross receipts of $26 million or locate the cost basis according to the respec- • Employee wages paid for the construction less for the 3 preceding tax years and tive fair market values (FMVs) of the land and work, reduced by any employment credits is not a tax shelter is not subject to the uniform improvements at the time of purchase. Figure allowed. capitalization rules. the basis of each asset by multiplying the lump • Depreciation on equipment you own while sum by a fraction. The numerator is the FMV of it is used in the construction. Generally, you are subject to the uniform that asset, and the denominator is the FMV of • Operating and maintenance costs for capitalization rules if you do any of the follow- the whole property at the time of purchase. equipment used in the construction. ing. Fair market value (FMV). FMV is the price • The cost of business supplies and materi- 1. Produce real property or tangible personal at which property would change hands between als used in construction. property. a willing buyer and a willing seller, neither hav- ing to buy or sell, and both having reasonable You must capitalize these expenses by in- 2. Acquire property for resale. knowledge of all necessary facts. Sales of simi- cluding them in the asset's basis. You produce property if you construct, build, lar property on or about the same date may help Do not include the value of your own la- install, manufacture, develop, improve, or cre- in figuring the FMV of the property. ! bor, or any other labor you did not pay ate the property. If you are not certain of the FMV of the CAUTION for, in the basis of any property you You are not subject to the uniform capi- TIP land and improvements, you can allo- construct. talization rules if the property is pro- cate the basis according to their as- duced for personal use. sessed values for real estate tax purposes. Allocating the Basis In a farming business, you produce property Real estate taxes. If you pay the real estate In some instances, the rules for determining ba- if you raise or grow any agricultural or horticul- taxes the seller owed on real property you sis apply to a group of assets acquired in the tural commodity, including plants and animals. bought, and the seller did not reimburse you, same transaction or to property that consists of treat those taxes as part of your basis. separate items. To determine the basis of these Plants. A plant produced in a farming business If you reimburse the seller for taxes the assets or separate items, there must be an allo- includes the following items. seller paid for you, you can generally deduct cation of basis. • A fruit, nut, or other crop-bearing tree. that amount as a tax expense in the year of pur- • An ornamental tree. chase. Whether or not you reimburse the seller, Group of assets acquired. If you buy multiple • A vine. do not include that amount in the basis of your assets for a lump sum, allocate the amount you • A bush. property. pay among the assets. Use this allocation to fig- • Sod. ure your basis for depreciation and gain or loss • The crop or yield of a plant that will have Settlement costs. Your basis includes the set- on a later disposition of any of these assets. more than one crop or yield. tlement fees and closing costs for buying the You and the seller may agree in the sales con- property. See Pub. 551 for a detailed list of tract to a specific allocation of the purchase Animals. An animal produced in a farming items you can and cannot include in basis. price among the assets. If this allocation is business includes any stock, poultry or other Do not include fees and costs for getting a based on the value of each asset and you and bird, and fish or other sea life. loan on the property. Also, do not include the seller have adverse tax interests, the alloca- The direct and indirect costs of producing amounts placed in escrow for the future pay- tion will generally be accepted. plants or animals include preparatory costs and ment of items such as taxes and insurance. preproductive period costs. Preparatory costs Farming business acquired. If you buy a include the acquisition costs of the seed, seed- Points. If you pay points to get a loan (includ- group of assets that makes up a farming busi- ling, plant, or animal. For plants, preproductive ing a mortgage, second mortgage, a home ness, there are special rules you must use to al- period costs include the costs of items such as equity loan, or line of credit), do not add the locate the purchase price among the assets. irrigation, pruning, frost protection, spraying, points to the basis of the related property. You Generally, reduce the purchase price by any and harvesting. For animals, preproductive pe- may be able to deduct the points currently or cash received. Allocate the remaining purchase riod costs include the costs of items such as over the term of the loan. For more information price to the other business assets received in feed, maintaining pasture or pen areas, breed- about deducting points, see Points in chapter 4 proportion to (but not more than) their FMV and ing, veterinary services, and bedding. of Pub. 535. in a certain order. See Trade or Business Ac- quired under Allocating the Basis in Pub. 551 Assumption of a mortgage. If you buy prop- Exceptions. In a farming business, the uniform for more information. Also, see the examples capitalization rules do not apply to: erty and assume (or buy the property subject to) under Sale of a Farm in chapter 8. an existing mortgage, your basis includes the 1. Any animal, amount you pay for the property plus the Transplanted embryo. If you buy a cow that is 2. Any plant with a preproductive period of 2 amount you owe on the mortgage. pregnant with a transplanted embryo, allocate years or less, or to the basis of the cow the part of the purchase Example. If you buy a farm for $100,000 price equal to the FMV of the cow without the 3. Any costs of replanting certain plants lost cash and assume a mortgage of $400,000, your implant. Allocate the rest of the purchase price or damaged due to casualty. basis is $500,000. to the basis of the calf. Neither the cost alloca- Exceptions (1) and (2) do not apply to a cor- ted to the cow nor the cost allocated to the calf poration, partnership, or tax shelter required to Constructing assets. If you build property or is deductible as a current business expense. have assets built for you, your expenses for this use an accrual method of accounting. See Ac- construction are part of your basis. Some of crual Method Required under Accounting Meth- these expenses include the following costs. Uniform Capitalization Rules ods in chapter 2. • Land. In addition, you can elect not to use the uni- • Labor and materials. Under the uniform capitalization rules, you must form capitalization rules for plants with a prepro- • Architect's fees. include certain direct and indirect costs in the ductive period of more than 2 years. This elec- • Building permit charges. basis of property you produce or in your inven- tion cannot be made by a corporation, • Payments to contractors. tory costs, rather than claim them as a current partnership, or tax shelter required to use an • Payments for rental equipment. year deduction. You recover these costs accrual method of accounting. This election through depreciation, amortization, or cost of also does not apply to any costs incurred for the

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planting, cultivation, maintenance, or develop- Table 6-1. Plants With a Preproductive Period of More Than 2 Years ment of any citrus or almond grove (or any part thereof) within the first 4 years the trees were Plants producing the following crops or yields have a nationwide weighted average planted. preproductive period of more than 2 years. If you elect not to use the uniform capi- • Almonds • Dates • Macadamia nuts • Pistachio nuts ! talization rules, you must use the alter- • Apples • Figs • Mangoes • Plums CAUTION native depreciation system for all prop- • Apricots • Grapefruit • Nectarines • Pomegranates erty used in any of your farming businesses and • Avocados • Grapes • Olives • Prunes placed in service in any tax year during which the election is in effect. See chapter 7 for addi- • Blueberries • Guavas • Oranges • Tangelos tional information on depreciation. • Cherries • Kiwifruit • Peaches • Tangerines • Chestnuts • Kumquats • Pears • Tangors Example. You grow trees that have a pre- • Coffee beans • Lemons • Pecans • Walnuts productive period of more than 2 years. The • Currants • Limes • Persimmons trees produce an annual crop. You are an indi- deduct these expenses as taxes. How- Residential energy efficient property cred- vidual and the uniform capitalization rules apply • ever, you can deduct as taxes amounts as- its. See Form 5695. to your farming business. You must capitalize sessed for maintenance or repairs, or for Investment credit (part or all) taken. the direct costs and an allocable part of indirect • meeting interest charges related to the im- Casualty and theft losses and insurance costs incurred due to the production of the • provements. reimbursements. trees. You are not required to capitalize the Payments you receive for granting an costs of producing the annual crop because its • If you make additions or improvements to easement. preproductive period is 2 years or less. business property, depreciate the basis of each • Exclusion from income of subsidies for en- addition or improvement as separate deprecia- ergy conservation measures. Preproductive period of more than 2 years. ble property using the rules that would apply to Certain canceled debt excluded from in- The preproductive period of plants grown in • the original property if you had placed it in serv- come. commercial quantities in the United States is ice at the same time you placed the addition or Rebates from a manufacturer or seller. based on their nationwide weighted average • improvement in service. See chapter 7 for more Patronage dividends received from a co- preproductive period. Plants producing the • information. operative association as a result of a pur- crops or yields shown in Table 6-1 have a na- chase of property. See Patronage Divi- tionwide weighted average preproductive pe- Deducting vs. capitalizing costs. Do not add dends in chapter 3. riod of more than 2 years. Other plants (not to your basis costs that you can deduct as cur- Gas-guzzler tax. See Form 6197. shown in Table 6-1) may also have a nation- • rent expenses. For example, amounts paid for wide weighted average preproductive period of Some of these items are discussed next. For a incidental repairs or maintenance are deducti- more than 2 years. more detailed list of items that decrease basis, ble as business expenses and are not added to see section 1016 of the Internal Revenue Code basis. However, you can elect either to deduct More information. For more information on and Pub. 551. or to capitalize certain other costs. See chap- the uniform capitalization rules that apply to ter 7 in Pub. 535. property produced in a farming business, see Depreciation and section 179 deduction. Regulations section 1.263A-4. The adjustments you must make to the basis of Note. Generally, you can deduct amounts the property if you take the section 179 deduc- paid for repairs and maintenance to your tangi- tion or depreciate the property are explained ble property if the amounts paid are not other- next. For more information on these deductions, Adjusted Basis wise required to be capitalized. However, you see chapter 7. may elect to capitalize amounts paid for repair Before figuring gain or loss on a sale, ex- and maintenance consistent with the treatment Section 179 deduction. If you take the change, or other disposition of property or figur- on your books and records. If you make this section 179 expense deduction for all or part of ing allowable depreciation, depletion, or amorti- election, it applies to all amounts paid for repair the cost of qualifying business property, de- zation, you must usually make certain and maintenance to tangible property that you crease the basis of the property by the deduc- adjustments to the cost basis or basis other treat as capital expenditures on your books and tion. than cost (discussed later) of the property. The records for the tax year. To make the election to adjustments to the original basis are increases treat repairs and maintenance as capital expen- Depreciation. Decrease the basis of prop- or decreases to the cost basis or other basis ditures, attach a statement titled “Section erty by the depreciation you deducted or could which result in the adjusted basis of the prop- 1.263(a)-3(n) Election” to your timely filed return have deducted on your tax returns under the erty. (excluding extensions). For more information on method of depreciation you chose. If you took what to include in the statement, see Regula- less depreciation than you could have under the Increases to Basis tions section 1.263(a)-3(n). If you timely filed method chosen, decrease the basis by the your return for the year without making the elec- amount you could have taken under that tion, you can still make the election by filing an method. If you did not take a depreciation de- Increase the basis of any property by all items duction, reduce the basis by the full amount of properly added to a capital account. These in- amended return within 6 months of the due date of the return (excluding extensions). Attach the the depreciation you could have taken. clude the cost of any improvements having a If you deducted more depreciation than you useful life of more than 1 year. statement to the amended return and write “Filed pursuant to section 301.9100-2” on the should have, decrease your basis by the The following costs increase the basis of statement. File the amended return at the same amount you should have deducted plus the part property. address you filed the original return. of the excess depreciation you deducted that • The cost of extending utility service lines to actually reduced your tax liability for any year. property. Decreases to Basis See chapter 7 for information on figuring the • Legal fees, such as the cost of defending depreciation you should have claimed. and perfecting title. In decreasing your basis for depreciation, • Legal fees for seeking a decrease in an as- The following are some items that reduce the take into account the amount deducted on your sessment levied against property to pay for basis of property. tax returns as depreciation and any deprecia- local improvements. • Section 179 deduction. tion you must capitalize under the uniform capi- • Assessments for items such as paving • Deductions previously allowed or allowa- talization rules. roads and building ditches that increase ble for amortization, depreciation, and de- the value of the property assessed. Do not pletion.

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Casualty and theft losses. If you have a Property changed from personal to busi- Involuntary Conversions casualty or theft loss, decrease the basis in ness or rental use. When you hold property your property by any insurance or other reim- for personal use and then change it to business If you receive property as a result of an involun- bursement and by any deductible loss not cov- use or use it to produce rent, you must figure its tary conversion, such as a casualty, theft, or ered by insurance. See chapter 11 for informa- basis for depreciation. An example of changing condemnation, figure the basis of the replace- tion about figuring your casualty or theft loss. property from personal to business use would ment property you receive using the basis of the You must increase your basis in the property be changing the use of your pickup truck that converted property. by the amount you spend on clean-up costs you originally purchased for your personal use (such as debris removal) and repairs that sub- to use in your farming business. Similar or related property. If the replace- stantially prolong the life of the property, in- The basis for depreciation is the lesser of: ment property is similar or related in service or crease its value, or adapt it to a different use. • The FMV of the property on the date of the use to the converted property, the replacement To make this determination, compare the re- change, or property's basis is the same as the old proper- paired property to the property before the casu- • Your adjusted basis on the date of the ty's basis on the date of the conversion. How- alty. For more information on casualty and theft change. ever, make the following adjustments. losses, see Pub. 547. If you later sell or dispose of this property, 1. Decrease the basis by the following the basis you use will depend on whether you amounts. Easements. The amount you receive for grant- are figuring a gain or loss. The basis for figuring ing an easement is usually considered to be a. Any loss you recognize on the invol- a gain is your adjusted basis in the property proceeds from the sale of an interest in the real untary conversion. when you sell the property. Figure the basis for property. It reduces the basis of the affected a loss starting with the smaller of your adjusted b. Any money you receive that you do part of the property. If the amount received is basis or the FMV of the property at the time of not spend on similar property. more than the basis of the part of the property the change to business or rental use. Then affected by the easement, reduce your basis in 2. Increase the basis by the following make adjustments (increases and decreases) that part to zero and treat the excess as a rec- amounts. for the period after the change in the property's ognized gain. See Easements and rights-of-way use, as discussed earlier under Adjusted Basis. a. Any gain you recognize on the invol- in chapter 3. untary conversion. Property received for services. If you re- Exclusion from income of subsidies for en- b. Any cost of acquiring the replacement ceive property for services, include the proper- ergy conservation measures. You can ex- property. ty's FMV in income. The amount you include in clude from gross income any subsidy you re- income becomes your basis. If the services ceived from a public utility company for the Money or property not similar or related. If were performed for a price agreed on before- purchase or installation of an energy conserva- you receive money or property not similar or re- hand, it will be accepted as the FMV of the tion measure for a dwelling unit. Reduce the ba- lated in service or use to the converted property property if there is no evidence to the contrary. sis of the property by the excluded amount. and you buy replacement property similar or re- lated in service or use to the converted prop- Example. Rocco Stowsa is an accountant Canceled debt excluded from income. If a erty, the basis of the replacement property is its and also operates a farming business. Rocco debt you owe is canceled or forgiven, other cost decreased by the gain not recognized on agreed to do some accounting work for his than as a gift or bequest, you must generally in- the involuntary conversion. neighbor in exchange for a dairy cow. The ac- clude the canceled amount in your gross in- counting work and the cow are each worth come for tax purposes. A debt includes any in- Allocating the basis. If you buy more than $1,500. Rocco must include $1,500 in income debtedness for which you are liable or which one piece of replacement property, allocate for his accounting services. Rocco's basis in the attaches to property you hold. your basis among the properties based on their cow is $1,500. You can exclude your canceled debt from respective costs. income if the debt is any of the following. Taxable Exchanges Basis for depreciation. Special rules apply in 1. Debt canceled in a bankruptcy case or determining and depreciating the basis of when you are insolvent. A taxable exchange is one in which the gain is MACRS property acquired in an involuntary 2. Qualified farm debt. taxable, or the loss is deductible. A taxable gain conversion. For more information, see Figuring or deductible loss is also known as a recog- the Deduction for Property Acquired in a Non- 3. Qualified real property business debt (pro- taxable Exchange under Figuring Depreciation vided you are not a C corporation). nized gain or loss. A taxable exchange occurs when you receive cash or get property that is Under MACRS in chapter 7. If you exclude canceled debt from income as not similar or related in use to the property ex- described in (1) or (2), you may have to reduce changed. If you receive property in exchange For more information about involuntary con- the basis of your depreciable and nondeprecia- for other property in a taxable exchange, the versions, see chapter 11. ble property. If you exclude canceled debt de- basis of the property you receive is usually its scribed in (3), you must only reduce the basis of FMV at the time of the exchange. Like-Kind Exchanges your depreciable property by the excluded amount. Example. You trade a tract of farmland with Generally, if you exchange real property you For more information about canceled debt in an adjusted basis of $20,000 for a tractor that use in your business or hold for investment a bankruptcy case, see Pub. 908, Bankruptcy has an FMV of $60,000. You must report a tax- solely for other business or investment real Tax Guide. For more information about insol- able gain of $40,000 for the land. The tractor property of a like kind, you do not recognize the vency and canceled debt that is qualified farm has a basis of $60,000. gain or loss from the exchange. If you also re- debt, see chapter 3. For more information about ceive non-like-kind property or money as part of qualified real property business debt, see Pub. Nontaxable Exchanges the exchange, you do recognize gain, but only 334, Tax Guide for Small Business. to the extent of the value of the other property or money you received in the exchange, and you A nontaxable exchange is an exchange in do not recognize any loss. which you are not taxed on any gain and you Basis Other Than Cost cannot deduct any loss. A nontaxable gain or loss is also known as an unrecognized gain or For an exchange to qualify as a like-kind ex- There are times when you cannot use cost as loss. If you receive property in a nontaxable ex- change, you must hold for business or invest- basis. In these situations, the FMV or the adjus- change, its basis is usually the same as the ba- ment purposes both the property you transfer ted basis of property may be used. Examples sis of the property you transferred. and the property you receive. There must also are discussed next. be an exchange of like-kind property. For more

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information, see Like-Kind Exchanges in chap- 2. Increase the basis by the following Sale and Purchase ter 8. amounts. If you sell property and buy similar property in a. Any additional costs you incur. The basis of the property you receive is gen- two mutually dependent transactions, you may erally the same as the adjusted basis of the b. Any gain you recognize on the ex- have to treat the sale and purchase as a single property you gave up. change. nontaxable exchange.

Example. You trade farmland for another If the other party to the exchange assumes your Example. You own farmland with a barn. larger tract of farmland. Your adjusted basis in liabilities, treat the debt assumption as money The properties have a combined adjusted basis your farmland is $110,000. The FMV of the new you received in the exchange. of $70,000, and an FMV of $150,000. You are tract of farmland is $150,000. Because this is a interested in another tract of farmland with a nontaxable exchange, you do not recognize any Example. You trade farmland (basis of larger barn owned by your neighbor who is in- gain and your basis in the farmland you receive $100,000) for another tract of farmland (FMV of terested in exchanging the property with you. is $110,000, the same as the adjusted basis in $110,000) and $30,000 cash. You realize a gain The total FMV of your neighbor's farmland and the farmland you exchanged. of $40,000. This is the FMV of the land received barn is $200,000. You want the new barn to plus the cash minus the basis of the land you have a larger basis for depreciation, so you ar- Exchange expenses. Exchange expenses traded ($110,000 + $30,000 − $100,000). In- range to sell your old farmland and barn to your are generally the closing costs that you pay. clude your gain in income (recognize gain) only neighbor for $150,000. Your neighbor then sells They include such items as brokerage commis- to the extent of the cash received. Your basis in his farmland and barn to you for $200,000. sions, attorney fees, and deed preparation fees. the land you received is figured as follows. However, you are treated as having exchanged Add them to the basis of the like-kind property the old property for the new property because you receive. Basis of land traded ...... $100,000 the sale and purchase are reciprocal and mutu- Minus: Cash received (adjustment ally dependent. Your basis in the new property Property plus cash. If you trade property in a 1a) ...... − 30,000 is $120,000 ($50,000 cash paid plus $70,000 like-kind exchange and also pay money, the ba- $70,000 adjusted basis in your old property), which must sis of the property you receive is increased by Plus: Gain recognized (adjustment be allocated between the farmland and the the money you paid. 2b) ...... + 30,000 barn. Basis of land received ...... $100,000 Example. Assume the same facts from the previous example except you pay an additional Property Received as a Gift $20,000 in cash. Your adjusted basis in the Allocation of basis. If you receive like-kind newly acquired farming real estate is $130,000 and unlike properties in the exchange, allocate To figure the basis of property you receive as a ($110,000 adjusted basis of your old farmland the basis first to the unlike property, other than gift, you must know the donor's adjusted basis plus the $20,000 cash you paid). money, up to its FMV on the date of the ex- (defined earlier) just before it was given to you. change. The rest is the basis of the like-kind You must also know its FMV at the time it was Special rules for related persons. If a property. given to you and any gift tax paid on it. like-kind exchange takes place directly or indi- rectly between related persons and either party Example. You trade a tract of farmland with FMV equal to or greater than donor's adjus- disposes of the property within 2 years after the an adjusted basis of $100,000 for another tract ted basis. If the FMV of the property is equal exchange, the exchange no longer qualifies for of farmland that has an FMV of $92,500. You to or greater than the donor's adjusted basis, like-kind exchange treatment. Each person also receive $4,000 in cash and a pickup truck your basis is the donor's adjusted basis when must report any gain or loss not recognized on with an FMV of $11,000. Since only real prop- you received the gift. Increase your basis by all the original exchange unless the loss is not de- erty qualifies for like-kind exchange treatment, or part of any gift tax paid, depending on the ductible under the related-party rules. Each per- your receipt of the truck and cash means you date of the gift. son reports it on the tax return filed for the year must recognize gain on the exchange. You real- Also, for figuring gain or loss from a sale or in which the later disposition occurred. If this ize a gain of $7,500. This is the sum of the FMV other disposition of the property, or for figuring rule applies, the basis of the property received of the tract of farmland you receive, the FMV of depreciation, depletion, or amortization deduc- in the original exchange will be its FMV. For the truck you receive, and the cash you receive, tions on business property, you must increase more information, see chapter 8. minus the adjusted basis of the farmland you or decrease your basis (the donor's adjusted traded ($92,500 + $11,000 + $4,000 – basis) by any required adjustments to basis Basis for depreciation. Special rules apply in $100,000). You include in income (recognize) while you held the property. See Adjusted Ba- determining and depreciating the basis of all $7,500 of the gain because it is the lesser of sis, earlier. MACRS property acquired in a like-kind trans- the realized gain ($7,500) and the sum of the If you received a gift during the tax year, in- action. For more information, see Figuring the FMV of the unlike property and the cash re- crease your basis in the gift (the donor's adjus- Deduction for Property Acquired in a Nontaxa- ceived ($15,000). Your basis in the properties ted basis) by the part of the gift tax paid on it ble Exchange under Figuring Depreciation Un- you received is figured as follows. due to the net increase in value of the gift. Fig- der MACRS in chapter 7. ure the increase by multiplying the gift tax paid Adjusted basis old farmland ...... $100,000 by the following fraction. Partially Nontaxable Exchanges Minus: Cash received (adjustment 1a) ...... − 4,000 Net increase in value of the gift A partially nontaxable exchange is an exchange $96,000 Amount of the gift in which you receive property that is not a Plus: Gain recognized (adjustment like-kind property or money in addition to a 2b) ...... + 7,500 The net increase in value of the gift is the like-kind property. The basis of the property you Total basis of properties FMV of the gift minus the donor's adjusted ba- receive is the same as the adjusted basis of the received ...... $103,500 sis. The amount of the gift is its value for gift tax property you gave up with the following adjust- purposes after reduction by any annual exclu- ments. Allocate the basis of $103,500 first to the unlike property, the truck ($11,000). This is the truck's sion and marital or charitable deduction that ap- 1. Decrease the basis by the following FMV. The rest ($92,500) is the basis in the plies to the gift. amounts. farmland. Example. In 2020, you received a gift of a. Any money you receive. property from your mother that had an FMV of b. Any loss you recognize on the ex- $50,000. Her adjusted basis was $20,000. The change. amount of the gift for gift tax purposes was $35,000 ($50,000 minus the $15,000 annual

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exclusion). She paid a gift tax of $7,100. Your basis. The same rule applies to a transfer by You can elect to increase your basis in spe- basis, $26,106, is figured as follows. your former spouse if the transfer is incident to cial-use valuation property if it becomes subject divorce. However, for property transferred in to the additional estate tax. To increase your

Fair market value ...... $50,000 trust, adjust your basis for any gain recognized basis, you must make an irrevocable election Minus: Adjusted basis ...... −20,000 by your spouse or former spouse if the liabilities and pay interest on the additional estate tax fig- Net increase in value ...... $30,000 assumed plus the liabilities to which the prop- ured from the date 9 months after the dece- Gift tax paid ...... $7,100 erty is subject are more than the adjusted basis dent's death until the date of payment of the ad- Multiplied by ($30,000 ÷ $35,000) ...... × 0.86 of the property transferred. ditional estate tax. If you meet these Gift tax due to net increase in value ..... $6,106 requirements, increase your basis in the prop- Adjusted basis of property to your The transferor must give you the records erty to its FMV on the date of the decedent's mother ...... +20,000 needed to determine the adjusted basis and death or the alternate valuation date. The in- Your basis in the property ...... $26,106 holding period of the property as of the date of crease in your basis is considered to have oc- the transfer. curred immediately before the event that resul- ted in the additional estate tax. Note. If you received a gift before 1977, For more information, see Property Settle- your basis in the gift (the donor's adjusted ba- You make the election by filing, with Form ments in Pub. 504, Divorced or Separated Indi- 706-A, United States Additional Estate Tax Re- sis) includes any gift tax paid on it. However, viduals. your basis cannot exceed the FMV of the gift turn, a statement that: when it was given to you. • Contains your (and the estate's) name, ad- Inherited Property dress, and taxpayer identification number; FMV less than donor's adjusted basis. If the • Identifies the election as an election under FMV of the property at the time of the gift is less Your basis in property you inherited from a de- section 1016(c) of the Internal Revenue than the donor's adjusted basis, your basis de- cedent is generally one of the following. Code; pends on whether you have a gain or a loss • The FMV of the property at the date of the • Specifies the property for which you are when you dispose of the property. Your basis decedent's death. If a federal estate return making the election; and for figuring gain is the donor's adjusted basis is filed, you can use its appraised value. • Provides any additional information re- plus or minus any required adjustments to basis • The FMV on the alternate valuation date if quired by the Form 706-A instructions. while you held the property. Your basis for figur- the personal representative for the estate For more information, see Form 706, United ing loss is its FMV when you received the gift elects to use alternate valuation. For infor- States Estate (and Generation-Skipping Trans- plus or minus any required adjustments to basis mation on the alternate valuation, see the fer) Tax Return; Form 706-A; and the related in- while you held the property. (See Adjusted Ba- Instructions for Form 706. structions. sis, earlier.) • The decedent's adjusted basis in land to If you use the donor's adjusted basis for fig- the extent of the value that is excluded uring a gain and get a loss, and then use the from the decedent's taxable estate as a Property Distributed From a FMV for figuring a loss and get a gain, you have qualified conservation easement. Partnership or Corporation neither gain nor loss on the sale or other dispo- sition of the property. If a federal estate tax return does not have The following rules apply to determine a part- to be filed, your basis in the inherited property is ner's basis and a shareholder's basis in prop- Example. You received farmland as a gift its appraised value at the date of death for state erty distributed respectively from a partnership from your parents when they retired from farm- inheritance or transmission taxes. to the partner with respect to the partner's inter- ing. At the time of the gift, the land had an FMV est in the partnership and from a corporation to of $80,000. Your parents' adjusted basis was Special-use valuation method. Under certain the shareholder with respect to the sharehold- $100,000. After you received the land, no conditions, when a person dies, the executor or er's ownership of stock in the corporation. events occurred that would increase or de- personal representative of that person's estate crease your basis. may elect to value qualified real property at Partner's basis. Unless there is a complete If you sell the land for $120,000, you will other than its FMV. If so, the executor or per- liquidation of a partner's interest, the basis of have a $20,000 gain because you must use the sonal representative values the qualified real property (other than money) distributed by a donor's adjusted basis at the time of the gift property based on its use as a farm or other partnership to the partner is its adjusted basis to ($100,000) as your basis to figure a gain. If you closely held business. If the executor or per- the partnership immediately before the distribu- sell the land for $70,000, you will have a sonal representative elects this method of valu- tion. However, the basis of the property to the $10,000 loss because you must use the FMV at ation for estate tax purposes, this value is the partner cannot be more than the adjusted basis the time of the gift ($80,000) as your basis to basis of the property for the qualified heirs. The of his or her interest in the partnership reduced figure a loss. qualified heirs should be able to get the neces- by any money received in the same transaction. If the sales price is between $80,000 and sary value from the executor or personal repre- For more information, see Partner's Basis for $100,000, you have neither gain nor loss. For sentative of the estate. Distributed Property in Pub. 541, Partnerships. instance, if the sales price was $90,000 and you If you are a qualified heir who received spe- tried to figure a gain using the donor's adjusted cial-use valuation property, increase your basis Shareholder's basis. The basis of property basis ($100,000), you would get a $10,000 loss. by any gain recognized by the estate or trust distributed by a corporation to a shareholder is If you then tried to figure a loss using the FMV because of post-death appreciation. Post-death its FMV. For more information about corporate ($80,000), you would get a $10,000 gain. appreciation is the property's FMV on the date distributions, see Distributions to Shareholders of distribution minus the property's FMV either in Pub. 542, Corporations. Business property. If you hold the gift as on the date of the individual's death or on the al- business property, your basis for figuring any ternate valuation date. Figure all FMVs without depreciation, depletion, or amortization deduc- regard to the special-use valuation. tions is the same as the donor's adjusted basis You may be liable for an additional estate plus or minus any required adjustments to basis tax if, within 10 years after the death of the de- while you hold the property. cedent, you transfer the property or the property stops being used as a farm. This tax does not Property Transferred From a apply if you dispose of the property in a Spouse like-kind exchange or in an involuntary conver- sion in which all of the proceeds are reinvested in qualified replacement property. The tax also The basis of property transferred to you or does not apply if you transfer the property to a transferred in trust for your benefit by your member of your family and certain requirements spouse is the same as your spouse's adjusted are met.

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pollution control facilities, and the costs of property must meet all the following require- section 197 intangibles ments. • It must be property you own. 7. Useful Items • It must be used in your business or in- You may want to see: come-producing activity. • It must have a determinable useful life. • It must have a useful life that extends sub- Publication Depreciation, stantially beyond the year you place it in Depletion, and 463 463 Travel, Gift, and Car Expenses service. 534 534 Depreciating Property Placed in Property You Own Amortization Service Before 1987 535 535 Business Expenses To claim depreciation, you must usually be the owner of the property. You are considered as

544 544 Sales and Other Dispositions of owning property even if it is subject to a debt. What's New for 2020 Assets

551 551 Basis of Assets Leased property. You can depreciate leased property only if you retain the incidents of own- Increased section 179 expense deduction 946 946 How To Depreciate Property ership in the property. This means you bear the dollar limits. The maximum amount you can burden of exhaustion of the capital investment elect to deduct for most section 179 property Form (and Instructions) in the property. If you lease property from you placed in service in 2020 is $1,040,000.

T someone to use in your trade or business or for This limit is reduced by the amount by which the T (Timber), Forest Activities Schedule the production of income, you generally cannot cost of the property placed in service during the 3115 3115 Application for Change in depreciate its cost because you do not have the tax year exceeds $2,590,000. Also, the maxi- Accounting Method incidents of ownership. You can, however, de- mum section 179 expense deduction for sport preciate any capital improvements you make to utility vehicles placed in service in tax years be- 4562 4562 Depreciation and Amortization the leased property. See Additions and Im- ginning in 2020 is $25,900. See Dollar Limits 4797 4797 Sales of Business Property provements under Which Recovery Period Ap- under Section 179 Expense Deduction, later. plies in chapter 4 of Pub. 946. See chapter 16 for information about getting Expiration of the treatment for certain race You can generally depreciate the cost of publications and forms. horses. The 3-year recovery period for race property you lease to someone even if the les- horses 2 years old or younger will not apply to It is important to keep good records for see (the person leasing from you) has agreed to horses placed in service after December 31, property you depreciate. Do not file preserve, replace, renew, and maintain the 2020. RECORDS these records with your return. Instead, property. However, you cannot depreciate the you should keep them as part of the permanent cost of the property if the lease provides that Qualified improvement property. Recent records of the depreciated property. They will the lessee is to maintain the property and return legislation has changed the treatment of quali- help you verify the accuracy of the depreciation to you the same property or its equivalent in fied improvement property (as defined in sec- of assets placed in service in the current and value at the expiration of the lease in as good tion 168(e)(6) of the Internal Revenue Code) previous tax years. For general information on condition and value as when leased. placed in service after December 31, 2017, to recordkeeping, see Pub. 583, Starting a Busi- 15-year property under MACRS. ness and Keeping Records. For specific infor- Life tenant. Generally, if you hold business or mation on keeping records for section 179 investment property as a life tenant, you can property and listed property, see Pub. 946, How depreciate it as if you were the absolute owner Introduction To Depreciate Property. of the property. See Certain term interests in property, later, for an exception. If you buy or make improvements to farm prop- erty, such as machinery, equipment, livestock, or a structure with a useful life of more than a Overview of Property Used in Your Business or year, you generally cannot deduct its entire cost Income-Producing Activity in one year. Instead, you must spread the cost Depreciation over the time you use the property and deduct To claim depreciation on property, you must part of it each year. For most types of property, This overview discusses basic information on use it in your business or income-producing ac- this is called depreciation. the following. tivity. If you use property to produce income (in- This chapter gives information on deprecia- • What property can be depreciated. vestment use), the income must be taxable. tion methods that generally apply to property • What property cannot be depreciated. You cannot depreciate property that you use placed in service after 1986. For information on • When depreciation begins and ends. solely for personal activities. However, if you depreciating pre-1987 property, see Pub. 534, • Whether MACRS can be used to figure de- use property for business or investment purpo- Depreciating Property Placed in Service Before preciation. ses and for personal purposes, you can deduct 1987. • What is the basis of your depreciable prop- depreciation based only on the percentage of erty. business or investment use. • How to treat repairs and improvements. Topics Example 1. If you use your car for farm • When you must file Form 4562. This chapter discusses: business, you can deduct depreciation based • How you can correct depreciation claimed on its percentage of use in farming. If you also incorrectly. • Overview of depreciation use it for investment purposes, you can depre- • Section 179 expense deduction ciate it based on its percentage of investment • Special depreciation allowance What Property Can Be use. • Modified Accelerated Cost Recovery Depreciated? Example 2. If you use part of your home for System (MACRS) business, you may be able to deduct deprecia- • Listed property You can depreciate most types of tangible prop- tion on that part based on its business use. For • Basic information on cost depletion erty (except land), such as buildings, machi- more information, see Business Use of Your (including timber depletion) and nery, equipment, vehicles, certain livestock, Home in chapter 4. percentage depletion and furniture. You can also depreciate certain • Amortization of the costs of going into intangible property, such as copyrights, patents, business, reforestation costs, the costs of and computer software. To be depreciable, the

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You may be able to use the simplified period of construction to the basis of your Fruit or nut trees and vines. If you acquire an TIP method to determine your business improvements. orchard, grove, or vineyard before the trees or use of the home deduction. If you • Intangible property such as section 197 in- vines have reached the income-producing choose to use the simplified method, you can- tangibles. This property does not have a stage, and they have a preproductive period of not also deduct depreciation on the part of the determinable useful life and generally can- more than 2 years, you must capitalize the pre- home used for business. For more information not be depreciated. However, see Amorti- productive-period costs under the uniform capi- about the simplified method, see Pub. 587, zation, later. Special rules apply to com- talization rules (unless you elect not to use Business Use of Your Home. puter software (discussed below). these rules). See chapter 6 for information • Certain term interests (discussed below). about the uniform capitalization rules. Your de- Inventory. You can never depreciate inventory preciation begins when the trees and vines because it is not held for use in your business. Computer software. Computer software gen- reach the income-producing stage (that is, Inventory is any property you hold primarily for erally is not a section 197 intangible even if ac- when they bear fruits, nuts, or grapes in quanti- sale to customers in the ordinary course of your quired in connection with the acquisition of a ties sufficient to commercially warrant harvest- business. business, if it meets all of the following tests. ing). For information on claiming the special de- • It is readily available for purchase by the preciation allowance for certain specified plants Livestock. Livestock purchased for draft, general public. bearing fruits and nuts, see Certain specified breeding, or dairy purposes can be depreciated • It is subject to a nonexclusive license. plants, later. only if they are not kept in an inventory account. • It has not been substantially modified. Livestock you raise usually has no depreciable If the software meets the tests above, it can Immature livestock. Depreciation for live- basis because the costs of raising them are de- be depreciated and may qualify for the section stock begins when the livestock reaches the ducted and not added to their basis. However, 179 expense deduction and the special depre- age of maturity. If you bought immature live- see Immature livestock under When Does De- ciation allowance (if applicable), discussed stock for drafting purposes, depreciation begins preciation Begin and End, later, for a special later. when they can be worked. If you bought imma- rule. ture livestock for breeding or dairy purposes, Certain term interests in property. You can- depreciation begins when they can be bred. Property Having a Determinable not depreciate a term interest in property cre- Your basis for depreciation is your initial cost for Useful Life ated or acquired after July 27, 1989, for any pe- the immature livestock. riod during which the remainder interest is held, To be depreciable, your property must have a directly or indirectly, by a person related to you. Idle Property determinable useful life. This means it must be This rule does not apply to the holder of a term something that wears out, decays, gets used interest in property acquired by gift, bequest, or Continue to claim a deduction for depreciation up, becomes obsolete, or loses its value from inheritance. For more information, see chap- on property used in your business or for the pro- natural causes. ter 1 of Pub. 946. duction of income even if it is temporarily idle. For example, if you stop using a machine be- Irrigation systems and water wells. Irriga- cause there is a temporary lack of a market for tion systems and wells used in a trade or busi- When Does Depreciation a product made with that machine, continue to ness can be depreciated if their useful life can Begin and End? deduct depreciation on the machine. be determined. You can depreciate irrigation systems and wells composed of masonry, con- You begin to depreciate your property when Cost or Other Basis Fully crete, tile (including drainage tile), metal, or you place it in service for use in your trade or Recovered wood. In addition, you can depreciate costs for business or for the production of income. You stop depreciating property either when you moving dirt to construct irrigation systems and You stop depreciating property when you have have fully recovered your cost or other basis or water wells composed of these materials. How- fully recovered your cost or other basis. This when you retire it from service, whichever hap- ever, land preparation costs for center pivot irri- happens when your section 179 and allowed or pens first. gation systems are not depreciable. allowable depreciation deductions equal your cost or investment in the property. Dams, ponds, and terraces. In general, you Placed in Service cannot depreciate earthen dams, ponds, and terraces unless the structures have a determi- Property is placed in service when it is ready Retired From Service nable useful life. and available for a specific use, whether in a You stop depreciating property when you retire business activity, an income-producing activity, it from service, even if you have not fully recov- a tax-exempt activity, or a personal activity. What Property Cannot Be ered its cost or other basis. You retire property Even if you are not using the property, it is in from service when you permanently withdraw it Depreciated? service when it is ready and available for its from use in a trade or business or from use in specific use. Certain property cannot be depreciated, even if the production of income because of any of the following events. the requirements explained earlier are met. This Example. You bought a planter for use in You sell or exchange the property. includes the following. your farm business. The planter was delivered • You convert the property to personal use. • Land. You can never depreciate the cost of in December 2019 after harvest was over. You • You abandon the property. land because land does not wear out, be- begin to depreciate the planter in 2019 because • You transfer the property to a supplies or come obsolete, or get used up. The cost of it was ready and available for its specific use in • scrap account. land generally includes the cost of clear- 2019, even though it will not be used until the The property is destroyed. ing, grading, planting, and landscaping. Al- spring of 2020. • though you cannot depreciate land, you If your planter comes unassembled in De- For information on abandonment of prop- can depreciate certain costs incurred in cember 2019 and is put together in February erty, see chapter 8. For information on de- preparing land for business use. See chap- 2020, it is not placed in service until 2020. You stroyed property, see chapter 11, and Pub. 547, ter 1 of Pub. 946. begin to depreciate it in 2020. Casualties, Disasters, and Thefts. • Property placed in service and disposed of If your planter was delivered and assembled in the same year. Determining when prop- in February 2020 but not used until April 2020, it erty is placed in service is explained later. is placed in service in February 2020, because • Equipment used to build capital improve- this is when the planter was ready for its speci- ments. You must add otherwise allowable fied use. You begin to depreciate it in 2020. depreciation on the equipment during the

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Can You Use MACRS To How Do You Treat Repairs by you in tax years ending after December Depreciate Your Property? and Improvements? 29, 2003. • You claimed the incorrect amount on prop- erty placed in service by you in tax years You must use the Modified Accelerated Cost If you improve depreciable property, you must ending before December 30, 2003. Recovery System (MACRS) to depreciate most treat the improvement as separate depreciable business and investment property placed in property. Improvement means an addition to or Note. You have adopted a method of account- service after 1986. MACRS is explained later partial replacement of property that is a better- ing if you used the same incorrect method of under Figuring Depreciation Under MACRS. ment to the property, restores the property, or depreciation for two or more consecutively filed You cannot use MACRS to depreciate the adapts it to a new or different use. See Regula- returns. following property. tions section 1.263(a)-3. If you are not allowed to make the correction • Property you placed in service before on an amended return, you may be able to You generally deduct the cost of repairing 1987. Use the methods discussed in Pub. change your accounting method to claim the business property in the same way as any other 534. correct amount of depreciation. See the Instruc- business expense. However, if the cost is for a • Certain property owned or used in 1986. tions for Form 3115. betterment to the property, restores the prop- See chapter 1 of Pub. 946. erty, or adapts it to a new or different use, you • Intangible property. must treat it as an improvement and depreciate • Films, video tapes, and recordings. it. See chapter 1 of Pub. 946 for more informa- Section 179 Expense • Certain corporate or partnership property tion. acquired in a nontaxable transfer. Deduction Property you elected to exclude from • Example. You repair a small section on a MACRS. You can elect to recover all or part of the cost of corner of the roof of a barn that you rent to oth- certain qualifying property, up to a limit, by de- For more information, see chapter 1 of Pub. ers. You deduct the cost of the repair as a busi- ducting it in the year you place the property in 946. ness expense. However, if you replace the en- service. This is the section 179 expense deduc- tire roof, the new roof is considered to be an tion. You can elect the section 179 expense de- What Is the Basis of Your improvement because it increases the value duction instead of recovering the cost by taking and lengthens the life of the property. You de- depreciation deductions. Depreciable Property? preciate the cost of the new roof. This part of the chapter explains the rules for To figure your depreciation deduction, you must Improvements to rented property. You can the section 179 expense deduction. It explains determine the basis of your property. To deter- depreciate permanent improvements you make what property qualifies for the deduction, what mine basis, you need to know the cost or other to business property you rent from someone property does not qualify for the deduction, the basis of your property. else. limits that may apply, how to elect the deduc- tion, and when you may have to recapture the Cost or other basis. The basis of property deduction. you buy usually is its cost plus amounts you Do You Have To File paid for items such as sales tax, freight Form 4562? For more information, see chapter 2 of Pub. charges, and installation and testing fees. The 946. cost includes the amount you pay in cash, debt Use Form 4562 to claim your deduction for de- obligations, other property, or services. For preciation and amortization. You must complete more information, see chapter 6. and attach Form 4562 to your tax return if you What Property Qualifies? There are times when you cannot use cost are claiming any of the following. as basis. In these situations, the fair market • A section 179 expense deduction for the To qualify for the section 179 expense deduc- value (FMV) or the adjusted basis of the prop- current year or a section 179 carryover tion, your property must meet all the following erty may be used. from a prior year. requirements. • Depreciation for property placed in service • It must be eligible property. Adjusted basis. To find your property's basis during the current year. • It must be acquired primarily for business for depreciation, you may have to make certain • Depreciation on any vehicle or other listed use. adjustments (increases and decreases) to the property, regardless of when it was placed • It must have been acquired by purchase. basis of the property for events occurring be- in service. tween the time you acquired the property and • Amortization of costs that began in the cur- Eligible Property the time you placed it in service. rent year. To qualify for the section 179 expense deduc- Basis adjustment for depreciation allowed For more information, see the Instructions tion, your property must be one of the following or allowable. After you place your property in for Form 4562. types of depreciable property. service, you must reduce the basis of the prop- 1. Tangible personal property. erty by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is How Do You Correct 2. Other tangible property (except buildings depreciation you actually deducted (from which Depreciation Deductions? and their structural components) used as: you received a tax benefit). Depreciation allow- a. An integral part of manufacturing, pro- able is depreciation you are entitled to deduct. If you deducted an incorrect amount of depreci- duction, or extraction or of furnishing ation in any year, you may be able to make a If you do not claim depreciation you are enti- transportation, communications, elec- correction by filing an amended return for that tled to deduct, you must still reduce the basis of tricity, gas, water, or sewage disposal year. You can file an amended return to correct the property by the full amount of depreciation services; allowable. the amount of depreciation claimed for any If you deduct more depreciation than you property in any of the following situations. b. A research facility used in connection should, you must reduce your basis by any • You claimed the incorrect amount because with any of the activities in (a) above; amount deducted from which you received a tax of a mathematical error made in any year. or You claimed the incorrect amount because benefit (the depreciation allowed). • c. A facility used in connection with any of a posting error made in any year, for ex- For more information, see chapter 6. of the activities in (a) for the bulk stor- ample, omitting an asset from the depreci- age of fungible commodities. ation schedule. • You have not adopted a method of ac- 3. Single-purpose agricultural (livestock) or counting for the property placed in service horticultural structures.

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4. Storage facilities (except buildings and Horticultural structure. A single-purpose property. Similarly, field drainage tile also quali- their structural components) used in con- horticultural structure is either of the following. fies as section 179 property. nection with distributing petroleum or any • A greenhouse specifically designed, con- primary product of petroleum. structed, and used for the commercial pro- Excepted property. Even if the requirements duction of plants. explained in the preceding discussions are met, 5. Qualified real property. (Special rules ap- • A structure specifically designed, construc- farmers cannot elect the section 179 expense ply to qualified real property that you elect ted, and used for the commercial produc- deduction for the following property. to treat as qualified section 179 real prop- tion of mushrooms. • Certain property you lease to others (if you erty. For more information, see chapter 2 are a noncorporate lessor). of Pub. 946, and section 179(f) of the In- Use of structure. A structure must be used • Certain property used predominantly to fur- ternal Revenue Code.) only for the purpose that qualified it. For exam- nish lodging or in connection with the fur- 6. Off-the-shelf computer software that is ple, a hog barn will not be qualifying property if nishing of lodging. readily available for purchase by the gen- you use it to house poultry. Similarly, using part • Property used by a tax-exempt organiza- eral public, is subject to a nonexclusive of your greenhouse to sell plants will make the tion (other than a tax-exempt farmers' co- lease, and has not been substantially greenhouse nonqualifying property. operative) unless the property is used modified. If a structure includes work space, the work mainly in a taxable unrelated trade or busi- space can be used only for the following activi- ness. Tangible personal property. Tangible per- ties. • Property used by governmental units or sonal property is any tangible property that is • Stocking, caring for, or collecting livestock foreign persons or entities (except property not real property. It includes the following prop- or plants or their produce. used under a lease with a term of less than erty. • Maintaining the enclosure or structure. 6 months). • Machinery and equipment. • Maintaining or replacing the equipment or • Property contained in or attached to a stock enclosed or housed in the structure. building (other than structural compo- How Much Can You Deduct? nents), such as milk tanks, automatic feed- Note. Recent legislation has changed the Your section 179 expense deduction is gener- ers, barn cleaners, and office equipment. treatment of qualified improvement property ally the cost of the qualifying property. How- Gasoline storage tanks and pumps at retail placed in service after December 31, 2017, to • ever, the total amount you can elect to deduct service stations. 15-year property under MACRS. See chapter 3 under section 179 is subject to a dollar limit and Livestock, including horses, cattle, hogs, of Pub. 946 for more information. • a business income limit. These limits apply to sheep, goats, and mink and other fur-bear- Qualified real property. Qualified real each taxpayer, not to each business. However, ing animals. property is any qualified improvement property see Married individuals under Dollar Limits, described in section 168(e)(6), and any of the later. Also, see the special rules for applying the Facility used for the bulk storage of fungi- following improvements to nonresidential real limits for partnerships and S corporations under ble commodities. A facility used for the bulk property placed in service after the date such Partnerships and S Corporations, later. storage of fungible commodities is qualifying property was first placed in service. property for purposes of the section 179 ex- • Roofs. If you deduct only part of the cost of qualify- pense deduction if it is used in connection with • Heating, ventilation, and air conditioning. ing property as a section 179 expense deduc- any of the activities listed earlier in item (2)(c). • Fire protection and alarms. tion, you can generally depreciate the cost you Bulk storage means the storage of a commodity • Security systems. do not deduct. in a large mass before it is used. Use Part I of Form 4562 to figure your sec- Grain bins. A grain bin is an example of a Property Acquired by Purchase tion 179 expense deduction. storage facility that is qualifying section 179 property. It is a facility used in connection with To qualify for the section 179 expense deduc- Partial business use. When you use property the production of grain or livestock for the bulk tion, your property must have been acquired by for business and nonbusiness purposes, you storage of fungible commodities. purchase. For example, property acquired by can elect the section 179 expense deduction gift or inheritance does not qualify. Property ac- only if you use it more than 50% for business in Single-purpose agricultural or horticultural quired from a related person (that is, your the year you place it in service. If you used the structures. A single-purpose agricultural (live- spouse, ancestors, or lineal descendants) is not property more than 50% for business, multiply stock) or horticultural structure is qualifying considered acquired by purchase. New or used the cost of the property by the percentage of property for purposes of the section 179 ex- equipment you acquired by purchase during the business use. Use the resulting business cost pense deduction. current tax year qualifies for the section 179 de- to figure your section 179 expense deduction. duction. Agricultural structure. A single-purpose Trade-in of other property. If you buy qualify- agricultural (livestock) structure is any building Example. Adrian is a farmer. He purchased ing property with cash and a trade-in, its cost for or enclosure specifically designed, constructed, two tractors, one from his brother and one from purposes of the section 179 expense deduction and used for both the following reasons. his father. He placed both tractors in service in includes only the cash you paid. • To house, raise, and feed a particular type the same year he bought them. The tractor pur- of livestock and its produce. chased from his father does not qualify for the Example. Adyo Farms traded two cultiva- • To house the equipment, including any re- section 179 expense deduction because he is a tors having a total adjusted basis of $6,800 for a placements, needed to house, raise, or related person (as defined above). The tractor new cultivator costing $13,200. They received feed the livestock. purchased from his brother does qualify for the an $8,000 trade-in allowance for the old cultiva- For this purpose, livestock includes poultry. deduction because Adrian is not a related per- tors, and paid $5,200 in cash for a new cultiva- Single-purpose structures are qualifying son (as defined above). tor. Adyo also traded a used pickup truck with property if used, for example, to breed chickens an adjusted basis of $8,000 for a new pickup or hogs, produce milk from dairy cattle, or pro- What Property Does Not truck costing $35,000. They received a $5,000 duce feeder cattle or pigs, broiler chickens, or trade-in allowance on the used van and paid eggs. The facility must include, as an integral Qualify? $30,000 in cash for the new van. part of the structure or enclosure, equipment Only the cash paid by Adyo qualifies for the necessary to house, raise, and feed the live- Land and improvements. Land and land im- section 179 expense deduction. Adyo's busi- stock. provements do not qualify as section 179 prop- ness costs that qualify for a section 179 ex- erty. Land improvements include swimming pense deduction are $35,200 ($5,200 + pools, paved parking areas, wharves, docks, $30,000). For information on the maximum bridges, and nonagricultural fences. However, amount you can elect to deduct, see Dollar agricultural fences do qualify as section 179 Limits below.

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Dollar Limits for filing your return, the dollar limit on the joint Step Action return is the lesser of the following amounts. 1 Figure taxable income without the The total amount you can elect to deduct under • The dollar limit (after reduction for any cost section 179 expense deduction or the section 179 for most property placed in service of section 179 property over $2,590,000). other deduction. in 2020 is $1,040,000. If you acquire and place • The total cost of section 179 property you 2 Figure a hypothetical section 179 in service more than one item of qualifying and your spouse elected to expense on expense deduction using the taxable property during the year, you can allocate the your separate returns. income figured in Step 1. section 179 expense deduction among the 3 Subtract the hypothetical section 179 items in any way, as long as the total deduction Business Income Limit expense deduction figured in Step 2 is not more than $1,040,000. You cannot carry from the taxable income figured in Step 1. costs in excess of the $1,040,000 limit over to The total cost you can deduct each year after future years. 4 Figure a hypothetical amount for the you apply the dollar limit is limited to the taxable other deduction using the amount income from the active conduct of any trade or figured in Step 3 as taxable income. Reduced dollar limit for cost exceeding business during the year. Generally, you are $2,590,000. If the cost of your qualifying sec- 5 Subtract the hypothetical other considered to actively conduct a trade or busi- deduction figured in Step 4 from the tion 179 property placed in service in 2020 is ness if you meaningfully participate in the man- taxable income figured in over $2,590,000, you must reduce the dollar agement or operations of the trade or business. Step 1. limit (but not below zero) by the amount of cost 6 Figure your actual section 179 expense over $2,590,000. If the cost of your section 179 Any cost not deductible in one year under deduction using the taxable income property placed in service during 2020 is section 179 because of this limit can be carried figured in Step 5. $3,630,000 or more, you cannot take a section to the next year. See Carryover of disallowed 7 Subtract your actual section 179 179 expense deduction and you cannot carry deduction, later. expense deduction figured in Step 6 over any of the cost that is more than from the taxable income figured in Step $3,630,000. Taxable income. In general, figure taxable in- 1. come for this purpose by totaling the net in- 8 Figure your actual other deduction using Example. This year, George Thomas come and losses from all trades and busi- the taxable income figured in Step 7. placed in service machinery costing nesses you actively conducted during the year. $2,690,000. Because this cost is $100,000 In addition to net income or loss from a sole Example. On February 1, 2020, the XYZ more than $2,590,000, he must reduce his dol- proprietorship, partnership, or S corporation, farm corporation purchased and placed in serv- lar limit to $940,000 ($1,040,000 − $100,000). net income or loss derived from a trade or busi- ice qualifying section 179 property that cost He cannot carry over any of the costs that ex- ness also includes the following items. $500,000. It elects to expense the entire ceed the $940,000 reduced limit. • Section 1231 gains (or losses) as dis- $500,000 cost under section 179. In June, the cussed in chapter 9. corporation gave a charitable contribution of Limits for sport utility vehicles. The total • Interest from working capital of your trade $100,000. A corporation's limit on charitable amount you can elect to deduct for certain sport or business. contributions is figured after subtracting any utility vehicles and certain other vehicles placed • Wages, salaries, tips, or other pay earned section 179 expense deduction. The business in service in 2020 is $25,900. This rule applies by you (or your spouse if you file a joint re- income limit for the section 179 expense deduc- to any 4-wheeled vehicle primarily designed or turn) as an employee of any employer. tion is figured after subtracting any allowable used to carry passengers over public streets, charitable contributions. XYZ's taxable income roads, and highways that is rated at more than In addition, figure taxable income without re- figured without the section 179 expense deduc- 6,000 pounds gross vehicle weight and not gard to any of the following. tion or the deduction for charitable contributions more than 14,000 pounds gross vehicle weight. • The section 179 expense deduction. is $700,000. XYZ figures its section 179 ex- For more information, see chapter 2 of Pub. • The self-employment tax deduction. pense deduction and its deduction for charita- 946. • Any net operating loss carryback or carry- ble contributions as follows. forward. Step 1. Taxable income figured without ei- Limits for passenger automobiles. For a • Any unreimbursed employee business ex- penses. ther deduction is $700,000. passenger automobile that is placed in service Step 2. Using $700,000 as taxable in- in 2020, the total section 179 and depreciation Two different taxable income limits. In addi- come, XYZ's hypothetical section 179 ex- deduction is limited. See Do the Passenger Au- pense deduction is $500,000. tomobile Limits Apply, later. tion to the business income limit for your section 179 expense deduction, you may have a taxa- Step 3. $200,000 ($700,000 − $500,000). Step 4. Using $200,000 (from Step 3) as Married individuals. If you are married, how ble income limit for some other deduction (for taxable income, XYZ's hypothetical charita- you figure your section 179 expense deduction example, charitable contributions). You may ble contribution (limited to 10% of taxable depends on whether you file jointly or sepa- have to figure the limit for this other deduction income) is $20,000. rately. If you file a joint return, you and your taking into account the section 179 expense de- Step 5. $680,000 ($700,000 − $20,000). spouse are treated as one taxpayer in determin- duction. If so, complete the following steps. Step 6. Using $680,000 (from Step 5) as ing any reduction to the dollar limit, regardless taxable income, XYZ figures the actual of which of you purchased the property or section 179 expense deduction. Because placed it in service. If you and your spouse file the taxable income is at least $500,000, separate returns, you are treated as one tax- XYZ can take a $500,000 section 179 ex- payer for the dollar limit, including the reduction pense deduction. for costs over $2,590,000. You must allocate Step 7. $200,000 ($700,000 − $500,000). the dollar limit (after any reduction) equally be- Step 8. Using $200,000 (from Step 7) as tween you, unless you both elect a different al- taxable income, XYZ's actual charitable location. If the percentages elected by each of contribution (limited to 10% of taxable in- you do not total 100%, 50% will be allocated to come) is $20,000. each of you. Joint return after separate returns. If you Carryover of disallowed deduction. You can and your spouse elect to amend your separate carry over for an unlimited number of years the returns by filing a joint return after the due date cost of any section 179 property you elected to expense but were unable to because of the business income limit. The amount you carry over is used in deter- mining your section 179 expense deduction in

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the next year. However, it is subject to the limits section 179 costs. However, John's deduction 1. Figure the allowable depreciation for the in that year. If you place more than one property is limited to his business taxable income of section 179 expense deduction you in service in a year, you can select the proper- $700,000 ($500,000 from P plus $200,000 from claimed. Begin with the year you placed ties for which all or a part of the cost will be car- his sole proprietorship). He carries over the property in service and include the ried forward. Your selections must be shown in $50,000 ($750,000 − $700,000) of the elected year of recapture. your books and records. section 179 costs to 2021. 2. Subtract the depreciation figured in (1) from the section 179 expense deduction Example. Last year, Diana Reynolds you actually claimed. The result is the placed in service a machine that cost $100,000 How Do You Elect the amount you must recapture. and elected to deduct all $100,000 under sec- Deduction? tion 179. The taxable income from her business Example. In January 2018, Paul Lamb, a (determined without regard to both a section You elect to take the section 179 expense de- calendar year taxpayer, bought and placed in 179 expense deduction for the cost of the ma- duction by completing Part I of Form 4562. service section 179 property costing $10,000. chine and the self-employment tax deduction) The property is 3-year property and is depreci- was $80,000. Her section 179 expense deduc- If you elect the deduction for listed ated under the Modified Accelerated Cost Re- tion was limited to $80,000. The $20,000 cost ! property, complete Part V of Form CAUTION covery System (MACRS) and a half-year con- that was not allowed as a section 179 expense 4562 before completing Part I. vention. The property is not listed property. He deduction (because of the business income elected a $5,000 section 179 expense deduc- limit) is carried to this year. File Form 4562 with either of the following. tion for the property and also elected not to This year, Diana placed another machine in • Your original tax return (whether or not you claim a special depreciation allowance. He service that cost $110,000. Her taxable income filed it timely). used the property only for business in 2018 and from business (determined without regard to • An amended return filed within the time 2019. During 2020 he used the property 40% both a section 179 expense deduction for the prescribed by law. An election made on an for business and 60% for personal use. He fig- cost of the machine and the self-employment amended return must specify the item of ures his recapture amount as follows. tax deduction) is $120,000. Diana can deduct section 179 property to which the election the full cost of the machine ($110,000) but only applies and the part of the cost of each $10,000 of the carryover from last year because such item to be taken into account. The Section 179 expense deduction claimed of the business income limit. She can carry over amended return must also include any re- (2018) ...... $5,000 the balance of $10,000 to next year. sulting adjustments to taxable income. Minus: Allowable depreciation (instead of section 179 expense deduction): Partnerships and S Corporations Revoking an election. An election (or any 2018 ...... $1,250 specification made in the election) to take a 2019 ...... 1,875 section 179 expense deduction for 2020 can be 2020 ($1,250 × 40% (business)) ... 500 3,625 The section 179 expense deduction limits apply 2020 — Recapture amount ...... $1,375 both to the partnership or S corporation and to revoked without IRS approval by filing an amen- each partner or shareholder. The partnership or ded return. The amended return must be filed S corporation determines its section 179 ex- within the time prescribed by law. The amended return must also include any resulting adjust- Paul must include $1,375 in income for pense deduction subject to the limits. It then al- 2020. locates the deduction among its partners or ments to taxable income (for example, allowa- ble depreciation in that tax year for the item of shareholders. Where to report recapture. Report any re- section 179 property for which the election per- capture of the section 179 expense deduction tains). Once made, the revocation is irrevoca- as ordinary income in Part IV of Form 4797 and If you are a partner in a partnership or share- ble. holder of an S corporation, you add the amount include it in income on Schedule F (Form 1040). allocated from the partnership or S corporation to any section 179 costs not related to the part- When Must You Recapture Recapture for qualified section 179 GO nership or S corporation and then apply the dol- the Deduction? Zone property. If any qualified section 179 lar limit to this total. To determine any reduction GO Zone property ceases to be used in the GO in the dollar limit for costs over $2,590,000, you Zone in a later year, you must recapture the You may have to recapture the section 179 ex- do not include any of the cost of section 179 benefit of the increased section 179 expense pense deduction if, in any year during the prop- property placed in service by the partnership or deduction as “other income.” erty's recovery period, the percentage of busi- S corporation. After you apply the dollar limit, ness use drops to 50% or less. In the year the you apply the business income limit to any re- business use drops to 50% or less, you include maining section 179 costs. For more informa- the recapture amount as ordinary income. You Claiming the Special tion, see chapter 2 of Pub. 946. also increase the basis of the property by the Depreciation Allowance recapture amount. Recovery periods for prop- Example. In 2020, Partnership P placed in erty are discussed later. service section 179 property with a total cost of For qualified property (defined below) placed in $2,690,000. P must reduce its dollar limit by If you sell, exchange, or otherwise dis- service in 2020, you can take a special depreci- $100,000 ($2,690,000 − $2,590,000). Its maxi- pose of the property, do not figure the ation allowance depending on the date you ac- mum section 179 expense deduction is recapture amount under the rules ex- quired the qualified property. The allowance is $940,000 ($1,040,000 − $100,000), and it plained in this discussion. Instead, use the rules an additional deduction you can take before you elects to expense that amount. Because P's for recapturing depreciation explained in chap- figure regular depreciation under MACRS. Fig- taxable income from the active conduct of all its ter 9 under Section 1245 Property. ure the special depreciation allowance by multi- trades or businesses for the year was plying the depreciable basis of the qualified $2,000,000, it can deduct the full $940,000. P If the property is listed property, do not property by the applicable percentage. allocates $200,000 of its section 179 expense figure the recapture amount under the deduction and $500,000 of its taxable income rules explained in this discussion when What is Qualified Property? to John, one of its partners. the percentage of business use drops to 50% or John also conducts a business as a sole less. Instead, use the rules for recapturing de- For farmers, qualified property is generally cer- proprietor and in 2020, placed in service in that preciation explained in chapter 5 of Pub. 946 tain qualified property acquired before Septem- business, section 179 property costing under Recapture of Excess Depreciation. ber 28, 2017, certain property acquired after $800,000. John's taxable income from that September 27, 2017, and certain specified business was $200,000. In addition to the Figuring the recapture amount. To figure the plants. $200,000 allocated from P, he elects to ex- amount to recapture, take the following steps. pense the $550,000 of his sole proprietorship's

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Certain qualified property acquired before Note. See sections 4 and 5 of Revenue To be sure you can use MACRS to fig- September 28, 2017. Certain property with a Procedure 2020-25, 2020-19 I.R.B. 785, availa- ure depreciation for your property, see long production period and for certain aircraft ble at www.irs.gov/irb/2020-19_IRB#REV- Can You Use MACRS To Depreciate acquired before September 28, 2017, and PROC-2020-25, for special rules for making a Your Property, earlier. placed in service before January 1, 2021, is eli- late election or revoking the election under sec- gible for a 30% special depreciation allowance. tion 168(k)(5) of the Internal Revenue Code for This part explains how to determine which The original use of the property must also begin tax years ending in 2018, 2019, and 2020. MACRS depreciation system applies to your with you. property. It also discusses the following infor- For more information, see chapter 3 of Pub. How Can You Elect Not To mation that you need to know before you can 946. figure depreciation under MACRS. Claim the Allowance? • Property's recovery class. Certain qualified property acquired after • Placed-in-service date. September 27, 2017. You can take a 100% You can elect, for any class of property, not to • Basis for depreciation. special depreciation allowance for property ac- deduct the special depreciation allowance for • Recovery period. quired and placed in service after September all property in such class placed in service dur- • Convention. 27, 2017, and before January 1, 2023 (or before ing the tax year. To make the election, attach a • Depreciation method. January 1, 2024, for certain property with a long statement to your return indicating the class of Finally, this part explains how to use this infor- production period and for certain aircraft). Your property for which you are making the election. mation to figure your depreciation deduction. property is qualified property if it meets the fol- lowing. Generally, you must make the election on a timely filed tax return (including extensions) for Which Depreciation System 1. It is one of the following types of property. the year in which you place the property in serv- (GDS or ADS) Applies? a. Tangible property depreciated under ice. However, if you timely filed your return for MACRS with a recovery period of 20 the year without making the election, you can Your use of either the General Depreciation years or less. still make the election by filing an amended re- System (GDS) or the Alternative Depreciation turn within 6 months of the due date of the origi- b. Water utility property depreciated un- System (ADS) to depreciate property under nal return (not including extensions). Attach the der MACRS. MACRS determines what depreciation method election statement to the amended return. On and recovery period you use. You must gener- c. Computer software defined in and de- the amended return, write “Filed pursuant to ally use GDS unless you are specifically re- preciated under section 167(f)(1) of section 301.9100-2.” quired by law to use ADS or you elect to use the Internal Revenue Code. ADS. Once made, the election may not be re- 2. Qualified property can be either new prop- voked without IRS consent. erty or certain used property. Required use of ADS. You must use ADS for the following property. 3. It is not excepted property. Note. See sections 4 and 5 of Revenue • All property used predominantly in a farm- Procedure 2020-25, 2020-19 I.R.B. 785, availa- ing business and placed in service in any For more information, see chapter 3 of Pub. ble at www.irs.gov/irb/2020-19_IRB#REV- tax year during which an election not to ap- 946. PROC-2020-25, for special rules for making a ply the uniform capitalization rules to cer- late election or revoking the election to not de- tain farming costs is in effect. Certain specified plants. You can elect to duct any special depreciation allowance for any • Listed property used 50% or less in a claim a 100% special depreciation allowance class of property for tax years ending in 2018, qualified business use. See Additional for the adjusted basis of certain specified plants 2019, and 2020. Rules for Listed Property, later. (defined later) bearing fruits and nuts planted or • Any tax-exempt use property. grafted after September 27, 2017, and before If you elect not to have the special de- • Any tax-exempt bond-financed property. January 1, 2023. ! preciation allowance apply, the prop- CAUTION • Any property imported from a foreign coun- A specified plant is: erty may be subject to an alternative minimum tax adjustment for depreciation. try for which an Executive Order is in effect • Any tree or vine that bears fruits or nuts, because the country maintains trade re- and strictions or engages in other discrimina- • Any other plant that will have more than tory acts. one yield of fruits or nuts and generally has When Must You Recapture an Allowance • Any tangible property used predominantly a pre-productive period of more than 2 outside the United States during the year. years from planting and grafting to the time it begins bearing fruits or nuts. When you dispose of property for which you Note. You must use ADS if you are required Any property planted or grafted outside the claimed a special depreciation allowance, any to file Form 8990 and you elect to expense United States does not qualify as a specified gain on the disposition is generally recaptured farming interest expense. plant. (included in income) as ordinary income up to the amount of the special depreciation allow- If you are required to use ADS to de- If you elect to claim the special depreciation preciate your property, you cannot allowance for any specified plant, the plant will ance previously allowed or allowable. For more information, see chapter 3 of Pub. 946. claim the special depreciation allow- not be treated as qualified property eligible for ance. the special depreciation allowance in the sub- sequent tax year in which it is placed in service. To make the election, attach a statement to Figuring Depreciation Electing ADS. Although your property may your timely filed return (including extensions) for Under MACRS qualify for GDS, you can elect to use ADS. The the tax year in which you plant or graft the election must generally cover all property in the specified plant(s) indicating you are electing to same property class you placed in service dur- The Modified Accelerated Cost Recovery Sys- apply section 168(k)(5) and identifying the ing the year. However, the election for residen- tem (MACRS) is used to recover the basis of specified plant(s) for which you are making the tial rental property and nonresidential real prop- most business and investment property placed election. The election once made cannot be re- erty can be made on a property-by-property in service after 1986. MACRS consists of two voked without IRS consent. basis. Once you make this election, you can depreciation systems, the General Depreciation never revoke it. See section 168(k)(5) of the Internal Reve- System (GDS) and the Alternative Depreciation nue Code. You make the election by completing line 20 System (ADS). Generally, these systems pro- in Part III of Form 4562. vide different methods and recovery periods to use in figuring depreciation deductions.

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Table 7-1. Farm Property Recovery Periods What Is the Basis for Recovery Period in Years Depreciation? Assets GDS ADS . . The basis for depreciation of MACRS property Agricultural structures (single purpose) ...... 10 15 is the property's cost or other basis multiplied Automobiles ...... 5 5 by the percentage of business/investment use. Calculators and copiers ...... 5 6 Reduce that amount by any credits and deduc- Cattle (dairy or breeding) ...... 5 7 tions allocable to the property. The following are 1 Communication equipment ...... 7 10 examples of some of the credits and deductions Computer and peripheral equipment ...... 5 5 that reduce basis. Drainage facilities ...... 15 20 • Any deduction for section 179 property. Farm buildings2 ...... 20 25 • Any deduction for removal of barriers to New farm machinery and equipment3 ...... 5 10 the disabled and the elderly. Used farm machinery and equipment ...... 7 10 • Any disabled access credit, enhanced oil Fences (agricultural) ...... 7 10 recovery credit, and credit for em- Goats and sheep (breeding) ...... 5 5 ployer-provided childcare facilities and Grain bin ...... 7 10 services. Hogs (breeding) ...... 3 3 • Any special depreciation allowance. Horses (age when placed in service) • Basis adjustment for investment credit Breeding and working (12 years or less) ...... 7 10 property under section 50(c) of the Internal Breeding and working (more than 12 years) ...... 3 10 Revenue Code. Racing horses (more than 2 years) ...... 3 12 Horticultural structures (single purpose) ...... 10 15 For information about how to determine the cost or other basis of property, see What Is the Basis 4 Logging machinery and equipment ...... 5 6 of Your Depreciable Property, earlier. Also, see Nonresidential real property ...... 395 40 chapter 6. Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) ... 7 10 For additional credits and deductions that Paved lots ...... 15 20 affect basis, see section 1016 of the Internal Residential rental property ...... 27.5 40 Revenue Code.

Tractor units (over-the-road) ...... 3 4 Trees or vines bearing fruits or nuts ...... 10 20 Which Recovery Period Truck (heavy duty, unloaded weight 13,000 lbs. or more) ...... 5 6 Truck (actual weight less than 13,000 lbs.) ...... 5 5 Applies? Water wells ...... 15 20 The recovery period of property is the number of years over which you recover its cost or other 1 Not including communication equipment listed in other classes. basis. It is determined based on the deprecia- 2 Not including single-purpose agricultural or horticultural structures. tion system (GDS or ADS) used. See Table 7-1 3 Not including grain bin, cotton ginning, asset fence, or other land improvement and the original use for recovery periods under both GDS and ADS starts with you and placed in service after December 31, 2017. for some commonly used assets. For a com- 4 Used by logging and sawmill operators for cutting of timber. plete list of recovery periods, see the Table of 5 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993, Class Lives and Recovery Periods in Appendix the recovery period is 31.5 years. B of Pub. 946. House trailers for farm laborers. To de- Note. See sections 4 and 5 of Revenue See Which Property Class Applies Under GDS preciate a house trailer you supply as housing Procedure 2020-25, 2020-19 I.R.B. 785, availa- in chapter 4 of Pub. 946 for examples of the for those who work on your farm, use one of the ble at www.irs.gov/irb/2020-19_IRB#REV- types of property included in each class. following recovery periods if the house trailer is PROC-2020-25, for special rules for making a mobile (it has wheels and a history of move- late election or withdrawing the election to use ment). ADS for tax years ending in 2018, 2019, and What Is the • A 7-year recovery period under GDS. 2020. Placed-in-Service Date? • A 10-year recovery period under ADS. You begin to claim depreciation when your However, if the house trailer is not mobile Which Property Class property is placed in service for use either in a (its wheels have been removed and permanent Applies Under GDS? trade or business or for the production of in- utilities and pipes attached to it), use one of the come. The placed-in-service date for your prop- following recovery periods. The following is a list of the nine property erty is the date the property is ready and availa- • A 20-year recovery period under GDS. classes under GDS. ble for a specific use. It is therefore not • A 25-year recovery period under ADS. necessarily the date it is first used. If you con- 1. 3-year property. verted property held for personal use to use in a Water wells. Water wells used to provide 2. 5-year property. trade or business or for the production of in- water for raising poultry and livestock are land come, treat the property as being placed in improvements. If they are depreciable, use one 3. 7-year property. service on the conversion date. See Placed in of the following recovery periods. 4. 10-year property. Service under When Does Depreciation Begin • A 15-year recovery period under GDS. and End, earlier, for examples illustrating when • A 20-year recovery period under ADS. 5. 15-year property. property is placed in service. The types of water wells that can be depre- 6. 20-year property. ciated were discussed earlier in Irrigation sys- Also, see Certain specified plants, earlier, tems and water wells under Property Having a 7. 25-year property. for information on the placed-in-service date for Determinable Useful Life. specified plants bearing fruits and nuts for 8. Residential rental property. which you elect to claim the special deprecia- 9. Nonresidential real property. tion allowance.

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Which Convention Applies? Property used in farming business. For 3-, If you elect to use a different method 5-, 7-, or 10-year property used in a farming for one item in a property class, you Under MACRS, averaging conventions estab- business and placed in service after 2017, the must apply the same method to all lish when the recovery period begins and ends. 150% declining balance method is no longer re- property in that class placed in service during The convention you use determines the number quired. However, for 15- or 20-year property the year of the election. However, you can of months for which you can claim depreciation placed in service in a farming business, you make the election on a property-by-property ba- in the year you place property in service and in must use the 150% declining balance method sis for residential rental and nonresidential real the year you dispose of the property. Use one over a GDS recovery period or you can elect property. of the following conventions. one of the following methods. • The half-year convention. • The straight line method over a GDS re- Straight line election. Instead of using the • The mid-month convention. covery period. declining balance method, you can elect to use • The mid-quarter convention. • The straight line method over an ADS re- the straight line method over the GDS recovery covery period. period. Make the election by entering “S/L” un- For a detailed explanation of each conven- der column (f) in Part III of Form 4562. For property placed in service before tion, see Which Convention Applies in chapter 4 1999, you could have elected to use of Pub. 946. Also, see the Instructions for Form ! ADS election. As explained earlier under CAUTION the 150% declining balance method 4562. Which Depreciation System (GDS or ADS) Ap- using the ADS recovery periods for certain plies, you can elect to use ADS even though property classes. If you made this election, con- your property may come under GDS. ADS uses Which Depreciation Method tinue to use the same method and recovery pe- the straight line method of depreciation over the Applies? riod for that property. ADS recovery periods, which are generally lon- ger than the GDS recovery periods. The ADS MACRS provides three depreciation methods Real property. You can depreciate real prop- recovery periods for many assets used in the under GDS and one depreciation method under erty using the straight line method under either business of farming are listed in Table 7-1. Ad- ADS. GDS or ADS. ditional ADS recovery periods for other classes • The 200% declining balance method over of property may be found in the Table of Class a GDS recovery period. Switching to straight line. If you use a declin- Lives and Recovery Periods in Appendix B of • The 150% declining balance method over ing balance method, you switch to the straight Pub. 946. a GDS recovery period. line method in the year it provides an equal or • The straight line method over a GDS re- greater deduction. If you use the MACRS per- How Is the Depreciation covery period. centage tables, discussed later under How Is • The straight line method over an ADS re- the Depreciation Deduction Figured, you do not Deduction Figured? covery period. need to determine in which year your deduction is greater using the straight line method. The ta- To figure your depreciation deduction under MACRS, you first determine the depreciation Depreciation Table. The following table lists bles have the switch to the straight line method system, property class, placed-in-service date, the types of property you can depreciate under built into their rates. basis amount, recovery period, convention, and each method. The declining balance method is depreciation method that applies to your prop- abbreviated as DB and the straight line method Fruit or nut trees and vines. Depreciate erty. Then you are ready to figure your depreci- is abbreviated as SL. trees and vines bearing fruits or nuts under GDS using the straight line method over a ation deduction. You can figure it in one of two Depreciation Table 10-year recovery period. ways. • You can use the percentage tables provi- System/Method Type of Property ADS required for some farmers. If you elect ded by the IRS. not to limit interest expense, you must use ADS • You can figure your own deduction without GDS using • All 15- and 20-year property using the tables. 150% DB to depreciate any property with a recovery pe- • Nonfarm 3-, 5-, 7-, and 10-year riod of 10 years or more. See chapter 4 for a Figuring your own MACRS deduction property1 discussion of interest rules. If you elect not to will generally result in a slightly differ- GDS using SL • Nonresidential real property apply the uniform capitalization rules to any ent amount than using the tables. plant shown in Table 6-1 of chapter 6 and pro- • Residential rental property • Trees or vines bearing fruits or duced in your farming business, you must use nuts ADS for all property you place in service in any Using the MACRS Percentage • All 3-, 5-, 7-, 10-, 15-, and year the election is in effect. See chapter 6 for a Tables 20-year property1 discussion of the application of the uniform cap- ADS using SL • Property used predomi- italization rules to farm property. To help you figure your deduction under nantly outside the United MACRS, the IRS has established percentage States Electing a different method. As shown in the tables that incorporate the applicable conven- • Farm property used when an Depreciation Table, you can elect a different tion and depreciation method. These percent- election not to apply the method for depreciation for certain types of age tables are in Appendix A of Pub. 946. uniform capitalization rules is property. You must make the election by the in effect due date of the return (including extensions) for Rules for using the tables. The following • Tax-exempt property the year you placed the property in service. rules cover the use of the percentage tables. • Tax-exempt bond-financed However, if you timely filed your return for the 1. You must apply the rates in the percent- property year without making the election, you can still • Imported property2 age tables to your property's unadjusted make the election by filing an amended return • Any property for which you basis. Unadjusted basis is the same basis 1 within 6 months of the due date of your return elect to use this method amount you would use to figure gain on a (excluding extensions). Attach the election to GDS using • Nonfarm 3-, 5-, 7-, and sale but figured without reducing your orig- the amended return and write “Filed pursuant to 200% DB 10-year property inal basis by any MACRS depreciation section 301.9100-2” on the election statement. • Farm 3-, 5-, 7-, and 10-year taken in earlier years. property placed in service after File the amended return at the same address 2017 you filed the original return. Once you make the 2. You cannot use the percentage tables for election, you cannot change it. a short tax year. See chapter 4 of Pub. 1Elective method 946 for information on how to figure the 2See section 168(g)(6) of the Internal Revenue deduction for a short tax year. Code

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3. You must generally continue to use them ery period of the property exchanged or invol- for the entire recovery period of the prop- Table 7-2. 150% Declining Balance untarily converted. You also generally continue erty. Method (Half-Year Convention) to use the same depreciation method and con- vention used for the exchanged or involuntarily 4. You must stop using the tables if you ad- Year 3-Year 5-Year 7-Year 20-Year converted property. This applies only to ac- just the basis of the property for any rea- 1 25.0% 15.00% 10.71% 3.750% quired property with the same or a shorter re- son other than: 2 37.5 25.50 19.13 7.219 covery period and the same or more acceler- a. Depreciation allowed or allowable, or 3 25.0 17.85 15.03 6.677 ated depreciation method than the property 4 12.5 16.66 12.25 6.177 exchanged or involuntarily converted. The ex- b. An addition or improvement to the 5 16.66 12.25 5.713 cess basis, if any, of the acquired MACRS property, which is depreciated as a 6 8.33 12.25 5.285 property is treated as newly placed in service separate property. 7 12.25 4.888 MACRS property. Basis adjustment due to casualty loss. 8 6.13 4.522 If you reduce the basis of your property be- Election out. You can elect not to use the cause of a casualty, you cannot continue to use above rules. The election, if made, applies to Figuring depreciation using the straight the percentage tables. For the year of the ad- both the acquired property and the exchanged line method and half-year convention. The justment and the remaining recovery period, or involuntarily converted property. If you make following table has the straight line percentages you must figure the depreciation yourself using the election, figure depreciation by treating the for 3-, 5-, 7-, and 20-year property using the the property's adjusted basis at the end of the carryover basis and excess basis, if any, for the half-year convention. The table covers only the year. See Figuring the Deduction Without Using acquired property as if placed in service the first 8 years for 20-year property. See Appendix the Tables in chapter 4 of Pub. 946. later of the date you acquired it, or the time of A of Pub. 946 for complete MACRS tables, in- the disposition of the exchanged or involuntarily cluding tables for the mid-quarter and Figuring depreciation using the 150% DB converted property. For depreciation purposes, mid-month convention. method and half-year convention. Table 7-2 the adjusted basis of the exchanged or involun- has the percentages for 3-, 5-, 7-, and 20-year tarily converted property is treated as if it was property. The percentages are based on the Table 7-3. Straight Line Method disposed of at the time of the exchange or con- 150% declining balance method with a change (Half-Year Convention) version. to the straight line method. This table covers Year 3-Year 5-Year 7-Year 20-Year When to make the election. You must only the half-year convention and the first 8 make the election on a timely filed return (in- years for 20-year property. See Appendix A of 1 16.67% 10% 7.14% 2.5% cluding extensions) for the year of replacement. Pub. 946 for complete MACRS tables, including 2 33.33 20 14.29 5.0 Once made, the election may not be revoked tables for the mid-quarter and mid-month con- 3 33.33 20 14.29 5.0 without IRS consent. vention. 4 16.67 20 14.28 5.0 5 20 14.29 5.0 For more information and special rules, see The following examples show how to figure chapter 4 of Pub. 946. depreciation under MACRS using the percen- 6 10 14.28 5.0 7 14.29 5.0 tages in Table 7-2. Property acquired in a nontaxable transfer. 8 7.14 5.0 You must depreciate MACRS property acquired Example 1. During the year, you bought an by a corporation or partnership in certain non- The following example shows how to figure item of 7-year property for $10,000 and placed taxable transfers over the property's remaining depreciation under MACRS using the straight it in service. You do not elect a section 179 ex- recovery period in the transferor's hands, as if line percentages in Table 7-3. pense deduction for this property. In addition, the transfer had not occurred. You must con- the property is not qualified property for purpo- tinue to use the same depreciation method and Example. If in Example 2, earlier, you had ses of the special depreciation allowance. The convention as the transferor. You can depreci- elected the straight line method, you figure this unadjusted basis of the property is $10,000. ate the part of the property's basis in excess of year's depreciation by multiplying $20,000 (un- You use the percentages in Table 7-2 to figure its carried-over basis (the transferor's adjusted adjusted basis) by 2.5% to get $500. For next your deduction. basis in the property) as newly purchased year, your depreciation will be $1,000 Since this is 7-year property, you multiply MACRS property. For information on the kinds ($20,000 × 5%). $10,000 by 10.71% to get this year's deprecia- of nontaxable transfers covered by this rule, see tion of $1,071. For next year, your depreciation chapter 4 of Pub. 946. will be $1,913 ($10,000 × 19.13%). Figuring Depreciation Without the Tables Example 2. You had a barn constructed on How Do You Use General your farm at a cost of $20,000. You placed the If you are required to or would prefer to figure Asset Accounts? barn in service this year. You elect not to claim your own depreciation without using the tables, the special depreciation allowance. The barn is see Figuring the Deduction Without Using the To make it easier to figure MACRS deprecia- 20-year property and you use the table percen- Tables in chapter 4 of Pub. 946. tion, you can group separate assets into one or tages to figure your deduction. You figure this more general asset accounts (GAAs). You can year's depreciation by multiplying $20,000 (un- Figuring the Deduction for then depreciate all the assets in each account adjusted basis) by 3.75% to get $750. For next as a single asset. Each account must include year, your depreciation will be $1,443.80 Property Acquired in a Nontaxable Exchange only assets of the same recovery period, depre- ($20,000 × 7.219%). ciation method, and convention. You cannot in- clude an asset if you use it in both a personal If your property has a carryover basis because activity and a trade or business (or for the pro- you acquired it in an exchange or involuntary duction of income) in the year in which you first conversion of other property or in a nontaxable placed it in service. transfer, you generally figure depreciation for the property as if the exchange, conversion, or After you have set up a GAA, you generally transfer had not occurred. figure the depreciation for it by using the appli- cable depreciation method, recovery period, Property acquired in a like-kind exchange and convention for the assets in the GAA. For or involuntary conversion. You must gener- each GAA, record the depreciation allowance in ally depreciate the carryover basis of MACRS a separate depreciation reserve account. property acquired in a like-kind exchange or in- voluntary conversion over the remaining recov- There are additional rules for grouping as- sets in a GAA, figuring depreciation for a GAA,

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disposing of GAA assets, and terminating GAA Other property used for transportation. Who Can Claim Depletion? treatment. Special rules apply in determining This includes trucks, buses, boats, airplanes, the basis and figuring the depreciation deduc- motorcycles, and other vehicles used for trans- If you have an economic interest in mineral tion for MACRS property in a GAA acquired in a porting persons or goods. property or standing timber (defined below), like-kind exchange or involuntary conversion. you can take a deduction for depletion. More For more details, see Regulations section Excepted vehicles. Other property used than one person can have an economic interest 1.168(i)-1 (as in effect for tax years beginning for transportation does not include the following in the same mineral deposit or timber. after December 31, 2013). Also, see chapter 4 vehicles. of Pub. 946. • Tractors and other special purpose farm vehicles. You have an economic interest if both the • Bucket trucks (cherry pickers), dump following apply. When Do You Recapture trucks, flatbed trucks, and refrigerated • You have acquired by investment any in- MACRS Depreciation? trucks. terest in mineral deposits or standing tim- • Combines, cranes and derricks, and fork- ber. • You have a legal right to income from the When you dispose of property you depreciated lifts. extraction of the mineral or the cutting of using MACRS, any gain on the disposition is • Any vehicle designed to carry cargo with a the timber, to which you must look for a re- generally recaptured (included in income) as or- loaded gross vehicle weight of over 14,000 turn of your capital investment. dinary income up to the amount of the deprecia- pounds. tion previously allowed or allowable for the For more information, see chapter 5 of Pub. A contractual relationship that allows you an property. For more information on depreciation 946. economic or monetary advantage from prod- recapture, see chapter 9. Also, see chapter 4 of ucts of the mineral deposit or standing timber is Pub. 946. not, in itself, an economic interest. A production What Is the Business-Use payment carved out of, or retained on the sale Requirement? of, mineral property is not an economic interest. Additional Rules for You can claim the section 179 expense deduc- Mineral property is each separate interest Listed Property tion for listed property and depreciate listed you own in each mineral deposit in each sepa- property using GDS and a declining balance rate tract or parcel of land. You can treat two or Listed property includes cars and other property method, if the property meets the business-use more separate interests as one property or as used for transportation, property used for enter- requirement. To meet this requirement, listed separate properties. See section 614 of the In- tainment, and certain computers. property must be used predominantly (more ternal Revenue Code and the related regula- than 50% of its total use) for qualified business tions for rules on how to treat separate mineral Deductions for listed property (other than use. To determine whether the business-use re- interests. certain leased property) are subject to the fol- quirement is met, you must allocate the use of lowing special rules and limits. any item of listed property used for more than Timber property is your economic interest in • Deduction for employees. one purpose during the year among its various standing timber in each tract or block represent- • Business-use requirement. uses. ing a separate timber account. • Passenger automobile limits and rules. Do the Passenger Figuring Depletion What Is Listed Property? Automobile Limits Apply? There are two ways of figuring depletion. Listed property is any of the following. The depreciation deduction (including the sec- • Cost depletion. • Passenger automobiles weighing 6,000 tion 179 expense deduction) you can claim for a • Percentage depletion. pounds or less. passenger automobile each year is limited. The For mineral property, you must generally use Any other property used for transportation, • passenger automobile limits are the maximum the method that gives you the larger deduction. unless it is an excepted vehicle. depreciation amounts you can deduct for a pas- For standing timber, you must use cost deple- Property generally used for entertainment, • senger automobile. They are based on the date tion. recreation, or amusement. you placed the vehicle in service. See chapter 5 • Certain aircraft. of Pub. 946 for tables that show the maximum depreciation deduction for passenger automo- Cost Depletion Passenger automobiles. A passenger auto- biles. Also, see the Instructions for Form 4562. mobile is any 4-wheeled vehicle made primarily To figure cost depletion, you must first deter- for use on public streets, roads, and highways For information about deducting expenses mine the following. and rated at 6,000 pounds or less of unloaded for the business use of your passenger automo- • The property's basis for depletion. gross vehicle weight (6,000 pounds or less of bile, see chapter 4 of Pub. 463. • The total recoverable units of mineral in the gross vehicle weight for trucks and vans). It in- property's natural deposit. cludes any part, component, or other item phys- Deductions for passenger automobiles ac- • The number of units of mineral sold during ically attached to the automobile or usually in- quired in a trade-in. Special rules apply in fig- the tax year. cluded in the purchase price of an automobile. uring the depreciation for a passenger automo- Electric passenger automobiles are vehicles bile received in a like-kind exchange or You must estimate or determine recoverable produced by an original equipment manufac- involuntary conversion. See chapter 5 of Pub. units (tons, barrels, board feet, thousands of cu- turer and designed to run primarily on electric- 946 and Regulations section 1.168(i)-6(d)(3). bic feet, or other measure) using the current in- ity. dustry method and the most accurate and relia- ble information you can obtain. Note. A truck or van that is a qualified nonper- Depletion sonal use vehicle is not considered a passen- Basis for depletion and total recoverable ger automobile. See Qualified nonpersonal use Depletion is the using up of natural resources units are explained in chapter 9 of Pub. 535. vehicles under Passenger Automobiles in chap- by mining, quarrying, drilling, or cutting. The de- ter 5 of Pub. 946 for the definition of qualified pletion deduction allows an owner or operator Number of units sold. You determine the nonpersonal use vehicles. to account for the reduction of a product's re- number of units sold during the tax year based For most vehicles, the gross vehicle serves. on your method of accounting. Use the follow- TIP weight rating can generally be found on ing table to make this determination. the driver door post of the vehicle.

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IF you use... THEN the units sold 3. Figure the number of timber units to take The following rules apply when figuring your during the year are... into account by adding the number of tim- taxable income from the property for purposes ber units acquired during the year to the of the taxable income limit. The cash method of The units sold for which number of timber units on hand in the ac- • Do not deduct any net operating loss de- accounting you receive payment during count at the beginning of the year and duction from the gross income from the the tax year (regardless of then adding (or subtracting) any correction property. the year of sale). to the estimate of the number of timber • Corporations do not deduct charitable con- An accrual method of The units sold based on units remaining in the account. tributions from the gross income from the accounting your inventories. property. 4. Divide the result of (2) by the result of (3). • If, during the year, you disposed of an item The number of units sold during the tax year This is your depletion unit. of section 1245 property used in connec- does not include any units for which depletion tion with the mineral property, reduce any deductions were allowed or allowable in earlier When to claim timber depletion. Claim your allowable deduction for mining expenses years. depletion allowance as a deduction in the year by the part of any gain you must report as of sale or other disposition of the products cut ordinary income that is allocable to the Figuring the cost depletion deduction. from the timber, unless you elect to treat the mineral property. See Regulations section Once you have figured your property's basis for cutting of timber as a sale or exchange, as ex- 1.613-5(b)(1) for information on how to fig- depletion, the total recoverable units, and the plained in chapter 8. Include allowable deple- ure the ordinary gain allocable to the prop- number of units sold during the tax year, you tion for timber products not sold during the tax erty. can figure your cost depletion deduction by tak- year the timber is cut, as a cost item in the clos- ing the following steps. ing inventory of timber products for the year. The inventory is your basis for determining gain For more information on depletion, see chapter 9 of Pub. 535. Step Action Result or loss in the tax year you sell the timber prod- ucts. 1 Divide your property's basis Rate per unit. for depletion by total Form T (Timber). Complete and attach Form Amortization recoverable units. T (Timber) to your income tax return if you are 2 Multiply the rate per unit by Cost depletion claiming a deduction for timber depletion, elect- Amortization is a method of recovering (deduct- units sold during the tax deduction. ing to treat the cutting of timber as a sale or ex- ing) certain capital costs over a fixed period of year. change, or making an outright sale of timber. time. It is similar to the straight line method of See the Instructions for Form T (Timber). depreciation. The amortizable costs discussed Cost depletion for ground water in Ogal- in this section include the start-up costs of go- lala Formation. Farmers who extract ground Example. Alex Borsht bought a farm that ing into business, reforestation costs, the costs water from the Ogallala Formation for irrigation included standing timber. This year Alex deter- of pollution control facilities, and the costs of are allowed cost depletion. Cost depletion is al- mined that the standing timber could produce section 197 intangibles. See chapter 8 of Pub. lowed when it can be demonstrated the ground 300,000 units when cut. At that time, the adjus- 535 for more information on these topics. water is being depleted and the rate of recharge ted basis of the standing timber was $24,000. is so low that, once extracted, the water would Alex then cut and sold 27,000 units. (Alex did be lost to the taxpayer and immediately suc- not elect to treat the cutting of the timber as a Business Start-Up Costs ceeding generations. To figure your cost deple- sale or exchange.) Alex's depletion for each unit tion deduction, use the guidance provided in for the year is $.08 ($24,000 ÷ 300,000). His de- When you go into business, treat all costs you Revenue Procedure 66-11 in Cumulative Bulle- duction for depletion is $2,160 (27,000 × $.08). incur to get your business started as capital ex- tin 1966-1. If Alex had cut 27,000 units but sold only 20,000 penses. Capital expenses are a part of your ba- units during the year, his depletion for each unit sis in the business. Generally, you recover Timber Depletion would have remained at $.08. However, his de- costs for particular assets through depreciation pletion deduction would have been $1,600 deductions. However, you generally cannot re- Depletion takes place when you cut standing (20,000 × $.08) for this year and he would have cover other costs until you sell the business or timber (including Christmas trees). You can fig- included the balance of $560 (7,000 × $.08) in otherwise go out of business. ure your depletion deduction when the quantity the closing inventory for the year. Start-up costs are costs for creating an ac- of cut timber is first accurately measured in the tive trade or business or investigating the crea- process of exploitation. Percentage Depletion tion or acquisition of an active trade or busi- ness. Start-up costs include any amounts paid Figuring the timber depletion deduction. To You can use percentage depletion on certain or incurred in connection with any activity en- figure your cost depletion allowance, multiply mines, wells, and other natural deposits. You gaged in for profit and for the production of in- the number of units of standing timber cut by cannot use the percentage method to figure de- come before the trade or business begins, in your depletion unit. pletion for standing timber, soil, sod, dirt, or turf. anticipation of the activity becoming an active Timber units. When you acquire timber trade or business. property, you must make an estimate of the To figure percentage depletion, you multiply You can elect to currently deduct a limited quantity of marketable timber that exists on the a certain percentage, specified for each min- amount of business start-up costs paid or incur- property. You measure the timber using board eral, by your gross income from the property red after October 22, 2004. See Capital Expen- feet, log scale, cords, or other units. If you later during the year. See Mines and other natural ses in chapter 4. If this election is made, any determine that you have more or less units of deposits in chapter 9 of Pub. 535 for a list of the costs that are not currently deducted can be timber, you must adjust the original estimate. percentages. You can find a complete list in section 613(b) of the Internal Revenue Code. amortized. Depletion units. You figure your depletion unit each year by taking the following steps. Taxable income limit. The percentage deple- Amortization period. The amortization period tion deduction cannot be more than 50% (100% for business start-up costs paid or incurred be- 1. Determine your cost or the adjusted basis for oil and gas property) of your taxable income fore October 23, 2004, is 60 months or more. of the timber on hand at the beginning of from the property figured without the depletion For start-up costs paid or incurred after October the year. deduction and the domestic production activi- 22, 2004, the amortization period is 180 2. Add to the amount determined in (1) the ties deduction. months. The period starts with the month your cost of any timber units acquired during active trade or business begins. the year and any additions to capital. Reporting requirements. To amortize your start-up costs that are not currently deductible

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under the election to deduct, complete Part VI election by filing an amended return within 6 Topics of Form 4562 and attach a statement containing months of the due date of your return (excluding This chapter discusses: any required information. See the Instructions extensions). Attach Form 4562 and the state- for Form 4562. ment to the amended return and write “Filed • Sales and exchanges pursuant to section 301.9100-2” on Form 4562. • Ordinary or capital gain or loss For more information, see Starting a Busi- File the amended return at the same address ness in chapter 8 of Pub. 535. you filed the original return. For additional information on reforestation Useful Items You may want to see: Reforestation Costs costs, see chapter 8 of Pub. 535. Publication You can elect to currently deduct a limited Section 197 Intangibles amount of qualifying reforestation costs for 334 334 Tax Guide for Small Business You must generally amortize over 15 years the each qualified timber property. See Capital Ex- 523 523 Selling Your Home penses in chapter 4. You can elect to amortize capitalized costs of section 197 intangibles you over 84 months any amount not deducted. acquired after August 10, 1993. You must am- 544 544 Sales and Other Dispositions of There is no annual limit on the amount you can ortize these costs if you hold the section 197 in- Assets tangible in connection with your farming busi- elect to amortize. Reforestation costs are the di- 550 550 Investment Income and Expenses rect costs of planting or seeding for forestation ness or in an activity engaged in for the or reforestation. production of income. Your amortization deduc- 908 908 Bankruptcy Tax Guide tion each year is the applicable part of the intan- Qualifying costs. Qualifying costs include gible's adjusted basis (for purposes of deter- Form (and Instructions) only those costs you must otherwise capitalize mining gain), figured by amortizing it ratably 982 982 Reduction of Tax Attributes Due to and include in the adjusted basis of the prop- over 15 years (180 months). You are not al- Discharge of Indebtedness (and erty. They include costs for the following items. lowed any other depreciation or amortization Section 1082 Basis Adjustment) • Site preparation. deduction for an amortizable section 197 intan- • Seeds or seedlings. gible. Sch D (Form 1040) Sch D (Form 1040) Capital Gains and • Labor. Losses Tools. Section 197 intangibles include the following • Sch F (Form 1040) assets. Sch F (Form 1040) Profit or Loss From • Depreciation on equipment used in plant- Farming ing and seeding. • Goodwill.

• Patents. 1099-A 1099-A Acquisition or Abandonment of If the government reimburses you for refor- • Copyrights. Secured Property estation costs under a cost-sharing program, • Designs. you can amortize these costs only if you include • Formulas. 1099-C 1099-C Cancellation of Debt the reimbursement in your income. • Licenses. 4797 4797 Sales of Business Property • Permits. Qualified timber property. Qualified timber • Covenants not to compete. 8824 8824 Like-Kind Exchanges property is property that contains trees in signif- • Franchises. 8949 8949 Sales and Other Dispositions of icant commercial quantities. It can be a woodlot • Trademarks. Capital Assets or other site that you own or lease. The property See chapter 8 of Pub. 535 for more information, qualifies only if it meets all the following require- 8960 8960 Net Investment Income ments. including a complete list of assets that are sec- Tax-Individuals, Estates, and Trusts • It is located in the United States. tion 197 intangibles and special rules. 8995 8995 Qualified Business Income • It is held for the growing and cutting of tim- Deduction Simplified Computation ber you will either use in, or sell for use in,

the commercial production of timber prod- 8995-A 8995-A Qualified Business Income ucts. Deduction It consists of at least one acre planted with • See chapter 16 for information about getting tree seedlings in the manner normally used publications and forms. in forestation or reforestation. 8. Qualified timber property does not include property on which you have planted shelter Sales and Exchanges belts or ornamental trees, such as Christmas Gains and trees. If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Amortization period. The 84-month amortiza- Losses This section explains certain rules for determin- tion period starts on the first day of the first ing whether any gain you have is taxable and month of the second half of the tax year you in- whether any loss you have is deductible. cur the costs (July 1 for a calendar year tax- payer), regardless of the month you actually in- Introduction A sale is a transfer of property for money or cur the costs. You can claim amortization This chapter explains how to figure, and report a mortgage, note, or other promise to pay deductions for no more than 6 months of the on your tax return, your gain or loss on the dis- money. An exchange is a transfer of property first and last (eighth) tax years of the period. position of your property or debt and whether for other property or services. such gain or loss is ordinary or capital. Ordinary How to make the election. To elect to amor- Property sold or exchanged may include the gain is taxed at the same rates as wages and sale of a portion of a MACRS asset. For details, tize qualifying reforestation costs, enter your interest income, while net capital gain is gener- deduction in Part VI of Form 4562. Attach a see Partial Dispositions of MACRS Property in ally taxed at a lower rate. Dispositions dis- chapter 1 of Pub. 544. statement containing any required information. cussed in this chapter include sales, ex- See the Instructions for Form 4562. changes, foreclosures, repossessions, Generally, you must make the election on a canceled debts, hedging transactions, and Determining Gain or Loss timely filed return (including extensions) for the elections to treat cutting of timber as a sale or year in which you incurred the costs. However, exchange. You usually realize a gain or loss when you sell if you timely filed your return for the year without or exchange property. If the amount you realize making the election, you can still make the from a sale or exchange of property is more

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than its adjusted basis, you have a gain. If the Receipt of title from third party. If you re- the percentage of its income that is collec- adjusted basis of the property is more than the ceive property in a like-kind exchange and the ted from its members for the purpose of amount you realize, you have a loss. other party who transfers the property to you meeting losses and expenses). does not give you the title, but a third party 2. The shares in the company have been Basis and adjusted basis. The basis of prop- does, you can still treat this transaction as a recognized by the highest court of the erty you buy is usually its cost. The adjusted ba- like-kind exchange if it meets all the require- state in which the company was organized sis of the property is the basis plus certain addi- ments. or by applicable state statute as constitut- tions and minus certain deductions. See ing or representing real property or an in- chapter 6 for more information about basis and Basis of property received. If you receive terest in real property. adjusted basis. property in a like-kind exchange, generally the basis of the property will be the same as the ba- Like-kind property. To qualify as a nontaxa- Amount realized. The amount you realize sis of the property you gave up. See chapter 6 ble exchange, the properties exchanged must from a sale or exchange is the total of all money for more information on basis. be of like kind. Like-kind properties are proper- you receive plus the fair market value (FMV) ties of the same nature or character, even if (defined in chapter 6) of all property or services Money paid. If, in addition to giving up they differ in grade or quality. Generally, real you receive. The amount you realize also in- like-kind property, you pay money in a like-kind property exchanged for real property qualifies cludes any of your liabilities assumed by the exchange, the basis of the property received is as an exchange of like-kind property. For exam- buyer and any liabilities to which the property the basis of the property given up, increased by ple, an exchange of city property for farm prop- you transferred is subject, such as real estate the money paid. erty or improved property for unimproved prop- taxes or a mortgage. erty is a like-kind exchange. If the liabilities relate to an exchange of mul- Example. You own farmland with a barn. tiple properties, see Multiple Property Ex- The combined adjusted basis of the properties Note. Whether you engaged in a like-kind changes in chapter 1 of Pub. 544. is $70,000 and the fair market value is exchange depends on an analysis of each as- $150,000. You are interested in another tract of set involved in the exchange. Amount recognized. Your gain or loss real- farmland, with a larger barn, worth $200,000. ized from a sale or exchange of certain property You exchange your existing property and Partially nontaxable exchange. If, in addition is usually a recognized gain or loss for tax pur- $50,000 in cash for the new property. Your ba- to like-kind property, you receive money or un- poses. A recognized gain is a gain you must in- sis in the new property is $120,000 ($70,000 like property in an exchange on which you real- clude in gross income and report on your in- adjusted basis in your old property plus $50,000 ize gain, you have a partially nontaxable ex- come tax return. A recognized loss is a loss you in cash paid). change. You are taxed on the gain you realize, deduct from gross income. However, your gain but only to the extent of the money and the FMV or loss realized from the exchange of certain Reporting the exchange. Report the ex- of the unlike property you receive. If you realize property may not be recognized for tax purpo- change of like-kind property, even though no a loss on the exchange, no loss is deductible. ses. See Like-Kind Exchanges next. Also, a gain or loss is recognized, on Form 8824, However, see Unlike property given up below. loss from the disposition of property held for Like-Kind Exchanges. The Instructions for Form personal use is not deductible. 8824 explain how to report the details of the ex- Example 1. You trade farmland that cost change. $130,000 for $10,000 cash and other land to be Like-Kind Exchanges If you have any recognized gain because used in farming with an FMV of $150,000. You you received money or unlike property, report it have a realized gain of $30,000 ($150,000 FMV on Schedule D (Form 1040) or Form 4797, of new land + $10,000 cash − $130,000 basis of Generally, if you exchange real property you whichever applies. You may also have to report old farmland = $30,000 realized gain). How- use in your business or hold for investment the recognized gain as ordinary income be- ever, only $10,000, the cash received, is recog- solely for other business or investment real cause of depreciation recapture on Form 4797. nized (included in income). property of a like-kind, you do not recognize the See chapter 9 for more information. gain or loss from the exchange. However, if you Example 2. Assume the same facts as in also receive non-like-kind property or money as Qualifying property. In a like-kind exchange, Example 1, except that, instead of money, you part of the exchange, you recognize gain to the both the real property you give up and the real received a tractor with an FMV of $10,000. Your extent of the value of the other property or property you receive must be held by you for in- recognized gain is still limited to $10,000, the money you received in the exchange. You do vestment or for productive use in your trade or value of the tractor (the unlike property). not recognize any losses. In general, your gain business. Buildings, land, and rental property or loss will not be recognized until you sell or are examples of property that may qualify. Example 3. Assume in Example 1 that the otherwise dispose of the property you receive in FMV of the land you received was only the exchange. See Qualifying property, later, for Nonqualifying property. The rules for $115,000. You have a realized loss of $5,000 details on property that qualify and exceptions. like-kind exchanges do not apply to exchanges ($115,000 FMV + $10,000 cash – $130,000 ba- Your gain or loss will not be recognized until of the following property. sis of old farmland = $5,000 loss). However, you sell or otherwise dispose of the property • Real property used for personal purposes, your $5,000 loss is not recognized. you receive in the exchange. such as your home. Unlike property given up. If, in addition to The exchange of property for the same kind • Real property held primarily for sale. like-kind property, you give up unlike property, of property is the most common type of nontax- • Any personal or intangible property. you must recognize gain or loss on the unlike able exchange. To qualify for treatment as a property you give up. The gain or loss is the dif- like-kind exchange, the property traded and the You may have a nontaxable exchange un- ference between the FMV of the unlike property property received must be both of the following der other rules. See Other Nontaxable Ex- and the adjusted basis of the unlike property. (discussed later). changes in chapter 1 of Pub. 544. • Qualifying property. Special rule for stock in a mutual ditch, Liabilities. If, in a like-kind exchange, you • Like-kind property. reservoir, or irrigation company. For purpo- transfer property subject to debt, the debt trans- For more information on like-kind exchanges, ses of real property, stock in a mutual ditch, res- ferred is considered the same as the receipt of see Pub. 544. ervoir, or irrigation company is treated as real unlike property. For purposes of figuring your property if both of the following conditions are realized gain, add any liabilities assumed by the Multiple-party transactions. The like-kind ex- met at the time of the trade. other party to your amount realized. Subtract change rules also apply to property exchanges any liabilities of the other party that you assume 1. The mutual ditch, reservoir, or irrigation that involve three- and four-party transactions. from your amount realized. For more informa- company is an organization described in Any part of these multiple-party transactions tion, see Partial Nontaxable Exchanges in section 501(c)(12)(A) of the Internal Reve- can qualify as a like-kind exchange if it meets all chapter 1 of Pub. 544. nue Code (determined without regard to the requirements described in this section.

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Like-kind exchanges between related per- Exceptions to the rules for related per- applies for determining loss as well as gain. Any sons. Special rules apply to like-kind ex- sons. The following property dispositions are gain recognized on a transfer in trust increases changes between related persons. These rules excluded from these rules. the basis. affect both direct and indirect exchanges. Un- • Dispositions due to the death of either rela- der these rules, if either person disposes of the ted person. property within 2 years after the exchange, the • Involuntary conversions. Ordinary or Capital exchange is disqualified from nonrecognition • Dispositions where it is established to the treatment. The gain or loss on the original ex- satisfaction of the IRS that neither the ex- Gain or Loss change must be recognized as of the date of change nor the disposition has, as a main the later disposition. The 2-year holding period purpose, the avoidance of federal income Generally, you will have a capital gain or loss if begins on the date of the last transfer of prop- tax. you sell or exchange a capital asset (defined erty that was part of the like-kind exchange. below). You may also have a capital gain if your Multiple property exchanges. Under the section 1231 transactions result in a net gain. Related persons. Under these rules, rela- like-kind exchange rules, you must generally See Section 1231 Gains and Losses in ted persons include, for example, you and a make a property-by-property comparison to fig- chapter 9. member of your family (spouse, brother, sister, ure your recognized gain and the basis of the parent, child, etc.), you and a corporation in property you receive in the exchange. However, To figure your net capital gain or loss, you which you have more than 50% ownership, you for exchanges of multiple properties, you do not must classify your gains and losses as either or- and a partnership in which you directly or indi- make a property-by-property comparison if you dinary or capital, and your capital gains or los- rectly own more than a 50% interest of the capi- do either of the following. ses as either short term or long term. tal or profits, and two partnerships in which you • Transfer and receive properties in two or Your net capital gains may be taxed at a directly or indirectly own more than 50% of the more exchange groups. lower tax rate than ordinary income. See Capi- capital interests or profits. • Transfer or receive more than one property tal Gains Tax Rates, later. Your deduction for a For the complete list of related persons, see within a single exchange group. net capital loss may be limited. See Treatment Related persons in chapter 2 of Pub. 544. For more information, see Multiple Property of Capital Losses, later. Example. You own real property used in Exchanges in chapter 1 of Pub. 544. your business. Your sister owns real property Capital Assets used in her business. In December 2019, you Deferred exchange. A deferred exchange for exchanged your property plus $15,000 for your like-kind property may qualify for nonrecogni- Almost everything you own and use for per- sister's property. At that time, the fair market tion of gain or loss. A deferred exchange is an sonal purposes, pleasure, or investment is a value of your real property was $200,000 and exchange in which you transfer property you capital asset. its adjusted basis was $65,000. The fair market use in business or hold for investment and later value of your sister's real property was receive like-kind property you will use in busi- The following items are examples of capital $215,000 and its adjusted basis was $70,000. ness or hold for investment. The property you assets. You realized a gain of $135,000 (the $215,000 receive is replacement property. The transac- • A home owned and occupied by you and fair market value of the real property received, tion must be an exchange of property for prop- your family. minus the $15,000 you paid, minus your erty rather than a transfer of property for money • Household furnishings. $65,000 adjusted basis in the property). Your used to buy replacement property. In addition, • A car used for pleasure. If your car is used sister realized a gain of $145,000 (the $200,000 the replacement property will not be treated as both for pleasure and for farm business, it fair market value of your real property, plus the like-kind property unless certain identification is partly a capital asset and partly a nonca- $15,000 you paid, minus her $70,000 adjusted and receipt requirements are met. pital asset, defined later. basis in the property). For more information, see Deferred Ex- • Stocks and bonds. However, there are However, because this was a like-kind ex- changes in chapter 1 of Pub. 544. special rules for gains on qualified small change and you received no cash or non-like business stock. For more information on kind property in the exchange, you recognize Transfer to Spouse this subject, see Gains on Qualified Small no gain on the exchange. Your basis in the real Business Stock and Losses on Section property you received is $80,000 (the $65,000 1244 (Small Business) Stock in chapter 4 Generally, no gain or loss is recognized on a of Pub. 550. adjusted basis of the real property given up plus transfer of property from an individual to (or in the $15,000 you paid). Your sister recognizes trust for the benefit of) a spouse, or a former gain only to the extent of the money she re- Personal-use property. Gain from a sale or spouse if incident to divorce. This rule does not exchange of personal-use property is a capital ceived, $15,000. Her basis in the real property apply in the following situations. she received was $70,000 (the $70,000 adjus- gain and is taxable. Loss from the sale or ex- • Your spouse or former spouse is a nonresi- change of personal-use property is not deducti- ted basis of the real property she exchanged dent alien (unless special elections have minus the $15,000 received, plus the $15,000 ble. You can deduct a loss relating to per- been made). sonal-use property only if it results from a gain recognized). • Certain transfers in trust. In 2020, you sold the real property you re- casualty or theft. For information on casualties • Certain stock redemptions under a divorce and thefts, see chapter 11. ceived to a third party for $220,000. Because or separation instrument or a valid written you sold property you acquired from a related agreement. party (your sister) within 2 years after the ex- Long and Short Term change with your sister, that exchange is dis- For more information and special rules for qualified from nonrecognition treatment and the transfers of property incident to divorce, see Where you report a capital gain or loss depends deferred gain must be recognized on your 2020 Property Settlements in Pub. 504, Divorced or on how long you own the asset before you sell return. On your 2020 tax return, you must report Separated Individuals. or exchange it. The time you own an asset be- your $135,000 gain on the 2019 exchange. You fore disposing of it is the holding period. also must report the gain on the 2020 sale on Any transfer of property to a spouse or for- your 2020 return. Additionally, your sister must mer spouse on which gain or loss is not recog- If you hold a capital asset 1 year or less, the report on her 2020 tax return gain of $130,000, nized is not considered a sale or exchange. The gain or loss resulting from its disposition is short which is the $145,000 gain on the 2019 ex- recipient's basis in the property will be the same term. Report it in Part I of Form 8949, Sales and change, minus the $15,000 she recognized in as the adjusted basis of the giver immediately Other Dispositions of Capital Assets, and/or 2019. Her adjusted basis in the property is in- before the transfer. This carryover basis rule Schedule D (Form 1040), as applicable. If you creased to $200,000 (its $70,000 basis plus the applies whether the adjusted basis of the trans- hold a capital asset longer than 1 year, the gain $130,000 gain recognized). ferred property is less than, equal to, or greater or loss resulting from its disposition is long term. than either its FMV at the time of transfer or any Report it in Part II of Form 8949 and/or consideration paid by the recipient. This rule Schedule D, as applicable. See the Instructions

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for Form 8949 and the Instructions for Sched- Net gain. If the total of your capital gains is a noncapital asset. Gain or loss from sales or ule D (Form 1040) for more information, includ- more than the total of your capital losses, the other dispositions of this property is reported on ing when Form 8949 is required. Also see chap- difference is taxable. However, part of your gain Schedule F (Form 1040) (not on Schedule D ter 4 of Pub. 544. (but not more than your net capital gain) may be (Form 1040) or Form 4797). The treatment of taxed at a lower rate than the rate of tax on your this property is discussed in chapter 3. Holding period. To figure if you held property ordinary income. See Capital Gains Tax Rates, longer than 1 year, start counting on the day af- later. Land and depreciable properties. Land and ter the day you acquired the property. The day depreciable property you use in farming are not you disposed of the property is part of your Net loss. If the total of your capital losses is capital assets. Noncapital assets also include holding period. more than the total of your capital gains, the dif- livestock held for draft, breeding, dairy, or sport- ference is deductible. But there are limits on ing purposes. However, your gains and losses Example. If you bought an asset on June how much loss you can deduct and when you from sales and exchanges of your farmland and 19, 2019, you should start counting on June 20, can deduct it. See Treatment of Capital Losses depreciable properties must be considered to- 2019. If you sold the asset on June 19, 2020, next. gether with certain other transactions to deter- your holding period is not longer than 1 year, mine whether the gains and losses are treated but if you sold it on June 20, 2020, your holding Treatment of Capital Losses as capital or ordinary gains and losses. The period is longer than 1 year. sales of these business assets are reported on Form 4797. See chapter 9 for more information. Inherited property. If you inherit property, If your capital losses are more than your capital you are considered to have held the property gains, you must claim the difference even if you longer than 1 year, regardless of how long you do not have ordinary income to offset it. For tax- Hedging actually held it. This rule does not apply to live- payers other than corporations, the yearly limit stock used in a farm business. See Holding pe- on the capital loss you can deduct is $3,000 Hedging transactions are transactions that you riod under Livestock, later. ($1,500 if you are married and file a separate enter into in the normal course of business pri- return). If your other income is low, you may not marily to manage the risk of interest rate or Nonbusiness bad debt. A nonbusiness be able to use the full $3,000. The part of the price changes, or currency fluctuations, with re- bad debt is a short-term capital loss, deductible $3,000 you cannot use becomes part of your spect to borrowings, ordinary property, or ordi- in the year the debt becomes worthless. See capital loss carryover (discussed next). nary obligations. Ordinary property or obliga- chapter 4 of Pub. 550. tions are those that cannot produce capital gain Capital loss carryover. Generally, you have a or loss if sold or exchanged. Nontaxable exchange. If you acquire an capital loss carryover if either of the following asset in exchange for another asset and your situations applies to you. A commodity futures contract is a standar- basis for the new asset is figured, in whole or in • Your net loss on Schedule D (Form 1040) dized, exchange-traded contract for the sale or part, by using your basis in the old property, the is more than the yearly limit. purchase of a fixed amount of a commodity at a holding period of the new property includes the • Your taxable income without your deduc- future date for a fixed price. The holder of an holding period of the old property. That is, it be- tion for exemptions is less than zero. option on a futures contract has the right (but gins on the same day as your holding period for not the obligation) for a specified period of time If either of these situations applies to you for the old property. to enter into a futures contract to buy or sell at a 2020, see Capital Losses under Reporting Cap- particular price. A forward contract is much dif- Gift. If you receive a gift of property and ital Gains and Losses in chapter 4 of Pub. 550 ferent than a futures contract since its terms are your basis in it is figured using the donor's ba- to figure the amount you can carry over to 2021. sis, your holding period includes the donor's not standardized and it is not exchange traded. To figure your capital loss carryover holding period. Businesses may enter into commodity fu- TIP from 2020 to 2021, you will need a tures contracts or forward contracts and may Real property. To figure how long you held copy of your 2020 Form 1040 or Form acquire options on commodity futures contracts real property, start counting on the day after you 1040-SR and Schedule D (Form 1040). as either of the following. received title to it or, if earlier, on the day after Hedging transactions. you took possession of it and assumed the bur- • Transactions that are not hedging transac- dens and privileges of ownership. Capital Gains Tax Rates • tions. However, taking possession of real property The tax rates that apply to a net capital gain are under an option agreement is not enough to Futures transactions with exchange-traded generally lower than the tax rates that apply to start the holding period. The holding period commodity futures contracts that are not hedg- other income. These lower rates are called the cannot start until there is an actual contract of ing transactions generally result in capital gain maximum capital gains rates. sale. The holding period of the seller cannot or loss and are subject to the mark-to-market end before that time. rules discussed in Pub. 550. There is a limit on The term “net capital gain” means the the amount of capital losses you can deduct Figuring Net Gain or Loss amount by which your net long-term capital gain each year. Hedging transactions are not subject for the year is more than your net short-term to the mark-to-market rules and the deduction capital loss. The totals for short-term capital gains and los- for hedging losses is not limited. ses and the totals for long-term capital gains If, as a farmer-producer, to protect yourself and losses must be figured separately. See Schedule D (Form 1040) and the In- structions for Schedule D (Form 1040). Also from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, fu- Net short-term capital gain or loss. Com- see Pub. 550. tures contracts, or options on futures contracts bine your short-term capital gains and losses. and the contracts cover an amount of the com- Do this by adding all of your short-term capital Noncapital Assets modity within your range of production, the gains. Then add all of your short-term capital transactions are generally considered hedging losses. Subtract the lesser total from the Noncapital assets include property such as in- transactions. They can take place at any time greater. The difference is your net short-term ventory and depreciable property used in a you have the commodity under production, capital gain or loss. trade or business. A list of properties that are have it on hand for sale, or reasonably expect to not capital assets is provided in the Instructions have it on hand. Net long-term capital gain or loss. Follow for Schedule D (Form 1040). the same steps to combine your long-term capi- The gain or loss on the termination of these tal gains and losses. The result is your net Property held for sale in the ordinary hedges is generally ordinary gain or loss. Farm- long-term capital gain or loss. course of your farm business. Property you ers who file their income tax returns on the cash hold mainly for sale to customers, such as live- method report any profit or loss on the hedging stock, poultry, livestock products, and crops, is transaction on Schedule F, line 8.

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Gains or losses from hedging transactions 5,000 bushels each for a total of 50,000 bushels The rules discussed here do not apply that hedge supplies of a type regularly used or of corn at $3.75 a bushel. ! to the sale of livestock held primarily for consumed in the ordinary course of your trade The price did not drop as anticipated but CAUTION sale to customers. The sale of this live- or business may be ordinary gains or losses. rose to $4 a bushel. In November, you sell your stock is reported on Schedule F. See chapter 3 Examples include fuel and feed. crop at a local elevator for $4 a bushel. You also for more information. If you have numerous transactions in close out your futures position by buying ten Also, special rules apply to sales or exchanges the commodity futures market during December contracts for $4 a bushel. You paid a broker's commission of $1,400 ($70 per con- caused by weather-related conditions. See RECORDS the year, you must be able to show Sales Caused by Weather-Related Conditions which transactions are hedging transactions. tract) for the complete in and out position in the in chapter 3 for more information. Clearly identify a hedging transaction on your futures market. books and records before the end of the day The result is that the price of corn rose 25 Holding period. The sale or exchange of live- you entered into the transaction. It may be help- cents a bushel and the actual selling price is $4 stock used in your farm business (defined be- ful to have separate brokerage accounts for a bushel. Your loss on the hedge is 25 cents a low) qualifies as a section 1231 transaction if your hedging and speculation transactions. bushel. In effect, the net selling price of your corn is $3.75 a bushel. you held the livestock for 12 months or more Report the results of your futures transac- (24 months or more for horses and cattle). Retain the identification of each hedging tions and your sale of corn separately on transaction with your books and records. Also, Schedule F. See the Instructions for Schedule F Livestock. For section 1231 transactions, live- identify the item(s) or aggregate risk that is be- (Form 1040). stock includes cattle, hogs, horses, mules, don- ing hedged in your records. Although the identi- The loss on your futures transactions is keys, sheep, goats, fur-bearing animals, and fication of the hedging transaction must be $13,900, figured as follows. other mammals. Also, for section 1231 transac- made before the end of the day it was entered tions, livestock does not include chickens, tur- into, you have 35 days after entering into the keys, pigeons, geese, emus, ostriches, rheas, transaction to identify the hedged item(s) or July 2 - Sold December corn futures or other birds, fish, frogs, reptiles, etc. risk. (50,000 bu. @$3.75) ...... $187,500 November 6 - Bought December corn Livestock used in farm business. If live- futures (50,000 bu. @$4 plus $1,400 stock is held primarily for draft, breeding, dairy, For more information on the tax treatment of broker's commission) ...... 201,400 or sporting purposes, it is used in your farm futures and options contracts, see Commodity Futures loss...... ($13,900) Futures and Section 1256 Contracts Marked to business. The purpose for which an animal is held ordinarily is determined by a farmer's ac- Market in Pub. 550. This loss is reported as a negative figure on tual use of the animal. An animal is not held for Schedule F, Part I, line 8, as other income. Accounting methods for hedging transac- draft, breeding, dairy, or sporting purposes The proceeds from your corn sale at the lo- merely because it is suitable for that purpose, or tions. The accounting method you use for a cal elevator are $200,000 (50,000 bu. × $4). hedging transaction must clearly reflect income. because it is held for sale to other persons for Report it on Schedule F, Part I, line 2, as in- use by them for that purpose. However, a draft, This means that your accounting method must come from sales of products you raised. reasonably match the timing of income, deduc- breeding, or sporting purpose may be present if Assume you were right and the price went tion, gain, or loss from a hedging transaction an animal is disposed of within a reasonable down 25 cents a bushel. In effect, you would with the timing of income, deduction, gain, or time after it is prevented from its intended use still net $3.75 a bushel, figured as follows. loss from the item or items being hedged. There or made undesirable as a result of an accident, are requirements and limits on the method you disease, drought, or unfitness of the animal. can use for certain hedging transactions. See Sold cash corn, per bushel ...... $3.50 Regulations section 1.446-4(e) for those re- Gain on hedge, per bushel ...... 25 Example 1. You discover an animal that quirements and limits. Net price, per bushel ...... $3.75 you intend to use for breeding purposes is ster- Hedging transactions must be accounted for ile. You dispose of it within a reasonable time. under the rules stated above unless the trans- The gain on your futures transactions would This animal was held for breeding purposes. action is subject to mark-to-market accounting have been $11,100, figured as follows. under section 475 or you use an accounting Example 2. You retire and sell your entire method other than the following methods. July 2 - Sold December corn futures (50,000 herd, including young animals that you would bu. @$3.75) ...... $187,500 have used for breeding or dairy purposes had 1. Cash method. November 6 - Bought December corn you remained in business. These young ani- 2. Farm-price method. futures (50,000 bu. @$3.50 plus $1,400 mals were held for breeding or dairy purposes. broker's commission) ...... 176,400 Also, if you sell young animals to reduce your 3. Unit-livestock-price method. Futures gain ...... $11,100 breeding or dairy herd because of drought, these animals are treated as having been held Once you adopt a method, you must apply it The $11,100 is reported on Schedule F, Part I, for breeding or dairy purposes. See Sales consistently and must have IRS approval before line 8, as other income. Caused by Weather-Related Conditions in changing it. The proceeds from the sale of your corn at chapter 3. Your books and records must describe the the local elevator, $175,000, are reported on accounting method used for each type of hedg- Schedule F, Part I, line 2, as income from sales Example 3. You are in the business of rais- ing transaction. They must also contain any ad- of products you raised. ing hogs for slaughter. Customarily, before sell- ditional identification necessary to verify the ap- ing your sows, you obtain a single litter of pigs plication of the accounting method you used for that you will raise for sale. You sell the brood the transaction. You must make the additional Livestock sows after obtaining the litter. Even though you identification no more than 35 days after enter- hold these brood sows for ultimate sale to cus- This part discusses the sale or exchange of ing into the hedging transaction. tomers in the ordinary course of your business, livestock used in your farm business. Gain or they are considered to be held for breeding pur- loss from the sale or exchange of this livestock Example of a hedging transaction. You file poses. your income tax returns on the cash method. may qualify as a section 1231 gain or loss. However, any part of the gain that is ordinary in- On July 2, you anticipate a yield of 50,000 Example 4. You are in the business of rais- come from the recapture of depreciation is not bushels of corn this year. The December fu- ing registered cattle for sale to others for use as included as section 1231 gain. See chapter 9 tures price is $3.75 a bushel, but there are indi- breeding cattle. The business practice is to for more information on section 1231 gains and cations that by harvest time the price will drop. breed the cattle before sale to establish their fit- losses and the recapture of depreciation under To protect yourself against a drop in the price, ness as registered breeding cattle. Your use of section 1245. you enter into the following hedging transaction. the young cattle for breeding purposes is ordi- You sell ten December futures contracts of nary and necessary for selling them as

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registered breeding cattle. Such use does not A wetland (before conversion) is land that Election to treat cutting as a sale or ex- demonstrate that you are holding the cattle for meets all the following conditions. change. Under the general rule, the cutting of breeding purposes. However, those cattle you • It is mostly soil that, in its undrained condi- timber results in no gain or loss. It is not until a held as additions or replacements to your own tion, is saturated, flooded, or ponded long sale or exchange occurs that gain or loss is re- breeding herd to produce calves are consid- enough during a growing season to de- alized. But if you owned or had a contractual ered to be held for breeding purposes, even velop an oxygen-deficient state that sup- right to cut timber, you can elect to treat the cut- though they may not actually have produced ports the growth and regeneration of plants ting of timber as a section 1231 transaction in calves. The same applies to hog and sheep growing in water. the year it is cut. Even though the cut timber is breeders. • It is saturated by surface or groundwater at not actually sold or exchanged, you report your a frequency and duration sufficient to sup- gain or loss on the cutting for the year the tim- Example 5. You breed, raise, and train port mostly plants that are adapted for life ber is cut. Any later sale results in ordinary busi- horses for racing purposes. Every year you cull in saturated soil. ness income or loss. See the example below. horses from your racing stable. In 2020, you de- • It supports, under normal circumstances, To elect this treatment, you must: cided that to prevent your racing stable from mostly plants that grow in saturated soil. getting too large to be effectively operated, you 1. Own or hold a contractual right to cut the must cull six horses that had been raced at pub- Highly erodible cropland. This is cropland timber for a period of more than 1 year be- lic tracks in 2019. These horses are all consid- subject to erosion that you used at any time for fore it is cut, and ered held for sporting purposes. farming purposes other than grazing animals. 2. Cut the timber for sale or use in your trade Generally, highly erodible cropland is land cur- or business. Figuring gain or loss on the cash method. rently classified by the Department of Agricul- Farmers or ranchers who use the cash method ture as Class IV, VI, VII, or VIII under its classifi- Making the election. You make the elec- of accounting figure their gain or loss on the cation system. Highly erodible cropland also tion on your return for the year the cutting takes sale of livestock used in their farming business includes land that would have an excessive place by including in income the gain or loss on as follows. average annual erosion rate in relation to the the cutting and including a computation of your soil loss tolerance level, as determined by the gain or loss. You do not have to make the elec- Raised livestock. Gain on the sale of Department of Agriculture. tion in the first year you cut the timber. You can raised livestock is generally the gross sales make it in any year to which the election would price reduced by any expenses of the sale. Ex- Successor. Converted wetland or highly erodi- apply. If the timber is partnership property, the penses of sale include sales commissions, ble cropland is also land held by any person election is made on the partnership return. This freight or hauling from farm to commission com- whose basis in the land is figured by reference election cannot be made on an amended re- pany, and other similar expenses. The basis of to the adjusted basis of a person in whose turn. the animal sold is zero if the costs of raising it hands the property was converted wetland or Once you have made the election, it re- were deducted during the years the animal was highly erodible cropland. mains in effect for all later years unless you re- being raised. However, if you are required to voke it. use the accrual accounting method, see Uni- form Capitalization Rules in chapter 6. Timber Election under section 631(a) may be re- voked. If you previously elected for any tax Purchased livestock. The gross sales Standing timber you held as investment prop- year ending before October 23, 2004, to treat price minus your adjusted basis and any expen- erty is a capital asset. Gain or loss from its sale the cutting of timber as a sale or exchange un- ses of sale is the gain or loss. is capital gain or loss reported on Form 8949 der section 631(a), you may revoke this election and Schedule D (Form 1040), as applicable. If without the consent of the IRS for any tax year Example. A farmer sold a breeding cow on you held the timber primarily for sale to custom- ending after October 22, 2004. The prior elec- January 8, 2020, for $1,250. Expenses of the ers, it is not a capital asset. Gain or loss on its tion (and revocation) is disregarded for purpo- sale were $125. The cow was bought July 2, sale is ordinary business income or loss. It is re- ses of making a subsequent election. See Form 2016, for $1,300. Depreciation (not less than ported on Schedule F, line 1 (purchased timber) T (Timber), Forest Activities Schedule, for more the amount allowable) was $867. or line 2 (raised timber). See the Instructions for information. Schedule F (Form 1040). Gross sales price ...... $1,250 Gain or loss. Your gain or loss on the cut- ting of standing timber is the difference between Cost (basis) ...... $1,300 Farmers who cut timber on their land and Minus: Depreciation deduction .... 867 its adjusted basis for depletion and its FMV on sell it as logs, firewood, or pulpwood usually the first day of your tax year in which it is cut. Unrecovered cost have no cost or other basis for that timber if no (adjusted basis) ...... $ 433 The FMV becomes your basis in the cut timber, allocation was made at the time of acquisition. Expense of sale ...... 125 558 and a later sale of the cut timber, including any Amounts realized from these sales, and the ex- Gain realized ...... $ 692 by-product or tree tops, will result in ordinary penses incurred in cutting, hauling, etc., are or- business income or loss. dinary farm income and expenses reported on Your adjusted basis for depletion of cut tim- Converted Wetland and Schedule F. ber is based on the number of units (board feet, log scale, or other units) of timber cut during the Highly Erodible Cropland Different rules apply if you owned the timber tax year and considered to be sold or ex- longer than 1 year and elect to treat timber cut- changed. Your adjusted basis for depletion is Special rules apply to dispositions of land con- ting as a sale or exchange or you enter into a also based on the depletion unit of timber in the verted to farming use after March 1, 1986. Any cutting contract, discussed below. gain realized on the disposition of converted account used for the cut timber, and should be figured in the same manner as shown in section wetland or highly erodible cropland is treated as Timber considered cut. Timber is considered 611 and Regulations section 1.611-3. ordinary income. Any loss on the disposition of cut on the date when, in the ordinary course of Depletion of timber is discussed in chap- such property is treated as a long-term capital business, the quantity of felled timber is first ter 7. loss. definitely determined. This is true whether the timber is cut under contract or whether you cut Example. In April 2020, you owned 4,000 Converted wetland. This is generally land that it yourself. MBF (1,000 board feet) of standing timber lon- was drained or filled to make the production of ger than 1 year. It had an adjusted basis for de- agricultural commodities possible. It includes Christmas trees. Evergreen trees, such as pletion of $40 per MBF. You are a calendar year converted wetland held by the person who orig- Christmas trees, that are more than 6 years old taxpayer. On January 1, 2020, the timber had inally converted it or held by any other person when severed from their roots and sold for or- an FMV of $350 per MBF. It was cut in April for who used the converted wetland at any time af- namental purposes are included in the term tim- sale. On your 2020 tax return, you elect to treat ter conversion for farming. ber. They qualify for both rules discussed be- the cutting of the timber as a sale or exchange. low.

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You report the difference between the FMV and right to cut it for sale on your own account or for For more information, see Sale of a Business in your adjusted basis for depletion as a gain. This use in your business. chapter 2 of Pub. 544. amount is reported on Form 4797 along with your other section 1231 gains and losses to fig- Tree stumps. Tree stumps are a capital asset Property used in farm operation. The rules ure whether it is treated as a capital gain or as if they are on land held by an investor who is not for excluding the gain on the sale of your home, ordinary gain. You figure your gain as follows. in the timber or stump business as a buyer, described later under Sale of your home, do not seller, or processor. Gain from the sale of apply to the property used for your farming busi-

FMV of timber January 1, 2020 ...... $1,400,000 stumps sold in one lot by such a holder is taxed ness. Recognized gains and losses on busi- Minus: Adjusted basis for depletion .... 160,000 as a capital gain. However, tree stumps held by ness property must be reported on your return Section 1231 gain...... $1,240,000 timber operators after the saleable standing tim- for the year of the sale. If the property was held ber was cut and removed from the land are con- longer than 1 year, it may qualify for section sidered by-products. Gain from the sale of 1231 treatment (see chapter 9). Outright sales of timber. Outright sales of stumps in lots or tonnage by such operators is timber by landowners qualify for capital gains taxed as ordinary income. Example. You sell your farm, including your treatment using rules similar to the rules for cer- See Form T (Timber) and its separate in- main home, which you have owned since De- tain disposal of timber under a contract with re- structions for more information about disposi- cember 2005. You realize gain on the sale as tained economic interest (defined later). How- tions of timber. follows. ever, for outright sales, the date of disposal is not deemed to be the date the timber is cut be- Farm Farm cause the landowner can elect to treat the pay- Sale of a Farm With Home Without ment date as the date of disposal (see Date of Home Only Home disposal below). The sale of your farm may involve the sale of Selling price .... $382,000 $158,000 $224,000 both nonbusiness property (your home) and Cost (or other Cutting contract. You must treat the disposal business property (the land and buildings used basis) ...... 240,000 110,000 130,000 of standing timber under a cutting contract as a in the farm operation and perhaps machinery Gain ...... $142,000 $48,000 $94,000 section 1231 transaction if all the following ap- and livestock). If any gain from the sale includes ply to you. a gain from the sale of your home, you may be You must report the $94,000 gain from the • You are the owner of the timber. allowed to exclude the gain on your home. For sale of the property used in your farm business. • You held the timber longer than 1 year be- more information, see Pub. 523, Selling Your All or a part of that gain may have to be repor- fore its disposal. Home. ted as ordinary income from the recapture of depreciation or soil and water conservation ex- • You kept an economic interest in the tim- The gain on the sale of your business prop- penses. Treat the balance as section 1231 ber. erty is taxable. A loss on the sale of your busi- gain. ness property to an unrelated person is deduc- You have kept an economic interest in The $48,000 gain from the sale of your ted as an ordinary loss. Your taxable gain or standing timber if, under the cutting contract, home is not taxable if you meet the require- loss on the sale of property used in your farm the expected return on your investment is con- ments explained later under Sale of your home. ditioned on the cutting of the timber. business is taxed under the rules for section The difference between the amount realized 1231 transactions. See chapter 9. Losses from Partial sale. If you sell only part of your farm, from the disposal of the timber and its adjusted personal-use property, other than casualty or you must report any recognized gain or loss on basis for depletion is treated as gain or loss on theft losses, are not deductible. If you receive the sale of that part on your tax return for the its sale. Include this amount on Form 4797 payments for your farm in installments, certain year of the sale. You cannot wait until you have along with your other section 1231 gains or los- gains may be eligible to be taxed over the pe- sold enough of the farm to recover its entire ses. riod of years the payments are received. See cost before reporting gain or loss. For a detailed chapter 10 for information about installment discussion on installment sales, see Pub. 544. Date of disposal. The date of disposal is sales. the date the timber is cut. However, for outright Adjusted basis of the part sold. This is When you sell your farm, the gain or loss on sales by landowners or if you receive payment the properly allocated part of your original cost each asset is figured separately. The tax treat- under the contract before the timber is cut, you or other basis of the entire farm plus or minus ment of gain or loss on the sale of each asset is can elect to treat the date of payment as the necessary adjustments for improvements, de- determined by the classification of the asset. date of disposal. preciation, etc., on the part sold. If your home is Each of the assets sold must be classified as This election applies only to figure the hold- on the farm, you must properly adjust the basis one of the following. ing period of the timber. It has no effect on the to exclude those costs from your farm asset • Capital asset held 1 year or less. time for reporting gain or loss (generally when costs, as discussed below under Sale of your • Capital asset held longer than 1 year. the timber is sold or exchanged). home. To make this election, attach a statement to • Property (including real estate) used in your business and held 1 year or less (in- the tax return filed by the due date (including Example. You bought a 600-acre farm for cluding draft, breeding, dairy, and sporting extensions) for the year payment is received. $700,000. The farm included land and build- animals held less than the holding periods The statement must identify the advance pay- ings. The purchase contract designated discussed earlier under Livestock). ments subject to the election and the contract $600,000 of the purchase price to the land. You • Property (including real estate) used in under which they were made. later sold 60 acres of land on which you had in- your business and held longer than 1 year If you timely filed your return for the year you stalled a fence. Your adjusted basis for the part (including only draft, breeding, dairy, and received payment without making the election, of your farm sold is $60,000 (1/10 of $600,000), sporting animals held for the holding peri- you can still make the election by filing an plus any unrecovered cost (cost not depreci- ods discussed earlier). amended return within 6 months after the due ated) of the fence on the 60 acres at the time of • Property held primarily for sale or which is date for that year's return (excluding exten- sale. Use this amount to determine your gain or of the kind that would be included in inven- sions). Attach the statement to the amended re- loss on the sale of the 60 acres. turn and write “Filed pursuant to section tory if on hand at the end of your tax year. 301.9100-2” at the top of the statement. File the Assessed values for local property Allocation of consideration paid for a farm. amended return at the same address the origi- taxes. If you paid a flat sum for the entire farm The sale of a farm for a lump sum is considered nal return was filed. and no other facts are available for properly al- a sale of each individual asset rather than a sin- locating your original cost or other basis be- Owner. An owner is any person who owns gle asset. If the group of assets sold constitutes tween the land and the buildings, you can use an interest in the timber, including a sublessor a trade or business, the residual method must the assessed values for local property taxes for and the holder of a contract to cut the timber. be used. This method determines gain or loss the year of purchase to allocate the costs. You own an interest in timber if you have the from the transfer of each asset. It also deter- mines the buyer's basis in the business assets.

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Example. Assume that in the preceding ex- Worksheet 8-1. Worksheet for Foreclosures ample there was no breakdown of the $700,000 and Repossessions Keep for Your Records purchase price between land and buildings. However, in the year of purchase, local taxes Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt on the entire property were based on assessed upon foreclosure or repossession. Complete this part only if you were personally valuations of $420,000 for land and $140,000 liable for the debt. Otherwise, go to Part 2. for improvements, or a total of $560,000. The 1. Enter the amount of outstanding debt immediately before the transfer of assessed valuation of the land is 3/4 (75%) of property reduced by any amount for which you remain personally liable after the the total assessed valuation. Multiply the $700,000 total purchase price by 75% to figure transfer of property ...... basis of $525,000 for the 600 acres of land. The 2. Enter the fair market value of the transferred property ...... unadjusted basis of the 60 acres you sold 3. Ordinary income from cancellation of debt upon foreclosure or would then be $52,500 (1/10 of $525,000). repossession.* Subtract line 2 from line 1. If zero or less, enter -0- ......

Sale of your home. Your home is a capital as- Part 2. Figure your gain or loss from foreclosure or repossession. set and not property used in the trade or busi- 4. If you completed Part 1, enter the smaller of line 1 or line 2. If you did not ness of farming. If you sell a farm that includes complete Part 1, enter the outstanding debt immediately before the transfer of a house you and your family occupy, you must property ...... determine the part of the selling price and the 5. Enter any proceeds you received from the foreclosure sale ...... part of the cost or other basis allocable to your home. Your home includes the immediate sur- 6. Add lines 4 and 5 ...... roundings and outbuildings relating to it that are 7. Enter the adjusted basis of the transferred property ...... not used for business purposes. 8. Gain or loss from foreclosure or repossession. Subtract line 7 If you use part of your home for business, from line 6 ...... you must make an appropriate adjustment to the basis for depreciation allowed or allowable. * For more information on basis, see chapter 6. The income may not be taxable. See Cancellation of debt. the amount realized even if the fair market value liable for the loan (recourse debt). In this case, More information. For more information of the property is less than the canceled debt. the amount she realizes is $170,000. This is the on selling your home, see Pub. 523. canceled debt ($180,000) up to the FMV of the Gain from condemnation. If you have a Example 1. Ann paid $200,000 for land land ($170,000). Ann figures her gain or loss on gain from a condemnation or sale of your home used in her farming business. She paid $15,000 the foreclosure by comparing the amount real- under threat of condemnation, you may use the down and borrowed the remaining $185,000 ized ($170,000) with her adjusted basis preceding rules for excluding the gain, rather from a bank. Ann is not personally liable for the ($200,000). She has a $30,000 deductible loss, than the rules discussed under Postponing loan (nonrecourse debt), but pledges the land which she figures on Form 4797, Part I. She is Gain in chapter 11. However, any gain that can- as security. The bank foreclosed on the loan 2 also treated as receiving ordinary income from not be excluded (because it is more than the years after Ann stopped making payments. cancellation of debt. That income is $10,000 limit) may be postponed under the rules dis- When the bank foreclosed, the balance due on ($180,000 − $170,000). This is the part of the cussed under Postponing Gain in chapter 11. the loan was $180,000 and the FMV of the land canceled debt not included in the amount real- was $170,000. The amount Ann realized on the ized. She reports this as other income on foreclosure was $180,000, the debt canceled Schedule F, line 8. Foreclosure or by the foreclosure. She figures her gain or loss Repossession on Form 4797, Part I, by comparing the amount Seller's (lender's) gain or loss on reposses- realized ($180,000) with her adjusted basis sion. If you finance a buyer's purchase of your If you do not make payments you owe on a loan ($200,000). She has a $20,000 deductible loss. property in an installment sale and later acquire secured by property, the lender may foreclose an interest in it through foreclosure or reposses- on the loan or repossess the property. The fore- Example 2. Assume the same facts as in sion, you may have a gain or loss on the acquis- closure or repossession is treated as a sale or Example 1 except the FMV of the land was ition. For more information, see Repossession exchange from which you may realize gain or $210,000. The result is the same. The amount in Pub. 537, Installment Sales. loss. This is true even if you voluntarily return Ann realized on the foreclosure is $180,000, the the property to the lender. You may also realize debt canceled by the foreclosure. Because her Cancellation of debt. If property that is repos- ordinary income from cancellation of debt if the adjusted basis is $200,000, she has a deducti- sessed or foreclosed upon secures a debt for loan balance is more than the FMV of the prop- ble loss of $20,000, which she reports on Form which you are personally liable (recourse debt), erty. 4797, Part I. you generally must report as ordinary income the amount by which the canceled debt is more Buyer's (borrower's) gain or loss. You figure Amount realized on a recourse debt. If than the FMV of the property. This income is and report gain or loss from a foreclosure or re- you are personally liable for the debt (recourse separate from any gain or loss realized from the possession in the same way as gain or loss debt), the amount realized on the foreclosure or foreclosure or repossession. Report the income from a sale or exchange. The gain or loss is the repossession includes the lesser of: from cancellation of a business debt on Sched- difference between your adjusted basis in the • The outstanding debt immediately before ule F, line 8. Report the income from cancella- transferred property and the amount realized. the transfer reduced by any amount for tion of a nonbusiness debt as miscellaneous in- See Determining Gain or Loss, earlier. which you remain personally liable immedi- come on Form 1040 or Form 1040-SR. ately after the transfer, or You can use Worksheet 8-1 to figure • The fair market value of the transferred You can use Worksheet 8-1 to figure TIP your gain or loss from a foreclosure or property. your income from cancellation of debt. repossession. You are treated as receiving ordinary in- However, income from cancellation of debt Amount realized on a nonrecourse debt. come from the canceled debt for the part of the debt that is more than the fair market value. The is not taxed in certain situations. See Cancella- If you are not personally liable for repaying the tion of Debt in chapter 3. debt (nonrecourse debt) secured by the trans- amount realized does not include the canceled ferred property, the amount you realize includes debt that is your income from cancellation of the full amount of the debt canceled by the debt. See Cancellation of debt, later. Abandonment transfer. The full canceled debt is included in Example 3. Assume the same facts as in The abandonment of property is a disposition of Example 1 above except Ann is personally property. You abandon property when you

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voluntarily and permanently give up possession Table 9-1. Where To First Report Certain Items on Form 4797 and use of the property with the intention of ending your ownership, but without passing it Held 1 year Held more than on to anyone else. Type of property or less 1 year 1 Depreciable trade or business property: Business or investment property. Loss from a Sold or exchanged at a gain ...... Part II Part III (1245, 1250) abandonment of business or investment prop- b Sold or exchanged at a loss ...... Part II Part I erty is deductible as a loss. Loss from abandon- 2 Farmland held less than 10 years for which soil, or water ment of business or investment property that is expenses were deducted: not treated as a sale or exchange is generally a Sold at a gain ...... Part II Part III (1252) an ordinary loss. If your adjusted basis is more b Sold at a loss ...... Part II Part I than the amount you realize (if any), then you 3 All other farmland used in a trade or business Part II Part I have a loss. If the amount you realize (if any) is more than your adjusted basis, then you have a 4 Disposition of cost-sharing payment property described in Part II Part III (1255) gain. This rule also applies to leasehold im- section 126 provements the lessor made for the lessee. 5 Cattle and horses used in a trade or business for draft, Held less Held 24 mos. However, if the property is foreclosed on or re- breeding, dairy, or sporting purposes: than 24 mos. or more possessed in lieu of abandonment, gain or loss a Sold at a gain ...... Part II Part III (1245) is figured as discussed earlier under Foreclo- b Sold at a loss ...... Part II Part I sure or Repossession. c Raised cattle and horses sold at a gain ...... Part II Part I If the abandoned property is secured by debt, special rules apply. The tax consequen- 6 Livestock other than cattle and horses used in a trade or Held less Held 12 mos. ces of abandonment of property that secures a business for draft, breeding, dairy, or sporting purposes: than 12 mos. or more debt depend on whether you are personally lia- a Sold at a gain ...... Part II Part III (1245) ble for the debt (recourse debt) or were not per- b Sold at a loss ...... Part II Part I sonally liable for the debt (nonrecourse debt). c Raised livestock sold at a gain ...... Part II Part I For more information, see chapter 3 of Pub. 7 Real or tangible trade or business property which was Held 1 year Held more than 4681, Canceled Debts, Foreclosures, Repos- deducted under the de minimis safe harbor or less 1 year sessions, and Abandonments (for Individuals). Part II Part II The abandonment loss is deducted in the tax year in which the loss is sustained. Report Topics the loss on Form 4797, Part II, line 10. This chapter discusses: 9. Personal-use property. You cannot deduct • Section 1231 gains and losses any loss from abandonment of your home or • Depreciation recapture other property held for personal use. Dispositions of • Other gains Canceled debt. If the abandoned property se- Useful Items cures a debt for which you are personally liable You may want to see: and the debt is canceled, you may realize ordi- Property Used nary income equal to the canceled debt. This income is separate from any loss realized from in Farming Publication abandonment of the property. Report income 544 544 Sales and Other Dispositions from cancellation of a debt related to a business of Assets or rental activity as business or rental income. Report income from cancellation of a nonbusi- Introduction Form (and Instructions) ness debt as miscellaneous income on Form

4797 4797 Sales of Business Property 1040 or Form 1040-SR. When you dispose of property used in your farm However, income from cancellation of debt business, your taxable gain or loss is usually See chapter 16 for information about getting is not taxed in certain circumstances. See Can- treated as ordinary income or capital gain (un- publications and forms. cellation of debt, earlier, under Foreclosure or der the rules for section 1231 transactions). Or- Repossession. dinary income is taxed at the same rate as wa- ges and interest. Capital gain is generally taxed Section 1231 Forms 1099-A and 1099-C. A lender who ac- at lower rates. quires an interest in your property in a foreclo- When you dispose of depreciable property Gains and Losses sure, repossession, or abandonment should (section 1245 property or section 1250 prop- send you Form 1099-A showing the information erty) at a gain, you may have to recognize all or Section 1231 gains and losses are the taxable you need to figure your loss from the foreclo- part of the gain as ordinary income under the gains and losses from section 1231 transac- sure, repossession, or abandonment. However, depreciation recapture rules. Any gain remain- tions (explained below). Their treatment as ordi- if the lender cancels part of your debt and the ing after applying the depreciation recapture nary or capital gains depends on whether you lender must file Form 1099-C, the lender may rules is a section 1231 gain, which may be have a net gain or a net loss from all of your include the information about the foreclosure, taxed as a capital gain. Similar rules apply to section 1231 transactions in the tax year. the sale of property on which soil and water repossession, or abandonment on that form in- If you have a gain from a section 1231 conservation expenses have been deducted or stead of Form 1099-A. The lender must file transaction, first determine whether Form 1099-C and send you a copy if the can- government cost-sharing payments have been ! CAUTION any of the gain is ordinary income un- received. celed debt is $600 or more and the lender is a der the depreciation (or other) recapture rules Gains and losses from property used in financial institution, credit union, federal govern- explained later. Do not take that gain into ac- farming are reported on Form 4797, Sales of ment agency, or any organization that has a sig- count as section 1231 gain. nificant trade or business of lending money. For Business Property. Table 9-1 contains exam- foreclosures, repossessions, abandonments of ples of items reported on Form 4797 and refers property, and debt cancellations occurring in to the part of that form on which they first should Section 1231 transactions. Section 1231 2020, these forms should be sent to you by be reported. transactions are sales and exchanges of real or February 1, 2021. depreciable property held longer than 1 year and used in a trade or business. Gain or loss on

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the following transactions is subject to section losses are more than your casualty or theft Bradley uses this information to figure how 1231 treatment. gains, the net casualty or theft loss is fully to report his net section 1231 gain for 2020 as • Sale or exchange of cattle and horses. deductible and is not combined with other shown below. The cattle and horses must be held for section 1231 transactions in the section draft, breeding, dairy, or sporting purposes 1231 computation. Section 1231 does not 1) Net section 1231 gain (2020) ..... $20,000 and held for 24 months or longer. apply to personal casualty gains and los- 2) Net section 1231 loss Sale or exchange of other livestock. ses. See chapter 11 for information on how • (2017) ...... ($25,000) This livestock must be held for draft, to treat those gains and losses. 3) Net section 1231 gain breeding, dairy, or sporting purposes and If the property is not held for the re- (2019) ...... $18,000 held for 12 months or longer. Other live- quired holding period, the transaction 4) Remaining net section stock include hogs, mules, sheep, goats, ! CAUTION is not subject to section 1231 treat- 1231 loss from donkeys, and other fur-bearing animals. ment, and any gain or loss is ordinary income prior 5 years ...... ($7,000) Other livestock does not include poultry. reported in Part II of Form 4797. See Table 9-1. 5) Gain treated as Sale or exchange of depreciable real • ordinary income ...... $7,000 property or personal property. This 6) Gain treated as long-term property must be used in your business Property held for sale to customers. A sale, capital gain ...... $13,000 and held longer than 1 year. Generally, exchange, or involuntary conversion of property property held for the production of rents or held mainly for sale to customers is not a sec- His remaining net section 1231 loss from royalties is considered to be used in a tion 1231 transaction. If you will get back all, or 2017 is completely recaptured in 2020. trade or business. This property must also nearly all, of your investment in the property by be either real property or is of a kind that is selling it rather than by using it up in your busi- subject to depreciation under section 167 ness, it is property held mainly for sale to cus- Depreciation Recapture of the Internal Revenue Code. Examples of tomers. depreciable personal property include farm If you dispose of depreciable or amortizable machinery and trucks. It also includes am- Property deducted under the de minimis property at a gain, you may have to treat all or ortizable section 197 intangibles. safe harbor for tangible property. If you de- part of the gain (even if it is otherwise nontaxa- • Sale or exchange of real estate. This ducted the cost of a property under the de mini- ble) as ordinary income. property must be used in your business mis safe harbor for tangible property, then upon and held longer than 1 year. Examples are its sale or disposition, this property is not trea- To figure any gain that must be repor- your farm or ranch (including barns and ted as a capital asset or as property used in the ted as ordinary income, you must keep sheds). trade or business under section 1231. Gener- RECORDS permanent records of the facts neces- • Sale or exchange of unharvested ally, any gain on the disposition of this property sary to figure the depreciation or amortization crops. The crop and land must be sold, is treated as ordinary income reported on Part II allowed or allowable on your property. For more exchanged, or involuntarily converted at of Form 4797. information on depreciation recapture, see the same time and to the same person, chapter 3 of Pub. 544. Also see Pub. 946. and the land must have been held longer Treatment as ordinary or capital. To deter- than 1 year. You cannot keep any right or mine the treatment of section 1231 gains and option to reacquire the land directly or indi- losses, combine all of your section 1231 gains Section 1245 Property rectly (other than a right customarily inci- and losses for the year. dent to a mortgage or other security trans- • If you have a net section 1231 loss, it is an A gain on the disposition of section 1245 prop- action). Growing crops sold with a ordinary loss. erty is treated as ordinary income to the extent leasehold on the land, even if sold to the • If you have a net section 1231 gain, it is or- of depreciation allowed or allowable. Any rec- same person in a single transaction, are dinary income up to your nonrecaptured ognized gain that is more than the part that is not considered a section 1231 transaction. section 1231 losses from previous years, ordinary income is a section 1231 gain. See • Distributive share of partnership gains explained next. The rest, if any, is Treatment as ordinary or capital under Section and losses. Your distributive share must long-term capital gain. 1231 Gains and Losses, earlier. Also see chap- ter 3 of Pub. 544. be from the sale or exchange of property Nonrecaptured section 1231 losses. listed above and held by the partnership Your nonrecaptured section 1231 losses are for longer than 1 year (or for the required Section 1245 property includes any property your net section 1231 losses for the previous 5 that is or has been subject to an allowance for period for certain livestock). You will re- years that have not been applied against a net ceive Schedule K-1 (Form 1065) showing depreciation or amortization and that is any of section 1231 gain. Therefore, if in any of your 5 the following types of property. the appropriate classification of any gains preceding tax years you had section 1231 los- or losses distributed to you. ses, a net gain for the current year from the sale 1. Personal property (either tangible or intan- • Cutting or disposal of timber. Special of section 1231 assets is ordinary gain to the gible). rules apply if you owned the timber longer extent of your prior losses. These losses are 2. Other tangible property (except buildings than 1 year and elect to treat timber cutting applied against your net section 1231 gain be- as a sale or exchange, or you enter into a and their structural components) used as ginning with the earliest loss in the 5-year pe- any of the following. See Buildings and cutting contract, as described in chapter 8 riod. under Timber. structural components below. • Condemnation. The condemned property Example. In 2020, Bradley has a $20,000 a. An integral part of manufacturing, pro- (defined in chapter 11) must have been net section 1231 gain. To figure how much he duction, or extraction, or of furnishing held longer than 1 year. It must be busi- has to report as ordinary income and long-term certain services. ness property or a capital asset held in capital gain, he must first determine his section connection with a trade or business or a b. A research facility in any of the activi- 1231 gains and losses from the previous 5-year ties in (a). transaction entered into for profit, such as period. From 2015 through 2019 he had the fol- investment property. It cannot be property lowing section 1231 gains and losses. c. A facility in any of the activities in (a) held for personal use. above, for the bulk storage of fungible • Casualty or theft. The casualty or theft commodities (discussed later). must have affected business property, Year Amount 2015 -0- 3. Where applicable, that part of real prop- property held for the production of rents or 2016 -0- royalties, or investment property (such as erty (not included in (2)) with an adjusted 2017 ($25,000) basis reduced by (but not limited to) the notes and bonds). You must have held the 2018 -0- following. property longer than the required holding 2019 $18,000 period. However, if your casualty or theft

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a. Amortization of certified pollution con- Use Part III of Form 4797 to figure the ordi- lowed or allowable when figuring the part of trol facilities. nary income part of the gain. gain to report as ordinary income. If, in prior years, you have consistently taken proper de- b. The section 179 expense deduction. Depreciation claimed on other property or ductions under one method, the amount al- c. Deduction for clean-fuel vehicles and claimed by other taxpayers. Depreciation lowed for your prior years will not be increased certain refueling property. and amortization include the amounts you even though a greater amount would have been claimed on the section 1245 property as well as allowed under another proper method. If you d. Expenditures to remove architectural the following depreciation and amortization did not take any deductions in prior years for and transportation barriers to the amounts. depreciation, your adjustments to basis for de- handicapped and elderly. • Amounts you claimed on property you ex- preciation allowable are figured by using the e. Certain reforestation expenditures (as changed for, or converted to, your section straight line method. This treatment applies only described under Reforestation Costs 1245 property in a like-kind exchange or when figuring what part of the gain is treated as in chapter 7). involuntary conversion. For details on ex- ordinary income under the rules for section changes of property that are not taxable, 1245 depreciation recapture. For more informa- 4. Single-purpose agricultural (livestock) or see Like-Kind Exchanges in chapter 8. tion on depreciation allowed or allowable, see horticultural structures. • Amounts a previous owner of the section chapter 7. For information on adjustments to 5. Storage facilities (except buildings and 1245 property claimed if your basis is de- basis for depreciation allowed or allowable, see their structural components) used in dis- termined with reference to that person's chapter 6. tributing petroleum or any primary product adjusted basis (for example, the donor's of petroleum. depreciation deductions on property you Disposition of plants. If you elect not to use received as a gift). the uniform capitalization rules (see chapter 6), Buildings and structural components. Sec- you must treat any plant that would have been tion 1245 property does not include buildings Depreciation and amortization. Depreciation subject to the uniform capitalization rules as and structural components. The term “building” and amortization deductions that must be re- section 1245 property. If you have a gain on the includes a house, barn, warehouse, or garage. captured as ordinary income include (but are property's disposition, you must recapture the The term “structural component” includes walls, not limited to) the following items. See Depreci- pre-productive expenses you would have capi- floors, windows, doors, central air conditioning ation Recapture in chapter 3 of Pub. 544 for talized if you had not made the election by treat- systems, light fixtures, etc. more details. ing the gain, up to the amount of these expen- Do not treat a structure that is essentially 1. Ordinary depreciation deductions. ses, as ordinary income. For section 1231 machinery or equipment as a building or struc- transactions, show these expenses as depreci- tural component. Also, do not treat a structure 2. Section 179 deduction (see chapter 7). ation on Form 4797, Part III, line 22. For plant that houses property used as an integral part of 3. Any special depreciation allowance. sales that are reported on Schedule F (Form an activity as a building or structural component 1040), Profit or Loss From Farming, this recap- if the structure's use is so closely related to the 4. Amortization deductions for all the follow- ture rule does not change the reporting of in- property's use that the structure can be expec- ing costs. come because the gain is already ordinary in- ted to be replaced when the property it initially a. Acquiring a lease. come. You can use the farm-price method houses is replaced. discussed in chapter 2 to figure these expen- b. Lessee improvements. The fact that the structure is specially de- ses. signed to withstand the stress and other de- c. Pollution control facilities. mands of the property and cannot be used eco- Example. Debbie sold her apple orchard in d. Reforestation expenses. nomically for other purposes indicates it is 2020 for $80,000. Her adjusted basis at the closely related to the use of the property it e. Section 197 intangibles. time of sale was $60,000. She bought the or- chard in 2013, but the trees did not produce a houses. Structures such as oil and gas storage f. Qualified disaster expenses. tanks, grain storage bins, and silos are not trea- crop until 2016. Her pre-productive expenses ted as buildings, but as section 1245 property. g. Franchises, trademarks, and trade were $6,000. She elected not to use the uniform names acquired before August 11, capitalization rules. Debbie must treat $6,000 of Facility for bulk storage of fungible com- 1993. the gain as ordinary income in addition to re- modities. This is a facility used mainly for the capturing depreciation allowed or allowable on bulk storage of fungible commodities. Bulk stor- Example. You file your returns on a calen- the orchard. This amount would be reported on age means storage of a commodity in a large dar year basis. In February 2018, you bought Form 4797, Part III, as ordinary income. mass before it is used. For example, if a facility and placed in service for 100% use in your is used to store oranges that have been sorted farming business a light-duty truck (5-year prop- Section 1250 Property and boxed, it is not used for bulk storage. To be erty) that cost $30,000. You used the half-year fungible, a commodity must be such that one convention and your MACRS deductions for the Section 1250 property includes all real property part may be used in place of another. truck were $4,500 in 2018 and $7,650 in 2019. You did not claim the section 179 expense de- subject to an allowance for depreciation that is not and never has been section 1245 property. Gain Treated as Ordinary Income duction for the truck. You sold it in May 2020 for $21,000. The MACRS deduction in 2020, the It includes buildings and structural components 1 that are not section 1245 property (discussed The gain treated as ordinary income on the year of sale, is $2,678 ( /2 of $5,355). Figure the gain treated as ordinary income as follows. earlier). It includes a leasehold of land or sec- sale, exchange, or involuntary conversion of tion 1250 property subject to an allowance for section 1245 property, including a sale and depreciation. A fee simple interest in land is not leaseback transaction, is the lesser of the fol- 1) Amount realized ...... $21,000 section 1250 property because, like land, it is lowing amounts. 2) Cost (February 2017) ...... $30,000 3) Depreciation allowed or not depreciable. 1. The depreciation (which includes any sec- allowable (MACRS deductions: tion 179 deduction claimed) and amortiza- $4,500 + $7,650 + $2,678) ... 14,828 Gain on the disposition of section 1250 tion allowed or allowable on the property. 4) Adjusted basis (subtract line 3 property is treated as ordinary income to the ex- from line 2) ...... $15,172 tent of additional depreciation allowed or allow- 2. The gain realized on the disposition (the 5) Gain realized (subtract line 4 able. To determine the additional depreciation amount realized from the disposition mi- from line 1) ...... 5,828 on section 1250 property, see Depreciation Re- nus the adjusted basis of the property). 6) Gain treated as ordinary income capture in chapter 3 of Pub. 544. (lesser of line 3 or line 5) ...... $5,828 See chapter 3 of Pub. 544 for more information Use Part III of Form 4797 to figure the ordi- on dispositions of section 1245 property. Depreciation allowed or allowable. You nary income part of the gain. generally use the greater of the depreciation al-

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You will not have additional depreciation if deductions for soil and water conservation ex- Applicable percentage. The applicable any of the following apply to the property dis- penses for the land, as discussed in chapter 5, percentage of the excluded cost-sharing pay- posed of. you must treat part of the gain as ordinary in- ments to be reported as ordinary income is • You figured depreciation for the property come and treat the balance as section 1231 based on the length of time you hold the prop- using the straight line method or any other gain. erty after receiving the payments. If the property method that does not result in depreciation is held less than 10 years after you receive the that is more than the amount figured by the Exceptions. Do not treat gain on the fol- payments, the percentage is 100%. After 10 straight line method and you have held the lowing transactions as gain on section 1252 years, the percentage is reduced by 10% a property longer than 1 year. property. year, or part of a year, until the rate is 0%. • You chose the alternate ACRS (straight • Disposition of farmland by gift. line) method for the property, which was a • Transfer of farm property at death (except Form 4797, Part III. Use Form 4797, Part III, type of 15-, 18-, or 19-year real property for income in respect of a decedent). to figure the ordinary income part of a gain from covered by the section 1250 rules. For more information, see Regulations section the sale, exchange, or involuntary conversion of • The property was nonresidential real prop- 1.1252-2. section 1252 property and section 1255 prop- erty placed in service after 1986 (or after erty. July 31, 1986, if the choice to use MACRS Amount to report as ordinary income. was made) and you held it longer than 1 You report as ordinary income the lesser of the year. These properties are depreciated us- following amounts. ing the straight line method. • Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary con- Installment Sale version, or the FMV for all other disposi- tions). 10. If you report the sale of property under the in- • The total deductions allowed for soil and stallment method, any depreciation recapture water conservation expenses multiplied by under section 1245 or 1250 is taxable as ordi- the applicable percentage, discussed next. Installment nary income in the year of sale. This applies even if no payments are received in that year. If Applicable percentage. The applicable the gain is more than the depreciation recapture percentage is based on the length of time you Sales income, report the rest of the gain using the held the land. If you dispose of your farmland rules of the installment method. For this pur- within 5 years after the date you acquired it, the pose, include the recapture income in your in- percentage is 100%. If you dispose of the land stallment sale basis to determine your gross within the 6th through 9th year after you ac- Introduction profit on the installment sale. quired it, the applicable percentage is reduced by 20% a year for each year or part of a year An installment sale is a sale of property where you receive at least one payment after the tax If you dispose of more than one asset in a you hold the land after the 5th year. If you dis- year of the sale. If you realize a gain on an in- single transaction, you must separately figure pose of the land 10 or more years after you ac- stallment sale, you may be able to report part of the gain on each asset so that it may be prop- quired it, the percentage is 0%, and the entire your gain when you receive each payment. This erly reported. To do this, allocate the selling gain is a section 1231 gain. method of reporting gain is called the install- price and the payments you receive in the year ment method. You can’t use the installment of sale to each asset. Report any depreciation Example. You acquired farmland on Janu- method to report a loss. You can choose to re- recapture income in the year of sale before us- ary 19, 2012. You incurred $15,000 of soil and port all of your gain in the year of sale. ing the installment method for any remaining water conservation expenditures for the land gain. that were fully deductible. On October 5, 2020, you sold the land at a $30,000 gain. The appli- Installment obligation. The buyer’s obligation For more information on installment sales, cable percentage is 40% since you sold the to make future payments to you can be in the see chapter 10. land within the 8th year after you acquired it. form of a deed of trust, note, land contract, You treat $6,000 (40% of $15,000) of the mortgage, or other evidence of the buyer’s debt to you. Other Dispositions $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. Topics Chapter 3 of Pub. 544 discusses the tax treat- Section 1255 property. If you receive certain This chapter discusses: ment of the following transfers of depreciable cost-sharing payments on property and you ex- property. clude those payments from income (as dis- By gift. • The general rules that apply to using the • cussed in chapter 3), you may have to treat part • At death. installment method. of any gain as ordinary income and treat the • Installment sale of a farm. • In like-kind exchanges. balance as a section 1231 gain. If you chose • In involuntary conversions. not to exclude these payments, you will not Pub. 544 also explains how to handle a single have to recognize ordinary income under this Useful Items You may want to see: transaction involving multiple properties. provision.

Amount to report as ordinary income. Publication Other Gains You report as ordinary income the lesser of the following amounts. 523 523 Selling Your Home • The applicable percentage of the total ex- This section discusses gain on the disposition cluded cost-sharing payments. 535 535 Business Expenses of farmland for which you were allowed either of • The gain on the disposition of the property. the following. 537 537 Installment Sales • Deductions for soil and water conservation You do not report ordinary income under this

538 538 Accounting Periods and Methods expenditures (section 1252 property). rule to the extent the gain is recognized as ordi- Exclusions from income for certain cost nary income under sections 1231 through 1254, • 544 544 Sales and Other Dispositions of 1256, and 1257. However, if applicable, gain re- sharing payments (section 1255 property). Assets ported under this rule must be reported regard- Section 1252 property. If you disposed of less of any contrary provisions (including nonre- Form (and Instructions) farmland you held more than 1 year and less cognition provisions) under any other section.

than 10 years at a gain and you were allowed 4797 4797 Sales of Business Property

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6252 6252 Installment Sale Income Electing out of the installment method. If More information. See Inventory under you elect not to use the installment method, you Sale of a Business in Pub. 537 for more infor- 8594 8594 Asset Acquisition Statement Under Section 1060 generally report the entire gain in the year of mation. sale, even though you don’t receive all the sale

8949 8949 Sales and Other Dispositions of proceeds in that year. Sale at a loss. If your sale results in a loss, Capital Assets To make this election, don’t report your sale you can’t use the installment method. If the loss See chapter 16 for information about getting on Form 6252. Instead, report it on Schedule F is on an installment sale of business assets, you publications and forms. (Form 1040), Schedule D (Form 1040), Form can deduct it only in the tax year of sale. 4797, or all three. You may also need to file Form 8949, Sales Figuring Installment Installment Sale and Other Dispositions of Capital Assets, along with Schedule D (Form 1040), Capital Gains Sale Income and Losses. For more information, see Form of a Farm Each payment on an installment sale usually 8949, and its instructions. consists of the following three parts. The installment sale of a farm for one overall When to elect out. Make this election by • Interest income. price under a single contract isn’t the sale of a the due date, including extensions, for filing • Return of your adjusted basis in the prop- single asset. It generally includes the sale of your tax return for the year the sale takes place. erty. real property and personal property reportable However, if you timely file your tax return for • Gain on the sale. on the installment method. It may also include the year the sale takes place without making the the sale of property for which you must maintain In each year you receive a payment, you must election, you can still make the election by filing an inventory, which can’t be reported on the in- include in income both the interest part and the an amended return within 6 months of the due stallment method. See Inventory, later. The sell- part that is your gain on the sale. Don’t include date of the return (excluding extensions). Write ing price must be allocated to determine the in income the part that is the return of your basis “Filed pursuant to section 301.9100-2” at the amount received for each class of asset. in the property. Basis is the amount of your in- top of the amended return. File the amended re- vestment in the property for installment sale Note. You may be required to report the turn at the same address you filed the original purposes. sale of your farm on Form 8594, Asset Acquisi- return. If you electronically filed your 2019 Form tion Statement. For more information, see Form 1040 or 1040-SR, you may electronically file the Interest income. You must report interest as 8594 and its instructions. Form 1040-X. ordinary income. Interest generally isn’t inclu- Revoking the election. Once made, the ded in a down payment. However, you may The tax treatment of the gain or loss on the have to treat part of each later payment as inter- sale of each class of asset is determined by its election can be revoked only with IRS approval. An approved revocation is retroactive. est, even if it isn’t called interest in your agree- classification as a capital asset, as property ment with the buyer. Interest provided in the used in the business, or as property held for The taxpayer can’t revoke the election if ei- ther of the following applies. agreement is called stated interest. If the agree- sale and by the length of time the asset was ment doesn’t provide for enough stated interest, held. (See chapter 8 for a discussion of capital • One of the purposes is to avoid federal in- come tax. there may be unstated interest or original issue assets and chapter 9 for a discussion of prop- discount. See Unstated interest, later. erty used in the business.) Separate computa- • The tax year in which any payment was re- tions must be made to figure the gain or loss for ceived has closed. You must continue to report the interest each class of asset sold. See Sale of a Farm in To revoke the election, you must obtain a income on payments you receive in chapter 8. private letter ruling from the IRS. The proce- subsequent years as interest income whether it’s stated or unstated. If you report the sale of property on the dures and user fees for obtaining a private letter installment method, any depreciation ruling are published annually in the first revenue ! procedure issued each calendar year. For CAUTION recapture under section 1245 or 1250 Adjusted basis and installment sale income is generally taxable as ordinary income in the 2020, go to IRS.gov/irb/ (gain on sale). After you have determined year of sale. See Depreciation recapture, later. 2020-01_IRB#RP-2020-01. how much of each payment to treat as interest, This applies even if no payments are received Send your request for a private letter ruling, you treat the rest of each payment as if it were in that year. including the applicable user fee, to the IRS fol- made up of two parts. lowing the instructions in section 7 of Rev. Proc. • A tax-free return of your adjusted basis in 2020-1. A schedule of the current user fees is the property, and Related parties. If you sell property to a rela- available in Appendix A. • Your gain (referred to as “installment sale ted party, you may not be able to report the sale income” on Form 6252). using the installment method. Generally, mem- Inventory. If you aren’t required to maintain bers of a family aren’t related parties for purpo- (keep a record of beginning and ending) inven- Figuring adjusted basis and gross profit ses of the installment method. For more infor- tories under your method of accounting, you percentage for installment sale purposes. mation, see Related Person under Sale to a can report gain from the sale of farm inventory You can use Worksheet 10-1 to figure your ad- Related Person in Pub. 537. using the installment method. Complete Form justed basis in the property for installment sale 6252 to figure the amount of installment gain to purposes. When you have completed the work- report each year from the sale of farm inventory sheet, you will also have determined the gross Installment Method and carry that amount to line 8 of Schedule F profit percentage necessary to figure your in- (Form 1040). stallment sale income (gain) for this year. An installment sale is a sale of property where If you are required to maintain inventories 1. Selling price. The selling price is the total you receive at least one payment after the tax under your method of accounting, you can’t re- cost of the property to the buyer and in- year of the sale. A farmer who isn’t required to port gain from the sale of farm inventory using cludes the following. maintain an inventory can use the installment the installment method. All gain or loss on the • Any money you’re to receive. method to report gain from the sale of property sale of farm inventory must be reported in the • The fair market value (FMV) of any used or produced in farming. See Inventory, year of sale, even if you receive payment in property you’re to receive (FMV is later, for information on the sale of farm prop- later years. If inventory items are included in an discussed under Property used as a erty where inventory items are included in the installment sale, you may have an agreement payment, later). assets sold. stating which payments are for inventory and • Any existing mortgage or other debt which are for the other assets being sold. If you If a sale qualifies as an installment sale, the the buyer pays, assumes, or takes don’t, each payment must be allocated between gain must be reported under the installment the property subject to (a note, mort- the inventory and the other assets sold. method unless you elect out of using the gage, or any other liability, such as a installment method.

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lien, accrued interest, or taxes you Worksheet 10-1. Figuring Adjusted Basis and Gross Profit Percentage owe on the property). • Any of your selling expenses the buyer pays. Don’t include stated interest, unstated Keep for Your Records interest, any amount recomputed or re- characterized as interest, or original issue 1. Enter the selling price for the property ...... discount in the selling price. 2. Enter your adjusted basis for the property ...... 2. Adjusted basis. Your adjusted basis in 3. Enter your selling expenses ...... property immediately before the install- ment sale is your original basis increased 4. Enter any depreciation recapture ...... or reduced as a result of various events 5. Add lines 2, 3, and 4. while you own the property. • Some events, such as adding rooms This is your adjusted basis or making permanent improvements, for installment sale purposes ...... increase basis. Others, such as de- 6. Subtract line 5 from line 1. If zero or less, enter -0-. ductible casualty losses or deprecia- tion previously allowed or allowable, This is your gross profit ...... decrease basis. If the amount entered on line 6 is zero, stop here. You can’t use • The way you figure your original basis the installment method. depends on how you acquire the property. The basis of property you 7. Enter the contract price for the property ...... buy is generally its cost. The basis of 8. Divide line 6 by line 7. This is your gross property you inherit, receive as a gift, profit percentage ...... build yourself, or receive in a tax-free exchange is figured differently. See chapter 6 and Pub. 551, Basis of As- Worksheet 10-2. New Gross Profit Percentage — Selling Price Reduced sets, for more information. • Generally, your adjusted basis in raised farm products, such as grain or Keep for Your Records market livestock, is zero. 3. Selling expenses. Selling expenses re- 1. Enter the reduced selling late to the sale of the property. Review the price for the property ...... closing statement for fees which may qual- 2. Enter your adjusted ify as selling expenses. These may in- clude appraisal fees, attorney fees, clos- basis for the ing fees, document preparation fees, property ...... escrow fees, mortgage satisfaction fees, 3. Enter your selling notary fees, points paid by seller to obtain expenses ...... financing for the buyer, real estate broker’s commission, recording fees (if paid by the 4. Enter any depreciation seller), costs of removing title clouds, set- recapture ...... tlement fees, title search fees, and transfer 5. Add lines 2, 3, and 4 ...... or stamp taxes charged by city, county, or state governments. 6. Subtract line 5 from line 1. 4. Depreciation recapture. If the property This is your adjusted you sold was depreciable property: gross profit ...... • You may need to recapture part of the 7. Enter any installment sale gain on the sale as ordinary income. • See Depreciation Recapture in chap- income reported in ter 9 and Depreciation Recapture In- prior year(s) ...... come in Pub. 537. 8. Subtract line 7 from line 6 ...... 5. Adjusted basis for installment sale 9. Future installments ...... purposes. Your adjusted basis for install- ment sale purposes is the total of the fol- 10. Divide line 8 by line 9. lowing three items. This is your new • Adjusted basis. gross profit percentage* ...... • Selling expenses. • Depreciation recapture. * Apply this percentage to all future payments to determine how much of each of those payments is installment sale 6. Gross profit. Gross profit is the total gain income. you report on the installment method. • To figure your gross profit, subtract • The amount of any mortgages, debts, ing interest) is reported as installment sale your adjusted basis for installment and other liabilities assumed or taken income. This percentage is called the sale purposes from the selling price. by the buyer, plus gross profit percentage and is figured by • If the property you sold was your • The amount, if any, by which the dividing your gross profit from the sale by home, subtract from the gross profit mortgages, debts, and other liabilities the contract price. any gain you can exclude. See Pub. assumed or taken by the buyer ex- • The gross profit percentage generally 523, Selling Your Home, for more in- ceed your adjusted basis for install- remains the same for each payment formation. ment sale purposes. you receive. However, see Example under Selling price reduced, later, for 7. Contract price. Contract price equals: 8. Gross profit percentage. A certain per- • The selling price, minus centage of each payment (after subtract-

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a situation where the gross profit per- dent’s return due to the transfer. Whoever re- centage changes. Example — New Gross Profit ceives the installment obligation as a result of Worksheet 10-2. Percentage — Sell- the seller’s death is taxed on the installment ing Price Reduced payments the same as the seller would’ve been Example. You sell property at a contract had the seller lived to receive the payments. price of $60,000 and your gross profit is Keep for Your Records However, if the installment obligation is can- $15,000. Your gross profit percentage is 25% 1. Enter the reduced selling celed, becomes unenforceable, or is transfer- ($15,000 ÷ $60,000). After subtracting interest 85,000 price for the property ...... red to the buyer because of the death of the from each payment, you report 25% of each 2. Enter your adjusted holder of the obligation, it’s a disposition. The payment, including the down payment, as in- basis for the estate must figure its gain or loss on the dispo- stallment sale income from the sale for the tax property ...... 40,000 sition. If the holder and the buyer were related, year you receive the payment. The remainder 3. Enter your selling -0- the FMV of the installment obligation is consid- (balance) of each payment is the tax-free return expenses ...... ered to be no less than its full face value. of your adjusted basis. 4. Enter any depreciation recapture ...... -0- More information. For more information, 5. Add lines 2, 3, and 4 ...... 40,000 Amount to report as installment sale in- see Disposition of an Installment Obligation in come. Multiply the payments you receive each 6. Subtract line 5 from line 1. Pub. 537. year (less interest) by the gross profit percent- This is your adjusted gross profit ...... 45,000 age. The result is your installment sales income Sale of depreciable property. You generally for the tax year. In certain circumstances, you 7. Enter any installment sale income reported in can’t report gain from the sale of depreciable may be treated as having received a payment, prior year(s) ...... 22,605 property to a related person on the installment even though you received nothing directly. A re- 8. Subtract line 7 from line 6 ...... 22,395 method. However, see Related parties under ceipt of property or the assumption of a mort- Installment Sale of a Farm, earlier. 9. Future installments ...... 47,325 gage on the property sold may be treated as a You generally can’t use the installment 10. Divide line 8 by line 9. payment. For a detailed discussion, see Pay- method to report any depreciation recapture in- ments Received or Considered Received, later. This is your new gross profit percentage* ...... 47.32% come. However, you can report any gain Selling price reduced. If the selling price greater than the recapture income on the install- is reduced at a later date, the gross profit on the * Apply this percentage to all future payments to determine ment method. sale will also change. You must then refigure how much of each of those payments is installment sale The recapture income reported in the year the gross profit percentage for the remaining income. of sale is included in your installment sale basis to determine your gross profit on the installment payments. Refigure your gross profit using You will report installment sale income of sale. Worksheet 10-2. You will spread any remaining $6,878 (47.32% of $14,535) in 2020, $7,449 Figure your depreciation recapture income gain over future installments. (47.32% of $15,742) in 2021, and $8,067 (including the section 179 deduction and the (47.32% of $17,048) in 2022. Example. In 2018, you sold land with a ba- section 179A deduction recapture) in Part III of sis of $40,000 for $100,000. Your gross profit Form 6252. Use Form 6252 to report an in- Form 4797. As instructed on the form, transfer was $60,000. You received a $20,000 down stallment sale in the year it takes place and to the depreciation recapture income to Part II of payment and the buyer’s note for $80,000. The report payments received, or considered re- Form 4797 as ordinary income in the year of note provides for monthly payments of $1,953 ceived because of related party resales, in later sale. each, figured at 8% interest, amortized over 4 years. Attach it to your tax return for each year. If you sell depreciable business prop- years, beginning in January 2019. Your gross TIP erty, prepare Form 4797 first in order to profit percentage was 60%. You received the figure the amount to enter on line 12 of down payment of $20,000 in 2018 and total Disposition of Installment Obligation Part I, Form 6252. See the Form 6252 instruc- payments of $23,436 in 2019, of which $17,675 tions for details. was principal and $5,761 was interest accord- ing to the amortization schedule. You reported a A disposition generally includes a sale, ex- For more information on the section 179 de- gain of $12,000 on the down payment received change, cancellation, bequest, distribution, or duction, see Section 179 Expense Deduction in in 2018 and $10,605 ($17,675 X 60% (0.60)) in transmission of an installment obligation. An in- chapter 7. For more information on depreciation 2019. stallment obligation is the buyer’s note, deed of recapture, see Depreciation Recapture in chap- In January 2020, you and the buyer agreed trust, or other evidence that the buyer will make ter 9. to reduce the purchase price to $85,000; and future payments to you. payments during 2020, 2021, and 2022 are re- If you’re using the installment method and Payments Received or duced to $1,483 a month amortized over the re- you dispose of the installment obligation, you maining 3 years. Considered Received will generally have a gain or loss to report. It’s The new gross profit percentage, 47.32%, is considered gain or loss on the sale of the prop- figured in Example — Worksheet 10-2. You must figure your gain each year on the pay- erty for which you received the installment obli- ments you receive, or are treated as receiving, gation. from an installment sale.

Cancellation. If an installment obligation is In certain situations, you’re considered to canceled or otherwise becomes unenforceable, have received a payment, even though the it’s treated as a disposition other than a sale or buyer doesn’t pay you directly. These situations exchange. Your gain or loss is the difference occur when the buyer assumes or pays any of between your basis in the obligation and its your debts, such as a loan, or pays any of your FMV at the time you cancel it. If the parties are expenses, such as a sales commission. How- related, the FMV of the obligation is considered ever, as discussed later, the buyer’s assump- to be no less than its full face value. tion of your debt is treated as a recovery of ba- sis, rather than as a payment, in many cases. Transfer due to death. The transfer of an in- stallment obligation (other than to a buyer) as a Buyer pays seller’s expenses. If the buyer result of the death of the seller isn’t a disposi- pays any of your expenses related to the sale of tion. Any unreported gain from the installment your property, it’s considered a payment to you obligation isn’t treated as gross income to the in the year of sale. Include these expenses in decedent. No income is reported on the dece- the selling and contract prices when figuring the gross profit percentage.

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Buyer assumes mortgage. If the buyer as- Selling price $90,000 York Stock Exchange) at any time, the securi- sumes or pays off your mortgage, or otherwise Minus: Installment sale basis (50,000) ties are readily tradable. In these examples, takes the property subject to the mortgage, the Gross profit $40,000 use the above rules to determine the amount following rules apply. you should consider as payment in the year re- ceived. Mortgage less than basis. If the buyer as- Your gross profit percentage is 100%. Re- sumes a mortgage that isn’t more than your in- port 100% of each payment (less interest) as Debt not payable on demand. Any evi- stallment sale basis in the property, it isn’t con- gain from the sale. Treat the $10,000 excess of dence of debt you receive from the buyer that sidered a payment to you. It’s considered a the mortgage over your installment sale basis isn’t payable on demand isn’t considered a pay- recovery of your basis. The contract price is the as a payment and report 100% of it as gain in ment. This is true even if the debt is guaranteed selling price minus the mortgage. the year of sale. by a third party, including a government agency. Example. You sell property with an adjus- Buyer assumes other debts. If the buyer as- ted basis of $19,000. You have selling expen- sumes any other debts, such as a loan or back Fair market value (FMV). This is the price ses of $1,000. The buyer assumes your existing taxes, it may be considered a payment to you in at which property would change hands between mortgage of $15,000 and agrees to pay you the year of sale. a willing buyer and a willing seller, neither being $10,000 (a cash down payment of $2,000 and If the buyer assumes the debt instead of under any compulsion to buy or sell and both $2,000 (plus 8% interest) in each of the next 4 paying it off, only part of it may have to be trea- having a reasonable knowledge of all the nec- years). ted as a payment. Compare the debt to your in- essary facts. stallment sale basis in the property being sold. The selling price is $25,000 ($15,000 + Third-party note. If the property the buyer If the debt is less than your installment sale ba- $10,000). Your gross profit is $5,000 ($25,000 − gives you is a third-party note (or other obliga- sis, none of it is treated as a payment. If it’s $20,000 installment sale basis). The contract tion of a third party), you’re considered to have more, only the difference is treated as a pay- price is $10,000 ($25,000 − $15,000 mortgage). received a payment equal to the note’s FMV. ment. If the buyer assumes more than one debt, Your gross profit percentage is 50% ($5,000 ÷ Because the FMV of the note is itself a payment any part of the total that is more than your in- $10,000). You report half of each $2,000 pay- on your installment sale, any payments you stallment sale basis is considered a payment. ment received as gain from the sale. You also later receive from the third party aren’t consid- These rules are the same as the rules dis- report all interest you receive as ordinary in- ered payments on the sale. The excess of the cussed earlier under Buyer assumes mortgage. come. note’s face value over its FMV is interest. Ex- However, they apply only to the following types clude this interest in determining the selling Mortgage more than basis. If the buyer of debt the buyer assumes. price of the property. However, see Exception assumes a mortgage that is more than your in- Those acquired from ownership of the • under Property used as a payment, earlier. stallment sale basis in the property, you recover property you’re selling, such as a mort- your entire basis. The part of the mortgage gage, lien, overdue interest, or back taxes. Example. You sold real estate in an install- greater than your basis is treated as a payment Those acquired in the ordinary course of • ment sale. As part of the down payment, the received in the year of sale. your business, such as a balance due for buyer assigned to you a $50,000, 8% To figure the contract price, subtract the inventory you purchased. mortgage from the selling price. This is the total third-party note. The FMV of the third-party note amount (other than interest) you will receive di- If the buyer assumes any other type of debt, at the time of the sale was $30,000. This rectly from the buyer. Add to this amount the such as a personal loan or your legal fees relat- amount, not $50,000, is a payment to you in the payment you’re considered to have received ing to the sale, it’s treated as if the buyer had year of sale. The third-party note had an FMV (the difference between the mortgage and your paid off the debt at the time of the sale. The equal to 60% of its face value ($30,000 ÷ installment sale basis). The contract price is value of the assumed debt is then considered a $50,000), so 60% of each principal payment then the same as your gross profit from the payment to you in the year of sale. you receive on this note is a nontaxable return sale. of capital. The remaining 40% is interest taxed Property used as a payment. If you receive as ordinary income. If the mortgage the buyer assumes is property rather than money from the buyer, it’s TIP equal to or more than your installment still considered a payment in the year received. Bond. A bond or other evidence of debt sale basis, the gross profit percentage However, see Trading property for like-kind you receive from the buyer that is payable on will always be 100%. property, later. Generally, the amount of the demand or readily tradable in an established payment is the property’s FMV on the date you securities market is treated as a payment in the receive it. year you receive it. For more information on the Example. The selling price for your prop- amount you should treat as a payment, see Ex- erty is $90,000. The buyer will pay you $10,000 Exception. If the property the buyer gives ception under Property used as a payment, ear- annually (plus 8% interest) over the next 3 you is payable on demand or readily tradable lier. years and assume an existing mortgage of (see examples later), the amount you should If you receive a government or corporate $60,000. Your adjusted basis in the property is consider as payment in the year received is: bond for a sale before October 22, 2004, and $44,000. You have selling expenses of $6,000, • The FMV of the property on the date you the bond has interest coupons attached or can for a total installment sale basis of $50,000. The receive it if you use the cash method of ac- be readily traded in an established securities part of the mortgage that is more than your in- counting; market, you’re considered to have received stallment sale basis is $10,000 ($60,000 − • The face amount of the obligation on the payment equal to the bond’s FMV. However, $50,000). This amount is included in the con- date you receive it if you use an accrual see Exception under Property used as a pay- tract price and treated as a payment received in method of accounting; or ment, earlier. the year of sale. The contract price is $40,000: • The stated redemption price at maturity less any original issue discount (OID) or, if Buyer’s note. The buyer’s note (unless Selling price $90,000 there is no OID, the stated redemption payable on demand) isn’t considered payment Minus: Mortgage (60,000) price at maturity appropriately discounted on the sale. However, its full face value is inclu- Amount actually received $30,000 to reflect total unstated interest. See Un- ded when figuring the selling price and the con- Add difference: stated interest, later. tract price. Payments you receive on the note Mortgage $60,000 are used to figure your gain in the year re- Minus: Installment sale basis Examples. If you receive a note from the ceived. 50,000 10,000 buyer as payment, and the note stipulates that Contract price $40,000 you can demand payment from the buyer at any Sale to a related person. If you sell deprecia- time, the note is payable on demand. If you re- ble property to a related person and the sale is Your gross profit on the sale is also $40,000: ceive marketable securities from the buyer as an installment sale, you may not be able to re- payment, and you can sell the securities on an port the sale using the installment method. For established securities market (such as the New information on these rules, see the Instructions

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for Form 6252 and Related parties under Install- More information. For more information, Selling Adjusted Gross ment Sale of a Farm, earlier. see Unstated Interest and Original Issue Dis- Price Basis Gain Profit count (OID) in Pub. 537. Home $60,000 $36,743 $23,257 $0 Trading property for like-kind property. If Farm land 165,000 81,860 83,140 83,140 you trade business or investment real property Buildings 75,000 38,880 36,120 36,120 solely for other business or investment real Example $300,000 $157,483 $142,517 $119,260 property of a like kind, you can postpone report- Home. The gain on the home ($23,257) is ing the gain from the trade. These trades are On January 3, 2020, you sold your farm, includ- excluded from your income because it qualifies known as like-kind exchanges. The property ing the home, farm land, and buildings. You re- for the exclusion of gain from the sale of a prin- you receive in a like-kind exchange is treated as ceived $50,000 down and the buyer’s note for cipal residence. Therefore, don’t include that if it were a continuation of the property you gave $200,000. In addition, the buyer assumed an gain when you figure your gross profit percent- up. A trade isn’t a like-kind exchange if the outstanding $50,000 mortgage on the farm age. property you trade or the property you receive is land. The total selling price was $300,000. The property you hold primarily for sale to custom- note payments of $25,000 each, plus adequate Section 1231 gains. The gain on the farm ers. See Like-Kind Exchanges in chapter 8 for a interest, are due every July 1 and January 1, land and buildings is reported as section 1231 discussion of like-kind property. beginning in July 2020. Your selling expenses gains. See Section 1231 Gains and Losses in If, in addition to like-kind property, you re- were $15,000. ceive an installment obligation in the exchange, chapter 9. the following rules apply to determine install- Adjusted basis and depreciation. The adjus- Contract price and gross profit percentage. ment sale income each year. ted basis and depreciation claimed on each as- The contract price is $250,000. This is calcula- • The contract price is reduced by the FMV set sold are as follows: of the like-kind property received in the ted by subtracting the $50,000 mortgage as- sumed from the $300,000 selling price. trade. Seller’s Depreciation Adjusted The gross profit is reduced by any gain on Basis Claimed Basis Gross profit percentage for the sale is • , 47.704% ($119,260 gross profit ÷ $250,000 the trade that can be postponed. Home* $33,743 $0 $33,743 • Like-kind property received in the trade Farm land 73,610 0 73,610 contract price). The gross profit percentage for isn’t considered payment on the install- Buildings 66,630 31,500 35,130 each asset is figured as follows: ment obligation. * Owned and used as main home for at least 2 of the 5 years prior to the sale Percent Unstated interest. An installment sale con- Home 0 tract may provide that each deferred payment Adjusted basis for installment sale purpo- Farm land ($83,140 ÷ $250,000) 33.256 on the sale will include interest or that there will ses. To determine the adjusted basis for in- Buildings ($36,120 ÷ $250,000) 14.448 be an interest payment in addition to the princi- stallment sale purposes, prorate the selling ex- Total 47.704 pal payment. Interest provided in the contract is pense based on the relative FMV of each asset called stated interest. and add it to the adjusted basis (see above). Figuring the gain to report on the install- If an installment sale contract doesn’t pro- ment method. One hundred percent (100%) vide for adequate stated interest, section 483 Selling Adjusted Adjusted of each payment is reported on the installment provides that part of the stated principal amount Expense Basis Basis for method. The total amount received on the sale of the contract may be recharacterized as inter- Installment Sale in 2020 is $75,000 ($50,000 down payment + est. This interest is called unstated interest. $25,000 payment on July 1). The installment If section 1274 applies to the contract, this Home* $3,000 $33,743 $36,743 sale part of the total payments received in 2020 interest is called original issue discount (OID). Farm land 8,250 73,610 81,860 Buildings 3,750 35,130 38,880 is also $75,000. Figure the gain to report for Generally, if a buyer gives a debt in consid- each asset by multiplying its gross profit per- $15,000 $142,483 $157,483 eration for personal use property, the unstated centage times $75,000. interest rules don’t apply to the buyer. There- * Owned and used as main home for at least 2 of the 5 years prior to the sale fore, the buyer can’t deduct the unstated inter- Income est. The seller must report the unstated interest Home $0 as income. Personal-use property is any prop- Farm land (33.256% × $75,000) 24,942 erty in which substantially all of its use by the Depreciation recapture. The buildings are Buildings (14.448% × $75,000) 10,836 buyer isn’t in connection with a trade or busi- section 1250 property. There may be specific Total installment income for 2020 $35,778 ness or an investment activity. rules for depreciation recapture of buildings If the debt is subject to section 483 rules and (1250 property) using the straight-line method. Reporting the sale. Report the installment is also subject to the below-market loan rules, See chapter 9 for more information on depreci- sale on three separate Forms 6252. One form such as a gift loan, compensation-related loan, ation recapture. should be filed for each component of the sale. or corporation-shareholder loan, then both par- Special rules may apply when you sell sec- Then, report the amounts from Form 6252 on ties are subject to the below-market loan rules tion 1250 assets depreciated under the Form 4797 and Schedule D (Form 1040). At- rather than the unstated interest rules. straight-line method. See the Unrecaptured tach a separate page to each Form 6252 that Unstated interest reduces the stated selling Section 1250 Gain Worksheet in the Instruc- shows the computations in the example. price of the property and the buyer’s basis in tions for Schedule D (Form 1040). As payments the property. It increases the seller’s interest in- are received on the installment sale, unrecog- If you sell depreciable business prop- come and the buyer’s interest expense. nized 1250 gain must be recognized before any TIP erty, prepare Form 4797 first in order to In general, an installment sale contract pro- section 1231 gain is recognized. See chapter 3 figure the amount to enter on Form vides for adequate stated interest if the stated of Pub. 544 for more information on section 6252. interest rate (based on an appropriate com- 1250 assets. pounding period) is at least equal to the appli- Section 1231 gains. The gains on the farm cable federal rate (AFR). Gross profit. The following table shows each land and buildings are section 1231 gains. They asset reported on the installment method, its are combined with any other section 1231 gains The AFRs are published monthly in the selling price, adjusted basis for installment sale, and losses. A net section 1231 gain is capital Internal Revenue Bulletin (IRB). You gain, and gross profit. gain and a net section 1231 loss is an ordinary can access the IRBs at IRS.gov/ loss. Guidance. Installment income for years after 2020. You figure installment income for the years after 2020 by applying the same gross profit

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percentages to the payments you receive each carry back NOLs including non-farm NOLs aris- event. A theft occurs when property is stolen. A year. If you receive $50,000 during the year, the ing from tax years 2018, 2019, and 2020 for 5 condemnation occurs when private property is entire $50,000 is considered received on the in- years. See section 172(b)(1)(D)(i) and Pub. legally taken for public use without the owner's stallment sale (100% × $50,000). You realize in- 536, Net Operating Losses (NOLs) for Individu- consent. A casualty, theft, or condemnation come as follows: als, Estates, and Trusts, for additional informa- may result in a deductible loss or taxable gain tion. on your federal income tax return. You may Income Special rules for qualified disaster losses. have a deductible loss or a taxable gain even if Home $0 Personal casualty losses attributable to a major only a portion of your property was affected by Farm land (33.256% × $50,000) 16,628 disaster declared by the President under sec- a casualty, theft, or condemnation. Buildings (14.448% × $50,000) 7,224 tion 401 of the Stafford Act in 2016, as well as An involuntary conversion occurs when you Total installment income $23,852 from Hurricane Harvey, Tropical Storm Harvey, receive money or other property as reimburse- Hurricane Irma, Hurricane Maria, the California ment for a casualty, theft, condemnation, dispo- In this example, no gain is ever recognized wildfires, and the disasters described in the sition of property under threat of condemnation, from the sale of your home. You will combine Taxpayer Certainty and Disaster Tax Relief Act or certain other events discussed in this chap- your section 1231 gains from this sale with sec- of 2019, may be claimed as a qualified disaster ter. tion 1231 gains and losses from other sales in loss on your Form 4684 for the year in which the If an involuntary conversion results in a gain each of the later years to determine whether to loss was sustained. You can deduct qualified and you buy qualified replacement property report them as ordinary or capital gains. The in- disaster losses without itemizing other deduc- within the specified replacement period, you terest received with each payment will be inclu- tions on Schedule A (Form 1040). Moreover, can postpone reporting the gain on your income ded in full as ordinary income. your net casualty loss from these qualified dis- tax return. For more information, see Postpon- asters does not need to exceed 10% of your ing Gain, later. Note. Refer to Pub. 523, Selling Your adjusted gross income to qualify for the deduc- Home, to determine whether or not the sale of tion, but the $100 limit per casualty is increased Topics the personal residence will result in a taxable to $500. See Disaster Area Losses, later, and This chapter discusses: event. Pub. 547, Casualties, Disasters, and Thefts, for Summary. The installment income (roun- more information on the special relief. Also, see • Casualties and thefts ded to the nearest dollar) from the sale of the Pub. 976, Disaster Relief, and IRS.gov/ • How to figure a loss or gain farm is reported as follows: DisasterTaxRelief for more information. • Other involuntary conversions Farming losses. If you previously carried back • Postponing gain Selling price $300,000 farming losses for 2 years and limited those los- • Disaster area losses Minus: Adjusted basis for installment (157,483) ses to 80% of taxable income (before any NOL • Reporting gains and losses reporting deduction) of the carryback year, you may now • Drought involving property connected with Minus: Excluded gain from home (23,257) carry back the losses 5 years without the 80% a trade or business or a transaction Gross profit $119,260 limitation. You may need to amend your returns entered into for profit for which you had already filed a claim for re- fund. Useful Items Gain reported in 2020 (year of sale) $35,778 You may want to see: Gain reported in 2021: $50,000 × 47.704% 23,852 Gain reported in 2022: Reminders Publication $50,000 × 47.704% 23,852

Gain reported in 2023: Disaster losses. Section D of Form 4684, 523 523 Selling Your Home $50,000 × 47.704% 23,852 Casualties and Thefts, may be used to make an 525 525 Taxable and Nontaxable Income Gain reported in 2024: election (or revoke a prior election) to deduct a $25,000 × 47.704% 11,926

loss attributable to a federally declared disaster 536 536 Net Operating Losses (NOLs) for Total gain reported $119,260 and that occurred in a federally declared disas- Individuals, Estates, and Trusts ter area in the tax year immediately preceding the tax year the loss was sustained. See Pub. 542 542 Corporations 547 for more information about disaster losses. 544 544 Sales and Other Dispositions of Limitation on personal casualty and theft Assets losses. Personal casualty and theft losses of

547 547 Casualties, Disasters, and Thefts an individual are subject to special rules for

11. those personal casualty and theft losses attrib- 584 584 Casualty, Disaster, and Theft Loss utable to federally declared disasters that occur Workbook (Personal-Use Property) during tax years beginning after 2017.

584-B 584-B Business Casualty, Disaster, and Personal casualty and theft losses are sub- Theft Loss Workbook Casualties, ject to the $100 per casualty and 10% of your

adjusted gross income (AGI) limitations. In this 976 976 Disaster Relief Thefts, and case you reduce your personal casualty gains by any casualty losses not attributable to a fed- Form (and Instructions) erally declared disaster. Net disaster losses Condemnations (disaster losses reduced by any excess per- Sch A (Form 1040) Sch A (Form 1040) Itemized sonal casualty gains) are subject to the $500 Deductions per casualty limitation but not subject to the Sch D (Form 1040) Sch D (Form 1040) Capital Gains and 10% of your adjusted gross income (AGI) limita- Losses What’s New tion..

Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From New rules for Net Operating Loss (NOL) Farming carrybacks. Section 2303 of the Coronavirus

Introduction 4684 4684 Casualties and Thefts Aid, Relief, and Economic Security Act (CARES This chapter explains the tax treatment of casu- Act) of 2020, revised the provisions of the Tax 4797 4797 Sales of Business Property Cuts and Jobs Act (TCJA) section 13302, for alties, thefts, and condemnations. A casualty tax years 2018, 2019, and 2020. Taxpayers can occurs when property is damaged, destroyed, See chapter 16 for information about getting or lost due to a sudden, unexpected, or unusual publications and forms.

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• A fire if you willfully set it, or pay someone from an identifiable event that is sudden, unex- else to set it. pected, or unusual. Casualties and Thefts • A car, truck, or farm equipment accident if Example. A car door is accidentally slam- For tax years 2018 through 2025, per- your willful negligence or willful act caused med on your hand, breaking the setting of your sonal casualty and theft losses of an in- it. The same is true if the willful act or willful ! negligence of someone acting for you diamond ring. The diamond falls from the ring CAUTION dividual are deductible only to the ex- and is never found. The loss of the diamond is a tent they're attributable to a federally declared caused the accident. Progressive deterioration (explained be- casualty. disaster. An exception to the rule limiting the • low). deduction for personal casualty and theft losses to federal disaster losses applies where you Family pet. Loss of property due to dam- Farm Property Losses have personal casualty gains to the extent the age by a family pet isn't deductible as a casu- losses don't exceed your gains. alty loss unless the requirements discussed You can deduct certain casualty or theft losses above under Casualty are met. that occur in the business of farming. The fol- If your property is destroyed, damaged, or lowing is a discussion of some losses you can stolen, you may have a deductible loss. If the in- Example. You keep your horse in your deduct and some you can't deduct. surance or other reimbursement is more than yard. The ornamental fruit trees in your yard the adjusted basis of the destroyed, damaged, were damaged when your horse stripped the Livestock or produce bought for resale. or stolen property, you may have a taxable gain. bark from them. Some of the trees were com- Casualty or theft losses of livestock or produce pletely girdled and died. Because the damage bought for resale are deductible if you report Casualty. A casualty is the damage, destruc- wasn't unexpected or unusual, the loss isn't de- your income on the cash method. If you report tion, or loss of property resulting from an identi- ductible. your income on an accrual method, take casu- fiable event that is sudden, unexpected, or un- alty and theft losses on property bought for re- Progressive deterioration. Loss of prop- usual. sale by omitting the item from the closing inven- erty due to progressive deterioration isn't de- A sudden event is one that is swift, not tory for the year of the loss. You can't take a • ductible as a casualty loss. This is because the gradual or progressive. separate deduction. damage results from a steadily operating cause An unexpected event is one that is ordina- • or a normal process, rather than from a sudden rily unanticipated and unintended. Livestock, plants, produce, and crops event. Examples of damage due to progressive An unusual event is one that isn't a raised for sale. Losses of livestock, plants, • deterioration include damage from rust, corro- day-to-day occurrence and that isn't typical produce, and crops raised for sale are generally sion, or termites. However, weather-related of the activity in which you were engaged. not deductible if you report your income on the conditions or disease may cause another type cash method. You have already deducted the Deductible losses. Deductible casualty of involuntary conversion. See Other Involun- cost of raising these items as farm expenses, losses can result from a number of different tary Conversions, later. so their basis is equal to zero. causes, including the following. For plants with a preproductive period of • Airplane crashes. Theft. A theft is the taking and removing of more than 2 years, you may have a deductible • Car, truck, or farm equipment accidents money or property with the intent to deprive the loss if you have a tax basis in the plants. You not resulting from your willful act or willful owner of it. The taking of property must be ille- usually have a tax basis if you capitalized the negligence. gal under the law of the state where it occurred expenses associated with these plants under • Earthquakes. and it must have been done with criminal intent. the uniform capitalization rules. The uniform • Fires (but see Nondeductible losses next You don't need to show a conviction for theft. capitalization rules are discussed in chapter 6. for exceptions). Theft includes the taking of money or prop- If you report your income on an accrual • Floods. erty by the following means. method, casualty or theft losses are deductible • Freezing. • Blackmail. only if you included the items in your inventory • Government-ordered demolition or reloca- • Burglary. at the beginning of your tax year. You get the tion of a home that is unsafe to use be- • Embezzlement. deduction by omitting the item from your inven- cause of a disaster, as discussed under • Extortion. tory at the close of your tax year. You can't take Disaster Area Losses in Pub. 547. • Kidnapping for ransom. a separate casualty or theft deduction. • Lightning. • Larceny. • Storms, including hurricanes and torna- • Robbery. Income loss. A loss of future income isn't de- does. • Threats. ductible. • Terrorist attacks. • Timber trespass. • Vandalism. The taking of money or property through fraud Example. A severe flood destroyed your • Volcanic eruptions. or misrepresentation is theft if it is illegal under crops. Because you are a cash method tax- state or local law. payer and already deducted the cost of raising Note. For tax years 2018 through 2025, if the crops as farm expenses, this loss isn't de- you are an individual, losses of personal-use Decline in market value of stock. You ductible, as explained above under Livestock, property from the aforementioned listed, or can't deduct as a theft loss the decline in market plants, produce, and crops raised for sale. You other casualty, or theft are deductible only if the value of stock acquired on the open market for estimate that the crop loss will reduce your farm loss is attributable to a federally declared disas- investment if the decline is caused by disclo- income by $25,000. This loss of future income ter. See Pub. 547 for more information. sure of accounting fraud or other illegal miscon- is also not deductible. If the event causing you to suffer a personal duct by the officers or directors of the corpora- casualty loss occurred before January 1, 2018, tion that issued the stock. However, you may be Loss of timber. If you sell timber downed as a but the casualty loss was not sustained until able to deduct it as a capital loss on Schedule D result of a casualty, treat the proceeds from the January 1, 2018, or later, the casualty loss is (Form 1040) if the stock is sold or exchanged or sale as a reimbursement. If you use the pro- not deductible. becomes completely worthless. You report a ceeds to buy qualified replacement property, capital loss on Schedule D (Form 1040). For you can postpone reporting the gain. See Post- Nondeductible losses. A casualty loss more information about stock sales, worthless poning Gain, later. isn't deductible if the damage or destruction is stock, and capital losses, see chapter 4 of Pub. caused by the following. 550. Property used in farming. Casualty and theft Accidentally breaking articles such as • losses of property used in your farm business glassware or china under normal condi- Mislaid or lost property. The simple dis- usually result in deductible losses. If a fire or tions. appearance of money or property isn't a theft. storm destroyed your barn, or you lose by casu- A family pet (explained below). However, an accidental loss or disappearance • alty or theft farm equipment or an animal you of property can qualify as a casualty if it results bought for draft, breeding, dairy, or sport, you

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may have a deductible loss. See How To Figure You figure the casualty or theft loss on this may indicate the decrease in FMV. You may be a Loss, later. property by taking the following steps. able to measure your loss by what you spend on the following. 1. Determine your adjusted basis in the prop- Raised draft, breeding, dairy, or sporting • Removing destroyed or damaged trees erty before the casualty or theft. animals. Generally, losses of raised draft, and shrubs, minus any salvage you re- breeding, dairy, or sporting animals don't result 2. Determine the decrease in fair market ceive. in deductible casualty or theft losses because value of the property as a result of the • Pruning and other measures taken to pre- you have no basis in the animals. However, you casualty or theft. serve damaged trees and shrubs. may have a basis in the animal and therefore • Replanting necessary to restore the prop- 3. From the smaller of the amounts you de- may be able to claim a deduction if you use in- erty to its approximate value before the termined in (1) and (2), subtract any insur- ventories to determine your income and you in- casualty. cluded the animals in your inventory. ance or other reimbursement you receive When you include livestock in inventory, its or expect to receive. Safe harbor methods for individual tax- last inventory value is its basis. When you lose payers to determine casualty and theft los- You must apply the deduction limits, discussed an inventoried animal held for draft, breeding, ses. Revenue Procedure 2018-08, 2018-2 later, to determine your deductible loss. dairy, or sport by casualty or theft during the I.R.B. 286, available at IRS.gov/IRB/ year, decrease ending inventory by the amount You can use Pub. 584 to list your sto- 2018-02_IRB#RP-2018-08, provides safe har- you included in inventory for the animal. You len or damaged personal-use property bor methods that you may use to figure the can't take a separate deduction. and figure your loss. It includes sched- amount of your casualty and theft losses of your ules to help you figure the loss on your home, personal-use residential real property and per- its contents, and your motor vehicles. sonal belongings. If you qualify for and use a How To Figure a Loss safe harbor method described in Revenue Pro- cedure 2018-08, the IRS won't challenge your How you figure a deductible casualty or theft Adjusted basis. Adjusted basis is your ba- determination. The use of a safe harbor method loss depends on whether the loss was to farm sis (usually cost) increased or decreased by described in Revenue Procedure 2018-08 isn't or personal-use property and whether the prop- various events, such as improvements and mandatory. For more information about this erty was stolen or partly or completely de- casualty losses. For more information about ad- safe harbor method, see Pub. 547. stroyed. justed basis, see chapter 6. Decrease in fair market value (FMV). Cost indexes safe harbor method to cal- Farm property. Farm property is the property The decrease in FMV is the difference between culate hurricane-related losses. Revenue you use in your farming business. If your farm the property's value immediately before the Procedure 2018-09, 2018-2 I.R.B. 290, availa- property was completely destroyed or stolen, casualty or theft and its value immediately after- ble at IRS.gov/IRB/2018-02_IRB#RP-2018-09, your loss is figured as follows: ward. FMV is defined in chapter 10 under Pay- provides a safe harbor method you may use to ments Received or Considered Received. calculate the amount of your casualty losses for Your adjusted basis in the property your personal-use residential real property Appraisal. To figure the decrease in FMV MINUS damaged or destroyed in Texas, Louisiana, because of a casualty or theft, you generally Florida, Georgia, South Carolina, the Common- Any salvage value need a competent appraisal. But other meas- wealth of Puerto Rico, or the territory of the U.S. MINUS ures, such as the cost of cleaning up or making Virgin Islands as a result of Hurricane and Trop- repairs and certain safe harbor methods, can ical Storm Harvey, Hurricane Irma, or Hurricane Any insurance or other reimbursement you be used to establish decreases in FMV. receive or expect to receive Maria. If you qualify for and use the cost in- An appraisal to determine the difference be- dexes safe harbor method described in Reve- tween the FMV of the property immediately be- You can use the schedules in Pub. nue Procedure 2018-09, the IRS won't chal- fore a casualty or theft and immediately after- TIP 584-B to list your stolen, damaged, or lenge your determination. The use of the cost ward should be made by a competent destroyed business property and to fig- indexes safe harbor method isn't mandatory. appraiser. The appraiser must recognize the ef- ure your loss. For more information about this safe harbor fects of any general market decline that may oc- method, see Pub. 976. If your farm property was partially damaged, cur along with the casualty. This information is use the steps shown under Personal-use prop- needed to limit any deduction to the actual loss Related expenses. The incidental expen- erty next to figure your casualty loss. However, resulting from damage to the property. ses due to a casualty or theft, such as expen- the deduction limits, discussed later, don't apply ses for the treatment of personal injuries, tem- to farm property. Note. Several factors are important in eval- porary housing, or a rental car, aren't part of uating the accuracy of an appraisal. See Pub. your casualty or theft loss. However, they may Personal-use property. For tax years 2018 547 for additional details regarding appraisals. be deductible as farm business expenses if the through 2025, personal casualty and theft los- damaged or stolen property is farm property. ses of an individual are deductible only to the Cost of cleaning up or making repairs. extent they're attributable to a federally de- The cost of cleaning up after a casualty isn't Separate computations for more than one clared disaster. An exception to the rule limiting part of a casualty loss. Neither is the cost of re- item of property. Generally, if a single casu- the deduction for personal casualty and theft pairing damaged property after a casualty. But alty or theft involves more than one item of losses to federal disaster losses applies where you can use the cost of cleaning up or making property, you must figure your loss separately you have personal casualty gains to the extent repairs after a casualty as a measure of the de- for each item of property. Then, combine the the losses don't exceed your gains. crease in FMV if you meet all the following con- losses to determine your total loss. ditions. Personal-use property is property used by • The repairs are actually made. you or your family members for personal purpo- Example. A fire on your farm damaged a • The repairs are necessary to bring the ses and not used in your farm business or for in- tractor and the barn in which it was stored. The property back to its condition before the come-producing purposes. The following items tractor had an adjusted basis of $3,300. Its FMV casualty. are examples of personal-use property. was $28,000 just before the fire and $10,000 • The amount spent for repairs isn't exces- Your main home. immediately afterward. The barn had an adjus- • sive. • Furniture and electronics used in your ted basis of $28,000. Its FMV was $55,000 just • The repairs fix the damage only. main home and not used in a home office before the fire and $25,000 immediately after- • The value of the property after the repairs or for business purposes. ward. You received insurance reimbursements is not, due to the repairs, more than the Clothing and jewelry. of $2,100 on the tractor and $26,000 on the • value of the property before the casualty. • An automobile used for nonbusiness pur- barn. Figure your deductible casualty loss sepa- poses. Landscaping. The cost of restoring land- rately for the two items of property. scaping to its original condition after a casualty

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Tractor Barn must reduce your loss even if you don't receive Qualified disaster relief payments for expen- payment until a later tax year. ses you incurred as a result of a federally de- 1) Adjusted basis ...... $3,300 $28,000 clared disaster aren't taxable income to you. 2) FMV before fire ...... $28,000 $55,000 Don't subtract from your loss any insur- See Qualified disaster relief payments, later, 3) FMV after fire ...... 10,000 25,000 ance payments you receive for living ! under Disaster Area Losses. 4) Decrease in FMV CAUTION expenses if you lose the use of your (line 2 − line 3) ...... $18,000 $30,000 main home or are denied access to it because 5) Loss (lesser of line 1 or Adjustments to basis. If you have a casualty of a casualty. You may have to include a portion or theft loss, you must decrease your basis in line 4) ...... $3,300 $28,000 of these payments in your income. See Insur- 6) Minus: Insurance ...... 2,100 26,000 the property by any insurance or other reim- ance payments for living expenses in Pub. 547 bursement you receive and by any deductible 7) Deductible casualty loss ... $1,200 $2,000 for details. 8) Total deductible casualty loss .... $3,200 loss. The result is your adjusted basis in the property. If you make either of the basis adjust- Reimbursement received after deduct- ments described above, amounts you spend on You spent $10,800 restoring the tractor to its ing loss. If you figure your casualty or theft pre-casualty condition and $30,000 restoring repairs to restore your property to its pre-casu- loss using your expected reimbursement, you alty condition increase your adjusted basis. See the barn to its pre-casualty condition. Your ad- may have to adjust your tax return for the tax justed basis in the tractor after the casualty is Adjusted Basis in chapter 6 for more informa- year in which you get your actual reimburse- tion. $10,800 ($3,300 – $2,100 – $1,200 + $10,800). ment. Your adjusted basis in the barn after the casu- alty is $30,000 ($28,000 – $26,000 – $2,000 + Actual reimbursement less than expec- Example. You built a new grain storage fa- $30,000). ted. If you later receive less reimbursement cility for $50,000. This is the basis in your grain than you expected, include that difference as a storage facility because that is the total cost you Exception for personal-use real prop- loss with your other losses (if any) on your re- incurred to build it. During the year, a tornado erty. In figuring a casualty loss on per- turn for the year in which you can reasonably damaged your grain storage facility and your al- sonal-use real property, the entire property (in- expect no more reimbursement. lowable casualty loss deduction was $2,000. In cluding any improvements, such as buildings, addition, your insurance company reimbursed trees, and shrubs) is treated as one item. Figure Actual reimbursement more than expec- you $8,000 for the damage and you spent the loss using the smaller of the following. ted. If you later receive more reimbursement $12,000 to restore the grain storage facility to • The decrease in FMV of the entire prop- than you expected after you have claimed a de- its pre-casualty condition. Your adjusted basis erty. duction for the loss, you may have to include in the grain storage facility after the casualty is • The adjusted basis of the entire property. the extra reimbursement in your income for the $52,000 ($50,000 – $2,000 – $8,000 + year you receive it. However, if any part of your $12,000). Example. You bought a farm in 2000 for original deduction didn't reduce your tax for the $80,000. The adjusted basis of the residential earlier year, don't include that part of the reim- part is now $64,000. In 2020, a tornado, which bursement in your income. Don't refigure your Deduction Limits on Losses was a federally declared disaster, blew down tax for the year you claimed the deduction. See of Personal-Use Property shade trees and three ornamental trees planted Recoveries in Pub. 525 to find out how much at a cost of $3,750 on the residential part. The extra reimbursement to include in income. Casualty and theft losses of property held for adjusted basis of the residential part includes personal use may be deductible if you itemize If the total of all the reimbursements the $3,750. The FMV of the residential part im- deductions on Schedule A (Form 1040). you receive is more than your adjusted mediately before the tornado was $200,000, basis in the destroyed or stolen prop- and $192,500 immediately after the tornado. For tax years 2018 through 2025, casualty erty, you will have a gain on the casualty or The trees weren’t covered by insurance. and theft losses of personal-use property are theft. See Figuring a Gain in Pub. 547 for infor- deductible only to the extent they're attributable mation on how to treat a gain from the reim- to a federally declared disaster. 1) Adjusted basis ...... $64,000 bursement you receive because of a casualty or 2) FMV before the tornado ...... $200,000 theft. The exception to the rule that disallows the 3) FMV after the tornado ...... 192,500 deduction for personal casualty losses other 4) Decrease in FMV (line 2 − line 3) .... $7,500 Actual reimbursement same as expec- than federal disaster losses applies where you 5) Loss before insurance ted. If you later receive exactly the reimburse- have personal casualty gains for the year. In (lesser of line 1 or line 4) ...... $7,500 ment you expected to receive, you don't have to 6) Minus: Insurance ...... -0- that case, you may deduct the portion of the include any of the reimbursement in your in- personal casualty loss not attributable to a fed- 7) Loss before applying limits .... $7,500 come and you can't deduct any additional loss. erally declared disaster to the extent the loss As explained later under Deduction Limits on Losses of Lump-sum reimbursement. If you have a doesn't exceed your personal casualty gains. Personal-Use Property, you have to reduce $7,500 by casualty or theft loss of several assets at the There are two limits on the deduction for $500 to get your deductible loss. Thus, your deductible same time without an allocation of reimburse- casualty or theft loss of personal-use property. loss is figured as follows. ment to specific assets, divide the lump-sum re- You figure these limits on Form 4684. imbursement among the assets according to 8) Subtract $500 ...... $500 the FMV of each asset at the time of the loss. 9) Casualty loss deduction ...... $7,000 $100 rule. You must reduce each casualty or Figure the gain or loss separately for each asset theft loss on personal-use property by $100. that has a separate basis. You never replaced the trees. Your adjusted This rule applies after you have subtracted any basis in the residential part of your property af- Disaster assistance. Food, medical sup- reimbursement. ter the casualty is $57,000 ($64,000 - $7,000). plies, and other forms of assistance you receive don't reduce your casualty loss, unless they are 10% rule. You must further reduce the total of Insurance and other reimbursements. If you replacements for lost or destroyed property. Ex- all your casualty or theft losses on personal-use receive an insurance or other type of reimburse- cludable cash gifts you receive also do not re- property by 10% of your AGI. Apply this rule af- ment, you must subtract the reimbursement duce your casualty loss if there are no limits on ter you reduce each loss by $100. AGI is repor- when you figure your business or personal loss. how you can use the money. ted on line 11 of Form 1040 or 1040-SR. You don't have a casualty or theft loss to the ex- Generally, disaster relief grants received un- tent you are reimbursed. der the Robert T. Stafford Disaster Relief and Example. In June, you discovered that your If you expect to be reimbursed for part or all Emergency Assistance Act aren't included in house had been burglarized. Your loss after in- of your loss, you must subtract the expected re- your income. See Federal disaster relief grants, surance reimbursement was $2,000. Your AGI imbursement when you figure your loss. You later, under Disaster Area Losses. for the year you discovered the burglary is $57,000. Figure your theft loss deduction as fol- lows:

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1) Loss after insurance ...... $2,000 $20,000, and the court entered a judgment in Your gain is figured as follows: 2) Subtract $100 ...... 100 favor of First Implement. Robert paid $20,000 in • The amount you receive, minus 3) Loss after $100 rule ...... $1,900 June 2020. He can claim the $20,000 as a loss • Your adjusted basis in the property at the 4) Subtract 10% (0.10) × $57,000 AGI ..... $5,700 on his 2020 tax return. time of the casualty or theft. 5) Theft loss deduction ...... -0- Net operating loss (NOL). If your deductions, Even if the decrease in FMV of your prop- erty is smaller than the adjusted basis of your You don't have a theft loss deduction be- including casualty or theft loss deductions, are property, use your adjusted basis to figure the cause your loss ($1,900) is less than 10% of more than your income for the year, you may gain. your AGI ($5,700). have an NOL. If you have personal casualty losses at- NOL rules have changed. Section Amount you receive. The amount you receive tributable to a major disaster declared 2303 of the Coronavirus Aid, Relief, includes any money plus the value of any prop- ! and Economic Security Act (CARES CAUTION by the President under section 401 of erty you receive, minus any expenses you have the Stafford Act in 2016, as well as from Hurri- Act) of 2020, revised the provisions of the Tax in obtaining reimbursement. It also includes any cane Harvey, Tropical Storm Harvey, Hurricane Cuts and Jobs Act (TCJA) section 13302, for reimbursement used to pay off a mortgage or Irma, Hurricane Maria, the California wildfires, tax years 2018, 2019, and 2020. Taxpayers can other lien on the damaged, destroyed, or stolen or the disasters described in the Taxpayer Cer- carry back NOLs including non-farm NOLs, property. tainty and Disaster Tax Relief Act of 2019, your arising from tax years 2018, 2019, and 2020 for net casualty loss from these qualified disasters 5 years. See section 172(b)(1)(D)(i). If you pre- Example. A tornado severely damaged doesn't need to exceed 10% of your AGI to viously carried back farming losses for 2 years your barn. The adjusted basis of the barn was qualify for the deduction, but the $100 limit per and limited those losses to 80% of taxable in- $25,000. Your insurance company reimbursed casualty is increased to $500. For more infor- come (before any NOL deduction) of the carry- you $40,000 for the damaged barn. However, mation, see the Instructions for Form 4684. back year, you may now carryback the losses 5 you had legal expenses of $2,000 to collect that years without the 80% limitation. You may need insurance. Your insurance minus your expen- If you have a casualty or theft gain in to amend your returns for which you had al- ses to collect the insurance is more than your addition to a loss, you will have to ready filed a claim for refund. See Pub. 536 for adjusted basis in the barn, so you have a gain. make a special computation before you more information. figure your 10% limit. See 10% Rule in Pub. 1) Insurance reimbursement ...... $40,000 547. Proof of Loss 2) Legal expenses ...... 2,000 3) Amount received (line 1 − line 2) ...... $38,000 To deduct a casualty or theft loss, you must be When Loss Is Deductible 4) Adjusted basis ...... 25,000 able to prove that there was a casualty or theft. 5) Gain on casualty (line 3 − line 4) .... $13,000 Generally, you can deduct casualty losses that You must have records to support the amount you claim for the loss. aren't reimbursable only in the tax year in which The adjusted basis of the barn after the they occur. You can generally deduct theft los- Casualty loss proof. For a casualty loss, your casualty is $0 ($25,000 + $13,000 – $38,000) if ses that aren't reimbursable only in the year you you recognized gain and did not repair the barn. discover your property was stolen. records should show all the following informa- tion. Example. In November 2019, engine parts • That you were the owner of the property or, Other Involuntary were stolen from Frank’s stored tractor. Frank if you leased the property from someone didn’t know that the theft occurred until March else, that you were contractually liable to Conversions 2020, when he attempted to start the tractor. the owner for the damage. • The type of casualty (car accident, fire, Any theft loss to which Frank is entitled as a de- In addition to casualties and thefts, other events storm, etc.) and when it occurred. duction will be deductible in the 2020 tax year. cause involuntary conversions of property. • That the loss was a direct result of the Some of these are discussed in the following Losses in federally declared disaster areas casualty. paragraphs. are subject to different rules. See Disaster Area • Whether a claim for reimbursement exists Losses, later, for an exception. for which there is a reasonable expectation Gain or loss from an involuntary conversion If you aren't sure whether part of your casu- of recovery. of your property is usually recognized for tax alty or theft loss will be reimbursed, don't de- purposes. You report the gain or deduct the Theft loss proof. For a theft loss, your records duct that part until the tax year when you be- loss on your tax return for the year you realize it. should show all the following information. come reasonably certain that it won’t be However, depending on the type of property That you were the owner of the property. reimbursed. • you receive, you may not have to report your That your property was stolen. • gain on the involuntary conversion. See Post- When you discovered your property was Leased property. If you lease property from • poning Gain, later. someone else, you can deduct a loss on the missing. property in the year your liability for the loss is • Whether a claim for reimbursement exists determined. This is true even if the loss occur- for which there is a reasonable expectation Condemnation red or the liability was paid in a different year. of recovery. You aren't entitled to a deduction until your lia- Condemnation is the process by which private bility under the lease can be determined with Figuring a Gain property is legally taken for public use without reasonable accuracy. Your liability can be de- the owner's consent. The property may be termined when a claim for recovery is settled, A casualty or theft may result in a taxable gain. taken by the federal government, a state gov- adjudicated, or abandoned. If you receive an insurance payment or other re- ernment, a political subdivision, or a private or- imbursement that is more than your adjusted ganization that has the power to legally take Example. Robert leased a tractor from First basis in the destroyed, damaged, or stolen property. The owner receives a condemnation Implement, Inc., for use in his farm business. property, you have a gain from the casualty or award (money or property) in exchange for the The tractor was destroyed by a tornado in June theft. You generally report your gain as income property taken. A condemnation is a forced 2019. The loss wasn’t insured. First Implement in the year you receive the reimbursement. sale, the owner being the seller and the con- billed Robert for the FMV of the tractor on the However, depending on the type of property demning authority being the buyer. date of the loss. Robert disagreed with the bill you receive, you may not have to report your and refused to pay it. First Implement later filed gain. See Postponing Gain, later. Threat of condemnation. Treat the sale of suit in court against Robert. In 2020, Robert and your property under threat of condemnation as First Implement agreed to settle the suit for a condemnation, provided you have reasonable

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grounds to believe that your property will be If you don't replace the livestock, you insurance company in March. You had a gain of condemned. TIP may be able to report the gain in the $98,000 ($146,000 − $48,000). following year's income. This rule also You spent $144,000 to rebuild the cabin. Main home condemned. If you have a gain applies to other livestock (including poultry). Since this is less than the insurance proceeds because your main home is condemned, you See Sales Caused by Weather-Related Condi- received, you must include $2,000 ($146,000 − generally can exclude the gain from your in- tions in chapter 3. $144,000) in your income. You choose to post- come as if you had sold or exchanged your pone reporting the remaining $96,000 gain. home. For information on this exclusion, see Pub. 523. If your gain is more than the amount Tree Seedlings Buying replacement property from a related you can exclude, but you buy replacement person. You can't postpone reporting a gain property, you may be able to postpone report- If, because of an abnormal drought, the failure from a casualty, theft, or other involuntary con- ing the excess gain. See Postponing Gain, of planted tree seedlings is greater than nor- version if you buy the replacement property later. (You can't deduct a loss from the condem- mally anticipated, you may have a deductible from a related person (discussed later). This nation of your main home.) loss. Treat the loss as a loss from an involuntary rule applies to the following taxpayers. conversion. The loss equals the previously cap- 1. C corporations. More information. For information on how to italized reforestation costs you had to duplicate figure the gain or loss on condemned property, on replanting. You deduct the loss on the return 2. Partnerships in which more than 50% of see chapter 1 in Pub. 544. Also, see Postpon- for the year the seedlings died. the capital or profits interest is owned by C ing Gain, later, to find out if you can postpone corporations. reporting the gain. 3. Individuals, partnerships (other than those Postponing Gain in (2) above), and S corporations if the to- Irrigation Project tal realized gain for the tax year on all in- Don't report a gain if you receive reimbursement voluntarily converted properties on which The sale or other disposition of property located in the form of property similar or related in serv- there are realized gains is more than within an irrigation project to conform to the ice or use to the destroyed, stolen, or other in- $100,000. acreage limits of federal reclamation laws is an voluntarily converted property. Your basis in the involuntary conversion. new property is generally the same as your ad- For involuntary conversions described in (3) justed basis in the property it replaces. above, gains can't be offset by any losses when determining whether the total gain is more than Livestock Losses You must ordinarily report the gain on your $100,000. If the property is owned by a partner- stolen, destroyed, or other involuntarily conver- ship, the $100,000 limit applies to the partner- Diseased livestock. If your livestock die from ted property if you receive money or unlike ship and each partner. If the property is owned disease, or are destroyed, sold, or exchanged property as reimbursement. However, you can by an S corporation, the $100,000 limit applies because of disease, even though the disease choose to postpone reporting the gain if you to the S corporation and each shareholder. isn't of epidemic proportions, treat these occur- purchase replacement property similar or rela- rences as involuntary conversions. If the live- ted in service or use to your destroyed, stolen, Exception. This rule doesn’t apply if the re- stock were raised or purchased for resale, fol- or other involuntarily converted property within lated person acquired the property from an un- low the rules for livestock discussed earlier a specific replacement period. related person within the period of time allowed under Farming Losses. Otherwise, figure the for replacing the involuntarily converted prop- gain or loss from these conversions using the If you have a gain on damaged property, erty. rules discussed under Determining Gain or you can postpone reporting the gain if you Related persons. Under this rule, related Loss in chapter 8. If you replace the livestock, spend the reimbursement to restore the prop- persons include, for example, a parent and you may be able to postpone reporting the gain. erty. child, a brother and sister, a corporation and an See Postponing Gain below. To postpone reporting all the gain, the cost individual who owns more than 50% of its out- Reporting dispositions of diseased live- of your replacement property must be at least standing stock, and two partnerships in which stock. If you choose to postpone reporting as much as the reimbursement you receive. If the same C corporations own more than 50% of gain on the disposition of diseased livestock, the cost of the replacement property is less than the capital or profits interests. For more infor- you must attach a statement to your return ex- the reimbursement, you must include the gain in mation on related persons, see Nondeductible plaining that the livestock were disposed of be- your income up to the amount of the unspent re- Loss under Sales and Exchanges Between Re- cause of disease. You must also include other imbursement. lated Persons in chapter 2 of Pub. 544. information on this statement. See How To Postpone Gain, later, under Postponing Gain. Example 1. In 1985, you constructed a Death of a taxpayer. If a taxpayer dies after barn to store farm equipment at a cost of realizing a gain, but before buying replacement Weather-related sales of livestock. If you $35,000. In 1990, you added a grain bin to the property, the gain must be reported for the year sell or exchange livestock (other than poultry) barn at a cost of $15,000. In May of this year, in which the decedent realized the gain. The ex- held for draft, breeding, or dairy purposes solely the property was worth $70,000. In June, the ecutor of the estate or the person succeeding to because of drought, flood, or other weather-re- barn and grain storage facility were destroyed the funds from the involuntary conversion can't lated conditions, treat the sale or exchange as by a tornado. At the time of the tornado, you postpone reporting the gain by buying replace- an involuntary conversion. Only livestock sold in had an adjusted basis of $0 in the property. You ment property. excess of the number you normally would sell received $70,000 from the insurance company. under usual business practice, in the absence You had a gain of $70,000 ($70,000 – $0). Replacement Property of weather-related conditions, are considered You spent $65,000 to rebuild the barn and involuntary conversions. Figure the gain or loss grain bin. Since this is less than the insurance You must buy replacement property for the spe- using the rules discussed under Determining proceeds received, you must include $5,000 cific purpose of replacing your property. Your Gain or Loss in chapter 8. If you replace the ($70,000 – $65,000) in your income. You replacement property must be similar or related livestock, you may be able to postpone report- choose to postpone the remaining $65,000 in service or use to the property it replaces. You ing the gain. See Postponing Gain below. gain. don't have to use the same funds you receive as reimbursement for your old property to ac- Example. It is your usual business practice Example 2. In 1993, you bought a cabin in quire the replacement property. If you spend to sell five of your dairy animals during the year. the mountains for your personal use at a cost of the money you receive for other purposes, and This year, you sold 20 dairy animals because of $48,000. You made no further improvements or borrow money to buy replacement property, drought. The sale of 15 animals is treated as an additions to it. When a storm destroyed the you can still choose to postpone reporting the involuntary conversion. cabin this January, the cabin was worth gain if you meet the other requirements. $250,000. You received $146,000 from the

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Property you acquire by gift or inheritance property was located in a federally declared dis- flood, or other weather-related conditions in an doesn’t qualify as replacement property. aster area, any tangible replacement property area eligible for federal assistance, the replace- you acquire for use in any business is treated ment period ends 4 years after the close of the Owner-user. If you are an owner-user, similar as similar or related in service or use to the de- first tax year in which you realize any part of or related in service or use means that replace- stroyed property. For more information, see your gain from the sale or exchange. The IRS ment property must function in the same way as Disaster Area Losses in Pub. 547. may extend the replacement period on a re- the property it replaces. Examples of property gional basis if the weather-related conditions that functions in the same way as the property it Substituting replacement property. Once continue for longer than 3 years. replaces are a home that replaces another you have acquired qualified replacement prop- For information on extensions of the re- home, a dairy cow that replaces another dairy erty that you designate as replacement property placement period because of persistent cow, and farm land that replaces other farm in a statement attached to your tax return, you drought, see Notice 2006-82, 2006-39 I.R.B. land. A grinding mill that replaces a tractor can't substitute other qualified replacement 529, available at IRS.gov/IRB/2006-39_IRB/ doesn’t qualify. Neither does a draft animal that property. This is true even if you acquire the ar11.html. For a list of counties for which excep- replaces a breeding or dairy cow. other property within the replacement period. tional, extreme, or severe drought was reported However, if you discover that the original re- during the 12 months ending August 31, 2020, Soil or other environmental contamination. placement property wasn’t qualified replace- see Notice 2020–74, available at IRS.gov. If, because of soil or other environmental con- ment property, you can, within the replacement tamination, it isn't feasible for you to reinvest period, substitute the new qualified replacement Condemnation. The replacement period for a your insurance money or other proceeds from property. condemnation begins on the earlier of the fol- destroyed or damaged livestock in property lowing dates. similar or related in service or use to the live- Basis of replacement property. You must re- • The date on which you disposed of the stock, you can treat other property (including duce the cost basis of your replacement prop- condemned property. real property) used for farming purposes as erty by the amount of postponed gain. In this • The date on which the threat of condemna- property similar or related in service or use to way, tax on the gain is postponed until you dis- tion began. the destroyed or damaged livestock. pose of the replacement property. The replacement period generally ends 2 years Weather-related conditions. If, because of Example. In 2020, you sold 50 cows with a after the close of the first tax year in which any drought, flood, or other weather-related condi- $0 basis due to severe drought. This is more part of the gain on the condemnation is real- tions, it isn't feasible for you to reinvest the in- than the 25 cows you normally sell each year. ized. But see Main home in disaster area, ear- surance money or other proceeds in property The proceeds from the sale of the additional 25 lier, for an exception. similar or related in service or use to the live- cows are $62,500. Because of the severe Business or investment real property. If stock, you can treat other property (excluding drought, it isn’t feasible for you to use these pro- real property held for use in a trade or business real property) used for farming purposes as ceeds to buy new cows. Instead, you use the or for investment (not including property held property similar or related in service or use to proceeds to buy a cattle watering system for primarily for sale) is condemned, the replace- the livestock you disposed of. $70,000. You choose to postpone reporting the ment period ends 3 years after the close of the $62,500 gain ($62,500 – $0) from the sale of first tax year in which any part of the gain on the Example. Each year, you normally sell 25 the cows. Therefore, the basis of the cattle wa- condemnation is realized. cows from your beef herd. However, this year tering system is $7,500 ($70,000 – $62,500). you had to sell 50 cows. This is because a se- Extension. You can apply for an extension of vere drought significantly reduced the amount Replacement Period the replacement period. Send your written ap- of hay and pasture yield needed to feed your plication to the Internal Revenue Service Center herd for the rest of the year. Because, as a re- where you file your tax return. See your tax re- sult of the severe drought, it isn't feasible for To postpone reporting your gain, you must buy turn instructions for the address. Include all the you to use the proceeds from selling the extra replacement property within a specified period details about your need for an extension. Make cows to buy new cows, you can treat other of time. This is the replacement period. your application before the end of the replace- property (excluding real property) used for farm- ment period. However, you can file an applica- The replacement period begins on the date ing purposes as property similar or related in tion within a reasonable time after the replace- your property was damaged, destroyed, stolen, service or use to the cows you sold. ment period ends if you can show a good sold, or exchanged. The replacement period reason for the delay. You will get an extension generally ends 2 years after the close of the first Standing crop destroyed by casualty. If a of the replacement period if you can show rea- tax year in which you realize any part of your storm or other casualty destroyed your standing sonable cause for not making the replacement gain from the involuntary conversion. crop and you use the insurance money to ac- within the regular period. quire either another standing crop or a harves- ted crop, this purchase qualifies as replacement Example. You are a calendar year tax- property. The costs of planting and raising a payer. Farm equipment that cost $2,200 was How To Postpone Gain new crop qualify as replacement costs for the stolen from your farm. You discovered the theft destroyed crop only if you use the crop method when you returned to your farm on November You postpone reporting your gain by reporting of accounting (discussed in chapter 2). In that 11, 2019. Your insurance company investigated your choice on your tax return for the year you case, the costs of bringing the new crop to the the theft and didn’t settle your claim until Janu- have the gain. You have the gain in the year you same level of maturity as the destroyed crop ary 3, 2020, when they paid you $3,000. You receive insurance proceeds or other reimburse- qualify as replacement costs to the extent they first realized a gain from the reimbursement for ments that result in a gain. are incurred during the replacement period. the theft during 2020, so you have until Decem- ber 31, 2022, to replace the property. Required statement. You should attach a Timber loss. Standing timber (not land) you statement to your return for the year you have bought with the proceeds from the sale of tim- Main home in disaster area. For your main the gain. This statement should include all the ber downed as a result of a casualty, such as home (or its contents) located in a federally de- following information. high winds, earthquakes, or volcanic eruptions, clared disaster area, the replacement period • The date and details of the casualty, theft, qualifies as replacement property. If you bought ends 4 years after the close of the first tax year or other involuntary conversion. the standing timber within the replacement pe- in which you realize any part of your gain from • The insurance or other reimbursement you riod, you can postpone reporting the gain. the involuntary conversion. See Disaster Area received. Losses, later. • How you figured the gain. Business or income-producing property lo- cated in a federally declared disaster area. Weather-related sales of livestock in an Replacement property acquired before If your destroyed business or income-producing area eligible for federal assistance. For the return filed. If you acquire replacement prop- sale or exchange of livestock due to drought, erty before you file your return for the year you

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have the gain, your statement should also in- can choose to deduct that loss on your return or clude detailed information about all the follow- amended return for the tax year immediately ing items. Disaster Area Losses preceding the disaster year. If you make this • The replacement property. For tax years 2018 through 2025, per- choice, the loss is treated as having occurred in • The postponed gain. sonal casualty and theft losses of an in- the preceding year. • The basis adjustment that reflects the ! CAUTION dividual are deductible only to the ex- Claiming a qualifying disaster loss on postponed gain. tent they're attributable to a federally declared the previous year's return may result in • Any gain you are reporting as income. disaster. An exception to the rule limiting the a lower tax for that year, often produc- Replacement property acquired after re- deduction for personal casualty and theft losses ing or increasing a cash refund. to federal disaster losses applies where you turn filed. If you intend to buy replacement You must make an election to deduct a 2020 property after you file your return for the year have personal casualty gains to the extent the losses don't exceed your gains. disaster loss on your 2019 return on or before you realize gain, your statement should also the date that is 6 months after the regular due say that you are choosing to replace the prop- date for filing your original return (without exten- erty within the required replacement period. Special rules apply to federally declared dis- sions) for the disaster year. For calendar year You should then attach another statement to aster area losses. A federally declared disaster individual taxpayers, the deadline for electing to your return for the year in which you buy the re- is a disaster that occurred in an area declared take a 2020 disaster loss on your 2019 tax re- placement property. This statement should con- by the President to be eligible for federal assis- turn is October 15, 2021. tain detailed information on the replacement tance under the Robert T. Stafford Disaster Re- If you claimed a deduction for a disaster loss property. If you acquire part of your replace- lief and Emergency Assistance Act. It includes in the disaster year and you wish to deduct the ment property in one year and part in another a major disaster or emergency declaration un- loss in the preceding year, you must file an year, you must attach a statement to each der the Act. amended return to remove the previously de- year's return. Include in the statement detailed ducted loss on or before you file the return or information on the replacement property bought A list of the areas warranting public or amended return for the preceding year that in- in that year. TIP individual assistance (or both) under the Act is available at the Federal cludes the disaster loss deduction. For more in- Reporting weather-related sales of live- Emergency Management Agency (FEMA) web formation, see Pub. 547. stock. If you choose to postpone reporting the site at FEMA.gov/Disasters. gain on weather-related sales or exchanges of Standard deduction and disaster losses. You can increase the amount of your standard livestock, show all the following information on This part discusses the special rules for a statement attached to your return for the tax deduction by your qualified disaster-related per- when to deduct a disaster area loss and what sonal casualty loss. Also, if you increase your year in which you first realize any of the gain. tax deadlines may be postponed. For other spe- • Evidence of the weather-related conditions standard deduction with your net qualified dis- cial rules, see Disaster Area Losses in Pub. aster loss, you will not be subject to the alterna- that forced the sale or exchange of the live- 547. stock. tive minimum tax for that part of your standard • The gain realized on the sale or exchange. Qualified disaster losses. A qualified dis- deduction. See Form 4684 and the instructions • The number and kind of livestock sold or aster loss is an individual’s casualty or theft loss for Schedule A (Form 1040) for more informa- exchanged. of personal-use property that is attributable to a tion. • The number of livestock of each kind you major disaster declared by the President under would have sold or exchanged under your section 401 of the Stafford Act in 2016, as well Federal disaster relief grants. Don't include usual business practice. as those sustained from Hurricane Harvey, post-disaster relief grants received under the Robert T. Stafford Disaster Relief and Emer- Show all the following information and the Tropical Storm Harvey, Hurricane Irma, Hurri- cane Maria, the California wildfires, or the dis- gency Assistance Act in your income if the grant preceding information on the return for the year payments are made to help you meet neces- in which you replace the livestock. asters described in the Taxpayer Certainty and Disaster Tax Relief Act of 2019. See IRS.gov/ sary expenses or serious needs for medical, • The dates you bought the replacement dental, housing, personal property, transporta- property. DisasterTaxRelief for date-specific declarations associated with these disasters and for more in- tion, or funeral expenses. Don't deduct casualty • The cost of the replacement property. losses or medical expenses to the extent they • Description of the replacement property formation. You can deduct qualified disaster losses are specifically reimbursed by these disaster re- (for example, the number and kind of the lief grants. If the casualty loss was specifically replacement livestock). without itemizing other deductions on Sched- ule A (Form 1040). Moreover, your net casualty reimbursed by the grant and you received the grant after the year in which you deducted the Amended return for changes regarding re- loss from these qualified disasters doesn’t need to exceed 10% of your AGI to qualify for the de- casualty loss, see Reimbursement received af- placement property. You must file an amen- ter deducting loss, earlier. Unemployment as- ded return (Form 1040-X) for the tax year of the duction, but the $100 limit per casualty is in- creased to $500. For more information, see the sistance payments under the Act are taxable gain in either of the following situations. unemployment compensation. • You don't acquire replacement property Instructions for Form 4684. within the replacement period, plus exten- Disaster year. The disaster year is the tax Qualified disaster relief payments. Qualified sions. On this amended return, you must disaster relief payments aren't included in the report the gain and pay any additional tax year in which you sustained the loss attributable to a federally declared disaster. Generally, a income of individuals to the extent any expen- due. ses compensated by these payments aren't • You acquire replacement property within disaster loss is sustained in the year the disas- ter occurred. A disaster loss may also be sus- otherwise compensated for by insurance or the required replacement period, plus ex- other reimbursement. These payments aren't tensions, but at a cost less than the tained in a year after the disaster occurred. For example, if a claim for reimbursement exists for subject to income tax, self-employment tax, or amount you receive from the casualty, employment taxes (social security, Medicare, theft, or other involuntary conversion. On which there is a reasonable prospect of recov- ery, no part of the loss for which reimbursement and federal unemployment taxes). No withhold- this amended return, you must report the ing applies to these payments. part of the gain that can't be postponed may be received is sustained until it can be as- Qualified disaster relief payments include and pay any additional tax due. certained with reasonable certainty whether you will be reimbursed. payments you receive (regardless of the source) for the following expenses. When to deduct the loss. You must generally • Reasonable and necessary personal, fam- deduct a casualty loss in the disaster year. ily, living, or funeral expenses incurred as a However, if you have a deductible loss from a result of a federally declared disaster. disaster that occurred in an area warranting • Reasonable and necessary expenses in- public or individual assistance (or both), you curred for the repair or rehabilitation of a

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personal residence due to a federally de- publish a news release and, where necessary, year and you have to recapture some or all of clared disaster. (A personal residence can a revenue ruling, revenue procedure, notice, your gain as ordinary income. be a rented residence or one you own.) announcement, or other guidance in the Internal • Reasonable and necessary expenses in- Revenue Bulletin (IRB). Go to IRS.gov/ Form 8949. Use this form to report gain from curred for the repair or replacement of the DisasterTaxRelief to find out if a tax deadline an involuntary conversion (other than from contents of a personal residence due to a has been postponed for your area. casualty or theft) of personal-use property. federally declared disaster. Who is eligible. If the IRS postpones a tax Schedule A (Form 1040). Use this form to de- Qualified disaster relief payments include deadline, the following taxpayers are eligible for duct your losses from casualties and thefts of amounts paid by a federal, state, or local gov- the postponement. personal-use property and income-producing ernment in connection with a federally declared • Any individual whose main home is located property that you reported on Form 4684. disaster to individuals affected by the disaster. in a covered disaster area (defined next). These payments must be made from a govern- • Any business entity or sole proprietor Schedule D (Form 1040). Use this form to mental fund, be based on individual or family whose principal place of business is loca- carry over the following gains. needs, and not be compensation for services. ted in a covered disaster area. • Net gain shown on Form 4797 from an in- Payments to businesses generally don't • Any individual who is a relief worker affili- voluntary conversion of business property qualify. ated with a recognized government or phil- held for more than 1 year. Qualified disaster relief payments don't anthropic organization and who is assisting • Net gain shown on Form 4684 from the ! include: in a covered disaster area. casualty or theft of personal-use property. CAUTION • Any individual, business entity, or sole pro- prietorship whose records are needed to Also use this form to figure the overall gain Payments for expenses otherwise paid for • meet a postponed tax deadline, provided or loss from transactions reported on Form by insurance or other reimbursements; or those records are maintained in a covered 8949. Income replacement payments, such as • disaster area. The main home or principal payments of lost wages, lost business in- place of business doesn’t have to be loca- Schedule F (Form 1040). Use this form to de- come, or unemployment compensation. duct your losses from casualty or theft of live- ted in the covered disaster area. • Any estate or trust that has tax records stock or produce bought for sale on line 32 (Other expenses) if you use the cash method of necessary to meet a postponed tax dead- Qualified disaster mitigation payments. accounting and haven’t otherwise deducted line, provided those records are main- Qualified disaster mitigation payments made these losses. under the Robert T. Stafford Disaster Relief and tained in a covered disaster area. Emergency Assistance Act or the National • The spouse on a joint return with a tax- Flood Insurance Act (as in effect on April 15, payer who is eligible for postponements. 2005) aren’t included in income. These are pay- • Any individual, business entity, or sole pro- ments you, as a property owner, received to re- prietorship not located in a covered disas- duce the risk of future damage to your property. ter area, but whose necessary records to You can't increase your basis in property, or meet a postponed tax deadline are located take a deduction or credit, for expenditures in the covered disaster area. 12. made with respect to those payments. • Any individual visiting the covered disaster area who was killed or injured as a result of Sale of property under hazard mitigation the disaster. program. Generally, if you sell or otherwise • Any other person determined by the IRS to Self-Employment transfer property, you must recognize any gain be affected by a federally declared disas- or loss for tax purposes unless the property is ter. Tax your main home. You report the gain or deduct Covered disaster area. This is an area of the loss on your tax return for the year you real- a federally declared disaster area in which the ize it. (You can't deduct a loss on personal-use IRS has decided to postpone tax deadlines for What's New for 2020 property unless the loss resulted from a casu- up to 1 year. alty, as discussed earlier.) However, if you sell or otherwise transfer property to the federal Abatement of interest and penalties. The Maximum net earnings. The maximum net government, a state or local government, or an IRS may abate the interest and penalties on the self-employment earnings subject to the social Indian tribal government under a hazard mitiga- underpaid income tax for the length of any post- security part (12.4%) of the self-employment tax tion program, you can choose to postpone re- ponement of tax deadlines. is $137,700 for 2020, up from $132,900 for porting the gain if you buy qualifying replace- 2019. There is no maximum limit on earnings ment property within a certain period of time. subject to the Medicare part (2.9%) or, if appli- See Postponing Gain, earlier, for the rules that Reporting Gains cable, the Additional Medicare Tax (0.9%). apply. The maximum net self-employment earn- and Losses ings subject to the social security part of the Other federal assistance programs. For self-employment tax for 2021 will be discussed more information about other federal assistance You will have to file one or more of the following in the 2020 Pub. 334. programs, see Crop Insurance and Crop Disas- forms to report your gains or losses from invol- Changes to Schedule SE (Form 1040). ter Payments and Feed Assistance and Pay- untary conversions. Schedule SE (Form 1040) has a new Part III to ments in chapter 3. allow self-employed persons to figure a maxi- Form 4684. Use this form to report your gains mum amount of self-employment tax payments Postponed tax deadlines. The IRS may post- and losses from casualties and thefts. pone for up to 1 year certain tax deadlines of which may be deferred. Schedule SE (Form 1040) has also been re- taxpayers who are affected by a federally de- Form 4797. Use this form to report involuntary vised into a single form format, and each per- clared disaster. The tax deadlines the IRS may conversions (other than from casualty or theft) son with net earnings from self-employment will postpone include those for filing income, ex- of property used in your trade or business and use a separate Schedule SE (Form 1040). cise, and employment tax returns, paying in- capital assets held in connection with a trade or come, excise, and employment taxes, and mak- business or a transaction entered into for profit. Credits for self-employed persons. New re- ing contributions to a traditional IRA or Roth Also use this form if you have a gain from a fundable credits are available to certain IRA. casualty or theft on trade, business, or in- self-employed persons impacted by the corona If any tax deadline is postponed, the IRS will come-producing property held for more than 1 publicize the postponement in your area and

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virus. See the Instructions for Form 7202 for An ITIN doesn’t entitle you to social se- more information. curity benefits. Obtaining an ITIN Why Pay doesn’t change your immigration or Self-Employment Tax? employment status under U.S. law. Introduction Social security benefits are available to self-em- Obtaining a social security number (SSN). Self-employment tax (SE tax) is a social secur- ployed persons just as they are to wage earn- If you have never had an SSN, apply for one us- ity and Medicare tax primarily for individuals ers. Your payments of SE tax contribute to your ing Form SS-5, Application for a Social Security who work for themselves. It is similar to the so- coverage under the social security system. So- Card. The application is also available in Span- cial security and Medicare taxes withheld from cial security coverage provides you with retire- ish. You can get this form at any Social Security the pay of most wage earners. ment benefits, disability benefits, survivor bene- office or by calling 800-772-1213. You usually have to pay SE tax if you are fits, and hospital insurance (Medicare) benefits. If you have a SSN from the time you were an self-employed. You are usually self-employed if employee, you must use that number. Don’t ap- you operate your own farm on land you either How to become insured under social secur- ply for a new one. own or rent. You have to figure SE tax on ity. You must be insured under the social se- Schedule SE (Form 1040). curity system before you begin receiving social Replacing a lost social security card. If Farmers who have employees may have to security benefits. You are insured if you have you have a number but lost your card, file Form pay the employer's share of social security and the required number of credits (also called SS-5. You will get a new card showing your Medicare taxes, as well. See chapter 13 for in- quarters of coverage). original number, not a new number. In some formation on employment taxes. areas you may be able to request a replace- If your self-employment income exceeds a Earning credits in 2020. You can earn a max- ment card online. certain threshold amount, you may also be sub- imum of four credits per year. For 2020, you Name change. If your name has changed ject to a 0.9% Additional Medicare Tax on the earn one credit for each $1,410 of combined income that is more than that amount. You fig- since you received your social security card, wages and self-employment earnings subject to complete Form SS-5 to report a name change. ure this tax using Form 8959. For more informa- social security tax. You need $5,640 ($1,410 × tion about the Additional Medicare Tax, includ- 4) of combined wages and self-employment You can find more information about ing the threshold amounts, see the Instructions earnings subject to social security tax to earn obtaining a social security number, re- for Form 8959. four credits in 2020. It doesn’t matter whether placing a lost card, or requesting a the income is earned in 1 quarter or is spread name change at SSA.gov. Self-employment tax rate. The self-employ- over 2 or more quarters. ment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survi- For an explanation of the number of credits Obtaining an individual taxpayer identifica- vors, and disability insurance) and 2.9% for you must have to be insured and the benefits tion number (ITIN). The IRS will issue you an Medicare (hospital insurance). available to you and your family under the so- ITIN, for tax use only, if you are a nonresident or cial security program, consult your nearest So- resident alien and you don’t have, and aren’t eli- gible to get, an SSN. To apply for an ITIN, file Topics cial Security Administration (SSA) office or visit the SSA website at SSA.gov. Form W-7, Application for IRS Individual Tax- This chapter discusses: payer Identification Number. You can download Making false statements to get or to in- Form W-7 from the IRS website at IRS.gov. For • Why pay self-employment tax ! crease social security benefits may more information on ITINs, see Pub. 1915. • How to pay self-employment tax CAUTION subject you to penalties. Form W-7 and Pub. 1915 are also available in • Who must pay self-employment tax Spanish. • Figuring self-employment earnings The Social Security Administration (SSA) If you were assigned an ITIN before • Landlord participation in farming time limit for posting self-employment earn- 2013, or if you have an ITIN that you • Methods for figuring net earnings ings. Generally, the SSA will give you credit haven't included on a tax return in the • Reporting self-employment tax only for self-employment earnings reported on a last 3 consecutive years, you may need to re- tax return filed within 3 years, 3 months, and 15 new it. For more information, see the Instruc- Useful Items days after the tax year you earned the income. tions for Form W-7 or visit IRS.gov/ITIN. You may want to see: If you file your tax return or report a change in your self-employment earn- Paying estimated tax. Estimated tax is the Publication ings after the SSA time limit for posting method used to pay tax (including SE tax) on in- self-employment earnings, the SSA may come not subject to withholding. You generally

541 541 Partnerships change its records, but only to remove or re- have to make estimated tax payments if you ex- duce the amount. The SSA won't change its re- pect to owe tax, including SE tax, of $1,000 or Form (and Instructions) cords to increase your self-employment earn- more when you file your return. Use Form ings after the SSA time limit listed above. 1040-ES, Estimated Tax for Individuals, to fig- 1040 1040 U.S. Individual Income Tax Return ure and pay the tax.

1040-SR 1040-SR U.S. Tax Return for Seniors However, if at least two-thirds of your gross How To Pay income for the current tax year or the prior tax Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From year is from farming and you file your tax return Farming Self-Employment Tax and pay all the tax due by March 1, you don’t have to pay any estimated tax. For example, if

Sch SE (Form 1040) Sch SE (Form 1040) Self-Employment To pay SE tax, you must have a social security at least two-thirds of your gross income for Tax number (SSN) or an individual taxpayer identifi- 2019 or 2020 is from farming and you file your cation number (ITIN). This section explains how 2020 Form 1040 and pay all the tax due by 1065 1065 U.S. Return of Partnership Income to: March 1, 2021, you don’t have to make any es- timated tax payments for 2020. For more infor- Sch K-1 (Form 1065) Sch K-1 (Form 1065) Partner's Share of • Obtain an SSN or ITIN, Income, Deductions, Credits, etc. • Pay your SE tax using estimated tax, and mation about estimated tax for farmers, the defi- • Defer certain SE tax payments. nition of farming income, and exceptions to

8959 8959 Additional Medicare Tax what constitutes farming income, see chap- ter 15. See chapter 16 for information about getting publications and forms.

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Penalty for underpayment of estimated Example. A share farmer produces a crop 1065, instead of Schedule F (Form 1040). How- tax. You may have to pay a penalty if you don’t on land owned by another person on a 50-50 ever, you and your spouse may still report in- pay enough estimated tax by its due date. crop-share basis. Under the terms of their come using Schedule F (Form 1040) instead of agreement, the share farmer furnishes the labor Form 1065 if either of the following applies. Deferring certain SE tax payments. If you and half the cost of seed and fertilizer. The • You and your spouse elect to be treated as were affected by the coronavirus, some of the landowner furnishes the machinery and equip- a qualified joint venture. See Qualified joint SE taxes you owe may be deferred on your ment used to produce and harvest the crop, venture, later. 2020 tax return and be paid later instead. You and half the cost of seed and fertilizer. The • You and your spouse wholly own the unin- may defer the payment of 50% of the social se- share farmer is provided a house in which to corporated farming business as commun- curity tax imposed for the period of March 27, live. The landowner and the share farmer de- ity property and you treat the business as a 2020, through December 31, 2020. For more in- cide on a cropping plan. sole proprietorship. See Community in- formation see the Instructions for Schedule SE The share farmer is a self-employed farmer come, later. (Form 1040). for purposes of the agreement to produce the If your spouse is your employee, not crops, and the share farmer's part of the profit your partner, you must withhold and or loss from the crops is reported on Sched- pay social security and Medicare taxes ule F (Form 1040) and included in self-employ- Who Must Pay for him or her. For more information about em- ment earnings. ployment taxes, see chapter 13. Self-Employment Tax? The tax treatment of the landowner is dis- cussed later under Landlord Participation in You must pay SE tax and file Schedule SE Farming. Qualified joint venture. If you and your (Form 1040) if your net earnings from self-em- spouse each materially participate as the only ployment were $400 or more. Contract farming. Under typical contract members of a jointly owned and operated farm, farming arrangements, the grower receives a and you file a joint tax return for the tax year, The SE tax rules apply no matter how fixed payment per unit of crops or finished live- you can make a joint election to be treated as a old you are and even if you are already ! stock delivered to the processor or packing qualified joint venture instead of a partnership CAUTION receiving social security or Medicare company. Because the grower typically fur- for the tax year. Making this election will allow benefits. nishes labor and bears some production risk, you to avoid the complexity of Form 1065 but the payments are reported on Schedule F still give each spouse credit for social security Aliens. Generally, resident aliens must pay (Form 1040) and are therefore subject to earnings on which retirement benefits are self-employment tax under the same rules that self-employment tax. based. For an explanation of “material participa- apply to U.S. citizens. Nonresident aliens aren’t tion,” see the instructions for Schedule C, line subject to self-employment tax unless an inter- 4-H Club or FFA project. If an individual par- G, and the instructions for Schedule F, line E. national social security agreement determines ticipates in a 4-H Club or National FFA Organi- Only businesses that are owned and that they are covered under the U.S. social se- zation (FFA) project, any net income received operated by spouses as co-owners curity system. Residents of the Virgin Islands, from sales or prizes related to the project may (and not in the name of a state law en- Puerto Rico, Guam, the Commonwealth of the be subject to income tax. Report the net income tity) qualify for the election. Thus, a business Northern Mariana Islands, or American Samoa as “Other income” on Schedule 1 (Form 1040), owned and operated by spouses through a limi- are subject to self-employment tax, as they are line 8. If necessary, attach a statement showing ted liability company does not qualify for the considered U.S. residents for self-employment the gross income and expenses. The net in- election of a qualified joint venture. tax purposes. For more information on aliens, come may not be subject to SE tax if the project see Pub. 519, U.S. Tax Guide for Aliens, and is primarily for educational purposes and not for To make this election, you must divide all the Instructions for Schedule SE (Form 1040). profit, and is completed by the individual under items of income, gain, loss, deduction, and the rules and economic restrictions of the spon- credit attributable to the business between you Are you self-employed? You are self-em- soring 4-H or FFA organization. Such a project and your spouse in accordance with your re- ployed if you carry on a trade or business (such is generally not considered a trade or business. spective interests in the venture. Each of you as running a farm) as a sole proprietor, an inde- For information on the filing requirements and must file a separate Schedule F and a separate pendent contractor, a member of a partnership, other tax information for dependents, see Pub. Schedule SE. For more information, see Quali- or are otherwise in business for yourself. A 929. fied Joint Ventures in the Instructions for Sched- trade or business is generally an activity carried ule SE (Form 1040). on for a livelihood or in good faith to make a Partners in a partnership. Generally, you are Community income. If you and your profit. self-employed if you are a member of a partner- spouse wholly own an unincorporated business ship that carries on a trade or business. as community property under the community Share farmer. You are a self-employed farmer property laws of a state, foreign country, or U.S. under an income-sharing arrangement if both Limited partner. If you are a limited part- possession, you can treat your wholly-owned, the following apply. ner, your partnership income is generally not subject to SE tax. However, guaranteed pay- unincorporated business as a sole proprietor- 1. You produce a crop or raise livestock on ments you receive for services you perform for ship, instead of a partnership. Any change in land belonging to another person. the partnership are subject to SE tax and your reporting position will be treated as a con- version of the entity. 2. Your share of the crop or livestock, or the should be reported to you in box 14 of your Report your income and deductions as fol- proceeds from their sale, depends on the Schedule K-1 (Form 1065). lows. amount produced. Community property. If you are a partner • If only one spouse participates in the busi- Your net farm profit or loss from the in- and your distributive share of any income or ness, all of the income from that business come-sharing arrangement is reported on loss from a trade or business carried on by the is the self-employment earnings of the Schedule F (Form 1040) and included in your partnership is community property, treat your spouse who carried on the business. self-employment earnings. share as your self-employment earnings. Don’t • If both spouses participate, the income and If you produce a crop or livestock on land treat any of your share as self-employment deductions are allocated to the spouses belonging to another person and are to receive earnings of your spouse. based on their distributive shares. a specified rate of pay, a fixed sum of money, or • If you and your spouse elected to treat the a fixed quantity of the crop or livestock, and not Business owned and operated by spouses. business as a qualifying joint venture, see a share of the crop or livestock or their pro- If you and your spouse jointly own and operate Qualified joint venture, earlier. a farm as an unincorporated business and ceeds, you may be either self-employed or an States with community property laws include share in the profits and losses, you are partners employee of the landowner. This will depend on Arizona, California, Idaho, Louisiana, Nevada, in a partnership whether or not you have a for- whether the landowner has the right to direct or New Mexico, Texas, Washington, and control your performance of services. mal partnership agreement. You must file Form

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Wisconsin. See Pub. 555 for more information held primarily for sale to customers isn’t inclu- surance deduction you report on Schedule 1 about community property laws. ded in self-employment earnings. It doesn’t (Form 1040), line 16, from self-employment matter whether the disposition is a sale, ex- earnings on Schedule SE (Form 1040). change, or involuntary conversion. For exam- Figuring ple, gains or losses from the disposition of the following types of property aren’t included in Landlord Participation Self-Employment self-employment earnings. in Farming • Investment property. Earnings • Depreciable property or other fixed assets As a general rule, income and deductions from used in your trade or business. rentals and from personal property leased with Farmer. If you are self-employed as a farmer, • Livestock held for draft, breeding, sport, or real estate aren’t included in determining use Schedule F (Form 1040) to figure your dairy purposes, and not held primarily for self-employment earnings. However, income self-employment earnings. sale, regardless of how long the livestock and deductions from farm rentals, including was held, or whether it was raised or pur- government commodity program payments re- Partnership income or loss. If you are a chased. ceived by a landowner who rents land, are in- member of a partnership that carries on a trade • Unharvested standing crops sold with land cluded if the rental arrangement provides that or business, the partnership should report your held more than 1 year. the landowner will, and does, materially partici- self-employment earnings in box 14, code A, of • Timber, coal, or iron ore held for more than pate in the production or management of pro- your Schedule K-1 (Form 1065). Box 14 of 1 year if an economic interest was re- duction of the farm products on the land. Schedule K-1 may also provide amounts for tained, such as a right to receive coal roy- gross farming or fishing income (code B) and alties. Material participation for landlords. You gross nonfarm income (code C). Use these materially participate if you have an arrange- amounts if you use the farm or nonfarm optional A gain or loss from the cutting of timber isn’t ment with your tenant for your participation and method to figure net earnings from self-employ- included in self-employment earnings if the cut- you meet one or more of the following tests. ment (see Methods for Figuring Net Earnings, ting is treated as a sale or exchange. For more later). information on electing to treat the cutting of 1. You do at least three of the following. If you are a general partner, you may need timber as a sale or exchange, see Timber in a. Pay, using cash or credit, at least half to reduce these reported earnings by amounts chapter 8. the direct costs of producing the crop you claim as a section 179 deduction, unreim- or livestock. bursed partnership expenses, or depletion on Wages and salaries. Wages and salaries re- b. Furnish at least half the tools, equip- oil and gas properties. ceived for services performed as an employee and covered by social security or railroad retire- ment, and livestock used in the pro- If the amount reported is a loss, include only duction activities. the deductible amount when you figure your to- ment aren’t included in self-employment earn- tal self-employment earnings. ings. c. Advise or consult with your tenant on For more information, see the Partner's In- Wages paid in kind to you for agricultural la- something like deciding what crops to structions for Schedule K-1 (Form 1065). bor performed as an employee, such as com- plant, the type of seed or fertilizer to modity wages, aren’t included in self-employ- For general information on partnerships, see use, or when and at what price the ment earnings. Pub. 541. crops should be sold. Retired partner. Retirement income received d. Inspect the production activities peri- More than one business. If you have self-em- by a partner from his or her partnership under a odically. ployment earnings from more than one trade, written plan isn’t included in self-employment business, or profession, you generally must 2. You regularly and frequently make, or take earnings if all the following apply. combine the net profit or loss from each to de- an important part in making, management • The retired partner performs no services termine your total self-employment earnings. A decisions substantially contributing to or for the partnership during the year. loss from one business reduces your profit from affecting the success of the enterprise. For • The retired partner is owed only the retire- another business. However, don’t combine example, decisions about when and ment payments. earnings from farm and nonfarm businesses if where to plant or spray, when to harvest, • The retired partner's share (if any) of the you are using one of the optional methods (dis- what standards to follow, and what re- partnership capital was fully paid to the re- cussed later) to figure net earnings. cords to keep. tired partner. The payments to the retired partner are 3. You work 100 hours or more spread over a Community property. If any of the income • lifelong periodic payments. period of 5 weeks or more in activities con- from a farm or business, other than a partner- nected with agricultural production. ship, is community property under state law, it is Conservation Reserve Program (CRP) pay- included in the self-employment earnings of the 4. You do things that, considered in their to- ments. Under the CRP, if you own or operate spouse carrying on the trade or business. tality, show you are materially and signifi- highly erodible or other specified cropland, you cantly involved in the production of the may enter into a long-term contract with the Payments for lost income. Include in farm commodities. USDA, agreeing to convert to a less intensive self-employment earnings any payments you use of that cropland. You must include the an- These tests may be used as general guides for receive from insurance or other sources to re- nual rental payments and any one-time incen- determining whether you are a material partici- place income lost because you reduced or tive payment you receive under the program on pant. stopped farming activities. These include USDA Schedule F, lines 4a and 4b. Cost-share pay- payments under the Dairy Margin Coverage ments you receive may qualify for the cost-shar- Crop shares. Rent paid in the form of crop (DMC) Program, which provides dairy produc- ing exclusion. See Cost-Sharing Exclusion (Im- shares is included in self-employment earnings ers with payments when dairy margins are be- provements), earlier, in chapter 3. CRP for the year you sell, exchange, give away, or low the margin coverage levels. Even if you payments are reported to you on Form 1099-G. use the crop shares if you meet one of the four aren’t farming when you receive the payment, it material participation tests (discussed above) at is included in self-employment earnings if it re- Individuals who are receiving social se- the time the crop shares are produced. Feeding lates to your farm business (even though it is TIP curity retirement or disability benefits such crop shares to livestock is considered us- temporarily inactive). A connection exists if it is may exclude CRP payments when cal- ing them. Your gross income for figuring your clear the payment would not have been made culating self-employment tax. See the Instruc- self-employment earnings includes the fair mar- but for your conduct of your farm business. tions for Schedule SE (Form 1040). ket value of the crop shares when they are used as feed. Gain or loss. A gain or loss from the disposi- Self-employed health insurance deduction. tion of property that is neither stock in trade nor You can’t deduct the self-employed health in-

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Figure 12-1. Can I Use the Optional Methods?

START here to determine if START here to determine if you can use the nonfarm you can use the farm optional method. optional method.

Are your net nonfarm pro ts No Is your gross farm income less than $6,107? $8,460 or less?

Yes Yes No Are your net nonfarm pro ts No less than 72.189% of your gross nonfarm income? You can Yes Are your net farm pro ts use the less than $6,107? Yes farm optional No Were your actual net earnings method.* from self-employment $400 or No See Table You can’t use the more in at least 2 of the 3 tax 12-1. farm optional method. years before this year?

Yes

Have you previously used this method less than 5 years? No (Note: There is a 5-year lifetime limit.)

Yes You can’t use the nonfarm You can use the nonfarm optional optional method.* See method. Pub. 334.

*If you use both optional methods, see Using Both Optional Methods, later, for limits on the amount to report.

Example. Nancy agrees to produce a crop 3. The nonfarm optional method. the deduction for one-half of SE tax on Form on G. Cohen's cotton farm, with each receiving 1040 or Form 1040-SR, which may affect your half the proceeds. Cohen agrees to furnish all You must use the regular method to the extent eligibility for credits, deductions, or other items the necessary equipment, and it is understood you don’t use one or both of the optional meth- that are subject to an AGI limit. Figure your AGI that Cohen will advise Nancy on when to plant, ods. See Figure 12-1, to see if you are eligible with and without using the optional methods to spray, and pick the cotton. It is also understood to use an optional method. see if the optional methods will benefit you. that he will inspect the crop every few days to If you use either or both optional methods, determine whether Nancy is properly taking Why use an optional method? You may you must figure and pay the SE tax due under care of the crop. Under their arrangement, it is want to use the optional methods (discussed these methods even if you would have had a further understood that Nancy will furnish all la- later) when you have a loss or a small net profit smaller SE tax or no SE tax using the regular bor needed to grow and harvest the crop. Co- and any one of the following applies. method. hen provides the advice, makes inspections, • You want to receive credit for social secur- The optional methods may be used only to and furnishes the equipment; and Nancy fur- ity benefit coverage. figure your SE tax. To figure your income tax, nishes all labor needed to grow and harvest the • You incurred child or dependent care ex- include your actual self-employment earnings in crop. penses for which you could claim a credit. gross income, regardless of which method you The management decisions made by Cohen (An optional method may increase your use to determine SE tax. in connection with the care of the cotton crop earned income, which could increase your and his regular inspection of the crop establish credit.) that Cohen participates to a material degree in • You are entitled to the earned income Regular Method the cotton production operations. The income credit. (An optional method may increase Cohen receives from the cotton farm is included your earned income, which could increase To figure net earnings using the regular in Cohen’s self-employment earnings. your credit.) method, multiply your self-employment earn- • You are entitled to the additional child tax ings by 92.35% (0.9235). For your net earnings credit. (An optional method may increase figured using the regular method, see line 4a of Methods for Figuring Net your earned income, which could increase your Schedule SE (Form 1040). your credit.) Earnings Net earnings figured using the regular Effects of using an optional method. Using method are also called “actual net earnings.” There are three ways to figure net earnings an optional method could increase your SE tax. from self-employment. Paying more SE tax may result in you getting higher social security disability or retirement Farm Optional Method 1. The regular method. benefits. 2. The farm optional method. Using the optional methods may also de- Use the farm optional method only for self-em- crease your adjusted gross income (AGI) due to ployment earnings from a farming business.

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You can use this method if you meet either of method for determining your farm net earnings the following tests. and even if you have a net loss from your non- farm business. For more information about the 1. Your gross farm income is $8,460 or less. nonfarm optional method, see Pub. 334. 13. 2. Your net farm profits are less than $6,107. You can’t combine farm and nonfarm Gross farm income. Your gross farm income ! self-employment earnings to figure is the total of the amounts from: CAUTION your net earnings under either of the Employment • Schedule F (Form 1040), line 9, and optional methods. • Schedule K-1 (Form 1065), box 14, code B Taxes (from farm partnerships). Using Both Optional Net farm profits. Net farm profits generally are Methods the total of the amounts from: What's New for 2020 • Schedule F (Form 1040), line 34, and If you use both optional methods, you must add • Schedule K-1 (Form 1065), box 14, code A the net earnings figured under each method to Coronavirus (COVID-19) related employ- (from farm partnerships). arrive at your total net earnings from self-em- ment tax credits and other tax relief. ployment. You can report less than your total • The Families First Coronavirus Response If you received social security retirement or dis- actual farm and nonfarm net earnings but not ability benefits, you must subtract the amount of Act (the "FFCRA"), enacted on March 18, less than actual nonfarm net earnings. If you 2020, provides small and midsize employ- any Conservation Reserve Program payments use both optional methods, you can report no included on your Schedule F, line 4b, or listed ers refundable tax credits that reimburse more than $5,640 as your combined net earn- them for the cost of providing paid sick and on Schedule K-1 (Form 1065), box 20, code ings from self-employment. AH. You may also need to adjust the amount re- family leave wages to their employees for ported on Schedule K-1 if you are a general leave related to COVID-19. The credit for partner or if it is a loss. For more information, qualified sick and family leave wages is see Partnership income or loss, earlier. Reporting claimed on Form 943, Employer’s Annual Self-Employment Tax Federal Tax Return for Agricultural Em- Figuring farm net earnings. If you meet ei- ployees. For more information about the credit for qualified sick and family leave ther of the two tests explained above, use Ta- Use Schedule SE (Form 1040) to figure and re- ble 12-1 to figure your net earnings from wages, including the dates for which the port your SE tax. Then, enter the SE tax on credit may be claimed, see the Instructions self-employment under the farm optional Schedule 2 (Form 1040), line 4, and attach method. for Form 943, and go to IRS.gov/PLC. Schedule SE to Form 1040 or Form 1040-SR. • The Coronavirus Aid, Relief, and Eco- Table 12-1. Figuring Farm Net If you have to pay SE tax, you must file nomic Security Act (CARES Act), enacted Earnings Form 1040 or Form 1040-SR (with on March 27, 2020, provides eligible em- Schedule SE attached) even if you ployers with an employee retention tax IF your gross farm THEN your net don’t otherwise have to file a federal income tax credit if they keep employees on their pay- income earnings are return. roll, despite experiencing economic hard- ship related to COVID-19. The employee is... equal to... retention credit is claimed on Form 943. Self-employment tax deduction. You can $8,460 or less Two-thirds of your For more information about the employee deduct half of your SE tax in figuring your adjus- gross farm income retention credit, including the dates for ted gross income. This deduction only affects which the credit may be claimed, see the More than $8,460 $5,640 your income tax. It doesn’t affect either your net Instructions for Form 943, and go to earnings from self-employment or your SE tax. IRS.gov/ERC. To deduct the tax, enter on Schedule 1 The CARES Act also allows employers to Optional method can reduce or eliminate • (Form 1040), line 14, the amount from line 13 of defer the deposit and payment of the em- SE tax. If your gross farm income is $8,460 or Schedule SE (Form 1040). ployer share of social security taxes. The less and your farm net earnings figured under deferred amount is reported on Form 943. the farm optional method are less than your ac- Joint return. Even if you file a joint return, you For more information about the deferral of tual farm net earnings, you can use the farm op- can’t file a joint Schedule SE. This is true the employer share of social security tional method to reduce or eliminate your SE whether one spouse or both spouses have taxes, including the dates that deposits tax. Your actual farm net earnings are your farm self-employment earnings. Your spouse isn’t may be deferred and when they must be net earnings figured using the regular method, considered self-employed just because you paid, see the Instructions for Form 943, explained earlier. are. If both of you have self-employment earn- and go to IRS.gov/ETD. ings, each of you must complete a separate • The Presidential Memorandum on Defer- Example. Your gross farm income is $540 Schedule SE. Attach both schedules to the joint ring Payroll Tax Obligations in Light of the and your net farm profit is $460. Consequently, return. If you and your spouse operate a busi- Ongoing COVID-19 Disaster, issued on your net earnings figured under the farm op- ness as a partnership, see Business owned and August 8, 2020, directs the Secretary of tional method are $360 (2/3 of $540) and your operated by spouses and Qualified joint ven- the Treasury to defer the withholding, de- actual net earnings are $425 (92.35% of $460). ture, earlier, under Who Must Pay Self-Employ- posit, and payment of the employee share You owe no SE tax if you use the optional ment Tax. method because your net earnings under the of social security tax on wages paid during farm optional method are less than $400. the period from September 1, 2020, through December 31, 2020. The deferral of the withholding and payment of the em- Nonfarm Optional Method ployee share of social security tax is avail- able for employees whose social security This is an optional method available for deter- wages paid for a biweekly pay period are mining net earnings from nonfarm self-employ- less than $4,000, or the equivalent thresh- ment, much like the farm optional method. old amount for other pay periods. For more If you are also engaged in a nonfarm busi- information about the deferral of the em- ness, you may be able to use this method to fig- ployee share of social security tax, see the ure your nonfarm net earnings. You can use this Instructions for Form 943 and Notice method even if you don’t use the farm optional

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2020-65, 2020-38 I.R.B. 567, available at the redesigned form. Similarly, any other em- Act of 2014 required the IRS to establish a vol- IRS.gov/irb/2020-38_IRB#NOT-2020-65. ployees who wish to adjust their withholding untary certification program for PEOs. PEOs Social security and Medicare tax for 2020. must use the redesigned form. A new employee handle various payroll administration and tax The rate of social security tax on taxable wa- who is first paid wages in 2020, including an reporting responsibilities for their business cli- ges, except for qualified sick leave wages and employee who previously worked for you and ents and are typically paid a fee based on pay- qualified family leave wages, is 6.2% (0.062) was rehired in 2020, and who fails to furnish a roll costs. To become and remain certified un- each for the employer and employee or 12.4% Form W-4 will be treated as if they had checked der the certification program, certified (0.124) for both. Qualified sick leave wages and the box for Single or Married filing separately in professional employer organizations (CPEOs) qualified family leave wages aren't subject to Step 1(c) and made no entries in Step 2, Step must meet various requirements described in the employer share of social security tax; there- 3, or Step 4 of the 2020 Form W-4. However, an sections 3511 and 7705 and related published fore, the tax rate on these wages is 6.2% employee who was paid wages in 2019 and guidance. Certification as a CPEO may affect (0.062). The social security wage base limit is who failed to furnish a Form W-4 should con- the employment tax liabilities of both the CPEO $137,700. tinue to be treated as single and claiming zero and its customers. A CPEO is generally treated allowances on a 2019 Form W-4. For the latest for employment tax purposes as the employer The Medicare tax rate is 1.45% (0.0145) information about developments related to of any individual who performs services for a each for the employee and employer, un- Form W-4, go to IRS.gov/FormW4. customer of the CPEO and is covered by a con- changed from 2019. There is no wage base tract described in section 7705(e)(2) between limit for Medicare tax. New Form 1099-NEC. There is a new Form 1099-NEC to report nonemployee compensa- the CPEO and the customer (CPEO contract), 2020 withholding tables. The federal income tion paid in 2020. The 2020 Form 1099-NEC is but only for wages and other compensation tax withholding tables are now included in Pub. due February 1, 2021. paid to the individual by the CPEO. To become 15-T, Federal Income Tax Withholding Meth- a CPEO, the organization must apply through ods. the IRS Online Registration System. For more What's New for 2021 information or to apply to become a CPEO, go Redesigned Form W-4 for 2020. The IRS to IRS.gov/CPEO. Also see Revenue Proce- has redesigned Form W-4 for 2020. In the past, dure 2017-14, 2017-3 I.R.B. 426, available at Social security and Medicare tax for 2021. the value of a withholding allowance was tied to IRS.gov/irb/2017-03_IRB#RP-2017-14. The employee and employer tax rates for social the amount of the personal exemption. Due to security and the maximum amount of wages CPEOs must generally file Form 943 and changes in the law, taxpayers can no longer subject to social security tax for 2021 will be Schedule R (Form 943), Allocation Schedule for claim personal exemptions or dependency ex- discussed in Pub. 51 (for use in 2021). Aggregate Form 943 Filers, electronically. For emptions; therefore, the 2020 Form W-4 no lon- more information about a CPEO's requirement The Medicare tax rate for 2021 will also be ger asks an employee to report the number of to file electronically, see Regulations section discussed in Pub. 51 (for use in 2021). There is withholding allowances that they are claiming. 31.3511-1(g)(2). However, CPEOs are permit- no limit on the amount of wages subject to Med- The revised Form W-4 is divided into five steps. ted to file a paper Form 943 and its accompany- icare tax. Step 1 and Step 5 apply to all employees. In ing schedules in lieu of electronic submissions Step 1, employees enter personal information for calendar year 2020. For more information like their name and filing status. In Step 5, em- Reminders about the waiver for 2020, see Notice 2020-35, ployees sign the form. Employees who com- 2020-25 I.R.B. 948, available at IRS.gov/irb/ plete only Step 1 and Step 5 will have their with- 2020-25_IRB#NOT-2020-35. holding figured based on their filing status's Additional employment tax information for standard deduction and tax rates with no other farmers. See Pub. 51 for more detailed guid- Correcting a previously filed Form 943. If adjustments. If applicable, in Step 2, employees ance on employment taxes for employers of ag- you discover an error on a previously filed Form increase their withholding to account for higher ricultural workers. For the latest information 943, make the correction using Form 943-X, tax rates due to income from other jobs in their about developments related to Pub. 51, such as Adjusted Employer's Annual Federal Tax Re- household. Under Step 2, employees either en- legislation enacted after it was published, go to turn for Agricultural Employees or Claim for Re- ter an additional amount to withhold in Step 4(c) IRS.gov/Pub51. For general tax information rel- fund. Form 943-X is filed separately from Form per payroll period or check the box in Step 2(c) evant to agricultural employers, go to IRS.gov/ 943. For more information on correcting Form for higher withholding rate tables to apply to AgricultureTaxCenter. For general information 943, see the Instructions for Form 943-X, sec- their wages. In Step 3, employees decrease about employment taxes, go to IRS.gov/ tion 9 of Pub. 51, or go to IRS.gov/ their withholding by reporting the annual EmploymentTaxes. For information about em- CorrectingEmploymentTaxes. amount of any credits they will claim on their in- ployer responsibilities under the Affordable Federal tax deposits must be made by elec- come tax return. In Step 4, employees may in- Care Act, go to IRS.gov/ACA. For information tronic funds transfer (EFT). You must use crease or decrease their withholding based on about COVID-19 tax relief, go to IRS.gov/ EFT to make all federal tax deposits. Generally, the annual amount of other income or deduc- Coronavirus. an EFT is made using the Electronic Federal tions they will report on their income tax return Qualified small business payroll tax credit Tax Payment System (EFTPS). If you don't and they may also request any additional fed- for increasing research activities. For tax want to use EFTPS, you can arrange for your eral income tax they want withheld each pay years beginning after 2015, a qualified small tax professional, financial institution, payroll period. business may elect to claim up to $250,000 of service, or other trusted third party to make Employees who have submitted Form W-4 its credit for increasing research activities as a electronic deposits on your behalf. Also, you in any year before 2020 aren't required to sub- payroll tax credit against the employer's share may arrange for your financial institution to ini- mit a new form merely because of the redesign. of social security tax. The payroll tax credit elec- tiate a same-day wire payment on your behalf. Employers will continue to figure withholding tion must be made on or before the due date of EFTPS is a free service provided by the Depart- based on the information from the employee's the originally filed income tax return (including ment of the Treasury. Services provided by your most recently submitted Form W-4. The with- extensions). The portion of the credit used tax professional, financial institution, payroll holding tables in Pub. 15-T allow employers to against the employer's share of social security service, or other third party may have a fee. figure withholding based on a Form W-4 for an tax is allowed in the first calendar quarter begin- For more information on making federal tax earlier year as well as the redesigned 2020 ning after the date that the qualified small busi- deposits, see section 7 of Pub. 51. To get more Form W-4. While you may ask your employees ness filed its income tax return. The first Form information about EFTPS or to enroll in EFTPS, hired before 2020 to submit new Forms W-4 us- 943 that you could claim this credit on was go to EFTPS.gov or call 800-555-4477 or ing the redesigned version of the form, you Form 943 filed for calendar year 2017. For more 800-733-4829 (TDD). Additional information should explain to them that they aren't required information, see the Instructions for Form 943 about EFTPS is also available in Pub. 966. to do this and if they don't submit a new Form and go to IRS.gov/ResearchPayrollTC. Electronic filing and payment. Businesses W-4, withholding will continue based on a valid Certification program for professional em- can enjoy the benefits of filing tax returns and Form W-4 previously submitted. All newly hired ployer organizations (PEOs). The Stephen paying their federal taxes electronically. employees first paid wages after 2019 must use Beck, Jr., Achieving a Better Life Experience Whether you rely on a tax professional or

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handle your own taxes, the IRS offers you con- • File Form 940, Employer's Annual Federal If you deferred the employer share of venient programs to make filing and paying eas- Unemployment (FUTA) Tax Return, with social security tax under the CARES ier. Spend less time worrying about taxes and the IRS. If you deposited all the FUTA tax Act, one-half is due by December 31, more time running your business. Use e-file and when due, you may file Form 940 by Feb- 2021, and the remainder is due by December EFTPS to your benefit. ruary 10. 31, 2022. If you deferred the employee share of • For e-file, go to IRS.gov/EmploymentEfile • File Copy A of all paper and electronic social security taxes under Notice 2020-65, you for additional information. A fee may be Forms W-2 with Form W-3, Transmittal of must withhold and pay the deferred taxes rata- charged to file electronically. Wage and Tax Statements, with the Social bly from wages paid between January 1, 2021, • For EFTPS, go to EFTPS.gov or call Security Administration (SSA). If filing elec- and April 30, 2021. For more information and EFTPS Customer Service at 800-555-4477 tronically, the SSA generates Form W-3 payment instructions, see the Instructions for or 800-733-4829 (TDD) for additional infor- automatically based on your Forms W-2. Form 943, IRS.gov/ETD, and Notice 2020-65. mation. For more information on reporting Form • For electronic filing of Form W-2, Wage W-2 information to the SSA electronically, and Tax Statement, go to SSA.gov/ go to the SSA’s Employer W-2 Filing In- Introduction employer. You may be required to file structions & Information webpage at Forms W-2 electronically. For details, see SSA.gov/employer. You’re generally required to withhold federal in- the General Instructions for Forms W-2 • Furnish each employee with a completed come tax from the wages of your employees. and W-3. Form W-2. You may be required to withhold social security • File Copy A of all paper and electronic and Medicare taxes from your employees' wa- Work opportunity tax credit for qualified Forms 1099-NEC, Nonemployee Compen- ges and pay the employer's share of these tax-exempt organizations hiring qualified sation, that report nonemployee compen- taxes under the Federal Insurance Contribu- veterans. Qualified tax-exempt organizations sation with Form 1096, Annual Summary tions Act (FICA). You may also have to pay fed- that hire eligible unemployed veterans may be and Transmittal of U.S. Information Re- eral unemployment tax under the Federal Un- able to claim the work opportunity tax credit turns, with the IRS. For information on filing employment Tax Act (FUTA). You must also against their payroll tax liability using Form information returns electronically with the withhold Additional Medicare Tax from wages 5884-C. For more information, go to IRS.gov/ IRS, see Pub. 1220. Other Forms 1099, in- you pay to an employee in excess of $200,000 WOTC. cluding Forms 1099-MISC, have different in a calendar year. This chapter includes infor- due dates. For details about filing Forms mation about these taxes. 1099 and for information about required You must also pay self-employment tax on Important Dates for 2021 electronic filing, see the General Instruc- your net earnings from farming. See chapter 12 tions for Certain Information Returns for for information on self-employment tax. You should take the action indicated by the general information, and the separate, dates listed. The dates listed here aren't specific instructions for each information adjusted for Saturdays, Sundays, and legal return you file (for example, the Instruc- Topics This chapter discusses: holidays (see the TIP next). Pub. 509, Tax tions for Forms 1099-MISC and Calendars (for use in 2021), adjusts the dates 1099-NEC). for Saturdays, Sundays, and legal holidays. • Furnish each recipient to whom you paid • Farm employment; Due dates for deposits of withheld federal $600 or more in nonemployee compensa- • Family employees; income taxes, social security taxes, and tion with a completed Form 1099-NEC. • Crew leaders; Medicare taxes aren't listed here. Also, the due • File Form 945, Annual Return of Withheld • Social security and Medicare taxes; dates for forms required for health coverage Federal Income Tax, with the IRS to report • Federal income tax withholding; reporting aren't listed here. For these dates, see any nonpayroll income tax withheld. If you • Required notice to employees about the Pub. 509. deposited all Form 945 taxes when due, earned income credit (EIC); you may file Form 945 by February 10. • Reporting and paying social security, If any date shown next for filing a re- Medicare, and withheld federal income TIP turn, furnishing a form, or depositing By February 15. Ask for a new Form W-4, Em- taxes; and taxes falls on a Saturday, Sunday, or ployee’s Withholding Certificate, or Formulario • FUTA tax. legal holiday, the due date is the next business W-4(SP) from each employee who claimed ex- day. The term “legal holiday” means any legal emption from federal income tax withholding holiday in the District of Columbia. Legal holi- last year. Useful Items days in the District of Columbia are provided in You may want to see: On February 16. Any Form W-4 claiming ex- section 7 of Pub. 51. A statewide legal holiday emption from withholding for the previous year delays a filing or furnishing due date only if the Publication has now expired. Begin withholding for any em- IRS office where you’re required to file a return ployee who previously claimed exemption from 15 15 Employer's Tax Guide or furnish a form is located in that state. How- withholding but hasn't given you a new Form ever, a statewide legal holiday doesn't delay the 15-A 15-A Employer's Supplemental Tax Guide W-4 for the current year. If the employee due date of federal tax deposits. For any due

doesn't give you a new Form W-4, withhold 15-B date, you will meet the “file” or “furnish” date re- 15-B Employer's Tax Guide to Fringe taxes as if he or she had checked the box for quirement if the envelope containing the tax re- Benefits Single or Married filing separately in Step 1(c) turn or form is properly addressed, contains suf- and made no entries in Step 2, Step 3, or Step 15-T 15-T Federal Income Tax Withholding ficient postage, and is postmarked by the U.S. 4 of the 2021 Form W-4. If the employee fur- Methods Postal Service on or before the due date, or nishes a new Form W-4 claiming exemption sent by an IRS-designated private delivery 51 51 Agricultural Employer's Tax Guide from withholding after February 15, you may ap- service (PDS) on or before the due date. Go to

ply the exemption to future wages, but don't re- 926 926 Household Employer's Tax Guide IRS.gov/PDS for the current list of PDSs. For fund taxes withheld while the exempt status the IRS mailing address to use if you're using a wasn't in place. Form (and Instructions) PDS, go to IRS.gov/PDSstreetAddresses.

By April 30, July 31, October 31, and Janu- W-2 W-2 Wage and Tax Statement Fiscal year taxpayers. The due dates listed ary 31. Deposit FUTA taxes. Deposit FUTA next apply whether you use a calendar or a fis- W-4 W-4 Employee's Withholding Certificate tax due if the undeposited amount is over $500. cal year.

W-9 W-9 Request for Taxpayer Identification Before December 1. Remind employees to By January 31. Number and Certification • File Form 943 with the IRS. If you depos- submit a new Form W-4 if their filing status,

ited all Form 943 taxes when due, you may other income, deductions, or credits have 940 940 Employer's Annual Federal file Form 943 by February 10. changed or will change for the next year. Unemployment (FUTA) Tax Return

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943 943 Employer's Annual Federal Tax should submit Form SS-5, Application for a So- Medicare taxes. Payments for the services of Return for Agricultural Employees cial Security Card, to the SSA. Form SS-5 is your child under age 21 employed by you, available from any SSA office or by calling whether or not in your trade or business, aren't

943-X 943-X Adjusted Employer's Annual 800-772-1213. It is also available from the subject to FUTA tax. Although not subject to so- Federal Tax Return for Agricultural SSA's website at SSA.gov/online/ss-5.pdf. cial security, Medicare, or FUTA tax, the child's Employees or Claim for Refund The employee must furnish evidence of age, wages may still be subject to federal income tax See chapter 16 for information about getting identity, and U.S. citizenship or lawful immigra- withholding. publications and forms. tion status permitting employment with the Form SS-5. Exemptions for your spouse. Payments for the services of your spouse who works for you Farm Employment Form I-9. You must verify that each new em- in your trade or business are subject to federal ployee is legally eligible to work in the United income tax withholding and social security and In general, you’re an employer of farmworkers if States. This includes completing the U.S. Citi- Medicare taxes, but not FUTA tax. your employees do any of the following types of zenship and Immigration Services (USCIS) Payments for the services of your spouse work. Form I-9, Employment Eligibility Verification. employed by you in other than a trade or busi- • Raising or harvesting agricultural or horti- You can get Form I-9 at USCIS.gov/Forms. For ness, such as payments for household services cultural products on a farm, including rais- more information, visit the USCIS website at in your home, aren't subject to social security, ing and feeding of livestock. USCIS.gov/I-9-Central or call 800-375-5283 or Medicare, or FUTA taxes. • Operating, managing, conserving, improv- 800-767-1833 (TTY). Employers and employ- ing, or maintaining your farm and its tools ees in Puerto Rico ONLY may use the Spanish Nonexempt services of a child or spouse. and equipment, if the major part of such version of Form I-9. Payments for the services of your child or service is performed on a farm. You may use the Social Security Number spouse are subject to federal income tax with- • Services performed in salvaging timber, or Verification Service (SSNVS) at SSA.gov/ holding as well as social security, Medicare, clearing land of brush and other debris, left employer/ssnv.htm to verify that an employee and FUTA taxes if he or she works for any of by a hurricane (also known as hurricane la- name matches an SSN. A person may have a the following entities. bor), if the major part of such service is valid SSN but not be authorized to work in the • A corporation, even if it is controlled by performed on a farm. United States. You may use E-Verify at e- you. • Handling, processing, or packaging any verify.gov to confirm the employment eligibility • A partnership, even if you’re a partner. This agricultural or horticultural commodity in its of newly hired employees. doesn't apply to wages paid to your child if unmanufactured state if you produced each partner is a parent of the child. more than half of the commodity (for a Form W-4. You should give each new em- • An estate or trust, even if it is the estate of group of up to 20 unincorporated opera- ployee a Form W-4 as soon as you hire the em- a deceased parent. tors, all of the commodity). ployee. For Spanish-speaking employees, you In these situations, the child or spouse is con- • Work related to cotton ginning, turpentine, may use Formulario W-4(SP), which is the sidered to work for the corporation, partnership, gum resin products, or the operation and Spanish translation of Form W-4. Have the em- or estate, not you. maintenance of irrigation facilities. ployee complete and return Form W-4 to you before the first payday. If the employee doesn't Exemptions for your parent. Payments for For more information, see sections 2 and 12 of return the completed form, you must withhold Pub. 51. the services of your parent employed by you in federal income tax as if the employee had your trade or business are subject to federal in- Generally, a worker who performs services checked the box for Single or Married filing sep- come tax withholding and social security and for you is your employee if you have the right to arately in Step 1(c) and made no entries in Step Medicare taxes. Social security and Medicare control what will be done and how it will be 2, Step 3, or Step 4 of Form W-4. taxes don't apply to wages paid to your parent done. This is so even when you give the em- for services not in your trade or business, but ployee freedom of action. What matters is that New hire reporting. You’re required to report they do apply to payments for household serv- you have the right to control the details of how any new employee to a designated state new ices in your home if both of the following condi- the services are performed. You’re responsible hire registry. A new employee is an employee tions are satisfied. for withholding and paying employment taxes who hasn’t previously been employed by you or • You have a child (including an adopted for your employees. You’re also required to file was previously employed by you but has been child or stepchild) living in your home who employment tax returns. These requirements separated from such prior employment for at is under age 18 or has a physical or mental don't apply to amounts that you pay to inde- least 60 consecutive days. Many states accept condition that requires care by an adult for pendent contractors, as discussed later under a copy of Form W-4 with employer information at least 4 continuous weeks in the calendar Nonemployee compensation. See sections 1 added. Visit the Office of Child Support En- quarter services were performed. and 2 of Pub. 15-A for more information on how forcement website at acf.hhs.gov/css/ • You’re a widow or widower; or divorced to determine whether an individual providing employers for more information. and not remarried; or have a spouse in the services is an independent contractor or an em- home who, because of a physical or men- ployee. tal condition, can't care for your child for at Family Employees least 4 continuous weeks in the calendar If you employ a family of workers, each quarter services were performed. worker subject to your control (not just the head Generally, the wages you pay to family mem- Wages you pay to your parent aren't subject of the family) is an employee. bers who are your employees are subject to to FUTA tax, regardless of the type of services employment taxes. However, certain exemp- Special rules apply to crew leaders. See provided. Crew Leaders, later. tions may apply to wages paid to your child, spouse, or parent. Qualified joint venture. If spouses elect to be Employer identification number (EIN). If treated as a qualified joint venture instead of a Exemptions for your child. Payments for the you’re required to report employment taxes or partnership, either spouse may report and pay services of your child under age 18 who works give tax statements to employees, you must the employment taxes due on the wages paid to for you in your trade or business (including a have an EIN. If you don't have an EIN, you may employees using the EIN of that spouse's sole farm) aren't subject to social security and Medi- apply for one online by visiting IRS.gov/EIN. proprietorship. For more information about care taxes. However, see Nonexempt services You may also apply for an EIN by faxing or mail- qualified joint ventures, see chapter 12. ing Form SS-4 to the IRS. of a child or spouse, later. Payments for the services of your child under age 21 employed Employee's social security number (SSN). by you in other than a trade or business, such An employee who doesn't have an SSN and is as payments for household services in your legally eligible to work in the United States home, also aren't subject to social security or

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or other goods or commodities. Noncash wa- ges paid to farmworkers, including commodity Crew Leaders Social Security and wages, aren't subject to social security and Medicare Taxes Medicare taxes. However, they are subject to If farmworkers are provided by a crew leader, these taxes if the substance of the transaction the crew leader may be the employer of the is a cash payment. For information on lodging All cash wages you pay to an employee during workers. provided as a condition of employment, see the year for farmwork are subject to social se- Pub. 15-B. curity and Medicare taxes if you meet either of Social security and Medicare taxes. For so- Report the value of noncash wages in box 1 cial security and Medicare tax purposes, the the following tests. • You pay the employee $150 or more in of Form W-2 together with cash wages. Don't crew leader is the employer of the workers if show noncash wages in box 3 or in box 5 (un- both of the following requirements are met. cash wages (count all wages paid on a time, piecework, or other basis) during the less the substance of the transaction is a cash • The crew leader pays (either on his or her payment). own behalf or on behalf of the farmer) the year for farmwork (the $150 test). The $150 test applies separately to each farm- workers for their farm labor. Tax rates and social security wage limit. worker that you employ. If you employ a • The crew leader hasn't entered into a writ- For 2020, the employer and the employee will family of workers, each member is treated ten agreement with the farmer under which pay the following taxes. separately. Don't count wages paid by the crew leader is designated as an em- The employer and employee each pay other employers. • ployee of the farmer. 6.2% of cash wages for social security tax • You pay cash and noncash wages of (old-age, survivors, and disability insur- If both requirements are met, the crew $2,500 or more during the year to all your ance). Qualified sick leave wages and leader isn't considered the employee of the employees for farmwork (the $2,500 test). farmer for services performed by the crew qualified family leave wages aren't subject leader in furnishing farmworkers and as a mem- If the $2,500 test for the group isn't met, the to the employer share of social security ber of the crew. $150 test for an employee still applies. tax; therefore, the tax rate on these wages is 6.2%. Federal income tax withholding. If the crew Exceptions. Annual cash wages of less than • The employer and employee each pay leader is the employer for social security and $150 you pay to a seasonal farmworker aren't 1.45% of cash wages for Medicare tax Medicare tax purposes, the crew leader is the subject to social security and Medicare taxes, (hospital insurance). employer for federal income tax withholding even if you pay $2,500 or more to all your farm- • The employee pays 0.9% of cash wages in purposes. workers. However, these wages count toward excess of $200,000 for Additional Medi- the $2,500 test for determining whether other care Tax. Federal unemployment (FUTA) tax. For farmworkers' wages are subject to social secur- See Coronavirus (COVID-19) related FUTA tax purposes, the crew leader is the em- ity and Medicare taxes. TIP employment tax credits and other tax ployer of the workers if, in addition to the earlier A seasonal farmworker is a worker who: relief, earlier, under What’s New for in- requirements, either of the following require- • Works as a hand-harvest laborer, formation about the deferral of the employer ments is met. • Is paid piece rates in an operation usually and employee share of social security tax which The crew leader is registered under the Mi- • paid on this basis in the region of employ- is available for certain wage payments during grant and Seasonal Agricultural Worker ment, 2020. Protection Act. • Commutes daily from his or her permanent • Substantially all crew members operate or home to the farm, and Wage limit. The limit on wages subject to maintain mechanized equipment provided • Worked in agriculture less than 13 weeks the social security tax for 2020 is $137,700. by the crew leader as part of the service to in the preceding calendar year. There is no limit on wages subject to the Medi- the farmer. See Family Employees, earlier, for certain care tax. All covered wages are subject to the The farmer is the employer of workers fur- exemptions from social security and Medicare Medicare tax. Additionally, all wages in excess nished by a crew leader in all other situations. In taxes that apply to your child, spouse, and pa- of $200,000 are subject to Additional Medicare addition, the farmer is the employer of workers rent. Tax withholding. furnished by a registered crew leader if the workers are the employees of the farmer under Religious exemption. An exemption from Paying employee's share. If you would rather the common-law test. For example, some farm- social security and Medicare taxes is available pay the employee's share of social security and ers employ individuals to recruit farmworkers to members of a recognized religious group or Medicare taxes without deducting it from his or exclusively for them. Although these individuals division opposed to public insurance. This ex- her wages, you may do so. It is additional in- may be required to register under the Migrant emption is available only if both the employee come to the employee. You must include it in and Seasonal Agricultural Worker Protection and the employer are members of the group or box 1 of the employee's Form W-2, but don't Act, the workers are employed directly by the division. These employees are still subject to count it as social security and Medicare wages farmer. The farmer is the employer in these ca- federal income tax. For more information, see (boxes 3 and 5 of Form W-2) or as wages for ses. For information about common-law em- Pub. 517. FUTA tax purposes. ployees, see section 1 of Pub. 15-A. For infor- mation about the Migrant and Seasonal Cash wages. Only cash wages paid to farm- Example. Gavrielle operates a small family Agricultural Worker Protection Act, which pro- workers are subject to social security and Medi- fruit farm. She employs day laborers in the pick- tects migrant and seasonal agricultural workers care taxes. Cash wages include checks, money ing season to enable her to timely get her crop by establishing employment standards related orders, and any kind of money or cash. to market. She doesn't deduct the employees' to wages, housing, transportation, and disclo- Only cash wages subject to social security share of social security and Medicare taxes sures and recordkeeping, and which requires and Medicare taxes are credited to your em- from their pay; instead, she pays it on their be- farm labor contractors to register with the U.S. ployees for social security benefit purposes. half. When she prepares her employees' Forms Department of Labor (DOL), see the DOL web- Payments not subject to these taxes, such as W-2, she adds each employee's share of social site at dol.gov/whd/regs/compliance/ certain commodity wages (discussed next), security and Medicare taxes that she paid to the whdfs49.htm. don't contribute to your employees' social se- employee's wage income (box 1 of Form W-2), curity coverage. For information about social but doesn't include it in box 3 (social security security benefits, go to SSA.gov or call the SSA wages) or box 5 (Medicare wages and tips). at 800-772-1213. For 2020, Gavrielle paid Dan $1,000 during the year. She enters $1,076.50 in box 1 of Noncash wages (including commodity wa- Dan’s Form W-2 ($1,000 wages plus $76.50 so- ges). Noncash wages include food, lodging, cial security and Medicare taxes paid for Dan). clothing, transportation passes, farm products,

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She enters $1,000.00 in boxes 3 and 5 of Dan's How to figure withholding. You can use one There is no employer share of Additional Medi- Form W-2. of several methods to determine the amount to care Tax. withhold. The methods are described in Pub. See Coronavirus (COVID-19) related Additional Medicare Tax. In addition to with- 15-T, which contains tables showing the correct TIP employment tax credits and other tax holding Medicare tax at 1.45%, you must with- amount of federal income tax you should with- relief, earlier, under What’s New for in- hold a 0.9% Additional Medicare Tax from wa- hold. Section 5 of Pub. 51 also contains addi- formation about the deferral of the employer ges you pay to an employee in excess of tional information about federal income tax with- and employee share of social security tax which $200,000 in a calendar year. You’re required to holding. begin withholding Additional Medicare Tax in is available for certain wage payments during the pay period in which you pay wages in ex- Nonemployee compensation. Generally, you 2020. cess of $200,000 to an employee and continue don't have to withhold federal income tax on to withhold it each pay period until the end of payments for services to individuals who aren't Form 943. Report withheld federal income tax, the calendar year. Additional Medicare Tax is your employees. However, you may be required social security tax, and Medicare tax on Form only imposed on the employee. There is no em- to report these payments on Form 1099-NEC 943. Your 2020 Form 943 is due by February 1, ployer share of Additional Medicare Tax. All wa- and to withhold under the backup withholding 2021 (or February 10, 2021, if you made depos- ges that are subject to Medicare tax are subject rules. For example, persons who haven’t fur- its on time in full payment of the taxes due for to Additional Medicare Tax withholding if paid in nished their taxpayer identification number the year). excess of the $200,000 threshold. (TIN) to you are subject to withholding on pay- For more information on what wages are ments required to be reported on Form Deposits. Generally, you must deposit both subject to Medicare tax, see the chart, Special 1099-NEC. For more information, see the In- the employer and employee share of social se- Rules for Various Types of Services and Pay- structions for Forms 1099-MISC and curity and Medicare taxes and federal income ments, in section 15 of Pub. 15. For more infor- 1099-NEC. For backup withholding on H-2A tax withheld during the year. However, you may mation on Additional Medicare Tax, go to visa holders, see Compensation paid to H-2A make payments with Form 943 instead of de- IRS.gov/ADMT. visa holders, later. positing them if you accumulate less than a $2,500 tax liability (“Total taxes after adjust- ments and nonrefundable credits” line on Form Federal Income Tax Required Notice to 943) during the year and you pay in full with a timely filed return. Withholding Employees About the For more information on deposit rules, see section 7 of Pub. 51. If the cash wages you pay to farmworkers are Earned Income Credit subject to social security and Medicare taxes, (EIC) Electronic deposit requirement. You they are also subject to federal income tax with- must use EFT to make all federal tax deposits. holding. Although noncash wages are subject See Federal tax deposits must be made by You must provide notification about the EIC to electronic funds transfer (EFT), earlier. to federal income tax, withhold income tax on each employee who worked for you at any time these noncash wages only if you and the em- during the year and from whom you didn't with- Form W-2. By January 31, you must furnish ployee agree to do so. The amount to withhold hold any federal income tax. However, you each employee a Form W-2 showing total wa- is figured on gross wages without taking out so- don't have to notify employees who claim ex- ges for the previous year and total federal in- cial security and Medicare taxes, union dues, emption from federal income tax withholding on come tax, social security tax, and Medicare tax etc. Form W-4. You meet the notification require- withheld. However, if an employee stops work- ment by giving each employee any of the fol- Form W-4. Generally, the amount of federal in- ing for you and asks for the form earlier, you lowing. must give it to the employee within 30 days of come tax you withhold is based on the employ- • Form W-2, which contains the EIC notifica- ee's filing status and other information reported the later of the following dates. tion on the back of Copy B. • The date the employee asks for the form. on the employee's Form W-4. Don't withhold • A substitute Form W-2 with the exact EIC federal income tax from the wages of an em- • The date you make your final payment of wording shown on the back of Copy B of wages to the employee. ployee who, by writing “Exempt” on Form W-4, Form W-2. certifies that he or she had no federal income • Notice 797, Possible Federal Tax Refund Compensation paid to H-2A visa holders. tax liability last year and anticipates no liability Due to the Earned Income Credit (EIC). Report compensation of $600 or more paid to for the current year. • Your own written statement with the exact foreign agricultural workers who entered the You should give each new employee a Form wording of Notice 797. country on H-2A visas in box 1 of Form W-2. W-4 as soon as you hire the employee. For Compensation paid to H-2A workers for agricul- Spanish-speaking employees, you may use For more information, see Pub. 51 and No- tural labor performed in connection with this Formulario W-4(SP) which is the Spanish trans- tice 1015, Have You Told Your Employees visa isn't subject to social security and Medi- lation of Form W-4. Have the employee com- About the Earned Income Tax Credit (EIC). care taxes, and therefore shouldn't be reported plete and return Form W-4 to you before the as wages subject to social security tax (line 2), first payday. If the employee doesn't return the Medicare tax (line 4), or Additional Medicare completed form, you must withhold federal in- Reporting and Paying Tax (line 6) on Form 943, and shouldn't be re- come tax as if the employee had checked the ported as social security wages (box 3) or Medi- box for Single or Married filing separately in Social Security, care wages (box 5) on Form W-2. On Form Step 1(c) and made no entries in Step 2, Step Medicare, and Withheld W-2, don't check box 13 (Statutory employee), 3, or Step 4 of Form W-4. as H-2A workers aren't statutory employees. New Form W-4 for 2021. You should Federal Income Taxes An employer isn’t required to withhold fed- make the 2021 Form W-4 available to your em- eral income tax from compensation paid to an ployees and encourage them to check their in- You must withhold federal income, social secur- H-2A worker for agricultural labor performed in come tax withholding for 2021. Those employ- ity, and Medicare taxes required to be withheld connection with this visa unless the worker asks ees who owed a large amount of tax or received from the salaries and wages of your employees. for withholding and the employer agrees. In this a large refund for 2020 may want to submit a You’re liable for the payment of these taxes to case, the worker must give the employer a com- new Form W-4. You can't accept substitute the federal government whether or not you col- pleted Form W-4. Federal income tax withheld Forms W-4 developed by employees. Advise lect them from your employees. If, for example, should be reported on Form 943, line 8, and in your employees to use the IRS Tax Withholding you withhold less than the correct tax from an box 2 of Form W-2. Estimator available at IRS.gov/W4App to deter- employee's wages, you’re still liable for the full These reporting rules apply when the H-2A mine accurate withholding. amount. You must also pay the employer's worker provides his or her TIN to the employer. share of social security and Medicare taxes.

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However, if an H-2A visa worker didn't provide Table 14-1. Fuel Excise Tax Credits and Refunds at a Glance the employer with a TIN, the employee is sub- ject to backup withholding. The employer must Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed. report the wages and backup withholding on Household Use or Form 1099-MISC. The employer must also re- On a Farm for Farming Off-Highway Use Other Than as port the backup withholding on Form 945, 1 line 2. Fuel Used Purposes Business Use a Fuel For more information, see the Instructions Gasoline Credit only Credit or refund None for Forms 1099-MISC and 1099-NEC and the Aviation gasoline Credit only None None Instructions for Form 945. For more information 2 2 on foreign agricultural workers on H-2A visas, Undyed diesel fuel Credit or refund Credit or refund Credit or refund go to IRS.gov/H2A. and undyed kerosene Trust fund recovery penalty. If you’re re- Kerosene for use in Credit or refund None None sponsible for withholding, accounting for, de- aviation positing, or paying federal income, social secur- ity, and Medicare taxes (that is, trust fund taxes) Dyed diesel fuel None None None and willfully fail to do so, you can be held liable and dyed kerosene for a penalty equal to the withheld tax not paid. Other Fuels Credit or refund Credit or refund None The trust fund recovery penalty won't apply to (including any amount of trust fund taxes an employer alternative fuels)3 holds back in anticipation of the credit for quali- fied sick and family leave wages or the em- 1 For a use other than as fuel in a propulsion engine. ployee retention credit that they are entitled to. 2 Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending It also won't apply to applicable taxes properly with undyed diesel fuel to be used for heating purposes. See Regulations section 48.6427-10(b)(1) for the deferred under Notice 2020-65 before May 1, definition of a blocked pump. 2021. A responsible person can be an officer of a 3 Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. It corporation, a partner, a sole proprietor, or an includes the alternative fuels: liquefied petroleum gas (LPG), “P” Series fuels, compressed natural gas employee of any form of business. A trustee or (CNG), liquefied hydrogen, Fischer-Tropsch process liquid fuel from coal (including peat), liquid fuel agent with authority over the funds of the busi- derived from biomass, liquefied natural gas (LNG), liquefied gas derived from biomass, and compressed ness can also be held responsible for the pen- gas derived from biomass. alty. Willfully means voluntarily, consciously, and intentionally. Paying other expenses of the Commodity wages. Payments in kind for farm add it to the tax for the next quarter. If the total business instead of the taxes due is acting will- labor aren't cash wages. Don't count them to undeposited tax is more than $500 at the end of fully. figure whether you’re subject to FUTA tax or to the next quarter, a deposit will be required. If figure how much tax you owe. the total undeposited tax at the end of the 4th Consequences of treating an employee as quarter is $500 or less, you can either make a an independent contractor. If you classify an Tax rate and credit. The gross FUTA tax rate deposit or pay it with your return by the Febru- employee as an independent contractor and is 6.0% of the first $7,000 cash wages you pay ary 1, 2021, due date. you have no reasonable basis for doing so, you to each employee during the year. However, may be held liable for employment taxes for that you’re given a credit of up to 5.4% of the first Electronic deposit requirement. You worker. See Pub. 15-A for more information. $7,000 cash wages you pay to each employee must use EFT to make all federal tax deposits. for the state unemployment tax you pay. If your See Federal tax deposits must be made by state tax rate (experience rate) is less than electronic funds transfer (EFT), earlier. Federal Unemployment 5.4%, you may still be allowed the full 5.4% credit. (FUTA) Tax If all of the taxable FUTA wages you paid were excluded from state unemployment tax, You must pay FUTA tax if you meet either of the the full 6.0% rate applies. See the Instructions following tests. for Form 940 for additional information. • You paid cash wages of $20,000 or more 14. to farmworkers in any calendar quarter More information. For more information on during the current or preceding calendar FUTA tax, see section 10 of Pub. 51. year. • You employed 10 or more farmworkers for Fuel Excise Tax some part of at least 1 day (whether or not Reporting and Paying FUTA all at the same time) during any 20 or more Tax different calendar weeks during the current Credits and or preceding calendar year. The FUTA tax is imposed on you as the em- ployer. It must not be collected or deducted These rules don't apply to exempt services of Refunds from the wages of your employees. your spouse, your parents, or your children un- der age 21. See Family Employees, earlier. Form 940. Report FUTA tax on Form 940. The 2020 Form 940 is due by February 1, 2021 (or Introduction Alien farmworkers. Wages paid to aliens ad- February 10, 2021, if you timely deposited the mitted on a temporary basis to the United You may be eligible to claim a credit on your in- full amount of your 2020 FUTA tax). States to perform farmwork (also known as come tax return for the federal excise tax on “H-2A visa workers”) are exempt from FUTA certain fuels. You may also be eligible to claim a Deposits. If at the end of any calendar quarter tax. However, include your employment of quarterly refund of the fuel taxes during the you owe, but haven't yet deposited, more than these workers and the wages you paid them to year, instead of waiting to claim a credit on your $500 in FUTA tax for the year, you must make a determine whether you meet either of the above income tax return. deposit by the end of the following month. If the tests. Whether you can claim a credit or refund de- undeposited tax is $500 or less at the end of a pends on whether the fuel was taxed and the quarter, you don't have to deposit it. You can

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purpose (nontaxable use) for which you used Dyed diesel fuel and dyed kerosene. If not included in list item (1) or (2) above, no one the fuel. The nontaxable uses of fuel for which a you purchase dyed diesel fuel or dyed kerosene can claim the credit or refund for fuel used on farmer may claim a credit or refund are gener- for a nontaxable use, you must use it only on a your farm for those other services. ally the following. farm for farming purposes or for other nontaxa- • Use on a farm for farming purposes. ble purposes. For example, you should not use Buyer of fuel, including undyed diesel • Off-highway business use. dyed diesel fuel in a truck that is used both on fuel or undyed kerosene. If doubt exists • Uses other than as a fuel in a propulsion the farm for farming purposes and on the high- whether the owner, tenant, or operator of the engine, such as home use. way, even though the highway use is in connec- farm bought the fuel, determine who actually tion with farm business. Excise tax applies to bore the cost of the fuel. For example, if the Table 14-1 presents an overview of credits owner of a farm and his or her tenant equally and refunds that may be claimed for fuels used the fuel used by the truck on the highways. In this situation, undyed (taxed) fuel should be share the cost of gasoline used on the farm, for the nontaxable uses listed above. See Pub. each can claim a credit for the tax on half the 510, Excise Taxes, for more information. purchased for the truck. You should keep fuel records of the use of the truck on the farm for fuel used. farming purposes, and for other uses. You may Topics Undyed diesel fuel, undyed kerosene, be eligible for a credit or refund for the excise and other fuels (including alternative fuel). This chapter discusses: tax on fuel used on the farm for farming purpo- Usually, the farmer is the only person who can ses. make a claim for credit or refund for the tax on • Fuels used in farming undyed diesel fuel, undyed kerosene, or other • Dyed diesel fuel and dyed kerosene Penalty. A penalty is imposed on any person fuels (including alternative fuel) used for farm- • Fuels used in off-highway business use who knowingly uses, sells, or alters dyed diesel ing purposes. However, see Custom applica- • Fuels used for household purposes fuel or dyed kerosene for any purpose other tion of fertilizer and pesticide next. Also see • How to claim a credit or refund than a nontaxable use. The penalty is the Dyed diesel fuel and dyed kerosene, earlier. • Including the credit or refund in income greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. After the Example. Farm owner Haleigh Blue hired Useful Items first violation, the $1,000 portion of the penalty custom operator Tyler Steele to cultivate the You may want to see: increases depending on the number of viola- soil on her farm. Tyler used 200 gallons of tions. For more information on this penalty, see undyed diesel fuel that he purchased to perform Pub. 510. Publication the work on Haleigh's farm. In addition, Haleigh hired contractor Lee Brown to pack and store 510 510 Excise Taxes Farming purposes. As the owner, tenant, or her apple crop. Lee bought 25 gallons of operator and the ultimate purchaser of fuel that undyed diesel fuel to use in packing the apples. Form (and Instructions) you purchased, you use the fuel on a farm for Haleigh can claim the credit for the 200 gallons farming purposes if you use it in any of the fol- 720 720 Quarterly Federal Excise Tax Return of undyed diesel fuel used by Tyler on her farm lowing ways. because it qualifies as fuel used on the farm for 4136 4136 Credit for Federal Tax Paid on Fuels 1. To cultivate the soil or to raise or harvest farming purposes. No one can claim a credit for 8849 8849 Claim for Refund of Excise Taxes any agricultural or horticultural commodity. the 25 gallons used by Lee because that fuel See chapter 16 for information about getting was not used for a farming purpose included in publications and forms. 2. To raise, shear, feed, care for, train, or list item (1) or (2) above. manage livestock, bees, poultry, fur-bear- In the above example, both Tyler Steele and ing animals, or wildlife. Lee Brown could have purchased dyed (un- Fuels Used in Farming 3. To operate, manage, conserve, improve, taxed) diesel fuel for their tasks. or maintain your farm and its tools and Custom application of fertilizer and pes- equipment. Owners, operators, and tenants of farms and ticide. Fuel used on a farm for farming purpo- certain other persons may be eligible to claim a 4. To handle, dry, pack, grade, or store any ses includes fuel used in the application (includ- credit or refund of excise taxes on fuel used in raw agricultural or horticultural commodity. ing aerial application) of fertilizer, pesticides, or the trade or business of farming, when used on For this use to qualify, you must have pro- other substances. Generally, the applicator is a farm in the United States for farming purpo- duced more than half the commodity so treated as having used the fuel on a farm for ses. See Table 14-1 for a list of available fuel treated during the tax year. The farming purposes and therefore, claims the excise tax credits and refunds. Fuel is used on more-than-one-half test applies separately credit or refund. For applicators using highway a farm for farming purposes only if used in car- to each commodity. Commodity means a vehicles, only the fuel used on the farm is ex- rying on a trade or business of farming, on a single raw product. For example, apples empt. Fuel used traveling on the highway to and farm in the United States, and for farming pur- and peaches are two separate commodi- from the farm is taxable. Fuel used by an aerial poses. ties. applicator for the direct flight between the air- field and one or more farms is treated as used 5. To plant, cultivate, care for, or cut trees or Farm. A farm includes livestock, dairy, fish, for a farming purpose. For aviation gasoline, the to prepare (other than sawing logs into poultry, fruit, fur-bearing animals, truck farms, aerial applicator makes the claim as the ulti- lumber, chipping, or other milling) trees for orchards, plantations, ranches, nurseries, mate purchaser. For kerosene used in aviation, market, but only if these activities are inci- ranges, and feed yards for finishing cattle. It the ultimate purchaser may make the claim or dental to your farming operations. Your also includes structures such as greenhouses waive the right to make the claim to the regis- tree operations are incidental only if they used primarily for raising agricultural or horticul- tered ultimate vendor. A sample waiver is inclu- are minor in nature when compared to the tural commodities. A fish farm is an area where ded as Model Waiver L in the appendix of Pub. total farming operations. fish are grown or raised and not merely caught 510. or harvested. If any other person, such as a neighbor or A registered ultimate vendor is the person custom operator (independent contractor), per- Dyed versus undyed diesel. Diesel is who sells undyed diesel fuel, undyed kerosene, forms a service for you on your farm for any of undyed when sold for highway use vehicles and or kerosene for use in aviation to the user (ulti- the purposes included in list item (1) or (2) excise tax is collected at the time of sale. The mate purchaser) of the fuel for use on a farm for above, you are considered to be the ultimate diesel is dyed when the intended use is for non- farming purposes. To claim a credit or refund of purchaser who used the fuel on a farm for farm- taxable purposes, such as farming, and no ex- tax, the ultimate vendor must be registered with ing purposes. Therefore, you can still claim the cise tax is collected at the time of sale. When the IRS at the time the claim is made. However, credit or refund for the fuel so used. However, undyed diesel is used in farming or any other registered ultimate vendors cannot make claims see Custom application of fertilizer and pesti- qualifying purpose, the taxpayer may recover for undyed diesel fuel and undyed kerosene cide, later. If the other person performs any the excise tax paid by claiming a credit or filing sold for use on a farm for farming purposes. for a refund (see Table 14-1). other services for you on your farm for purposes

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Fuel not used for farming. You do not use Table 14-2. Claiming a Credit or Refund of Excise Taxes fuel on a farm for farming purposes when you use it in any of the following ways. This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a • Off the farm, such as on the highway or in nontaxable use. noncommercial aviation, even if the fuel is Credit Refund used in transporting livestock, feed, crops, or equipment. Which form to use Form 4136, Credit for Federal Form 8849, Claim for Refund of • For personal use, such as lawn mowing. Tax Paid on Fuels Excise Taxes; and Schedule 1 In processing, packaging, freezing, or can- • (Form 8849), Nontaxable Use ning operations. of Fuels • In processing crude gum into gum spirits of turpentine or gum resin or in processing Type of form Annual Quarterly maple sap into maple syrup or maple When to file With your income tax return By the last day of the quarter sugar. following the last quarter included in the claim All-terrain vehicles (ATVs). Fuel used in ATVs on a farm for farming purposes, dis- Amount of tax Any amount $750 or more1 cussed earlier, is eligible for a credit or refund of 1 You may carry over an amount less than $750 to the next quarter. excise taxes on the fuel. Fuel used in ATVs for nonfarming purposes is not eligible for a credit it is also not considered an off-highway busi- • Tax on fuel you did not include in any claim or refund of the taxes. If ATVs are used both for ness use. for refund previously filed for any quarter of farming and nonfarming purposes, only that the tax year. portion of the fuel used for farming purposes is eligible for the credit or refund. How To Claim a Claiming a Credit Credit or Refund Fuels Used in You make a claim for a fuel tax credit on Form 4136 and attach it to your income tax return. Do You may be able to claim a credit or refund of Off-Highway not claim a credit for any excise tax for which the excise tax on fuels you use for nontaxable you have filed a refund claim. Business Use uses. The basic rules for claiming credits and refunds are listed in Table 14-2. How to claim a credit. How you claim a credit You may be eligible to claim a credit or refund Keep at your principal place of busi- depends on whether you are an individual, part- for the excise tax on fuel used in an off-highway ness all records needed to enable the nership, corporation, S corporation, trust, or business use. RECORDS IRS to verify that you are the person farmers' cooperative association. entitled to claim a credit or refund and the Off-highway business use. This is any use of amount you claimed. You do not have to use Individuals. You claim the credit on the fuel in a trade or business or in an income-pro- any special form, but the records should estab- “Credit for federal tax on fuels” line of your Form ducing activity. The use must not be in a high- lish the following information. 1040 or 1040-SR. If you would not otherwise way vehicle registered or required to be regis- have to file an income tax return, you must do tered for use on public highways. Off-highway • The total number of gallons bought and so to get a fuel tax credit. business use generally does not include any used during the period covered by your use in a recreational motorboat. claim. Partnerships. Partnerships claim the credit • The dates of the purchases. by including a statement on Schedule K-1 Examples. Off-highway business use in- • The names and addresses of suppliers (Form 1065), Partner's Share of Income, De- cludes the use of fuels in a trade or business in and amounts bought from each during the ductions, Credits, etc., showing each partner's any of the following ways. period covered by your claim. share of the number of gallons of each fuel sold • In stationary machines such as generators, • The nontaxable use for which you used the or used for a nontaxable use, the type of use, compressors, power saws, and similar fuel. and the applicable credit per gallon. Each part- equipment. • The number of gallons used for each non- ner claims the credit on his or her income tax • For cleaning. taxable use. return for the partner's share of the fuel used by • In forklift trucks, bulldozers, and earthmov- the partnership. ers. It is important that your records separately show Other entities. Corporations, S corpora- Off-highway nonbusiness (taxable) use of the number of gallons used for each nontaxable tions, farmers' cooperative associations, and fuel includes use in minibikes, snowmobiles, use that qualifies as a claim. For more informa- trusts make the claim on the appropriate line of power lawn mowers, chain saws, and other tion about recordkeeping, see Pub. 583, Start- their income tax return. yard equipment. For more information, see Pub. ing a Business and Keeping Records. 510. When to claim a credit. You can claim a fuel Credit or refund. A credit is an amount that re- tax credit on your income tax return for the year duces the tax on your income tax return when you used the fuel. Fuels Used for you file it at the end of the year. If you meet cer- You may be able to make a fuel tax tain requirements, you may claim a refund dur- TIP claim on an amended income tax re- Household Purposes or ing the year instead of waiting until you file your turn for the year you used the fuel. A Other Than as a Fuel for income tax return. claim for credit or refund of an overpayment Credit only. You can claim the following must generally be filed within the later of: Propulsion Engines taxes only as a credit on your income tax return. • 3 years from the date the original return • Tax on gasoline and aviation gasoline you was filed, or You may be eligible to claim a credit or refund used on a farm for farming purposes. • 2 years from the date the tax was paid. for the excise tax on undyed diesel fuel or kero- • Tax on fuels (including undyed diesel fuel sene used for home heating, lighting, and cook- or undyed kerosene) you used for nontax- ing. This also applies to diesel fuel and kero- able uses if the total for the tax year is less sene used in a home generator to produce than $750. electricity for home use. Home use of a fuel does not include use in a propulsion engine and

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Claiming a Refund amount in gross income for the tax year in Form (and Instructions) which you receive the refund. If you claim a

1040 1040 U.S. Individual Income Tax Return If eligible, you may claim a refund of excise credit on your income tax return, include the taxes on Form 8849. Complete and attach to credit amount in gross income for the tax year in 1040-SR 1040-SR U.S. Tax Return for Seniors Form 8849 the appropriate Form 8849 sched- which you file Form 4136. If you file an amen-

1040-ES 1040-ES Estimated Tax for Individuals ule(s). The instructions for Form 8849 and the ded return and claim a credit, include the credit amount in gross income for the tax year in separate instructions for each schedule explain 2210-F 2210-F Underpayment of Estimated Tax the requirements for making a claim for refund. which you receive the credit. by Farmers and Fishermen If you file Form 720, you can use its Schedule C for your refund claims for the quarter. See the Example. Marucia Brown, a farmer who See chapter 16 for information about getting Instructions for Form 720. Do not claim a refund uses the cash method, filed her 2019 Form publications and forms. on Form 8849 for any amount for which you 1040 on March 3, 2020. On her Schedule F, have filed or will file a claim on Form 720 or she deducted the total cost of gasoline (includ- Form 4136. ing $110 of excise taxes) used on the farm for Special Estimated Tax farming purposes. Then, on Form 4136, she You may file a claim for refund for any quar- claimed the $110 as a credit. Marucia reports Rules for Qualified ter of your tax year for which you can claim the $110 as other income on line 8 of her 2020 $750 or more. This amount is the excise tax on Schedule F. Farmers all fuels used for a nontaxable use during that quarter or any prior quarter (for which no other Accrual method. If you use an accrual Special rules apply to the payment of estimated claim has been filed) during the tax year. method, include the amount of credit or refund tax by individuals who are qualified farmers. If you are not a qualified farmer, as defined next, If you cannot claim at least $750 at the end in gross income for the tax year in which you used the fuels. It does not matter whether you see Pub. 505 for the estimated tax rules that ap- of a quarter, you carry the amount over to the ply. next quarter of your tax year to determine if you filed for a quarterly refund or claimed the entire can claim at least $750 for that quarter. If you amount as a credit. cannot claim at least $750 at the end of the Qualified Farmer fourth quarter of your tax year, you must claim a Example. Amy Johnson, a farmer who credit on your income tax return using Form uses the accrual method, files her 2019 Form An individual is a qualified farmer for 2020 if at 4136. Only one claim can be filed for a quarter. 1040 on April 15, 2020. On Schedule F, she de- least two-thirds of his or her gross income from ducts the total cost of gasoline (including $155 all sources for 2019 or 2020 was from farming. You cannot claim a refund for excise of excise taxes) she used on the farm for farm- See Gross Income, next, for information on how ! tax on gasoline and aviation gasoline ing purposes during 2019. On Form 4136, Amy to figure your gross income from all sources CAUTION used on a farm for farming purposes. claims the $155 as a credit. She reports the and see Gross Income From Farming, later, for You must claim a credit on your income tax re- $155 as other income on line 8 of her 2019 information on how to figure your gross income turn for the tax. Schedule F. from farming. See also Percentage From Farm- ing, later, for information on how to determine How to file a quarterly claim. File the claim the percentage of your gross income from farm- for refund by filling out Schedule 1 (Form 8849) ing. and attaching it to Form 8849. Send it to the ad- dress shown in the instructions. If you file Form Gross Income 720, you can use its Schedule C for your refund claims. See the Instructions for Form 720. 15. Gross income is all income you receive in the form of money, goods, property, and services When to file a quarterly claim. You must file that is not exempt from income tax. On a joint a quarterly claim by the last day of the first quar- return, you must add your spouse's gross in- ter following the last quarter included in the Estimated Tax come to your gross income. To decide whether claim. If you do not file a timely refund claim for two-thirds of your gross income was from farm- the fourth quarter of your tax year, you will have ing, use as your gross income the total of the to claim a credit for that amount on your income Introduction following income (not loss) amounts from your tax return, as discussed earlier. tax return. In most situations, the amount claimed Estimated tax is the method used to pay tax on • Wages, salaries, tips, etc. as a credit or refund will be less than income that is not subject to withholding. See • Taxable interest. the amount of fuel tax paid, because Pub. 505 for the general rules and requirements • Ordinary dividends. the Leaking Underground Storage Tank (LUST) for paying estimated tax. If you are a qualified • Taxable refunds, credits, or offsets of state tax of $0.001 per gallon is generally not subject farmer, defined below, you are subject to the and local income taxes. to credit or refund. special rules covered in this chapter for paying • Alimony paid. estimated tax. • Gross business income from Schedule C (Form 1040). Topics • Capital gains from Schedule D (Form Including the Credit or This chapter discusses: 1040). Losses are not netted against Refund in Income gains. • Special estimated tax rules for qualified • Gains on sales of business property. • Taxable IRA distributions, pensions, annui- Include any credit or refund of excise taxes on farmers ties, and social security benefits. fuels in your gross income if you claimed the to- • Estimated tax penalty • Gross rental income from Schedule E tal cost of the fuel (including the excise taxes) (Form 1040). as an expense deduction that reduced your in- Useful Items • Gross royalty income from Schedule E come tax liability. You may want to see: (Form 1040). Which year you include a credit or refund in • Taxable net income from an estate or trust gross income depends on whether you use the Publication reported on Schedule E (Form 1040). cash or an accrual method of accounting. • Income from a Real Estate Mortgage In- 505 505 Tax Withholding and Estimated Tax vestment Conduit reported on Schedule E Cash method. If you use the cash method and (Form 1040). file a claim for refund, include the refund • Gross farm rental income from Form 4835.

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Figure 15-1. Estimated Tax for Farmers Gross Income

Total Farm Start Here: Taxable interest ...... $3,000 Will you owe $1,000 or No Dividends ...... 500 more after subtracting Rental income (Sch E) .... 41,500 income tax withholding Farm income (Sch F) ..... 75,000 $75,000 and refundable credits Gain (Form 4797) ...... 5,000 5,000 from your total tax? (Do not subtract any Total ...... $125,000 $80,000 estimated tax payments.) Yes Schedule D showed gain from the sale of dairy cows carried over from Form 4797 Was at least 662⁄3 % ($5,000) in addition to a loss from the sale of Yes No of all your gross Follow the general corporate stock ($2,000). However, that loss is income in 2019 or estimated tax rules. not netted against the gain to figure Ms. Smith's 2020 from farming? total gross income or her gross farm income. Her gross farm income is 64% of her total gross income ($80,000 ÷ $125,000 = 0.64). Since Ms. Will your 2020 Will your 2020 Smith's gross farm income is less than You must pay income tax income tax Will you le your your estimated two-thirds of her total gross income, she is not a withholding and No withholding and No income tax No tax (your qualified farmer and the general estimated tax credits be at credits be at return and pay required annual rules apply. least 662⁄3 % of least 100% of the tax in full by payment) by the tax shown the tax shown March 1, 2021? on your 2020 on your 2019 January 15, 2021. Special Rules for Qualified return? return? Farmers Yes Yes Yes The following special estimated tax rules apply You do not have to if you are a qualified farmer for 2020. pay estimated tax. • You do not have to pay estimated tax if you file your 2020 tax return and pay all the tax due by March 1, 2021. Note. See Special Rules for Qualified Farmers, later, for a detailed description of the special • You do not have to pay estimated tax if estimated tax rules that apply to qualied farmers. your 2020 income tax withholding (includ- ing any amount applied to your 2020 esti- mated tax from your 2019 return) will be at Gross farm income from Schedule F (Form Gross farm income from Schedule E (Form • • least 662/3% (0.6667) of the total tax 1040). 1040), Parts II and III. shown on your 2020 tax return or 100% of • Your distributive share of gross income • Gains from the sale of livestock used for the total tax shown on your 2019 return. from a partnership, or limited liability com- draft, breeding, sport, or dairy purposes re- • If you must pay estimated tax, you are re- pany treated as a partnership, from Sched- ported on Form 4797. quired to make only one estimated tax pay- ule K-1 (Form 1065). ment (your required annual payment) by • Your pro rata share of gross income from For more information about income from January 15, 2021, using special rules to an S corporation, from Schedule K-1 farming, see chapter 3. figure the amount of the payment. See Re- (Form 1120-S). Farm income does not include any of quired Annual Payment next for details. Unemployment compensation. • the following: Other income not included with any of the ! Figure 15-1 presents an overview of the • CAUTION items listed above. special estimated tax rules that apply to quali- • Wages you receive as a farm employee, fied farmers. The calculation of farm income for soil • Income you receive from contract grain TIP and water conservation expenses differ harvesting and hauling with workers and Example 2. Assume the same facts as in from the calculations for income aver- machines you furnish, and Example 1. Ms. Smith's gross farm income is aging and estimated tax payments. See Income • Gains you receive from the sale of farm 64% of her total income. Therefore, based on Averaging for Farmers and Estimated Tax, land and depreciable farm equipment. her 2020 income, she does not qualify to use later. the special estimated tax rules for qualified farmers. However, she does qualify if at least Gross Income From Farming Percentage From Farming two-thirds of her 2019 gross income was from farming. Figure your gross income from all sources, dis- Gross income from farming is income from culti- cussed earlier. Then, figure your gross income Example 3. Assume the same facts as in vating the soil or raising agricultural commodi- from farming, discussed earlier. Divide your Example 1 except that Ms. Smith's farm income ties. It includes the following amounts. farm gross income by your total gross income to from Schedule F was $90,000 instead of • Income from operating a stock, dairy, poul- determine the percentage of gross income from $75,000. This made her total gross income try, bee, fruit, or truck farm. farming. $140,000 ($3,000 + $500 + $41,500 + $90,000 • Income from a plantation, ranch, nursery, + $5,000) and her farm gross income $95,000 range, orchard, or oyster bed. Example 1. Jane Smith had the following ($90,000 + $5,000). She qualifies to use the • Crop shares for the use of your land. total gross income and farm gross income special estimated tax rules for qualified farmers, • Gains from sales of draft, breeding, dairy, amounts in 2020. since 67.9% (at least two-thirds) of her gross in- or sporting livestock. come is from farming ($95,000 ÷ $140,000 = 0.679). Gross income from farming is the total of the following amounts from your tax return. • Gross farm income from Schedule F (Form Required Annual Payment 1040). • Gross farm rental income from Form 4835. If you are a qualified farmer and must pay esti- mated tax for 2020, use the worksheet on Form

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1040-ES to figure the amount of your required disabilities, and limited-English-speaking tax- The following IRS YouTube channels provide annual payment. Apply the following special payers who need help preparing their own tax short, informative videos on various tax-related rules for qualified farmers to the worksheet. returns. The Tax Counseling for the Elderly topics in English, Spanish, and ASL. • On line 12a, multiply line 11c by 662/3% (TCE) program offers free tax help for all tax- (0.6667). payers, particularly those who are 60 years of • Youtube.com/irsvideos. • On line 12b, enter 100% of the tax shown age and older. TCE volunteers specialize in an- • Youtube.com/irsvideosmultilingual. on your 2019 tax return regardless of the swering questions about pensions and retire- • Youtube.com/irsvideosASL. amount of your adjusted gross income. For ment-related issues unique to seniors. Watching IRS videos. The IRS Video portal this purpose, the “tax shown on your 2019 You can go to IRS.gov to see your options (IRSVideos.gov) contains video and audio pre- tax return” is the amount on line 16 of your for preparing and filing your return, which in- sentations for individuals, small businesses, 2019 return modified by certain adjust- clude the following. and tax professionals. ments. For more information, see chap- • Free File. Go to IRS.gov/FreeFile to see if ter 2 of Pub. 505. you qualify to use brand-name software to Getting tax information in other languages. prepare and e-file your federal tax return For taxpayers whose native language isn’t Eng- for free. lish, we have the following resources available. Estimated Tax Penalty • VITA. Go to IRS.gov/VITA, download the Taxpayers can find information on IRS.gov in for 2020 free IRS2Go app, or call 800-906-9887 to the following languages. find the nearest VITA location for free tax • Spanish (IRS.gov/Spanish). return preparation. If you do not pay all your required estimated tax • Chinese (IRS.gov/Chinese). • TCE. Go to IRS.gov/TCE, download the • Korean (IRS.gov/Korean). for 2020 by January 15, 2021, or file your 2020 free IRS2Go app, or call 888-227-7669 to return and pay any tax due by March 1, 2021, • Russian (IRS.gov/Russian). find the nearest TCE location for free tax • Vietnamese (IRS.gov/Vietnamese). you may owe a penalty. Use Form 2210-F, Un- return preparation. derpayment of Estimated Tax by Farmers and The IRS Taxpayer Assistance Centers Fishermen, to determine if you owe a penalty. Employers can register to use Business (TACs) provide over-the-phone interpreter serv- See the Instructions for Form 2210-F. Also, see Services Online. The SSA offers online serv- ice in over 170 languages, and the service is the Instructions for Form 2210-F for information ice for fast, free, and secure online W-2 filing available free to taxpayers. on how to request a waiver of the penalty. options to CPAs, accountants, enrolled agents, and individuals who process W-2s (Wage and Getting tax forms and publications. Go to If you receive a penalty notice, do not Tax Statement) and W-2Cs (Statement of Cor- IRS.gov/Forms to view, download, or print all of ! ignore it, even if you think it is in error. rected Income and Tax Amounts). Employers the forms, instructions, and publications you CAUTION You may get a penalty notice even can go to SSA.gov/employer for more informa- may need. You can also download and view though you filed your return on time, attached tion. popular tax publications and instructions (in- Form 2210-F, and met the gross income from cluding the 1040 and 1040-SR instructions) on farming requirement. If you receive a penalty Getting answers to your tax ques- mobile devices as an eBook at no charge at notice for underpaying estimated tax and you tions. On IRS.gov, get answers to your IRS.gov/eBooks. Or you can go to IRS.gov/ think it is in error, write to the address on the no- tax questions anytime, anywhere. OrderForms to place an order and have them tice and explain why you think the notice is in • Go to IRS.gov/Help for a variety of tools mailed to you within 10 business days. error. Include a computation similar to the one that will help you get answers to some of in Example 1 (earlier), showing that you met the the most common tax questions. Access your online account (individual tax- gross income from farming requirement. • Go to IRS.gov/ITA for the Interactive Tax payers only). Go to IRS.gov/Account to se- Assistant, a tool that will ask you questions curely access information about your federal tax on a number of tax law topics and provide account. answers. You can print the entire interview • View the amount you owe, pay online, or and the final response for your records. set up an online payment agreement. • Go to IRS.gov/Forms to search for our • Access your tax records online. forms, instructions, and publications. You • Review the past 24 months of your pay- will find details on 2020 tax changes and ment history. 16. hundreds of interactive links to help you • Go to IRS.gov/SecureAccess to review the find answers to your questions. required identity authentication process. • You may also be able to access tax law in- formation in your electronic filing software. Using direct deposit. The fastest way to re- How To Get Tax ceive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and elec- Help Tax reform. Tax reform legislation affects indi- tronically transfers your refund directly into your viduals, businesses, and tax-exempt and gov- financial account. Eight in 10 taxpayers use di- rect deposit to receive their refund. The IRS is- If you have questions about a tax issue, need ernment entities. Go to IRS.gov/TaxReform for information and updates on how this legislation sues more than 90% of refunds in less than 21 help preparing your tax return, or want to down- days. load free publications, forms, or instructions, go affects your taxes. to IRS.gov and find resources that can help you IRS Social Media. Go to IRS.gov/SocialMedia Getting a transcript or copy of a return. The right away. to see the various social media tools the IRS quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts. Click on either Preparing and filing your tax return. After uses to share the latest information on tax changes, scam alerts, initiatives, products, and “Get Transcript Online” or “Get Transcript by receiving your wage and earning statements Mail” to order a copy of your transcript. If you (Form W-2, W-2G, 1099-R, 1099-MISC) from services. At the IRS, privacy and security are paramount. We use these tools to share public prefer, you can order your transcript by calling all employers and interest and dividend state- 800-908-9946. ments from banks (Forms 1099), you can find information with you. Don’t post your social se- curity number or other confidential information free options to prepare and file your return on Using online tools to help prepare your re- IRS.gov or in your local community if you qual- on social media sites. Always protect your iden- tity when using any social networking site. turn. Go to IRS.gov/Tools for the following. ify. • The Earned Income Tax Credit Assistant The Volunteer Income Tax Assistance (IRS.gov/EITCAssistant) determines if (VITA) program offers free tax help to people you’re eligible for the EIC. with low-to-moderate incomes, persons with

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• The Online EIN Application (IRS.gov/EIN) • Debit or Credit Card: Choose an approved helps you get an employer identification payment processor to pay online, by number. phone, and by mobile device. The Taxpayer Advocate • The Tax Withholding Estimator (IRS.gov/ • Electronic Funds Withdrawal: Offered only Service (TAS) Is Here To W4app) makes it easier for everyone to when filing your federal taxes using tax re- pay the correct amount of tax during the turn preparation software or through a tax Help You year. The Estimator replaces the Withhold- professional. ing Calculator. The redesigned tool is a • Electronic Federal Tax Payment System: convenient, online way to check and tailor Best option for businesses. Enrollment is What is TAS? your withholding. It’s more user-friendly for required. taxpayers, including retirees and self-em- • Check or Money Order: Mail your payment TAS is an independent organization within the ployed individuals. The new and improved to the address listed on the notice or in- IRS that helps taxpayers and protects taxpayer features are: structions. rights. Their job is to ensure that every taxpayer – Easy to understand language; • Cash: You may be able to pay your taxes is treated fairly and that you know and under- – The ability to switch between screens, with cash at a participating retail store. stand your rights under the Taxpayer Bill of correct previous entries, and skip • Same-Day Wire: You may be able to do Rights. screens that don’t apply; same-day wire from your financial institu- – Tips and links to help you determine if tion. Contact your financial institution for How Can You Learn About Your you qualify for tax credits and deduc- availability, cost, and cut-off times. Taxpayer Rights? tions; – A progress tracker; What if I can’t pay now? Go to IRS.gov/ The Taxpayer Bill of Rights describes 10 basic – A self-employment tax feature; and Payments for more information about your op- rights that all taxpayers have when dealing with – Automatic calculation of taxable social tions. the IRS. Go to TaxpayerAdvocate.IRS.gov to security benefits. • Apply for an online payment agreement help you understand what these rights mean to • The First Time Homebuyer Credit Account (IRS.gov/OPA) to meet your tax obligation you and how they apply. These are your rights. Look-up (IRS.gov/HomeBuyer) tool pro- in monthly installments if you can’t pay Know them. Use them. vides information on your repayments and your taxes in full today. Once you complete the online process, you will receive imme- account balance. What Can TAS Do For You? • The Sales Tax Deduction Calculator diate notification of whether your agree- (IRS.gov/SalesTax) figures the amount you ment has been approved. TAS can help you resolve problems that you can claim if you itemize deductions on • Use the Offer in Compromise Pre-Qualifier can’t resolve with the IRS. And their service is Schedule A (Form 1040), choose not to to see if you can settle your tax debt for free. If you qualify for their assistance, you will claim state and local income taxes, and less than the full amount you owe. For be assigned to one advocate who will work with you didn’t save your receipts showing the more information on the Offer in Compro- you throughout the process and will do every- sales tax you paid. mise program, go to IRS.gov/OIC. thing possible to resolve your issue. TAS can help you if: Resolving tax-related identity theft issues. Checking the status of an amended return. • Your problem is causing financial difficulty • The IRS doesn’t initiate contact with tax- Go to IRS.gov/WMAR to track the status of for you, your family, or your business; payers by email or telephone to request Form 1040-X amended returns. Please note You face (or your business is facing) an personal or financial information. This in- that it can take up to 3 weeks from the date you • immediate threat of adverse action; or cludes any type of electronic communica- mailed your amended return for it to show up in You’ve tried repeatedly to contact the IRS tion, such as text messages and social me- our system, and processing it can take up to 16 • but no one has responded, or the IRS dia channels. weeks. hasn’t responded by the date promised. • Go to IRS.gov/IDProtection for information. • If your SSN has been lost or stolen or you Understanding an IRS notice or letter. Go to suspect you’re a victim of tax-related iden- IRS.gov/Notices to find additional information How Can You Reach TAS? tity theft, visit IRS.gov/IdentityTheft to learn about responding to an IRS notice or letter. what steps you should take. TAS has offices in every state, the District of Contacting your local IRS office. Keep in Columbia, and Puerto Rico. Your local advo- Checking on the status of your refund. mind, many questions can be answered on cate’s number is in your local directory and at • Go to IRS.gov/Refunds. IRS.gov without visiting an IRS Tax Assistance TaxpayerAdvocate.IRS.gov/Contact-Us. You • The IRS can’t issue refunds before Center (TAC). Go to IRS.gov/LetUsHelp for the can also call them at 877-777-4778. mid-February 2021 for returns that claimed topics people ask about most. If you still need the EIC or the ACTC. This applies to the help, IRS TACs provide tax help when a tax is- How Else Does TAS Help entire refund, not just the portion associ- sue can’t be handled online or by phone. All Taxpayers? ated with these credits. TACs now provide service by appointment so • Download the official IRS2Go app to your you’ll know in advance that you can get the TAS works to resolve large-scale problems that mobile device to check your refund status. service you need without long wait times. Be- affect many taxpayers. If you know of one of • Call the automated refund hotline at fore you visit, go to IRS.gov/TACLocator to find these broad issues, please report it to them at 800-829-1954. the nearest TAC, check hours, available serv- IRS.gov/SAMS. ices, and appointment options. Or, on the Making a tax payment. The IRS uses the lat- IRS2Go app, under the Stay Connected tab, TAS also has a website, Tax Reform est encryption technology to ensure your elec- choose the Contact Us option and click on “Lo- Changes, which shows you how the new tax tronic payments are safe and secure. You can cal Offices.” law may change your future tax filings and helps make electronic payments online, by phone, you plan for these changes. The information is and from a mobile device using the IRS2Go categorized by tax topic in the order of the IRS app. Paying electronically is quick, easy, and Form 1040 or 1040-SR. Go to TaxChanges.us faster than mailing in a check or money order. for more information. Go to IRS.gov/Payments to make a payment using any of the following options. • IRS Direct Pay: Pay your individual tax bill TAS for Tax Professionals or estimated tax payment directly from TAS can provide a variety of information for tax your checking or savings account at no professionals, including tax law updates and cost to you. guidance, TAS programs, and ways to let TAS

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know about systemic problems you’ve seen in certain level and need to resolve tax problems IRS Pub. 4134, Low Income Taxpayer Clinic your practice. with the IRS, such as audits, appeals, and tax List. collection disputes. In addition, clinics can pro- vide information about taxpayer rights and re- Low Income Taxpayer sponsibilities in different languages for individu- Clinics (LITCs) als who speak English as a second language. Services are offered for free or a small fee. To LITCs are independent from the IRS. LITCs find a clinic near you, visit IRS.gov/LITC or see represent individuals whose income is below a

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To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Crop insurance 11 Taxable 33 A C Tree seedlings 70 Like-kind 49 Abandonment 55 Canceled debt 14 Debt: Nontaxable 49 Accounting method: Capital assets 50 Bad 51 Excise taxes: Accrual 6 Capital expenses 24 Canceled 14, 33, 55, 56 Credit 86 Cash 5 Car expenses 23 Nonrecourse 55 Diesel fuel 85 Change in 8 Cash method of accounting 5 Qualified farm 16 Farming purposes 85 Crop 8 Casualties and thefts: Recourse 55 Home use of fuels 86 Farm inventory 7 Adjustments to basis 68 Depletion 46 Off-highway uses 86 Accounting periods 5 Casualty, defined 66 Depreciation 41 Refund 87 Accrual method of accounting 6 Disaster area losses 72 ADS election 44 Additional Medicare Tax Leased property 69 Conservation assets 28 withholding 83 Livestock 66, 67 Deduction 36 F Adjusted basis of assets 32 Reimbursement 68 Incorrect amount deducted 38 Fair market value (FMV) 63 Agricultural activity codes, Reporting gains and losses 73 Limit for automobiles 40 Fair market value defined 31 Schedule F 3 Theft, defined 66 Listed property 46 Family member: Agricultural program Certified professional employer Raised livestock 37 Business expenses 6 payments 10 organization (CPEO) 79 Recapture 46, 57, 58 Like-kind exchange 50 Agricultural structure, Change in accounting method 8 When to file 38 Loss on sale or exchange of defined 39 Chickens, purchased 24 Depreciation allowable 38 property 25 Alternative Depreciation System Christmas trees 25, 53 Depreciation allowed 38 Personal-use property 67 (ADS) 42, 44 Club dues 26 Disaster area losses 72 Social security coverage 81 Amortization: Comments on publication 2 Disaster payments 11 Farm: Going into business 47 Commodity: Disaster relief grants 72 Business, defined 27 Reforestation expenses 48 Wages 82 Disaster relief payments 72 Business expenses 18 Section 197 intangibles 48 Commodity Credit Corporation Disposition of installment Defined 28, 85 Assessments: (CCC): obligation 62 Income averaging 18 By conservation district 28 Loans 10 Dispositions 29, 30, 56 Rental 28 Depreciable property 29 Market gain 11 Drainage tile 28 Sale of 54 Assistance (See Tax help) Community property 75, 76 Dyed diesel fuel 85 Farmer 76 Automobiles, depreciation 40 Computer, software 37 Dyed kerosene 85 Federal unemployment tax Condemnation 65, 69 (FUTA) 84 Conservation: Fertilizer 13, 21 B Cost-sharing exclusion 28 E Figuring installment sale income: Bankruptcy 15 District assessments 28 Easement 17, 33 Adjusted basis 60 Barter income 17 Expenses 28 Election: Adjusted basis and installment Basis: Plans 28 ADS depreciation 42, 44 sale income (gain on Involuntary conversion 33 Conservation Reserve Amortization: sale) 60 Like-kind exchange 34 Program 76 Business start-up costs 47 Adjusted basis for installment Partner's basis 35 Conservation Reserve Program Reforestation costs 48 sale purposes 60 Replacement property 71 (CRP) 11 Crop method 24 Amount to report as installment Shareholder's basis 35 Constructing assets 31 Cutting of timber 53 sale income 60 Basis of assets: Constructive receipt of income 5 Deducting conservation Cancellation 60 Adjusted basis 32 Contamination 71 expenses 30 Contract price 60 Allocating to several assets 31 Converted wetland 53 Not excluding cost-sharing Depreciation recapture 60 Changed to business use 33 Cooperatives, income from 13 payments 13 Disposition of installment Constructing assets 31 Coronavirus (COVID-19) Out of installment method 60 obligation 60 Cost 30 employment tax relief 78 Postponing casualty gain 70 Figuring adjusted basis and Decreases 32 Cost-sharing exclusion 12 Postponing reporting crop gross profit percentage for Depreciation 43 Credits: insurance proceeds 11 installment sale purposes 60 Exchanges: Employment 20 Section 179 expense Form 6252 60 Like-kind 33 Fuel tax 17, 86 deduction 41 Gross profit 60 Nontaxable 33 Social security and Medicare 74 Embryo transplants 31 Gross profit percentage 60 Partially nontaxable 34 Social security coverage 74 Employer identification Interest income 60 Taxable 33 State unemployment tax 84 number 3 Sale of depreciable property 60 Gifts 34 Crew leaders 82 Employer identification number Selling expenses 60 Increases 32 Crop: (EIN) 81 Selling price 60 Real property 30 Destroyed 71 Endangered species recovery Selling price reduced 60 Received for services 33 Insurance proceeds 11 expenses 28 Transfer due to death 60 Uniform capitalization rules 31 Method of accounting 8 Environmental contamination 71 Foreclosure 55 Below-market loans 17 Shares 10 Estimated tax: Forestation costs 25 Books and records 3 Unharvested 26, 57, 76 Farm gross income 88 Form: Breeding fees 21 Cropland, highly erodible 53 Gross income 87 1099-A 11, 56 Business income limit, section Penalties 89 1099-C 14, 56 179 expense deduction 40 Exchanges: 1099-G 11, 13 Business use of home 22 D Basis: 1099-MISC 3 Damage: Like-kind 33 1099-NEC 83 Casualties and thefts 66 Nontaxable 33 1099-PATR 13 Partially nontaxable 34 1128 5

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2210-F 89 Individual taxpayer identification Purchased 53 Buyer assumes other debts 62 3115 8 number (ITIN) 74 Raised 53 Buyer pays seller’s 4136 86 Inherited property 35 Sale of 9, 52 expenses 62 4562 38 Insolvency 15 Unit-livestock-price, inventory Buyer’s note 62 4797 9, 13, 49 Installment method: valuation 7 Debt not payable on demand 62 4835 10 Electing out of the installment Used in a farm business 52 Mortgage less than basis 62 5213 27 method 60 Weather-related sales 9, 70 Mortgage more than basis 62 8822 3 Inventory (See More information) Loans 10, 24 Property used as a payment 62 8824 49 Revoking the election (See More Losses: Sale to a related person 62 8849 87 information) At-risk limits 26 Third-party note 62 8886 3 Sale at a loss 60 Casualty 65 Trading property for like-kind 940 84 When to elect out 60 Disaster areas 72 property 62 943 83 Installment sales: Farming 66 Payments received 62 982 16 Electing out 60 Growing crops 25 Penalties: I-9 81 Example 64 Hobby farming 26 Estimated tax 89 SS-4 3, 81 Farm, sale of 60 Livestock 52, 70 Returns 89 SS-5 74 Installment obligation 59 Nondeductible 25 Trust fund recovery 84 T (Timber) 47 Related parties 60 Theft 65 Personal expenses 25 W-2 83 Unstated interest 64 Lost income payments 76 Per-unit retain certificates 14 W-4 3, 79, 81, 83 Insurance 21, 22 Lost property 66 Placed in service 37, 43 W-4V 11 Intangible property 48 Postponing casualty gain 70 W-7 74 Interest: Prepaid expense: Fuel tax credit or refund 17, 86 Expense 20 M Advance premiums 22 Inventory: MACRS property: Extends useful life 6 Items included 7 Involuntary conversion 45 Farm supplies 19 G Methods of valuation 7 Like-kind exchange 45 Livestock feed 19 Gains: Involuntary conversions 45, 65 Nontaxable transfer 45 Prizes 17 Section 1231 gains 64 Irrigation: Market gain, reporting 11 Produce 9 Gains and losses: Illegal subsidy 17 Marketing quota penalties 23 Property: Basis of assets 30 Project 70 Material participation 76 Changed to business use 33 Capital assets, defined 50 Meals 23 Received for services 33 Casualty 67, 69 Membership fees 26 Repairs and improvements 38 Installment sales 59 L Methods of accounting 5 Section 1231 56 Livestock 52 Labor hired 20 Modified ACRS (MACRS): Section 1245 57 Long- or short-term 50 Landlord participation 76 ADS election 44 Section 1250 58 Ordinary or capital 50 Lease or purchase 22 Conventions 44 Section 1252 59 Sale of farm 54 Life tenant (See Term interests) Depreciation methods 44 Section 1255 59 Section 1231 56 Like-kind exchanges 33, 49 Exchange 45 Tangible personal 39 Theft 67, 69 Lime 21 Figuring the deduction 44 Property used as a payment: Timber 53 Limited liability company Involuntary conversion 45 Examples 63 General asset accounts 45 (LLC) 3 Nontaxable transfer 45 Exception 63 Gifts 10, 26, 34, 51 Limits: Percentage tables 44 Publications (See Tax help) Going into business 47 At-risk 26 Property classes 43 Grants, disaster relief 72 Business use of home 23 Recovery periods 43 Capital losses 51 Q Conservation expenses 29 Qualified disaster relief H Depreciation: N payments 72 Health insurance deduction 22 Business-use 46 National Center for Missing & Qualified farm debt 16 Highway use tax 21 Excluded farm debt 16 Exploited Children 3 Qualified joint venture 75 Holding period 51 Farm losses 26 Net operating losses 65 Qualified small business payroll Home 64 Loss of personal-use Net operating loss (NOL) 69 tax credit for increasing Horticultural structure 39 property 68 New hire reporting 81 research activities 79 Not-for-profit farming 26 Noncapital asset 51 Passive activity 26 Nontaxable exchanges 49 I Percentage depletion 47 Nontaxable transfer of MACRS R Identity theft 90 Prepaid farm supplies 19 property 45 Recapture: Illegal irrigation subsidy 17 Reforestation costs 48 Not-for-profit farming 26 Amortization 58 Important dates 80 Section 179 expense deduction: Basis reductions 16 Improvements 12 Automobile 40 Certain depreciation 17 Income: Business income 40 O Cost-sharing payments 13 Accounting for 5 Dollar 40 Organizational costs 24 Depreciation 46, 57 Accrual method of accounting 6 Time to keep records 5 Section 1245 property 57 Canceled debt excluded 14 Listed property: Section 1250 property 58 From farming 8, 29, 88 Defined 46 P Section 179 expense Gross 87 Passenger automobile 46 Partners, limited 75 deduction 41 Not-for-profit farming 26 Rules 46 Partners, retired 76 Section 179 GO Zone Pasture 10 Livestock 57 Partners, spouses 75 property 41 Schedule F 8 Casualty and theft losses 66 Partnership 76 Special depreciation Withholding of tax 83 Crop shares 10 Passenger automobile 46 allowance 42 Income averaging (See Farm: Depreciation 37 Pasture income 10 Recordkeeping 3, 23 Income averaging) Diseased 70 Patronage dividends 13 Records on depreciable Incorrect amount of depreciation Feed assistance 12 Payments considered received: property 57 deducted 38 Immature 37 Bond 62 Reforestation costs 25, 48 Losses 25, 52 Buyer assumes mortgage 62

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Refund: Listed property 46 Contamination 71 Travel expenses 23 Deduction taken 17 Qualifying property 38 Special depreciation allowance: Truck expenses 23 Fuel tax 17, 87 Recapture 41 How to elect not to claim 42 Trust fund recovery penalty 84 Reimbursements: Self-employed health Recapture 42 Casualties and thefts 33, 66, 68 insurance 22 Standard mileage rate 23 Deduction taken 17 Self-employed health insurance Start-up costs for businesses 24 U Expenses 19 deduction 76 Suggestions for publication 2 Uniform capitalization rules: Feed assistance 12 Self-employment tax: Basis of assets 31 Real estate taxes 31 Community property 76 Inventory 7 Reforestation expenses 48 Deduction 78 T To employees 23 How to pay 74 Tangible personal property 39 Related parties 60 Landlord participation 76 Taxes: W Related persons 6, 25, 34, 50, 70 Material participation 76 Credits and Refunds 84 Wages and salaries 76 Rental income 10 Maximum net earnings 73 Federal use 21 Water conservation 28 Rented property, Methods for figuring net General 21 Water well 28, 43 improvements 38 earnings 77 Self-employment 73 Weather-related sales, Repairs 20 Optional method 77 State and federal 21 livestock 9, 70 Repairs and improvements 38 Regular method 77 State and local general sales 21 Withholding: Repayment of income 6 Rental income 76 Withholding 82, 83 Income tax 83 Replacement: Reporting 78 Tax-free exchanges 49 Social security and Medicare Period 71 Self-employment tax rate 74 Tax help 89 tax 82 Property 70 Share farming 75 Tax preparation fees 24 Reportable transactions. 3 Who must pay 75 Tax shelter: Repossessions 55 Selling price reduced 62 At-risk limits 26 Right-of-way income 17 Settlement costs (fees) 31 Defined 7 Social security and Medicare: Telephone expense 23 Credits of coverage 74 Tenant house expenses 24 S Withholding of tax 82 Term interests 37 Sale of home 55 Social security number 74 Theft losses 65 Section 179 expense Software, computer 37 Third-party note 63 deduction 38 Soil: Timber 25, 47, 53 How to elect 41 Conservation 28 Trade-in 34

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