EA2 Study Unit 2.3 Income and Farms - Farming Income and Expense

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Questions and Answers

What type of income can taxpayers receive from a cooperative when selling farm products?

Patronage dividends

Per-unit retain certificates

Both patronage dividends and per-unit retain certificates (correct)

None of the above

Which of the following expenses are typically included in the cost of inventory for a farmer?

Direct costs of the property

Indirect costs allocable to the property

Both direct and indirect costs (correct)

None of the above

What is the purpose of Form 1099-PATR?

To report income from the sale of farm products

To report depreciation of farm equipment

To report patronage dividends received by taxpayers from cooperatives (correct)

To report capital gains from the sale of farm property

Which of these is NOT depreciable farm property?

Livestock bought for resale (C) Signup and view all the answers

What is the purpose of capitalization in the context of farm accounting?

To determine the cost basis of farm property for tax purposes (B) Signup and view all the answers

What is the recovery period for agricultural structures under GDS?

10 years (A) Signup and view all the answers

Which type of asset has a recovery period of 5 years under both GDS and ADS?

Automobiles (D) Signup and view all the answers

How many years is the recovery period for farm machinery and equipment under ADS?

10 years (A) Signup and view all the answers

For tractor units over-the-road, what is the recovery period under GDS?

3 years (A) Signup and view all the answers

Which asset has the longest recovery period under ADS?

Farm buildings (B) Signup and view all the answers

What type of income can a farmer average using rates from the prior three years?

Current year's farm income (A) Signup and view all the answers

Which property is NOT included in Schedule F according to Section 1231?

Farm supplies (D) Signup and view all the answers

What is the recovery period for water wells under GDS?

15 years (A) Signup and view all the answers

Who is eligible to elect farm income averaging?

Individual partners or shareholders in an S corporation (D) Signup and view all the answers

What must a taxpayer file to elect farm income averaging?

Schedule J (C) Signup and view all the answers

What happens to a taxpayer's ability to elect farm income averaging if they did not engage in farming in any base year?

They may still elect farm income averaging (C) Signup and view all the answers

For how long can a gain from sales of livestock caused by weather-related conditions be postponed?

4 years (C) Signup and view all the answers

Which method of accounting allows a farmer to defer income from additional livestock sales due to weather conditions?

Cash method (D) Signup and view all the answers

When are crop insurance and disaster payments generally included in taxable income?

In the year they are paid out (C) Signup and view all the answers

What options do farmers have for including crop insurance proceeds in taxable income?

Include for the next tax year if elected (D) Signup and view all the answers

Which entities cannot use farm income averaging?

C Corporations, S Corporations, multi-member LLCs and partnerships (C) Signup and view all the answers

What is the primary source for reporting gains from the sale of livestock used for sporting purposes?

Form 4797 (B) Signup and view all the answers

Which of the following is NOT included in gross farm income?

Rent received from the use of farmland (A) Signup and view all the answers

What is the general rule for reporting agriculture program payments?

Report on Schedule F and are subject to self-employment taxes. (B) Signup and view all the answers

Under what condition is Form 4835 used for reporting farm rental income?

When the rental income is based on crops or livestock produced by the tenant and the activity was a rental activity for purposes of passive activity loss limitations. (D) Signup and view all the answers

Which of the following is considered a farm asset not held primarily for sale?

Livestock held for breeding purposes. (B) Signup and view all the answers

What is the general basis for livestock included in gross farm income?

The cost of the animals. (C) Signup and view all the answers

What are the two main categories of income reported on Schedule F?

Gross farm income and gross farm rental income. (B) Signup and view all the answers

Which of the following is an example of a cost-sharing conservation program payment that is generally excluded from income?

Payments for planting cover crops (D) Signup and view all the answers

Study Notes

Farming Income and Expense

Gross income from farming includes gross farm income, gross farm rental income, and gains from the sale of livestock raised or purchased for resale.
Gross farm income includes income from cultivating the soil or raising/harvesting agricultural commodities and gains from selling farm livestock. The basis of livestock is typically the cost of the animals. Income is reported on Schedule F.
Rent from farmland is generally rental income unless the taxpayer materially participates in the lessee's operations. Otherwise use Form 4835 to report farm rental income.
Gains from livestock used for draft, dairy, breeding, or sporting purposes are typically capital gains and are reported on Form 4797, not Schedule F.
Farm products raised for sale and farm products bought for resale are reported on Schedule F. Assets not held for primary sale (e.g., livestock for draft, breeding, sport, or dairy), are also reported on Schedule F.
Agricultural program payments (farm subsidies) are reported on Schedule F and are subject to self-employment taxes. Most government payments for conservation practices are included in income, but some cost-sharing programs are excluded.

Capitalization and Depreciation

Certain expenses for producing real or tangible personal property, or for resale, must be included in inventory costs or capitalized. These include direct costs plus allocable indirect costs.
Farmers can deduct depreciation on buildings, improvements, cars/trucks, machinery, and other permanent farm equipment.
Depreciation is not allowed on homes, furniture, livestock bought for resale, or items in inventory. Specific recovery periods for different assets are shown in a table.

Section 1231 Gains

Schedule F does not include gains/losses from sales of farm land (1231 property), depreciable farm equipment (1245 property), and buildings/structures (1250 property).

Farm Income Averaging

Farmers may be able to average all or some of their current year's income by using income rates from the 3 prior years.
Individuals, partners in partnerships, or shareholders in S corporations can sometimes elect farm income averaging, but not corporations, partnerships, S corporations, estates, or trusts.
Filing a Schedule J with their income tax return is required if electing farm income averaging.

Gains from livestock sales due to weather-related conditions (like drought or flood) eligible for federal assistance, can be postponed up to 4 years.
Farmers can choose to include the additional livestock sales gain from weather conditions in the next year's income instead of the current year to offset the added revenue.
This election applies to all livestock, including breeding, dairy, sporting or draft animals.

Crop Insurance and Disaster Payments

Crop insurance and disaster payments are typically included in income in the year they're received.
It's permitted to include these income proceeds in a following tax year, if the crops were damaged during that year.

Estimated Taxes

Taxpayers who earn at least two-thirds of their gross income from farming in the current or preceding tax year may have specific payment rules.
These rules generally involve paying all estimated taxes by January 15th and filing the 1040 return by April 15th, or the smaller of 2/3 of current year's tax or 100% of previous year's tax and filing the 1040 return by March 1st.

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Description

Explore the various components of farming income and expenses in this quiz. Understand how gross farm income, rental income, and gains from livestock play a role in financial reporting for farmers. Delve into the differences in reporting, including the use of Schedule F and Form 4797.