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9/8/2015
1
Farm Expenses
Kristy MaitreTax SpecialistCenter for Agricultural Law and TaxationSeptember 10, 2015
26 CFR 1.162‐12 ‐ Expenses of Farmers
• Farms engaged in for profit• A farmer who operates a farm for profit is entitled to
deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming
• The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be deducted
• The purchase of feed and other costs connected with raising livestock may be treated as expense deductions insofar as such costs represent actual outlay, but not including the value of farm produce grown upon the farm or the labor of the taxpayer
Ordinary and Necessary
• The ordinary and necessary costs of operating a farm for profit are deductible business expenses
• An ordinary expense is an expense that is common and accepted in the business
• A necessary expense is one that is appropriate for the business
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Business Expenses
• In general many of the expenses we will address today will be allowed in other business entities
• §162 – Trade or business expenses– (a) In general– There shall be allowed as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
• (1)a reasonable allowance for salaries or other compensation for personal services actually rendered;
• (2)traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and
• (3)rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
Form 1040 Schedule F
Expenses
• Some expenses paid during the tax year may be partly personal and partly business
• Examples include gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest and taxes. Farmers must allocate these expenses between their business and personal parts
• Generally, the personal part of these expenses is not deductible
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Prepaid Farm Supplies
• §464 limits the allowable deduction for pre‐paid expenses• If the prepaid farm supplies have actually been used or
consumed, the amount is fully deductible• Prepaid farm supplies include the following items if paid
for during the year– Feed– Seed– Fertilizer, and – Similar farm supplies not used or consumed during the year, but
not including farm supplies that would have been consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought
Prepaid Farm Supplies
• Poultry (including egg‐laying hens and baby chicks) bought for use (or for both use and resale) in the farm business
– However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry
• Poultry bought for resale and not resold during the year
Prepaid Farm SuppliesDeduction Limit
• If the cash method of accounting is used to report income and expenses, the deduction for prepaid farm supplies in the year paid for them may be limited to 50% of the other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies)
• This limit does not apply if an exception is met, covered later:
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Prepaid Farm SuppliesDeduction Limit
• If the limit applies, deduct the excess cost of farm supplies other than poultry in the year used or consumed
• The excess cost of poultry bought for use (or for both use and resale) in the farm business is deductible in the year following the year it was paid for
• The excess cost of poultry bought for resale is deductible in the year sold or otherwise dispose of the poultry
Example
• During 2015, the farmer bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on the farm in the following year
• The total prepaid farm supplies expense for 2015 is $5,500
• The other deductible farm expenses totaled $10,000 for 2015
• Therefore, the deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2015
• The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when used or consumed
Exceptions
• 1. The prepaid farm supplies expense are more than 50% of the other deductible farm expenses because of a change in business operations caused by unusual circumstances
• 2. The total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of the total other deductible farm expenses for those 3 tax years
• The client is a farm related taxpayer if any of the following tests apply– 1. The main home is on a farm– 2. The principal business is farming– 3. A member of the family meets (1) or (2)
• For this purpose, the family includes your brothers and sisters, half‐brothers and half‐sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children
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Rev. Proc. 79‐229
• Rev. Rul. 79‐229, 1979‐2 C.B. 210, sets out three tests that must be met in order to deduct the cost of a supply purchased in the current taxable year which will be used in the subsequent taxable year– The expense must be a payment for the purchase of supplies, not a deposit– The amount is considered a payment if it was made under a binding commitment to
accept delivery of a specific quantity at a fixed price, and the farmer is not entitled to a refund or repurchase
– The prepayment is not merely for tax avoidance, but has a specific business purpose– Examples of business benefits are:
Fixing maximum pricesSecuring an assured feed supplySecuring preferential treatment in anticipation of shortages
• The deduction does not result in a material distortion of income. Some factors to consider in determining whether there is a material distortion of income are:– The farmer’s customary business practices in conducting the farming operation – The materiality of the expenditure in relation to the taxpayer’s income for the year– The time of the year the purchase is made– The amount of the expenditure in relation to past purchases
Rev. Proc. 79‐229
• Remember Rev. Rul. 79‐229 was written before the passive activity rules of IRC § 469 were enacted
• Consideration of IRC § 469 could further limit farming expenses
Prepaid Livestock Feed
• If the client reports income and expenses under the cash method of accounting, they cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless they meet all the following tests– 1. The payment is for the purchase of feed rather than a deposit
– 2. The prepayment has a business purpose and is not merely for tax avoidance
– 3.Deducting the prepayment does not result in a material distortion of your income
• If your client meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies
• If your client fails any of these tests, your client can deduct the prepaid feed only in the year it is consumed
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Payment for the Purchase of Feed
• Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case
• It is for the purchase of feed if your client can show they made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and they are not entitled, by contract or business custom, to a refund or repurchase
• The following are some factors that show a payment is a depositrather than for the purchase of feed– The absence of specific quantity terms– The right to a refund of any unapplied payment credit at the end of
the contract– The seller's treatment of the payment as a deposit– The right to substitute other goods or products for those specified in
the contract
Payment for the Purchase of Feed
• A provision permitting substitution of ingredi‐ents to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit
• Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit
Commodity Wages
• TaxPlace has two presentations covering commodity wages
• In respecting the time limits of today’s presentation the issue will not be discussed
• As a member of TaxPlace you can view those webinars at any time
• The issue in itself could extend our webinar by 30‐40 minutes
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Labor Hired
• Your client can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to work in the farming operations
• Your client can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in the farming business
• The cost of boarding farm labor is a deductible labor cost
• Other deductible costs incurred for farm labor include health insurance, workers' compensation insurance, and other benefits
Farm labor
• If a farmer pays his child to do farm work and a true employer‐employee relationship exists, reasonable wages or other compensation paid to the child is deductible
• The wages are included in the child’s income, and the child may have to file an income tax return
• These wages may also be subject to social security and Medicare taxes if the child is age 18 or older
Repairs and Maintenance
• You can deduct most expenses for the repair and maintenance of your farm property
• Common items of repair and maintenance are re‐painting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery
• However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses
• For example, if you repair the barn roof, the cost is deductible but if you replace the roof, it is a capital expense
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Capital vs. Reoccurring Costs
• A capital cost is paid or incurred for the acquisition, improvement, or restoration of an asset having a useful life of more than one year
• Capital expenses are generally not deductible, but they may be depreciable (IRC § 263)
• Uniform capitalization rules also require you to capitalize or include in inventory certain expenses (IRC § 263A)
What Property Cannot Be Depreciated?
• Certain property cannot be depreciated • Land
– You can never depreciate the cost of land because land does not wear out, be come obsolete, or get used up. The cost of land generally includes the cost of clearing, grading, planting, and landscaping
– Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use
• Property placed in service and disposed of in the same year• Equipment used to build capital improvements. You must add
otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements
• Intangible property such as section 197 intangibles– This property does not have a determinable useful life and generally
cannot be depreciated– Certain term interests
What Property Does Not Qualify for §179 ?
• Land and land improvements, do not qualify as section 179 property
• Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences
• However, agricultural fences do qualify as section 179 property
• Similarly, field drainage tile also qualifies as section 179 property
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§179
• Farmers cannot elect the section 179 expense deduction for the following property:
• Certain property you lease to others (if you are a non‐corporate lessor)
• Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging
• Property used by a tax‐exempt organization (other than a tax‐exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business
New Repair Regulations
• Unit of property
• Economic useful life
• Applicable Financial Statement
• Coordination with other provisions
• Written Capitalization policy
• Material and Supply
• Rotable and Temporary Spare Parts
• Small business taxpayers
Unit of Property
• Starting point for implementing the new repair regulations• The unit‐of‐property must be identified before the client can
determine whether the expenditure can be deducted or must be capitalized
• Once the unit of property has been determined, the client applies the improvement standards under the regulations to determine if the expenditure improves the property and requires capitalization– In general, a unit of property includes all components that are
“functionally interdependent” (i.e., the placing in service of one component depends upon the placing in service of another component
• An additional rule provides that if the taxpayer breaks down the unit of property into smaller components with different depreciation lives, then the smaller components are the units of property
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Unit of Property
• In general, a unit of property includes all components that are “functionally interdependent” (i.e., the placing in service of one component depends upon the placing in service of another component)
• An example: a client generally cannot place an tractor into service without tires; therefore, the tractor and tires may be a unit of property
• An additional rule provides that if the taxpayer breaks down the unit of property into smaller components with different depreciation lives, then the smaller components are the units of property
• An example: if the taxpayer treats the tractor tires under a different modified accelerated cost recovery system (MACRS) class than the tractor, the tires are a separate unit of property from the tractor
Where to start?
• Start with the concept that all tangible property that is not inventory must be capitalized and depreciated unless there is an exception
• The regulations provide an exception for items that qualify as materials and supplies
Improvement Costs
• The new regulations provide rules for distinguishing between costs than can be expensed and costs that must be capitalized
• Review the treatment of items expensed in prior years
• The new rules for improvement costs are referred to as the BAR (Betterment, Adaptation and Restoration) test
• Amounts paid that meet any portion of the BAR test must be capitalized
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Materials & Supplies
• The new rules also define what the IRS considers “materials and supplies”
• Materials and supplies are assets defined by the new rules as follows:– Asset costing $200 or less– Asset with an economic useful life of 12 months or less
– Component to maintain, repair or improve an asset, including rotable, temporary and stand‐by emergency spare parts
– Fuel, lubricants, water, etc. reasonably expected to be consumed in 12 months or less
Routine Maintenance Safe Harbor
• The new regulations allow for immediate expensing of items paid to keep an asset in ordinary and efficient working condition
• The following items may be expensed as repairs under the Routine Maintenance Safe Harbor:– Building property (structural components or building systems) –
expenditures for maintenance activities that you reasonably expect to perform more than once during a 10 year period
• Replacement of damaged or worn parts with comparable parts, such as replacing 2 windows in a building that has 10 windows or replacing 1 AC unit in a building that has 3 AC units.
• Non‐building property – expenditures for maintenance activities that you reasonably expect to perform more than once during the asset’s depreciable class life, which is typically longer than an asset’s depreciable life for tax purposes.
De Minimis Safe Harbor Election
• This is an annual election to expense amounts paid or incurred to acquire an asset, produce an asset or purchase materials and supplies
• The amount that may be expensed for tax purposes is limited to $500 per item unless you have an applicable financial statement then the amount is $5,000
• Policies in excess of $500 are permissible if the increased threshold accurately reflects your income and can be supported upon IRS exam
• An applicable financial statement is defined as an annual independent audit report or a financial statement submitted to a governmental agency
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Safe Harbor Election for Small Taxpayers with Buildings
• This is an annual election to expense improvements that would otherwise be capitalized
• To qualify for this safe harbor you must meet all of the following criteria:– Taxpayer owned or leased building must have an unadjusted cost basis of $1 million or less
– Taxpayer must have average gross receipts of less than $10 million for 3 previous tax years
– Total amount for repairs, maintenance and improvements must not exceed the lessor of $10,000 or 2% of the unadjusted basis in the building
Flow Charts to Assist on TaxPlace
• Materials and Supplies Chart
• Handling DeMinimus Amounts Chart
• Repair Regulations Client Checklist
Interest
• You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business
• Cash method– If you use the cash method of accounting, you can generally deduct
interest paid during the tax year – You cannot deduct interest paid with funds received from the original lender
through another loan, advance, or other arrangement similar to a loan– You can, however, deduct the interest when you start making payments on
the new loan
• Prepaid interest– Under the cash method, you generally cannot deduct any interest paid
before the year it is due– Interest paid in advance may be deducted only in the tax year in which it is
due
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Interest
• Accrual method
• If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year
• However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person
Allocation of Interest
• If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use
• Allocate the interest to the following categories:
– Trade or business interest
– Passive activity interest
– Investment interest
– Portfolio interest
– Personal interest
Breeding Fees
• You can deduct breeding fees as a farm business expense
• However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc
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Fertilizer and Lime
• You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less
• You can also deduct the cost of applying these materials in the year you pay or incur it
• However
Do Not Forget the Prepaid Farm Supplies Rule
• That rule may limit the deduction for these materials• If the benefits of the fertilizer, lime, or other materials last
substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last
• However, you can elect to deduct these expenses in the year paid or incurred– If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items
• If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income
Fertilizer and Lime
• Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock
• It does not include land you have never used previously for producing crops or sustaining livestock
• You cannot deduct initial land preparation costs
• Include government payments you receive for lime or fertilizer in income
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Taxes
• You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings
• You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay
Allocation of Taxes
• The taxes on the part of your farm you use as your home (including the
• furnishings and surrounding land not used for farming) are nonbusiness taxes
• You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040)
• To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets
• The allocation can be done from the assessed valuations.
• If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor
State and Local General Sales Taxes
• State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items
• Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate
• Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you
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State and Federal Income Taxes
• Individuals cannot deduct state and federal income taxes as farm business expenses
• Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040) – expired in 2014
• However, you cannot deduct federal income tax
Highway Use Tax
• You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business
• Form 2290, Heavy Highway Vehicle Use Tax Return
Self‐employment Tax Deduction
• You can deduct as an adjustment to income on Form 1040 one‐half of your selfemployment tax in figuring your adjusted gross income
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Insurance
• You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense
• This includes premiums you pay for the following types of insurance– Fire, storm, crop, theft, liability, and other insurance on farm
business assets– Health and accident insurance on your farm employees– Workers' compensation insurance set by state law that covers
any claims for job related bodily injuries or diseases suffered by employees on your farm, regardless of fault
– Business interruption insurance– State unemployment insurance on your farm employees
(deductible as taxes if they are considered taxes under state law)
Insurance to Secure a Loan
• If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense
• In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt
Advance Premiums
• Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting
• method• Example • On June 28, 2015, you paid a premium of $3,000 for fire
insurance on the barn• The policy will cover a period of 3 years beginning on July 1, 2015• Only the cost for the 6 months in 2015 is deductible as an
insurance expense on your 2015 calendar year tax return• Deduct $500, which is the premium for 6 months of the 36 ‐
month premium period• In both 2016 and 2017, deduct $1,000 • Deduct the remaining $500 in 2018• Had the policy been effective on January 1, 2015, the deductible
expense would have been $1,000 for each of the years 2015, 2016, and 2017, based on one‐third of the premium used each year
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Business Interruption Insurance
• Use and occupancy and business interruption insurance premiums are deductible as a business expense
• This insurance pays for lost profits if your business is shut down due to a fire or other
• Cause
• Report any proceeds in full on Schedule F Part 1
Self‐Employed Health Insurance Deduction
• If you are self‐employed, you can deduct as an adjustment to income on Form 1040 the payments for medical, dental, and qualified longterm care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040
• Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2015, even if the child was not your dependent
• Generally, this deduction cannot be more than the net profit from the business under which the plan was established
Rent and Leasing
• If you lease property for use in your farm busi
• ness, you can generally deduct the rent you pay on Schedule F
• However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses
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Advance Payments
• Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method
Farm Home
• If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live
Lease or Purchase
• If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease
• If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property
• Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation
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Conditional Sales Contract
• Whether an agreement is a conditional sales contract depends on the intent of the parties
• Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement
• No single test, or special combination of tests, always applies
• However, in general, an agreement may be • considered a conditional sales contract rather • than a lease if any of the following is true
Conditions
• The agreement applies part of each payment toward an equity interest you will receive
• You get title to the property after you make a stated amount of required payments
• The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property
• You pay much more than the current fair rental value of the property• You have an option to buy the property at a nominal price compared to
the value of the property when you may exercise the option– Determine this value when you make the agreement
• You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement
• The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest
Example
• You lease new farm equipment from a dealer who both sells and leases
• The agreement includes an option to purchase the equipment for a specified price
• The lease payments and the specified option price equal the sales price of the equipment plus interest
• Under the agreement, you are responsible for maintenance, repairs, and the risk of loss
• For federal income tax purposes, the agreement is a conditional sales contract
• You cannot deduct any of the lease payments as rent• You can deduct interest, repairs, insurance, depreciation, • and other expenses related to the equipment
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Motor Vehicle Leases
• Special rules apply to lease agreements that have a terminal rental adjustment clause
• In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease
• If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease
• §7701(h).
Leveraged Leases
• Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party)
• Revenue Procedure 2001‐28
Business Use of Your Home
• You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly:– As the principal place of business for any trade or business in which
you engage,– As a place to meet or deal with patients, clients, or customers in the
normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home.
• Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements– You use it exclusively and regularly for the administrative or
management activities of your trade or business– You have no other fixed location where you conduct substantial
administrative or management activities of your trade or business
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Business Use of Your Home
• If you use part of your home for business, you must divide the expenses of operating your home between personal and business use
• The IRS now provides a simplified method
• to determine your expenses for business use of your home
Deduction Limit
• If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses.
• But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited
• Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses
• The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses)
Deduction Limit
• If you are self‐employed, do not include your deduction for half of your self‐employment tax
• Deductions over the current year's limit can be carried over to your next tax year under the historical method not the simplified method
• They are subject to the deduction limit for the next tax year
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Telephone Expense
• You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home
• However, charges for business long distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses
• Cell phone charges for calls relating to your farm business are deductible
• If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls
Truck and Car Expenses
• You can deduct the actual cost of operating a
• truck or car in your farm business
• Only expenses for business use are deductible
• These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits)
Standard Mileage Rate
• Instead of using actual costs, under certain conditions you can use the standard mileage rate
• The standard mileage rate for each mile of business use is 57.5 cents in 2015
• You can use the standard mile age rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease
• You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time
• You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business
• Notice 2014‐79
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Business Use Percentage
• You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming
• You choose this method of substantiating business use the first year the vehicle is placed in service
• Once you make this choice, you may not change to another method later
• The following are uses directly connected with the business of farming– Cultivating land– Raising or harvesting any agricultural or horticultural commodity– Raising, shearing, feeding, caring for, training, and managing animals– Driving to the feed or supply store
Truck and Car Expenses
• If you keep records and they show that the business use was more than 75%, you may be able to claim more
• Beginning and ending odometer reading is needed
Travel Expenses
• You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business
• You cannot deduct lavish or extravagant expenses• Usually, the location of your farm business is
considered your • home for tax purposes• You are traveling away from home if:
– Your duties require you to be absent from your farm substantially longer than an ordinary work day, and
– You need to get sleep or rest to meet the demands of your work while away from home
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Travel Expenses
• If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses
• The following are some types of deductible travel expenses– Air, rail, bus, and car transportation;– Meals and lodging;– Dry cleaning and laundry;– Telephone and fax;– Transportation between your hotel and your temporary work or business meeting location; and
– Tips for any of the above expenses
Meals
• You ordinarily can deduct only 50% of your businessrelated meals expenses
• You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties
• You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment
• The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal
• You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses
Recordkeeping Requirements
• You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement
• Estimates or approximations do not qualify as proof of an expense
• You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense
• Generally, it is best to record the expense and get documentation of it at the time you pay it
• If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items
• However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel
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Reimbursements to Employees
• You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business
• Employees may be reimbursed under an accountable or non‐accountable plan
• Under an accountable plan, the employee must provide evidence of expenses
• Under a non‐accountable plan, no evidence of expenses is required.
• If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses
• If you reimburse expenses under a non‐accountable plan, you must report the reimbursements as wages on Form W2 and deduct them as wages
Marketing Quota Penalties
• You can deduct as Other expenses on Sched‐ule F penalties you pay for marketing crops in excess of farm marketing quotas
• However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received
• Do not take a separate deduction for the penalty
Tenant House Expenses
• You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses
• These costs include repairs, utilities, insurance, and depreciation
• The value of a dwelling you furnish to a tenant under the usual tenant farmer arrangement is not taxable income to the tenant
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Other Expenses
• The following list, while not all inclusive, shows some expenses you can deduct as other farm
• expenses on Schedule F, Part II.• These expenses must be for business purposes and (1) paid, if you use
the cash method of accounting, or (2) incurred, if you use an accrual method of accounting.– Accounting fees– Advertising– Business travel and meals– Commissions– Consultant fees– Crop scouting expenses– Dues to cooperatives– Educational expenses (to maintain and improve farming skills)– Farm related attorney fees– Farm magazines– Ginning
Other Expenses
– Insect sprays and dusts– Litter and bedding– Livestock fees– Marketing fees– Milk assessment– Recordkeeping expenses– Service charges– Small tools expected to last one year or less– Stamps and stationery– Subscriptions to professional, technical, and trade journals that deal with farming
– Tying material and containers
Loan Expenses
• You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan
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Tax Preparation Fees
• You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business
• You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions
• You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business
Advertising
• You generally can deduct reasonableadvertising expenses that are directly related to your business activities
• Generally, you cannot deduct amounts paid to influence legislation (i.e., lobbying
• You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future
Advertising
• The cost of ordinary advertising of your goods or services ‐‐ business cards, yellow page ads, and so on ‐‐ is deductible as a current expense
• Promotional costs that create business goodwill ‐‐ for example, sponsoring a peewee football team ‐‐ are also deductible as long as there is a clear connection between the sponsorship and your business
• For example, naming the team the "Southwest Auto Parts Blues" or listing the business name in the program is evidence of the promotion effort
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Scoop Dates for Post Filing Season
• September 23, 2015
• October 21, 2015
• October 28, 2015
Iowa Taxpayer Advocate Town Hall Meeting
• Join us for our Annual Town Hall Advocate meeting
• September 25, 2015
• Noon – 1:00
• Your chance to air your concerns
September Webinars
• September 15 ‐ S‐Corp K‐1 Preparation ‐ The proper preparation of an S‐Corporation K‐1 is essential to the client and reporting the flow‐through income. This class will review the key areas of Form K‐1 and the flow‐through process.
• September 22 ‐ Health Savings Accounts ‐ A health savings account (HSA) is a tax‐advantaged medical savings account available to taxpayers in the United States who are enrolled in a high‐deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. How can this help your client with medical expenses and save them tax.
• September 23 ‐ Farm Income A‐Z ‐ Farm entities enjoy many unique benefits under the Internal Revenue Code. These advantages provide numerous opportunities for valid income deferral. This class will examine some of the relevant income issues unique to farming entities.
• September 24 ‐ Charitable Contributions Recordkeeping Pitfalls ‐What is FMV, do you need appraisals, and what must you have in your recordkeeping to substantiate your donation. IRS is auditing charitable contributions and you and your client need to be prepared.
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ACA Week 2015Get ready for the 2016 filing season and ACA
• ACA Week October 19, 2015 – October 23, 2015– The Marketplace and Affordability: October 19, 2015 ‐Noon to 1 pm (CST) – 1 hour of CPE
– Exemptions and Shared Responsibility Payment: October 20, 2015 ‐ Noon to 1 pm (CST) – 1 hour of CPE
– Premium Tax Credit: October 21, 2015 ‐ Noon to 1 pm (CST) 1 hour of CPE
– Shared Allocations: October 22, 2015 – Noon to 2 pm(CST) 2 hours of CPE
– Employer Issues and Cadillac Tax: October 23, 2015 – Noon to 2 pm (CST) – 2 hours of CPE
ACA Week 2015
• Registration: – To register: https://goo.gl/RnW5nG
• Special Discount!! (must be pre‐registered for all 5 classes): $200 (7 hours of CPE)
• The Marketplace and Affordability: October 19, 2015 ‐ Noon to 1 pm (CST) – 1 hour of CPE ‐ $35
• Exemptions and Shared Responsibility Payment: October 20, 2015 ‐ Noon to 1 pm (CST) – 1 hour of CPE ‐ $35
• Premium Tax Credit: October 21, 2015 ‐ Noon to 1 pm (CST) – 1 hour of CPE ‐ $35
• Shared Allocations: October 22, 2015 – Noon to 2 pm (CST) – 2 hours of CPE ‐ $70
• Employer Issues and Cadillac Tax: October 23, 2015 – Noon to 2 pm (CST) – 2 hours of CPE ‐ $70
Webinars: Repair Regulation Week at CALTOctober 26, 2015 to October 30, 2015
• October 26, 2015 Buildings: Betterments ~ Noon to 1 pm CST
• What is an Improvement? An improvement occurs if the unit of property (UOP) undergoes, other than through routine maintenance: (1) betterment, (2) restoration, or (3) adaptation to another use. This session will cover the new regulations and provide examples that will, assist in the of when that Unit of Property (1) ameliorates a material condition or defect that predates the taxpayer’s ownership of the property, (2) is for a material improvement to the property’s capacity, or (3) is expected to materially improve the property’s productivity, efficiency, strength, quality or output. Discussion on how to identify and examples will be shared. Also a discussion on the safe harbor will be demonstrated.
• October 27, 2015 Buildings: Restoration ~ Noon to 1 pm CST
• What is an Improvement? Does that improvement: (1) it returns a non‐functional unit of property to operating condition; (2) it replaces a major component or substantial structural part or set of parts, or (3) it restores property after the end of its class life to a like‐new condition (as defined in either a federal regulatory guideline or the manufacturer’s specifications. Discussion on how to identify and examples will be shared.
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Webinars: Repair Regulation Week at CALTOctober 26, 2015 to October 30, 2015
• October 28, 2015 Buildings: Adaptation ~ Noon to 1 pm CST
• Does that improvement adapt the property to new uses? Are improvements subject to capitalization or can they be expensed under the safe harbor. Examples will be demonstrated. The treatment under the new rule applies to all direct costs of the improvement plus all indirect costs that either directly benefit from, or are incurred by reason of, the improvement. Discussion on how to identify and examples will be shared.
• October 29, 2015 Dispositions ~ Noon to 1 pm CST
• What happens when the property is disposed of or sold, how is that handled under the new repair regulations? What are the new procedures? Discussion on how to apply the new regulations and examples will be shared.
• October 30, 2015 Other Remaining Issues of Importance ~ Noon to 1 pm CST
• The NEW repair regulations cover a variety of aspects. This session will cover a potpourri of issues to round out the previous five classes. We will try to address common questions and reiterated some of the key definitions necessary to fully understand the new regulations. We will also cover as time allowed topics we were unable to fully address in other sessions.
2015 Farm Tax Schools
• November 9, 2015 to December 15, 2015 • 8 Locations in Iowa• Registration and the Fall Brochure will be out in August
• The program is intended for tax professionals and is designed to provide up‐to‐date training on current tax law and regulations.
• The program stresses practical information to facilitate the filing of individual and small business returns, in addition to farm returns.
2015 Farm Tax Schools‐ Dates and Locations
• Waterloo: Nov 9‐10• Sheldon: Nov. 10‐11• Red Oak: Nov. 11‐12• Ottumwa: Nov. 12‐13• Mason City: Nov. 16‐17• Maquoketa: Nov. 23‐24• Denison: Dec. 7‐8• Ames: Dec. 14‐15 – live as well as attendance via webinar available
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CALT Website
http://www.calt.iastate.edu/
Tour of the CALT Website
CALT Staff
Roger A. McEowenCALT Director and is a Leonard Dolezal Professor in Agricultural LawEmail: [email protected]: (515) 294‐4076Fax: (515) 294‐0700
Kristine A. TidgrenStaff AttorneyE‐mail: [email protected]: (515) 294‐6365Fax: (515) 294‐0700
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CALT Staff
Kristy S. MaitreTax SpecialistE‐mail: [email protected]: (515) 296‐3810Fax: (515) 294‐0700
Tiffany KayserProgram AdministratorEmail: [email protected]: (515) 294‐5217Fax: (515) 294‐0700