Accounting Methods
for Farmers
1)Cash method
2)Accrual method –
required for certain farm corporations and partnerships, & for all tax
shelters. Generally, if inventories are
used to figure gross income, the accrual method is required. However, an exception is allowed for
taxpayers with average annual gross receipts of $1 million or less. Farmers who are required to use an accrual
method are subject to UNICAP for plants (even if the plant preproductive period
is two years or less) and animals.
3)Special methods for
certain income and expense items – Crop
method – Can be used by farmers who do not complete harvesting and
disposing of crops within the tax year they planted (Exception:timeber). The entire cost of producing the crop,
including expenses of seed or young plants, is deducted in the year the income
from the crop is realized.
4)Combination method – May be used if it reflects income and
is used consistently. Certain
restrictions apply
Limit on Farm Losses
- For tax years beginning after 2009, the farming loss of taxpayer (other than
a C corporation) who receives an applicable
subsidy is limited to the great of (1) $300,000 ($150,000 if MFS) or (2)
the taxpayer’s total net farm income for the prior five tax years.
Farm Inventories
– Inventories include all unsold items at the end of the tax year, whether
raised or purchased, that are held for sale or for use as feed, seed, etc. Generally, growing crops are not included in
inventory.
Valuation methods
1)Cost
2)Lower of cost or
market
3)Farm-price method
– Each item is valued at the market price less the estimated direct cost of
disposition (such as broker’s commission, freight and hauling to market, etc.)
4)Unit-livestock-price
method – Livestock is classified according to kind and age, and a standard
unit price is used for each animal within a class. All raised livestock and livestock purchased
for sale must be included in inventory.
Animals purchased for draft, breeding, dairy or sporting purposes may be
treated as depreciable assets or included in inventory.
Farming Income and SE tax
Income reported on
Schedule F
1)Sales of livestock and other items bought for resale
2)Sales of livestock, produce, grains, etc. that taxpayer
raised
3)Distributions from cooperatives in the year made available
to members
4)Agricultural program payments such as commodity credit
loans or certificates, crop insurance proceeds and disaster payments, feed
assistance and payments, fertilizer and lime program payments, government
payments for improvements, etc.
5)Custom hire machine work
6)Federal and state fuel tax credits
7)Conservation Reserve Program (CRP) payments
Farming income not
subject to SE tax
1)Gains from sales of farmland or depreciable farm equipment
2)Gains from sales of livestock held for draft, breeding,
sport or dairy purposes (report on Form 4797). Animals not held primarily for
sale are considered business assets of the farm.
3)Tobacco quota buyout payments received under the 2004
Tobacco Reform Act.
Computing SE tax – 3 ways
1)Regular method
2)Farm optional method – is a way for a farmer to continue
to accrue Social Security benefits when net profit for the year is small or is
a loss. It is available if Gross Income
(GI) from farming is $6,720 or less or Net farm profit is less than $4,851. Net earnings are the lesser of $4,480 (4.851
x 92.35%) or 2/3 of Gross Farm Income (not less than zero).
3)Nonfarm optional method – is available only if (1) net
nonfarm profits are less than $4,851 and less than 72.189% of gross non-farm
income and (2) net earnings from self-employment are at least $400 in two of
the prior three years. It can only be
used five times.
Farm Rental Income
– Rent received for the use of farmland is rental income, not farm income. Such rental income is not subject to SE tax.
Determining material
participation for SE tax – A landlord materially participates in the
farming activity (and is subject to SE tax) if the landlord has an arrangement
with the tenant for participation and the landlord meets any of the following tests:
1)The landlord does
any three of the following: (a) pays at least half the direct costs of
producing the crop or livestock. (b) furnishes at least half the tools,
equipment and livestock used in the production activities. (c) advises or
consults with the tenant. (d) inspects the production activities periodically.
2)Regularly and
frequently makes management decisions substantially contributing to the success
of the enterprise.
3)Works 100 hours or more spread over a period of 5 weeks or
more in activities connected with agricultural production.
4)Does things that, considered in their totality, show
material and significant involvement in production of the farm commodities.
Pasture income and
rental
1)Rental income –
Fee paid to the taxpayer for renting out the taxpayer’s pasture for the use and
care of the renter’s cattle (Schedule E).
2)Farm income –
Fee paid to the taxpayer for taking someone else’s cattle to the taxpayer’s
pasture and for assuming responsibility for furnishing water, salt, etc.
(schedule F).
Where to report farm
rental income
Form 4835 – Rent is
a share of crops or livestock produced by the tenant, and the taxpayer did not
materially participate in farm operation or management.
Schedule E – Cash rent
is a flat charge for use of farm land.
Schedule F – Farm operations
in which the landlord materially participates, whether received in cash or as a
crop share.
Schedule C –
Rental of farm equipment as a trade or business.
Form 1040, line 21
– Personal property rental, not conducted as a trade or business (for example,
infrequent rental of a tractor). Related expenses are deducted on line 36 of Form 1040 with the
notation “PPR.”
Crop Shares
Rents received as crop share are included in income in the
year the crop shares are reduced to money, whether the cash or accrual method
is used.
Crop shares used to
feed livestock – crop share received by a landlord and fed to livestock are
considered converted to money when fed to the livestock. The FMV of the crop shares is included in
income at that time. At the same time, a
business expense deduction, for the same amount, is taken for livestock
feed. Even though these two transactions
cancel each other out, they may be necessary to determine net earnings from
self-employment under the farm optional method.
Crop shares given to
others – crop shares received as a landlord and given to others are
considered converted to money when given.
The FMV of the crop shares is reported as income even though someone
else receives payment for the crop shares.
Agriculutral
Programs
Commodity Credit
Corporation loans
CCC nonrecourse
marketing assistance loan program
Conservation Reserve
Program (CRP)
Crop insurance and
disaster payments
Tobacco quota buyout
program payments
Income
Deferral-Livestock Sales
1-year deferral – A farmer can elect to postpone
reporting the proceeds from the sale of livestock (including poultry) if more
animals than usual business practice were sold due to weather-related
conditions. The gain from the sale of
the additional animals may be included in income the year after the sale.
Qualifications for
income tax deferral:
1)Principal business
is farming
2)Cash method of
accounting is used
3)Under normal
conditions, the sale would not have occurred and
4)Weather-related
conditions resulted in an area being designated as eligible for assistance by
the federal government.
Making the election – Generally, the 1-year deferral
under Section 451 is elected by attaching a statement to the return for the
year of the sale. However, farmers who
qualify for the Section 451 election and who are also eligible to use the
Section 1033 involuntary conversion rules to postpone the gain from
weather-related sales of livestock in an area eligible for federal assistance
can make the Section 451 election any time during the 4 years after the year
the livestock are sold.
Livestock Sales –
Where to Report
Schedule F
1)Raised livestock held primarily for sale
2)Livestock bought for resale
Form 4797
1)Animals not held primarily for sale
2)Livestock held for draft, breeding, dairy or sporting purposes
Business Use of Vehicles – 75% Rule
Farmers can claim 75% business use for vehicles used primarily for farming business instead of keeping records of business mileage. Once this method is elected, it must be used in future years. Like-wise, if the standard mileage rate or actual expenses method is elected, the farmer cannot revert to the 75% rule.
Section 179 Deduction – Farm Property
Farm property that qualifies for a Section 179 deduction includes:
(1)Tangible personal property such as machinery and equipment, milk tanks, automatic feeders, barn cleaners and office equipment.
(2)Livestock
(3)Certain facilities used for the bulk storage of fungible commodities. This includes grain bins used in connection with the production of grain or livestock.
(4)Single purpose agricultural and horticultural structures.
Depreciating Farm Assets
3, 5, 7, & 10 year MACRS property used in a farming business must be depreciated using the 150% DB or SL method.
Form T (Timber) – Forest Activities Schedule
Generally, Form T should be filed when standing timber is sold or cut, or when there are other timber transactions. Form T must be completed to claim a deduction for timber depletion, to elect to treat the cutting of timber as a sale or exchange.
Domestic Producer Deduction (DPD)
For 2011, the DPD is 95 of the lesser of the business’s:
(1)Qualified production activities income or
(2)Taxable income (AGI for individuals) determined without regard to the DPD.
The DPD cannot exceed 50% of the wages paid and reported on For W-2 by the business for the year.
Oil and Gas Activities – Individuals with oil-related qualified production activities income must reduce their DPD by 3% of the least of their (1) oil-related qualified production activities income, (2)qualified production activities income, or (3)AGI
Qualified Production Activities Income
To determine the net income that qualifies for the 9% deduction, the taxpayer’s receipts must be divided into those from eligible activities (Domestic Production Gross Receipts DPGR) and non-DPGR. Then, the taxpayer’s expenses are allocated between the two categories of income. The DPGR less allocable expenses equals qualified production activities income.
Eligible activities – The following activities generate DPGR if performed in the USA
(1)Manufacture, production, growth or extraction of: (a)Tangible personal property (clothes, goods, food, ag products), (b)Computer software, and (c)Sound recordings.
(2)Certain film production
(3)Production of electricity, natural gas or portable water
(4)Construction or substantial renovation of residential and commercial buildings and infrastructure by taxpayers engaged in the construction business.
(5)Engineering and architectural services performed by a taxpayer engaged in the business of performing engineering or architecture.
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