EA2 Study Unit 2.3 Income and Farms - Farming PDF

10 SU 2: Income and Farms 2.3 FARMING INCOME AND EXPENSE Gross income from farming includes gross farm income, gross farm rental income, and gains from the sale of livestock that were raised on the farm or purchased for resale. Gross Income from Farming 1. Gross farm income includes...

10 SU 2: Income and Farms 2.3 FARMING INCOME AND EXPENSE Gross income from farming includes gross farm income, gross farm rental income, and gains from the sale of livestock that were raised on the farm or purchased for resale. Gross Income from Farming 1. Gross farm income includes a. Income from farming -- amounts received from cultivating the soil or raising or harvesting agricultural commodities. b. Gains from the sale of livestock -- amounts received for livestock raised on the farm or purchased for resale. The basis of livestock is generally the cost of the animals. c. Income reported on Schedule F. Gross Farm Rental Income 2. Rent received from the use of farmland is generally rental income unless it is rent received from crop shares or unless the taxpayer materially participates in the lessee’s operations. a. Use Form 4835, Farm Rental Income and Expenses, to report farm rental income based on crops or livestock produced by the tenant only if the activity was a rental activity for purposes of the passive activity loss limitations. Gains from the Sale of Livestock 3. Gains from the sale of livestock used for draft (hauling), dairy, breeding, or sporting purposes generally result in capital gains and are not reported on Schedule F. a. Gains on the sale of these types of livestock are reported on Form 4797. Where to Report Sales of Farm Products Items Sold Schedule F Form 4797 Farm products raised for sale X Farm products bought for resale X Farm assets not held primarily for sale, such as livestock held for draft, breeding, X sport, or dairy purposes (bought or raised) 4. Agriculture program payments (i.e., farm subsidies) are reported on Schedule F and are subject to self-employment taxes. a. Generally, taxpayers must include in income most government payments for approved conservation practices. However, excluded are some payments received under certain cost-sharing conservation programs. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Income and Farms 11 5. Taxpayers buying farm supplies through a cooperative may receive income from the cooperative in the form of patronage dividends (refunds), as reported to the taxpayer on Form 1099-PATR. a. Taxpayers selling their farm products through a cooperative may receive either patronage dividends or a per-unit retain certificate from the cooperative. These dividends are also reported on Schedule F. Capitalization and Depreciation 6. If the taxpayer produced real or tangible personal property or acquired property for resale, certain expenses must be included in inventory costs or capitalized. These expenses include the direct costs of the property and the share of any indirect costs allocable to that property. a. A farmer can deduct depreciation of buildings, improvements, cars and trucks, machinery, and other farm equipment of a permanent nature. 1) Do not deduct depreciation on a home, furniture or other personal items, land, livestock bought or raised for resale, or other property in inventory. b. The following are just a few examples of depreciable farm property and the corresponding recovery periods. This information does not need to be memorized for the exam. Recovery Assets Period in Years GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Cattle (dairy or breeding) 5 7 Farm buildings 20 25 Farm machinery and equipment 7 10 Acquired after 2017 5 10 Fences (agricultural) 7 10 Tractor units (over-the-road) 3 4 Truck (heavy duty, unloaded weight 13,000 lbs. or more) 5 6 Truck (actual weight less than 13,000 lbs.) 5 5 Water wells 15 20 Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 12 SU 2: Income and Farms Section 1231 Gains 7. Schedule F does not include gains and losses from sales or other dispositions of farm land (Sec. 1231 property), depreciable farm equipment (Sec. 1245 property), and buildings and structures (Sec. 1250 property). Farm Income Averaging 8. If a taxpayer is engaged in a farming or fishing business, (s)he may be able to average all or some of his or her current year’s farm income by using income rates from the 3 prior years (base years) to calculate the tax on that income. a. An individual, a partner in a partnership, or a shareholder in an S corporation may elect farm income averaging on a timely filed return (including extensions) or later if the IRS approves. 1) The taxpayer need not have engaged in a farming business in any base year. b. Corporations, partnerships, S corporations, estates, and trusts cannot use farm income averaging. c. To elect farm income averaging as a tax computation method, you must file a Schedule J with your income tax return for the election year. 1) This includes late or amended returns if the period of limitations on filing a claim for credit or refund has not expired. 9. Special Circumstances Weather-Related Gains on Sale of Livestock a. The gain from sales of livestock caused by drought, flood, or other weather-related conditions (causing the affected area to be eligible for assistance by the federal government) can be postponed for 4 years. If, because of the weather-related conditions, a farmer who uses the cash method of accounting sells more livestock (including poultry) than (s)he would have sold under normal business conditions, the farmer may choose to include the gain from the sale of the additional livestock in income next year instead of the current year. 1) The election applies to all livestock, whether held for resale or other purposes. It applies even if the livestock was actually exchanged or sold before an area is designated as eligible for federal assistance, as long as the weather-related condition caused the exchange or sale. Crop Insurance and Disaster Payments b. Crop insurance and disaster payments are generally included in income in the year they are received. 1) An election is available to include the proceeds in income for the tax year following the tax year in which the crops were damaged. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 2: Income and Farms 13 Estimated Taxes 10. If a taxpayer qualifies as a farmer by receiving at least two-thirds of the total gross income from farming in the current year or the preceding tax year, the following special rules apply: a. The taxpayer shall pay all estimated taxes by January 15 and then file the 1040 return and pay any additional taxes by April 15. The required annual payment is the smaller of two- thirds of the current year’s tax or 100% of the previous year’s tax. b. In lieu of estimated payments described in 10.a., the taxpayer may file the 1040 return and pay all taxes due by March 1. c. The taxpayer should be sure to include any alternative minimum tax that (s)he expects to owe in the calculation for estimated tax. d. The following illustrates the process of determining if estimated tax payments are required by a farmer: Figure 2-2 Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].