Table of Contents
- What's New
- Introduction
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Schedule F
- Sales of Farm Products
- Rents (Including Crop Shares)
- Agricultural Program Payments
- Commodity Credit Corporation (CCC) Loans
- Conservation Reserve Program (CRP)
- Crop Insurance and Crop Disaster Payments
- Feed Assistance and Payments
- Cost-Sharing Exclusion (Improvements)
- Payments Under the Farm Security and Rural Investment Act of 2002
- Tobacco Quota Buyout Program Payments
- Other Payments
- Payment to More Than One Person
- Income From Cooperatives
- Cancellation of Debt
- Income From Other Sources
- Income Averaging for Farmers
Qualified principal residence debt. You can exclude from income a canceled debt that is qualified principal residence debt. This exclusion applies to debts canceled after December 31, 2006, and before January 1, 2010. The amount excluded from income is applied to reduce (but not below zero) the basis of your principal residence. See Qualified Principal Residence Debt, later.
You may receive income from many sources. You must report the income on your tax return, unless it is excluded by law. Where you report the income depends on its source.
This chapter discusses farm income you report on Schedule F (Form 1040). For information on where to report other income, see the Instructions for Form 1040.
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Schedule F
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Sales of farm products
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Rents (including crop shares)
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Agricultural program payments
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Income from cooperatives
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Cancellation of debt
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Income from other sources
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Income averaging for farmers
Publication
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525 Taxable and Nontaxable Income
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550 Investment Income and Expenses
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908 Bankruptcy Tax Guide
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925 Passive Activity and At-Risk Rules
Form (and Instructions)
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Sch E (Form 1040) Supplemental
Income and Loss -
Sch F (Form 1040) Profit or Loss From Farming
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Sch J (Form 1040) Income Averaging for Farmers and Fishermen
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982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
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1099-G Certain Government Payments
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1099-PATR Taxable Distributions
Received From Cooperatives -
4797 Sales of Business Property
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4835 Farm Rental Income and
Expenses
See chapter 16 for information about getting publications and forms.
Report your farm income on Schedule F (Form 1040). Use this schedule to figure the net profit or loss from regular farming operations.
Income from farming reported on Schedule F (Form 1040) includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. It also includes income from the sale of crop shares if you materially participate in producing the crop. See Rents (Including Crop Shares), later.
Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming.
Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets.
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Land.
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Depreciable farm equipment.
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Buildings and structures.
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Livestock held for draft, breeding, sport, or dairy purposes.
Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11.
When you sell livestock, produce, grains, or other products you raised on your farm for sale or bought for resale, the entire amount you receive is reported on Schedule F. This includes money and the fair market value of any property or services you receive.
Example.
In 2007, you bought 20 feeder calves for $6,000 for resale. You sold them in 2008 for $11,000. You report the $11,000 sales price, subtract your $6,000 basis, and report the resulting $5,000 profit on your 2008 Schedule F, Part I.
If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. You must meet all the following conditions to qualify.
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Your principal trade or business is farming.
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You use the cash method of accounting.
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You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition.
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The weather-related condition caused an area to be designated as eligible for assistance by the federal government.
Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies.
A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. See Other Involuntary Conversions in chapter 11.-
Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock.
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Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions.
Example.
You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. As a result of drought, you sold 135 head during 2008. You realized $70,200 from the sale. On August 9, 2008, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. The income you can postpone until 2009 is $18,200 [($70,200 ÷ 135) × 35].
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A statement that you are postponing gain under section 451(e) of the Internal Revenue Code.
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Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions.
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A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock.
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The number of animals sold in each of the 3 preceding years.
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The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions.
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The total number of animals sold and the number sold because of weather-related conditions during the tax year.
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A computation, as described above, of the income to be postponed for each class of livestock.
The rent you receive for the use of your farmland is generally rental income, not farm income. However, if you materially participate in farming operations on the land, the rent is farm income. See Landlord Participation in Farming in chapter 12.
You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. It does not matter whether you use the cash method of accounting or an accrual method of accounting.
If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. (See Landlord Participation in Farming in chapter 12.) Report the rental income on Schedule F.
If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). The income is not included in self-employment income.
Example.
A tenant farmed part of your land under a crop-share arrangement. The tenant harvested and delivered the crop in your name to an elevator company. Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. They sell their crop shares in the following year and the elevator company makes payments directly to your children.
In this situation, you are considered to have received rental income and then made a gift of that income. You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children.
You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. See Cost-Sharing Exclusion (Improvements), later.
Report the agricultural program payment on the appropriate line of Schedule F, Part I. Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. Claim the deduction on Schedule F for the year of repayment or reduction.
Generally, you do not report loans you receive as income. However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. You do not need approval from the IRS to adopt this method of reporting CCC loans.
Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later
years in the same way. However, you can obtain automatic consent to change your method of accounting for loans received from
the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan
amount as a loan. For more information, see Part I of the instructions for Form 3115 and Revenue Procedure 2008-52 as modified
by Announcement 2008-84. See Revenue Procedure 2008-52, 2008-36 I.R.B. 587, available at
www.irs.gov/irb/2008-36_IRB/ar09.html. See Announcement 2008-84, 2008-38 I.R.B. 748, available at
www.irs.gov/irb/2008-38_IRB/ar14.html.
To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. Attach a statement to your return showing the details of the loan.
You must file the statement and the return by the due date of the return, including extensions. If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section 301.9100-2” at the top of the return. File the amended return at the same address you filed the original return.
When you make this election, the amount you report as income becomes your basis in the commodity. See chapter 6 for information on the basis of assets. If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F.
If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture.
Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. Whether you use cash or CCC certificates to repay the loan, you will receive a Form CCC-1099-G showing the market gain you realized. Market gain should be reported as follows.
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If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. However, adjust the basis of the commodity for the amount of the market gain.
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If you did not include the CCC loan in income in the year received, include the market gain in your income.
The following examples show how to report market gain.
Example 1.
Mike Green is a cotton farmer. He uses the cash method of accounting and files his tax return on a calendar year basis. He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. In 2007, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $500 (a loan rate of $.50 per pound). In 2008, he repaid the loan and redeemed the cotton for $420 when the world price was $.42 per pound (lower than the loan amount). Later in 2008, he sold the cotton for $600.
The market gain on the redemption was $.08 ($.50 – $.42) per pound. Mike realized total market gain of $80 ($.08 x 1,000 pounds). How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2007.
Example 2.
The facts are the same as in Example 1 except that, instead of selling the cotton for $600 after redeeming it, Mike entered into an option-to-purchase contract with Tom Merchant before redeeming the cotton. Under that contract, Mike authorized Tom to pay the CCC loan on Mike's behalf. In 2008, Tom repaid the loan for $420 and immediately exercised his option, buying the cotton for $420. How Mike reports the $80 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2007.
Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 6a and 6b. Cost-share payments you receive may qualify for the cost-sharing exclusion. (See Cost-Sharing Exclusion, later.) CRP payments are reported to you on Form CCC-1099-G.
Certain Conservation Reserve Program payments may be excluded from self-employment tax. For more information, see chapter 12.You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them. Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster.
You can request income tax withholding from crop disaster payments you receive from the federal government. Use Form W-4V, Voluntary Withholding Request. See chapter 16 for information about ordering the form.-
You use the cash method of accounting.
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You receive the crop insurance proceeds in the same tax year the crops are damaged.
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You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred.
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A statement that you are making an election under section 451(d) of the Internal Revenue Code and Regulations section 1.451-6.
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The specific crop or crops destroyed or damaged.
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A statement that under your normal business practice you would have included income from the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged.
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The cause of the destruction or damage and the date or dates it occurred.
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The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment.
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The name of each insurance carrier from whom you received payments.
Ogden Submission Processing Center
P. O. Box 9941
Ogden, UT 84409
The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation.
Include in income:
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The market value of donated feed,
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The difference between the market value and the price you paid for feed you buy at below market prices, and
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Any cost reimbursement you receive.
You must include these benefits in income in the year you receive them. You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. Report the benefits on Schedule F, Part I, as agricultural program payments. You can usually take a current deduction for the same amount as a feed expense.
You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. A payment is any economic benefit you get as a result of an improvement. However, this exclusion applies only to that part of a payment that meets all three of the following tests.
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It was for a capital expense. You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. You must include the payment for a deductible expense in income, and you can take any offsetting deduction. (See chapter 5 for information on deducting soil and water conservation expenses.)
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It does not substantially increase your annual income from the property for which it is made. An increase in annual income is substantial if it is more than the greater of the following amounts.
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10% of the average annual income derived from the affected property before receiving the improvement.
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$2.50 times the number of affected acres.
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The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.
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The rural clean water program authorized by the Federal Water Pollution Control Act.
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The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977.
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The water bank program authorized by the Water Bank Act.
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The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978.
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The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act.
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The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act.
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The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act.
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Certain small watershed programs, listed later.
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Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Several state programs have been approved. For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS).
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The programs under the Watershed Protection and Flood Prevention Act.
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The flood prevention projects under the Flood Control Act of 1944.
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The Emergency Watershed Protection Program under the Flood Control Act of 1950.
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Certain programs under the Colorado River Basin Salinity Control Act.
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The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002.
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The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996.
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The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996.
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The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000.
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The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000.
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The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996.
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The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002.
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The Conservation Security Program authorized by the Food Security Act of 1985.
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Any government payments under a program not listed earlier.
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Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation.
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Any government payment to you for rent or for your services.
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10% of the prior average annual income from the affected acreage. The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement.
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$2.50 times the number of affected acres.
Example.
One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. The total cost of the improvement was $500,000. The USDA paid $490,000. You paid $10,000. The value of the cost-sharing improvement is $15,000.
The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. The excludable portion is the greater amount, $1,550.
You figure the amount to include in gross income as follows:
Value of cost-sharing improvement | $15,000 | ||
Minus: | Your share | $10,000 | |
Excludable portion | 1,550 | 11,550 | |
Amount included in income | $ 3,450 |
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The dollar amount of the cost funded by the government payment.
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The value of the improvement.
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The amount you are excluding.
The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. You must include these payments on Schedule F, lines 6a and 6b.
The Fair and Equitable Tobacco Reform Act of 2004, Title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support.
If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014.
Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. The gain or loss is capital or ordinary depending on how you used the quota. See Capital or ordinary gain or loss, later.
Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method.
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The basis of a quota derived from an original grant by the federal government is zero.
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The basis of a purchased quota is the purchase price.
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The basis of a quota received as a gift is generally the same as the donor's basis. However, under certain circumstances, the basis is increased by the amount of gift taxes paid. If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value.
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The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death.
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Deductions you took for amortization, depletion, or depreciation.
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Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota.
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The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero).
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The cost of acquiring a quota.
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Amounts for amortization, depletion, or depreciation.
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Amounts to reflect a reduction in the quota pounds.
Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years.
You must include most other government program payments in income.
Include in income the value of fertilizer or lime you receive under a government program. How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4.
If government payments are based on improvements, such as a pollution control facility, you must include them in income. You must also capitalize the full cost of the improvement. Since you have included the payments in income, they do not reduce your basis. However, see Cost-Sharing Exclusion (Improvements), earlier, for additional information.
If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. You should receive a Form 1099-MISC that shows the payment amount.
If you produce a tobacco crop, report the payments as income from farming on your Schedule F. If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835.
The USDA reports program payments to the IRS. It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. You should file Form 1099-G to report the identity of the actual recipient to the IRS. You should also give this information to the recipient. You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form.
Report the total amount reported to you as the payee of record on Schedule F, line 6a or 8a. However, do not report as a taxable amount on line 6b or 8b any amount belonging to someone else.
See chapter 16 for information about ordering Form 1099-G.
If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative.
You generally report patronage dividends as income on Schedule F, lines 5a and 5b, for the tax year you receive them. They include the following items.
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Money paid as a patronage dividend.
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The stated dollar value of qualified written notices of allocation.
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The fair market value of other property.
Do not report as income on line 5b any patronage dividends from buying personal or family items, capital assets, or depreciable property. Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls.
If you cannot determine what the dividend is for, report it as income on lines 5a and 5b.
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The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation.
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You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following.
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Signing and giving a written agreement to the cooperative.
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Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. The cooperative must notify you in writing of this bylaw and give you a copy.
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Endorsing and cashing a qualified check paid as part of the same patronage dividend. You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid.
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It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above.
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It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend.
Example.
On July 1, 2007, Mr. Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946). Mr. Brown files his return on a calendar year basis. For 2007, he claimed a depreciation deduction of $311, using the 10.71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). On July 2, 2008, the cooperative association paid Mr. Brown a $300 cash patronage dividend for buying the machine. Mr. Brown adjusts the basis of the machine and figures his depreciation deduction for 2008 (and later years) as follows.
Cost of machine on July 1, 2007 | $2,900 | ||
Minus: | 2007 depreciation | $311 | |
2008 cash dividend | 300 | 611 | |
Adjusted basis for depreciation for 2008: |
$2,289 | ||
Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/08) = 15.38% × 1.5 = 23.07% | |||
Depreciation deduction for 2008 ($2,289 × 23.07%) |
$528 |
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If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year.
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If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain).
A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. These allocations can be paid in money, other property, or qualified certificates.
Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier.
This section explains the general rule for including canceled debt in income and the exceptions to the general rule. For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. Report the canceled amount on Schedule F, line 10, if you incurred the debt in your farming business. If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21.
The following discussion covers some exceptions to the general rule for canceled debt. These exceptions apply before the exclusions discussed below.
Example.
You get accounting services for your farm on credit. Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. Your accountant forgives part of the amount you owe for the accounting services. How you treat the canceled debt depends on your method of accounting.
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Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense.
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Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt.
Do not include canceled debt in income in the following situations.
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The cancellation takes place in a bankruptcy case under title 11 of the U.S. Code.
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The cancellation takes place when you are insolvent.
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The canceled debt is a qualified farm debt.
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The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). See chapter 5 in Publication 334.
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The canceled debt is qualified principal residence indebtedness which is discharged after December 31, 2006, and before January 1, 2010.
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The discharge of certain indebtedness of a qualified individual because of Midwestern disasters. See Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
The exclusions do not apply in the following situations:
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If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), (5), and (6) do not apply.
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If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent.
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If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness.
See Form 982, later, for information on how to claim an exclusion for a canceled debt.
You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent.
Example.
You had a $15,000 debt canceled outside of bankruptcy. Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). You can exclude this amount from income. The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. If not, you must include it in income.
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Net operating loss (NOL). Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt.
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General business credit carryover. Reduce the credit carryover to or from the tax year of the debt cancellation. Reduce the carryover 33 cents for each dollar of excluded canceled debt.
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Minimum tax credit. Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. Reduce the credit 33 cents for each dollar of excluded canceled debt.
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Capital loss. Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt.
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Basis. Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order.
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Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt.
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Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt.
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Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment.
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Inventory and accounts and notes receivable.
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Other property.
Reduce the basis one dollar for each dollar of excluded canceled debt. However, the reduction cannot be more than the total bases of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation.
For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1.1017-1(b)(2). Also see Electing to reduce the basis of depreciable property first, later.
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Passive activity loss and credit carryovers. Reduce the passive activity loss and credit carryovers from the tax year of the debt cancellation. Reduce the loss carryover one dollar for each dollar of excluded canceled debt. Reduce the credit carryover 33 cents for each dollar of excluded canceled debt.
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Foreign tax credit. Reduce the credit carryover to or from the tax year of the debt cancellation. Reduce the carryover 33 cents for each dollar of excluded canceled debt.
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Depreciable real property used in your trade or business or held for investment that secured the canceled debt.
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Depreciable personal property used in your trade or business or held for investment that secured the canceled debt.
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Other depreciable property used in your trade or business or held for investment.
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Real property held as inventory if you elect to treat it as depreciable property on Form 982.
You can exclude from income a canceled debt that is qualified principal residence debt. The amount excluded from income is applied to reduce (but not below zero) the basis of your principal residence.
You can exclude from income a canceled debt that is qualified farm debt owed to a qualified person. This exclusion applies only if you were solvent when the debt was canceled or, if you were insolvent, only to the extent the canceled debt is more than the amount by which you were insolvent. This exclusion does not apply to a canceled debt excluded from income because it relates to your principal residence or it takes place in a bankruptcy case.
Your debt is qualified farm debt if both the following requirements are met.
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You incurred it directly in operating a farming business.
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At least 50% of your total gross receipts for the 3 tax years preceding the year of debt cancellation were from your farming business.
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A person related to you.
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A person from whom you acquired the property (or a person related to this person).
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A person who receives a fee from your investment in the property (or a person related to this person).
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Any net operating loss (NOL) for the tax year of the debt cancellation and any NOL carryover to that year.
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Any general business credit carryover to or from the year of the debt cancellation, multiplied by 3.
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Any minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation, multiplied by 3.
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Any net capital loss for the tax year of the debt cancellation and any capital loss carryover to that year.
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Any passive activity loss and credit carryovers from the tax year of the debt cancellation. Any credit carryover is multiplied by 3.
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Any foreign tax credit carryovers to or from the tax year of the debt cancellation, multiplied by 3.
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Depreciable qualified property. You may elect on Form 982 to treat real property held as inventory as depreciable property.
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Land that is qualified property and is used or held for use in your farming business.
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Other qualified property.
Use Form 982 to show the amounts of canceled debt excluded from income and the reduction of tax attributes in the order listed on the form. Also use it if you are electing to apply the excluded canceled debt to reduce the basis of depreciable property before reducing tax attributes. You make this election by showing the amount you elect to apply on line 5 of the form.
This section discusses other types of income you may receive.
Example.
You granted a right-of-way for a gas pipeline through your property for $10,000. Only a specific part of your farmland was affected. You reserved the right to continue farming the surface land after the pipe was laid. Treat the payment for the right-of-way in one of the following ways.
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If the payment is less than the basis properly allocated to the part of your land affected by the right-of-way, reduce the basis by $10,000.
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If the payment is equal to or more than the basis of the affected part of your land, reduce the basis to zero and the rest, if any, is gain from a sale. The gain is reported on Form 4797 and is treated as section 1231 gain if you held the land for more than 1 year. See chapter 9.
Easement contracts usually describe the affected land using square feet. Your basis may be figured per acre. One acre equals 43,560 square feet.
If construction of the line damaged growing crops and you later receive a settlement of $250 for this damage, the $250 is income and is included on Schedule F, line 10. It does not affect the basis of your land.
Example.
A tenant farmer purchased fertilizer for $1,000 in April 2007. He deducted $1,000 on his 2007 Schedule F and the entire deduction reduced his tax. The landowner reimbursed him $500 of the cost of the fertilizer in February 2008. The tenant farmer must include $500 in income on his 2008 tax return because the entire deduction decreased his 2007 tax.
If you are engaged in a farming business, you may be able to average all or some of your farm income by allocating it to the 3 prior years (base years). This may give you a lower tax if your income from farming is high and your taxable income from one or more of the 3 prior years was low. The term “farming business” is defined in the Instructions for Schedule J (Form 1040).
EFI is the amount of income from your farming business that you elect to have taxed at base year rates. You can designate as EFI any type of income attributable to your farming business. However, your EFI cannot be more than your taxable income, and any EFI from a net capital gain attributable to your farming business cannot be more than your total net capital gain.
Income from your farming business is the sum of any farm income or gain minus any farm expenses or losses allowed as deductions in figuring your taxable income. However, it does not include gain or loss from the sale or other disposition of land, or from the sale of development rights, grazing rights, and other similar rights.
If you average your farm income, you will figure your tax on Schedule J (Form 1040).
You subtract your EFI from your taxable income and add one-third of it to the taxable income of each of the base years to determine the tax rate to use for income averaging. The allocation of your EFI to the base years does not affect other tax determinations. For example, you make the following determinations before subtracting your EFI (or adding it to income in the base years).
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The amount of your self-employment tax.
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Whether, in the aggregate, sales and other dispositions of business property (section 1231 transactions) produce long-term capital gain or ordinary loss.
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The amount of any net operating loss carryover or net capital loss carryover applied and the amount of any carryover to another year.
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The limit on itemized deductions based on your adjusted gross income.
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The amount of any net capital loss or net operating loss in a base year.
If your child was under age 19 (or 24 if a full-time student) at the end of 2008 and had investment income of more than $1,800, part of that income may be taxed at your tax rate instead of your child's tax rate. For more information, see the Instructions for Form 8615.
If you use income averaging, figure your child's tax on investment income using your rate after allocating EFI. You cannot use any of your child's investment income as your EFI, even if it is attributable to a farming business. For information on figuring the tax on your child's investment income, see Publication 929, Tax Rules for Children and Dependents.
You can elect to use income averaging to compute your regular tax liability. However, income averaging is not used to determine your regular tax or tentative minimum tax when figuring your AMT. Using income averaging may reduce your total tax even if you owe AMT.
You can use income averaging by filing Schedule J (Form 1040) with your timely filed (including extensions) return for the year. You can also use income averaging on a late return, or use, change, or cancel it on an amended return, if the time for filing a claim for refund has not expired for that election year. You generally must file the claim for refund within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
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