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              Publication 225
              Cat. No. 11049L                                                  Contents
                                                                               Introduction      . . . . . . . . . . . . . . . . . . 1
Department 
of the        Farmer's                                                         What's New for 2023 . . . . . . . . . . . . . 2
Treasury
Internal                                                                       What's New for 2024 . . . . . . . . . . . . . 3
Revenue       Tax Guide
Service                                                                        Reminders . . . . . . . . . . . . . . . . . . . 3
                                                                               Chapter  1.  Importance of Records . . . . 4
              For use in preparing                                             Chapter  2.  Accounting Methods             . . . . . 6

                                                                               Chapter  3.  Farm Income . . . . . . . . . . 9
              2023 Returns
                                                                               Chapter  4.  Farm 
                                                                                   Business Expenses             . . . . . . . . .   19
              Acknowledgment: The valuable advice and assistance given us each Chapter  5.  Soil and Water 
              year by the National Farm Income Tax Extension Committee is          Conservation Expenses . . . . . . .               28
              gratefully acknowledged. 
                                                                               Chapter  6.  Basis of Assets          . . . . . . .   31
                                                                               Chapter  7.  Depreciation, Depletion, 
                                                                                   and Amortization . . . . . . . . . . .            37
                                                                               Chapter  8.  Gains and Losses . . . . . .             49
                                                                               Chapter  9.  Dispositions of 
                                                                                   Property Used in Farming            . . . . . .   57
                                                                               Chapter  10.  Installment Sales           . . . . .   60
                                                                               Chapter  11.  Casualties, Thefts, and 
                                                                                   Condemnations . . . . . . . . . . . .             66
                                                                               Chapter  12.  Self-Employment Tax             . . .   74
                                                                               Chapter  13.  Employment Taxes              . . . .   79
                                                                               Chapter  14.  Fuel Excise Tax 
                                                                                   Credits and Refunds . . . . . . . . .             85
                                                                               Chapter  15.  Estimated Tax         . . . . . . . .   88
                                                                               Chapter  16.  How To Get Tax Help             . . .   89
                                                                               Index       . . . . . . . . . . . . . . . . . . . . . 93

                                                                               Introduction
                                                                               You are in the business of farming if you culti-
                                                                               vate, operate, or manage a farm for profit, either 
                                                                               as  owner  or  tenant.  A  farm  includes  livestock, 
                                                                               dairy, poultry, fish, fruit, and truck farms. It also 
                                                                               includes  plantations,  ranches,  ranges,  and  or-
                                                                               chards and groves.
                                                                               This publication explains how the federal tax 
                                                                               laws apply to farming. Use this publication as a 
                                                                               guide  to  figure  your  taxes  and  complete  your 
                                                                               farm tax return. If you need more information on 
                                                                               a  subject,  get  the  specific  IRS  tax  publication 
                                                                               covering that subject. We refer to many of these 
                                                                               free  publications  throughout  this  publication. 
                                                                               See chapter  16  for  information  on  ordering 
                                                                               these publications.
                                                                               The explanations and examples in this publi-
              Get forms and other information faster and easier at:            cation reflect the IRS's interpretation of tax laws 
              • IRS.gov (English)         • IRS.gov/Korean (한국어)               enacted by Congress, Treasury regulations, and 
              • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)          court decisions. However, the information given 
              • IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt)    does not cover every situation and is not inten-
                                                                               ded to replace the law or change its meaning. 

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This publication covers subjects on which a Treasury Inspector General for Tax Admin- 2022. There is no maximum limit on earnings
court may have rendered a decision more favor- istration (TIGTA). If you want to confidentially subject to the Medicare part (2.9%) or, if appli-
able to taxpayers than the interpretation by the report misconduct, waste, fraud, or abuse by an cable, the Additional Medicare Tax (0.9%).
IRS. Until these differing interpretations are re- IRS employee, you can visit TIGTA. You can re- The maximum net self-employment earnings
solved by higher court decisions, or in some main anonymous. subject to the social security part of the self-em-
other way, this publication will continue to ployment tax for 2024 will be discussed in the
present the interpretation by the IRS. Farm tax classes. Many state Cooperative Ex- 2023 Pub. 334.
tension Services conduct farm tax workshops in
The IRS Mission. Provide America's taxpayers conjunction with the IRS. Contact your county or 2023 withholding tables. The federal income
top-quality service by helping them understand regional extension office for more information. tax withholding tables are now included in Pub.
and meet their tax responsibilities and enforce 15-T, Federal Income Tax Withholding Methods.
the tax law with integrity and fairness to all. Rural Tax Education website. The Rural Tax Business meals deduction. The temporary
Education website is a source for information 100% deduction for food or beverages provided
Comments and suggestions. We welcome concerning agriculturally related income and by a restaurant has expired. The business meal
your comments about this publication and sug- deductions and self-employment tax. The web- deduction reverts back to the previous 50% al-
gestions for future editions. site is available for farmers and ranchers, other lowable deduction beginning January 1, 2023.
You can send us comments through agricultural producers, Extension educators, Qualified small business payroll tax credit
IRS.gov/FormComments. Or, you can write to and anyone interested in learning about the tax for increasing research activities. For tax
the Internal Revenue Service, Tax Forms and side of the agricultural community. Members of years beginning before January 1, 2023, a
Publications, 1111 Constitution Ave. NW, the National Farm Income Tax Extension Com- qualified small business may elect to claim up
IR-6526, Washington, DC 20224. mittee are contributors to the website, and the to $250,000 of its credit for increasing research
Although we can’t respond individually to website is hosted by Utah State University Co- activities as a payroll tax credit. The Inflation
each comment received, we do appreciate your operative Extension. You can visit the website at Reduction Act of 2022 (the IRA) increases the
feedback and will consider your comments and ruraltax.org. election amount to $500,000 for tax years be-
suggestions as we revise our tax forms, instruc- ginning after December 31, 2022. The payroll
tions, and publications. Don’t send tax ques- tax credit election must be made on or before
tions, tax returns, or payments to the above ad- the due date of the originally filed income tax re-
dress. Future Developments turn (including extensions). The portion of the
Getting answers to your tax questions. The IRS has created a page on IRS.gov for credit used against payroll taxes is allowed in
If you have a tax question not answered by this information about Pub. 225 at the first calendar quarter beginning after the
publication or the How To Get Tax Help section IRS.gov/Pub225. Information about recent date that the qualified small business filed its in-
at the end of this publication, go to the IRS In- developments affecting Pub. 225 will be posted come tax return. The election and determination
teractive Tax Assistant page at IRS.gov/ on that page. of the credit amount that will be used against
the employer's payroll taxes are made on Form
Help/ITA where you can find topics by using the 6765, Credit for Increasing Research Activities.
search feature or viewing the categories listed. The amount from Form 6765, line 44, must then
be reported on Form 8974, Qualified Small
Getting tax forms, instructions, and pub- What's New for 2023 Business Payroll Tax Credit for Increasing Re-
lications. Go to IRS.gov/Forms to download
current and prior-year forms, instructions, and The following items highlight a number of search Activities.
publications. administrative and tax law changes for 2023. Starting in the first quarter of 2023, the pay-
They are discussed in more detail throughout roll tax credit is first used to reduce the em-
Ordering tax forms, instructions, and this publication. ployer share of social security tax up to
publications. Go to IRS.gov/OrderForms to or- Standard mileage rate. The business stand- $250,000 per quarter and any remaining credit
der current forms, instructions, and publica- ard mileage rate for 2023 has increased to 65.5 reduces the employer share of Medicare tax for
tions; call 800-829-3676 to order prior-year cents per business mile. See chapter 4. the quarter. Any remaining credit, after reducing
forms and instructions. The IRS will process the employer share of social security tax and
your order for forms and publications as soon Increased section 179 expense deduction the employer share of Medicare tax, is then car-
as possible. Don’t resubmit requests you’ve al- dollar limits. The maximum amount you can ried forward to the next quarter. Form 8974 is
ready sent us. You can get forms and publica- elect to deduct for most section 179 property used to determine the amount of the credit that
tions faster online. you placed in service in 2023 is $1,160,000. can be used in the current quarter. The amount
This limit is reduced by the amount by which the from Form 8974, line 12 or, if applicable, line 17,
Comments on IRS enforcement actions. cost of the property placed in service during the is reported on Form 943, line 12a. For more in-
The Small Business and Agricultural Regulatory tax year exceeds $2,890,000. Also, the maxi- formation about the payroll tax credit, see the
Enforcement Ombudsman and 10 Regional mum section 179 expense deduction for sport Instructions for Form 8974 and go to IRS.gov/
Fairness Boards were established to receive utility vehicles placed in service in tax years be- ResearchPayrollTC.
comments from small business about federal ginning in 2023 is $28,900. See chapter 7.
Credit for COBRA premium assistance pay-
agency enforcement actions. The Ombudsman Phase down of special depreciation allow- ments. The COBRA premium assistance
will annually evaluate the enforcement activities ance. The special depreciation allowance is credit lines have been “Reserved for future use”
of each agency and rate its responsiveness to 80% for certain qualified property acquired after on Form 943 because the first quarter of 2022
small business. If you wish to comment on the September 27, 2017, and placed in service af- was the last quarter in which most employers
enforcement actions of the IRS, you can: ter December 31, 2022, and before January 1, may have been eligible to claim the COBRA
• Call 888-734-3247; 2024 (other than certain property with a long premium assistance credit. Section 9501 of the
• Fax your comments to 202-481-5719; production period and certain aircraft). The spe- American Rescue Plan Act of 2021 (the ARP)
• Write to: cial depreciation allowance is also 80% for cer- provided for COBRA premium assistance in the
Office of the National Ombudsman tain specified plants bearing fruits and nuts form of a full reduction in the premium otherwise
U.S. Small Business Administration planted or grafted after December 31, 2022, payable by certain individuals and their families
409 3rd Street SW and before January 1, 2024. See Certain quali- who elected COBRA continuation coverage due
Washington, DC 20416; fied property acquired after September 27, to a loss of coverage as the result of a reduction
• Send an email to ombudsman@sba.gov; 2017 and Certain specified plants under What in hours or an involuntary termination of em-
or Is Qualified Property, later. ployment (assistance eligible individuals). This
• Complete and submit a Federal Agency Maximum net earnings. The maximum net COBRA premium assistance was available for
Comment Form online at self-employment earnings subject to the social periods of coverage beginning on or after April
sba.gov/ombudsman/comment. security part (12.4%) of the self-employment tax 1, 2021, through periods of coverage beginning
is $160,200 for 2023, up from $147,000 for on or before September 30, 2021. A premium
Page 2 Publication 225 (2023)

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payee was entitled to the COBRA premium as- the qualified sick and family leave credit repor-
sistance credit at the time an eligible individual ted on their 2022 Form 943. For more informa-
elected coverage. Therefore, due to the COBRA Reminders tion, see the instructions for the income tax re-
notice and election period requirements (gener- The following reminders and other items may turn or the Form 1040 schedule you file for your
ally, employers had 60 days to provide notice help you file your tax return. business.
and assistance eligible individuals had 60 days Principal agricultural activity codes. You Advance payment of COVID-19 credits
to elect coverage), the first quarter of 2022 was must enter on line B of Schedule F (Form 1040) ended. Although you may pay qualified sick
the last quarter in which most employers may a code that identifies your principal agricultural and family leave wages in 2023 for leave taken
have been eligible to claim the COBRA pre- activity. It is important to use the correct code after March 31, 2020, and before October 1,
mium assistance credit. because this information will identify market 2021, or provide COBRA premium assistance
Pub. 51 discontinued after 2023. Pub. 51, segments of the public for IRS Taxpayer Educa- payments in 2023, you may no longer request
Agricultural Employer's Tax Guide, will no lon- tion programs. The U.S. Census Bureau also an advance payment of any credit on Form
ger be available after 2023. Instead, information uses this information for its economic census. 7200, Advance Payment of Employer Credits
specific to agricultural employers will be inclu- See the list of Principal Agricultural Activity Co- Due to COVID-19.
ded in Pub. 15, Employer's Tax Guide, begin- des on page 2 of Schedule F (Form 1040).
Certification program for professional em-
ning with the Pub. 15 for use in 2024. Beginning Publication on employer identification num- ployer organizations (PEOs). The Stephen
in 2024, there will be a new Pub. 15 (sp) that is bers (EINs). Pub. 1635, Understanding Your Beck, Jr., Achieving a Better Life Experience
a Spanish-language version of Pub. 15. Refer- Employer Identification Number, provides gen- Act of 2014 required the IRS to establish a vol-
ences to Pub. 51 were retained throughout this eral information on EINs. Topics include how to untary certification program for PEOs. PEOs
chapter because this chapter is for tax year apply for an EIN and how to complete Form handle various payroll administration and tax re-
2023. If you need information specific to tax SS-4. porting responsibilities for their business clients
year 2024, you will use Pub. 15 or Pub. 15 (sp) Change of address. If you change your home and are typically paid a fee based on payroll
in 2024. address, you should use Form 8822, Change of costs. To become and remain certified under
Social security and Medicare tax for 2023. Address, to notify the IRS. If you change your the certification program, certified professional
The rate of social security tax on taxable wages, business address, you should use Form employer organizations (CPEOs) must meet
including qualified sick leave wages and quali- 8822-B, Change of Address or Responsible various requirements described in sections
fied family leave wages paid in 2023 for leave Party—Business, to notify the IRS. Be sure to 3511 and 7705 and related published guidance.
taken after March 31, 2021, and before October include your suite, room, or other unit number. Certification as a CPEO may affect the employ-
1, 2021, is 6.2% each for the employer and em- Coronavirus Food Assistance Program ment tax liabilities of both the CPEO and its
ployee or 12.4% for both. Qualified sick leave (CFAP). The CFAP provides direct payments to customers. A CPEO is generally treated for em-
wages and qualified family leave wages paid in producers of eligible agricultural commodities ployment tax purposes as the employer of any
2023 for leave taken after March 31, 2020, and adversely affected by the coronavirus individual who performs services for a customer
before April 1, 2021, aren't subject to the em- (COVID-19) pandemic to help offset sales los- of the CPEO and is covered by a contract de-
ployer share of social security tax; therefore, the ses and increased marketing costs associated scribed in section 7705(e)(2) between the
tax rate on these wages is 6.2%. The social se- with the COVID-19 pandemic. CFAP payments CPEO and the customer (CPEO contract), but
curity wage base limit is $160,200. are agricultural program payments that you only for wages and other compensation paid to
The Medicare tax rate is 1.45% (0.0145) must include in gross income. Report the full the individual by the CPEO. To become a
each for the employee and employer, un- amount of your CFAP payments on Schedule F CPEO, the organization must apply through the
changed from 2022. There is no wage base limit (Form 1040), lines 4a and 4b. Go to usda.gov. IRS Online Registration System. For more infor-
for Medicare tax. See chapter 3. mation or to apply to become a CPEO, go to
IRS.gov/CPEO.
The COVID-19 related credit for qualified
sick and family leave wages is limited to CPEOs must generally file Form 943 and
leave taken after March 31, 2020, and be- Schedule R (Form 943), Allocation Schedule for
What's New for 2024 fore October 1, 2021. Generally, the credit for Aggregate Form 943 Filers, electronically. For
Phase down of special depreciation allow- qualified sick and family leave wages, as enac- more information about a CPEO's requirement
ance. The special depreciation allowance is ted under the Families First Coronavirus Re- to file electronically, see Revenue Procedure
60% for certain qualified property acquired after sponse Act (FFCRA) and amended and exten- 2023-18, 2023-13 I.R.B. 605, available at
September 27, 2017, and placed in service af- ded by the COVID-related Tax Relief Act of IRS.gov/irb/2023-13_IRB#REV-PROC-2023-18.
ter December 31, 2023, and before January 1, 2020, for leave taken after March 31, 2020, and Work opportunity tax credit for qualified
2025 (other than certain property with a long before April 1, 2021, and the credit for qualified tax-exempt organizations hiring qualified
production period and certain aircraft). For sick and family leave wages under sections veterans. Qualified tax-exempt organizations
property with a long production period and cer- 3131, 3132, and 3133 of the Internal Revenue that hire eligible unemployed veterans may be
tain aircraft placed in service after December Code, as enacted under the ARP, for leave able to claim the work opportunity tax credit
31, 2023, and before January 1, 2025, the spe- taken after March 31, 2021, and before October against their payroll tax liability using Form
cial depreciation allowance is 80%. The special 1, 2021, have expired. However, employers that 5884-C. For more information, go to IRS.gov/
depreciation allowance is also 60% for certain pay qualified sick and family leave wages in WOTC.
specified plants bearing fruits and nuts planted 2023 for leave taken after March 31, 2020, and Correcting a previously filed Form 943. If
or grafted after December 31, 2023, and before before October 1, 2021, are eligible to claim a you discover an error on a previously filed Form
January 1, 2025. See Certain qualified property credit for qualified sick and family leave wages 943, or if you otherwise need to amend a previ-
acquired after September 27, 2017 and Certain in 2023. ously filed Form 943, make the correction using
specified plants under What Is Qualified Prop- For more information about the credit for Form 943-X, Adjusted Employer's Annual Fed-
erty, later. qualified sick and family leave wages, see the eral Tax Return for Agricultural Employees or
Instructions for Form 943, and go to IRS.gov/ Claim for Refund. Form 943-X is filed separately
Social security and Medicare tax for 2024. PLC. from Form 943. For more information, see the
The employee and employer tax rates for social Instructions for Form 943-X, section 9 of Pub.
security and the maximum amount of wages An employer who receives a refund of
subject to social security tax for 2024 will be TIP payroll taxes resulting from qualified 51, or go to IRS.gov/
discussed in Pub. 15 (for use in 2024). sick and family leave credit reported on CorrectingEmploymentTaxes.
The Medicare tax rate for 2024 will also be a 2022 Form 943 generally won't receive that Federal tax deposits must be made by elec-
discussed in Pub. 15 (for use in 2024). There is refund until the 2023 calendar year. Even tronic funds transfer (EFT). You must use
no limit on the amount of wages subject to Med- though that credit isn't received until 2023, in- EFT to make all federal tax deposits. Generally,
icare tax. come reported in 2022 must be increased by an EFT is made using the Electronic Federal
the refundable and nonrefundable portions of Tax Payment System (EFTPS). If you don't want
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to use EFTPS, you can arrange for your tax pro- 2023 for employers of agricultural workers. See information, contact the Farm Financial Stand-
fessional, financial institution, payroll service, or Pub. 15 for more detailed guidance on employ- ards Council in the following manner.
other trusted third party to make electronic de- ment taxes for tax year 2024 for employers of • Call 262-253-6902.
posits on your behalf. Also, you may arrange for agricultural workers. For the latest information • Send a fax to 262-253-6903.
your financial institution to initiate a same-day about developments related to Pub. 15, such as • Write to:
wire payment on your behalf. EFTPS is a free legislation enacted after it was published, go to Farm Financial Standards Council
service provided by the Department of the IRS.gov/Pub15. For general tax information rel- N78 W14573 Appleton Ave., #287
Treasury. Services provided by your tax profes- evant to agricultural employers, go to IRS.gov/ Menomonee Falls, WI 53051.
sional, financial institution, payroll service, or AgricultureTaxCenter. For general information
other third party may have a fee. about employment taxes, go to IRS.gov/ Topics
EmploymentTaxes. For information about em- This chapter discusses:
Note. An exception applies to the EFT re- ployer responsibilities under the Affordable
quirement for making your federal tax deposits. Care Act, go to IRS.gov/ACA. For information
If your liability is less than $2,500 (Form 943, about COVID-19 tax relief, go to IRS.gov/ • Benefits of recordkeeping
line 13), you may pay in full with a check or Coronavirus. • Kinds of records to keep
money order with a timely filed return. See the • How long to keep records
Instructions of Form 943 for more information. You may have nonfarm employees as
well as farm employees, for example,
For more information on making federal tax CAUTION! workers at a retail farm market. See Useful Items
You may want to see:
deposits, see section 7 of Pub. 51. To get more Pub.15 for employment tax rules for wages and
information about EFTPS or to enroll in EFTPS, noncash wages paid to these employees as
go to EFTPS.gov or call one of the following they may differ from those discussed in this Publication
numbers. chapter. 51 51 (Circular A), Agricultural Employer's
• 800-555-4477 Tax Guide
• 800-244-4829 (Spanish) Photographs of missing children. The IRS is 463 463 Travel, Gift, and Car Expenses
• 303-967-5916 if you're outside the United a proud partner with the National Center for
States (toll call) Missing & Exploited Children® (NCMEC). Pho- 544 544 Sales and Other Dispositions of
To contact EFTPS using Telecommunica- tographs of missing children selected by the Assets
tions Relay Services (TRS) for people who are Center may appear in this publication on pages 946 946 How To Depreciate Property
deaf, hard of hearing, or have a speech disabil- that would otherwise be blank. You can help
ity, dial 711 and then provide the TRS assistant bring these children home by looking at the See chapter 16 for information about getting
the 800-555-4477 number above or photographs and calling 1-800-THE-LOST publications.
800-733-4829. Additional information about (1-800-843-5678) (24 hours a day, 7 days a
EFTPS is also available in Pub. 966. week) if you recognize a child.
Electronic filing and payment. Businesses Benefits of
can enjoy the benefits of filing tax returns and
paying their federal taxes electronically. Recordkeeping
Whether you rely on a tax professional or han-
dle your own taxes, the IRS offers you conven- Everyone in business, including farmers, must
ient and secure programs to make filing and keep appropriate records. Recordkeeping will
paying easier. Spend less time worrying about 1. help you do the following.
taxes and more time running your business.
Use e-file and EFTPS to your benefit. Monitor the progress of your farming busi-
• For e-file, go to IRS.gov/EmploymentEfile ness. You need records to monitor the pro-
for additional information. A fee may be Importance of gress of your business. In addition to measuring
charged to file electronically. overall profitability, detailed records can help
you identify which crop or livestock enterprises
• For EFTPS, go to EFTPS.gov or call Records are most profitable or indicate where manage-
EFTPS at one of the numbers provided un- ment changes may be needed to improve profit-
der the Note, earlier. ability. Records that help you make better deci-
• For electronic filing of Form W-2, Wage sions should also increase the likelihood of
and Tax Statement, go to SSA.gov/ Introduction
business success.
employer. You may be required to file A farmer, like other taxpayers, must keep re-
Forms W-2 electronically. For details, see cords to prepare an accurate income tax return Prepare your financial statements. You will
the General Instructions for Forms W-2 and determine the correct amount of tax. This need records to prepare accurate financial
and W-3. chapter explains the benefits of keeping re- statements. These include income (profit and
Note. For employers in Puerto Rico, references cords, what kinds of records you must keep, loss) statements, cash flow statements, balance
to Form W-2 also apply to Form 499R-2/W-2PR and how long you must keep them for federal sheets, and statements of owner’s equity.
and references to Form W-3 also apply to Form tax purposes. These statements will be required and helpful
W-3 (PR), unless otherwise specified. While this publication only discusses tax re- when working with your bank or creditors and
cords, the records you keep as a farm business may also help you manage your farm business.
Special rules for qualified disaster losses. owner should allow you to accurately measure
Special rules apply to federally declared disas- your farm’s financial performance, create finan- Identify source of receipts. You will receive
ter area losses. A federally declared disaster is cial statements, and help you make manage- money, property, and/or services from many
a disaster that occurred in an area declared by ment decisions in addition to calculating taxable sources. Your records can identify the source of
the President to be eligible for federal assis- farm income. your receipts. You need this information to sep-
tance under the Robert T. Stafford Disaster Re- Records that provide information beyond arate farm from nonfarm receipts and taxable
lief and Emergency Assistance Act. your tax return require additional information from nontaxable income. See chapter 3 for
See Disaster Area Losses, later, and Pub. and effort on the part of the record keeper. To more information.
547, Casualties, Disasters, and Thefts, for more assist you in developing or improving your re-
information on the special relief. Also, see cordkeeping system, the Farm Financial Stand- Keep track of deductible expenses. You
IRS.gov/DisasterTaxRelief for more information. ards Council produces publications that provide may forget expenses when you prepare your tax
Additional employment tax information for recommendations for financial reporting and return unless you record them when they occur.
farmers. See Pub. 51 for more detailed analysis. You can download the Implementation Your records can identify the purpose and
guidance on employment taxes for tax year Guidelines at https://ffsc.org. For more timing of expenses. You need this information to
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separate farm business expenses from nonfarm systems must provide a complete and accurate The following are examples of records that
payments and other expenses. You also need to record of your data that is accessible to the IRS. may show this information.
keep these records to separate expenses de- Electronic storage systems are also subject • Purchase and sales invoices.
ductible for tax purposes from those that are to the same controls and retention guidelines as • Real estate closing statements.
non-tax related. See chapter 4 for more infor- those imposed on your original hard copy books • Canceled checks.
mation. and records. The original hard copy books and • Bank statements.
records may be destroyed, provided that the
Prepare your tax returns. You need records electronic storage system has been tested to Financial account statements as proof of
to prepare your tax return. These records must establish that the hard copy books and records payment. If you do not have a canceled check,
accurately support the income, expenses, and are being reproduced in compliance with IRS you may be able to prove payment with certain
credits you report. Generally, these are the requirements for an electronic storage system financial account statements prepared by finan-
same records you use to monitor your farming and procedures are established to ensure con- cial institutions. These include account state-
business and prepare your financial statements. tinued compliance with all applicable rules and ments prepared for the financial institution by a
You will also need records to prepare informa- regulations. You still have the responsibility of third party. These account statements must be
tion returns such as a Form 1099-MISC or Form retaining any other books and records that are legible. The following table lists acceptable ac-
1099-NEC provided to a vendor or a Form W-2 required to be retained. count statements.
provided to an employee. The IRS may test your electronic storage
system, including the equipment used, indexing THEN the statement must
Support items reported on tax returns. You methodology, software, and retrieval capabili- IF payment is by... show the...
must keep your business records available at all ties. This test is not considered an examination
times for inspection by the IRS. If the IRS exam- and the results must be shared with you. If your Check • Check number.
ines any of your tax returns, you may be asked electronic storage system meets the require- • Amount.
• Payee's name.
to explain the items reported. A complete set of ments mentioned earlier, you will be in compli- • Date the check amount
records will assist in the examination. ance. If not, you may be subject to penalties for was posted to the
noncompliance, unless you continue to main- account by the financial
tain your original hard copy books and records institution.
Kinds of Records in a manner that allows you and the IRS to de-
termine your correct tax. For details on elec- Electronic funds • Amount transferred.
To Keep tronic storage system requirements, see Reve- • Payee's name.
transfer
• Date the transfer was
nue Procedure 97-22. You can find Revenue posted to the account by
Except in a few cases, the law does not require Procedure 97-22 on page 9 of Internal Revenue the financial institution.
any specific kind of records. You can choose Bulletin 1997-13 at
any recordkeeping system suited to your farm- IRS.gov/pub/irs-irbs/irb97-13.pdf. Credit card • Amount charged.
ing business that clearly shows, for example, • Payee's name.
your income and expenses. Travel, transportation, entertainment, and • Transaction date.
gift expenses. Specific recordkeeping rules
You should set up your recordkeeping sys- apply to these expenses. For more information, Proof of payment of an amount, by it-
tem using an accounting method that clearly see Pub. 463. ! self, does not establish you are entitled
shows your income for your tax year. If you are CAUTION to a tax deduction. You should also
in more than one business, you should keep a Employment taxes. There are specific em- keep other documents, such as credit card
complete and separate set of records for each ployment tax records you must keep. Payroll re- sales slips and invoices, to show that you also
business. A corporation’s recordkeeping system cords are important when claiming various tax incurred the cost.
should include board of directors meeting mi- deductions and credits based on payroll items
nutes. See chapter 2 for more information. such as number of employees and wages paid. Tax returns. Keep copies of your filed tax re-
Your recordkeeping system should include a For a list of employment tax records you must turns. They help in preparing future tax returns
summary of your business transactions, which keep, see Pub. 51 (Circular A). and making computations if you file an amen-
shows your gross income, as well as any expen- ded return. Keep copies of your information re-
ses, deductions, and credits you are reporting. Excise taxes. See How To Claim a Credit or turns such as Form 1099, Schedule K-1, and
In addition, you must keep supporting docu- Refund in chapter 14 for the specific records Form W-2.
ments, such as invoices and receipts, for pur- you must keep to verify your claim for credit or
chases, sales, payroll, and other business refund of excise taxes on certain fuels.
How Long To Keep
transactions. Assets. Assets are the property, such as ma-
It is important to keep these documents be- chinery and equipment, you own and use in Records
cause they support the entries in your journals your business. You must keep records to verify
and ledgers and on your tax return. Keep them certain information about your business assets. You must keep your records as long as they
in an orderly fashion and in a safe place. For in- You need records to figure your annual depreci- may be needed for the administration of any
stance, organize them by year and type of in- ation deduction and the gain or (loss) when you provision of the Internal Revenue Code. Keep
come or expense. sell the assets. Your records should show all the records that support an item of income or a de-
following. duction appearing on a return until the period of
Electronic records. All requirements that ap- • When and how you acquired the asset limitations for the return runs out. A period of
ply to hard copy books and records also apply (whether the asset was new or used). limitations is the period of time after which no le-
to electronic storage systems that maintain tax • Full purchase cost of the asset. gal action can be brought. Generally, that
books and records. When you replace hard • Cost of any improvements. means you must keep your records for at least 3
copy books and records, you must maintain the • Section 179 deduction taken. years from when your tax return was due or filed
electronic storage systems for as long as they • Deductions taken for depreciation. or within 2 years of the date the tax was paid,
are material to the administration of tax law. • Deductions taken for casualty losses, such whichever is later. However, certain records
An electronic storage system is any system as losses resulting from fires or storms. must be kept for a longer period of time, as dis-
for preparing or keeping your records either by • How you used the asset. cussed below.
electronic imaging or by transfer to electronic • When and how you disposed of the asset.
storage media. The electronic storage system • Fair market value of property when traded. Employment taxes. If you have employees,
must index, store, preserve, retrieve, and repro- • Selling price. you must keep all employment tax records for at
duce the electronically stored books and re- • Expenses of sale. least 4 years after the date the tax becomes
cords in legible format. All electronic storage due or is paid, whichever is later.

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Assets. Keep records relating to property until Useful Items Cash Method
the period of limitations expires for the year in You may want to see:
which you dispose of the property in a taxable Most farmers use the cash method because
disposition. You must keep these records to fig- Publication they find it easier to keep records using the
ure any depreciation, amortization, or depletion cash method. Certain farm corporations and
deduction and to figure your basis for comput- 538 538 Accounting Periods and Methods partnerships and all tax shelters are generally
ing gain or (loss) when you sell or otherwise dis- required to use an accrual method of account-
pose of the property. Form (and Instructions) ing. However, for tax years beginning in 2023,
You may need to keep records relating to the farm corporations or partnerships that have
basis of property longer than the period of limi- 1128 1128 Application To Adopt, Change, or average annual gross receipts of $29 million or
tation. Keep those records as long as they are Retain a Tax Year less for the 3 preceding tax years and are not
important in figuring the basis of the original or 3115 3115 Application for Change in tax shelters can use the cash method instead of
replacement property. Generally, this means as the accrual method. See Accrual Method Re-
long as you own the property and, after you dis- Accounting Method quired, later. Also, see Inventory, later.
pose of it, for the period of limitations that ap-
plies to you. For example, if you received prop- See chapter 16 for information about getting
erty in a nontaxable exchange, you must keep publications and forms. Income
the records for the old property, as well as for
the new property, until the period of limitations Under the cash method, include in your gross
expires for the year in which you dispose of the Accounting Methods income all items of income you actually or con-
new property in a taxable disposition. For more structively received during the tax year. Items of
information on basis, see chapter 6. An accounting method is a set of rules used to income include money received as well as prop-
determine when and how your income and ex- erty or services received. If you received prop-
Records for nontax purposes. When your re- penses are reported on your tax return. Your ac- erty or services, you must include the fair mar-
cords are no longer needed for tax purposes, counting method includes not only your overall ket value (FMV) of the property or services
do not discard them until you check to see if you method of accounting, but also the accounting received in income. See chapter 3 for informa-
have to keep them longer for other purposes. treatment you use for any material item. tion on how to report farm income on your in-
For example, your insurance company or cred- come tax return.
itors may require you to keep them longer than Facts and circumstances affect whether an
the IRS does. item is material. Factors to consider in deter- Constructive receipt. Income is constructively
mining the materiality of an item include the size received when an amount is credited to your ac-
of the item (both in absolute terms and in rela- count or made available to you without restric-
tion to income and expenses) and the treatment tion. You do not need to have possession of the
of the item on your financial statements. Gener- income for it to be treated as income for the tax
ally, an item considered material for financial year. You need to have the ability to receive the
statement purposes is also considered material income. If you authorize someone to be your
for income tax purposes. See Pub. 538 for more agent and receive income for you, you are con-
2. information. sidered to have received the income when your
agent receives it. Income is not constructively
You generally choose an accounting method received if your receipt of the income is subject
Accounting for your farm business when you file your first in- to substantial restrictions or limitations.
come tax return that includes a Schedule F Delaying receipt of income. You cannot
(Form 1040), Profit or Loss From Farming. If you hold checks or postpone taking possession of
Methods later want to change your accounting method, similar property from one tax year to another to
you must generally get IRS approval. How to avoid paying tax on the income. You must report
obtain IRS approval is discussed later under the income in the year the money or property is
Changes in Methods of Accounting.
Introduction received or made available to you without re-
striction.
Types of accounting methods. Generally,
You must use an accounting method that you can use any of the following accounting Example. Frances Jones, a farmer who
clearly shows the income and expenses used to methods. Each method is discussed in detail uses the cash method of accounting was enti-
figure your taxable income. You must also file below. tled to receive a $10,000 payment on a grain
an income tax return for an annual accounting • Cash method. contract in December 2023. Frances was told in
period called a “tax year.” • Accrual method. December that the payment was available, and
This chapter discusses accounting meth- • Special methods of accounting for certain requested not to be paid until January 2024.
ods. For information on accounting periods, see items of income and expenses. Frances must include this payment in 2023 in-
Pub. 538, Accounting Periods and Methods, • Combination (hybrid) method using ele- come because it was made available in 2023.
and the Instructions for Form 1128, Application ments of two or more of the above meth-
To Adopt, Change, or Retain a Tax Year. ods. Debts paid by another person or can-
celed. If your debts are paid by another person
Business and other items. You can account or are canceled by your creditors, you may have
Topics for business and personal items using different to report part or all of this debt relief as income.
This chapter discusses: accounting methods. For example, you can fig- If you receive income in this way, you construc-
ure your business income under an accrual tively receive the income when the debt is can-
• Cash method method, even if you use the cash method to fig- celed or paid. See Cancellation of Debt in chap-
• Accrual method ure personal items. ter 3 for more information.
• Farm inventory
• Special methods of accounting Two or more businesses. If you operate two Deferred payment contract. If you sell an
• Changes in methods of accounting or more separate and distinct businesses, you item under a deferred payment contract that
can use a different accounting method for each calls for payment in a future year, there is no
business. Generally, no business is separate constructive receipt in the year of sale. How-
and distinct unless a complete and separate set ever, if the sales contract states that you have
of books and records is maintained for each the right to the proceeds of the sale from the
business. buyer at any time after delivery of the item, then
you must include the sales price in income in
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the year of the sale, regardless of when you ac- See Pub. 538 for more information and exam- 1. The all-events test has been met. This test
tually receive payment. ples. is met when:
See chapter 4 for special rules for prepaid
Example. You are a farmer who uses the farm supplies and prepaid livestock feed. a. All events have occurred that fix the
cash method and a calendar tax year. You sell fact that you have a liability, and
grain in December 2023 under a bona fide b. The amount of the liability can be de-
arm's-length contract that calls for payment in Accrual Method termined with reasonable accuracy.
2024. You include the proceeds from the sale in
your 2024 gross income since that is the year Under the accrual method of accounting, you 2. Economic performance has occurred.
payment is received. However, if the contract generally report income in the year earned and
states that you have the right to the proceeds deduct or capitalize expenses in the year incur- Economic performance. Generally, you can-
from the buyer at any time after the grain is de- red. The purpose of an accrual method of ac- not deduct or capitalize a business expense un-
livered, you must include the sales price in your counting is to correctly match income and ex- til economic performance occurs. If your ex-
2023 income, even if payment is received in the penses in the correct tax year. Certain large pense is for property or services provided to
following year. farm businesses must use an accrual method of you, or for your use of property, economic per-
accounting for its farm activities and for sales formance occurs as the property or services are
Repayment of income. If you include an and purchases of inventory items. See Accrual provided or as the property is used. If your ex-
amount in income and in a later year you have Method Required and Farm Inventory, later. pense is for property or services you provide to
to repay all or part of it, then you may be able to others, economic performance occurs as you
deduct the repayment in the year repaid. The Income provide the property or services.
type of deduction you are allowed in the year of Example. Jane, who is a farmer, uses a cal-
repayment depends on the type of income you Generally, you include an amount in income for
included in the earlier year. If you use the cash the tax year in which all events that fix your right endar tax year and an accrual method of ac-
method of accounting, you can take the deduc- to receive the income have occurred, and you counting. To take advantage of early payment
tion (or credit, if applicable) for the tax year in can determine the amount with reasonable ac- discounts, Jane paid for seed in October 2022.
which you actually make the repayment. If you curacy. Under this rule, include an amount in in- The seed was delivered in March 2023. Eco-
use any other accounting method, you can de- come on the earliest of the following dates. nomic performance did not occur until the seed
duct the repayment or claim a credit for it only • When you receive payment. was delivered and planted. Jane incurs the ex-
for the tax year in which it is a proper deduction • When the income amount is due to you. pense in 2023.
under your accounting method. For example, if • When you earn the income. An exception to the economic performance
you use the accrual method, you are entitled to • When title passes. rule allows certain recurring items to be treated
the deduction or credit in the tax year in which • When included as revenue in an applicable as incurred during a tax year even though eco-
the obligation for the repayment accrues. financial statement, if you have an applica- nomic performance has not occurred. For more
ble financial statement. information, see Economic Performance in Pub.
538.
Expenses
For more information, see Pub. 538. If you
Under the cash method, you generally deduct use an accrual method of accounting, complete Special rule for related persons. Business
expenses in the tax year you pay them. This in- Part III of Schedule F (Form 1040) to report your expenses and interest owed to a related person
cludes business expenses for which you con- income. who uses the cash method of accounting are
not deductible until you make the payment and
test liability. However, you may not be able to the corresponding amount is includible in the
deduct an expense paid in advance or you may Inventory related person's gross income. Determine the
be required to capitalize certain costs, as ex- relationship for this rule as of the end of the tax
plained under Uniform Capitalization Rules in Generally, if you keep an inventory, you must year for which the expense or interest would
chapter 6. See chapter 4 for information on how use an accrual method of accounting to deter- otherwise be deductible.
to deduct farm business expenses on your in- mine your gross income. However, see Excep-
come tax return. tion below. An inventory is necessary to clearly
show income when the production, purchase, or Accrual Method Required
Prepayment. Generally, you cannot deduct ex- sale of merchandise is an income-producing Generally, the following businesses, if engaged
penses paid in advance. This rule applies to any factor. See Pub. 538 for more information. Also, in farming, are required to use an accrual
expense paid far enough in advance to, in ef- see Farm Inventory, later, for more information method of accounting.
fect, create an asset with a useful life extending on items that must be included in inventory by
substantially beyond the end of the current tax farmers, and inventory valuation methods for 1. A corporation that has gross receipts of
year. farmers. more than $29 million.
Example. On November 1, 2023, you Exception. For tax years beginning in 2023, 2. A partnership with a corporation as a part-
signed and paid $3,600 for a 3-year (36-month) you are not required to maintain an inventory if ner, if that corporation meets the require-
insurance contract for equipment. In 2023, you the average annual gross receipts for the 3 pre- ments of (1) above.
are allowed to deduct only $200 (2/36 x $3,600) ceding tax years for the farm is $29 million or 3. A tax shelter (discussed below).
of the cost of the policy that is attributable to less and the farm is not a tax shelter. In this
2023. In 2024, you'll be able to deduct $1,200 case, the farm can use a method of accounting Note. Items (1) and (2) above do not apply
(12/36 x $3,600); in 2025, you'll be able to de- that (1) treats inventory as nonincidental materi- to an S corporation or a business operating a
duct $1,200 (12/36 x $3,600); and in 2026, als and supplies, or (2) accounts for the inven- nursery or sod farm, or the raising or harvesting
you'll be able to deduct the remaining balance tory in the same manner as the applicable fi- of trees (other than fruit and nut trees).
of $1,000. nancial statements. If it does not have an
An exception applies if the expense qualifies applicable financial statement, it can use the Tax shelter. A tax shelter is a partnership, non-
for the 12-month rule. Under the 12-month rule, method of accounting used in its books and re- corporate enterprise, or S corporation that
a taxpayer is not required to capitalize amounts cords prepared according to its accounting pro- meets either of the following tests.
paid to create certain rights or benefits for the cedures. 1. Its principal purpose is the avoidance or
earlier of the following: evasion of federal income tax.
• 12 months after the right or benefit begins, Expenses
or 2. It is a farming syndicate. A farming syndi-
• The end of the tax year after the tax year in Under an accrual method of accounting, you cate is an entity that meets either of the
which payment is made. generally deduct or capitalize a business ex- following tests.
pense when both of the following apply.
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a. Interests in the activity have been of- Uniform capitalization rules. The follow- Any other changes in unit prices or classifica-
fered for sale in an offering required to ing applies if you are required to use an accrual tions do require IRS approval.
be registered with a federal or state method of accounting. If you use this method, include all raised
agency with the authority to regulate • The uniform capitalization rules apply to all livestock in inventory, regardless of whether
the offering of securities for sale. costs of raising a plant, even if the prepro- they are held for sale or for draft, breeding,
b. More than 35% of the losses during ductive period of raising a plant is 2 years sport, or dairy purposes. This method accounts
the tax year are allocable to limited or less. only for the increase in cost of raising an animal
partners or limited entrepreneurs. • The costs of animals are subject to the uni- to maturity. It does not provide for any decrease
form capitalization rules. in the animal's market value after it reaches ma-
A “limited partner” is one whose personal li- turity. Also, if you raise cattle, you are not re-
ability for partnership debts is limited to the Note. If a farming business has average an- quired to inventory hay you grow to feed your
money or other property the partner contributed nual gross receipts of $29 million or less for the herd.
or is required to contribute to the partnership. 3 preceding tax years and is not a tax shelter, Do not include animals that were sold or lost
A “limited entrepreneur” is one who has an the farm is not subject to the uniform capitaliza- in the year-end inventory. If your records do not
interest in an enterprise other than as a limited tion rules. See Uniform Capitalization Rules in show which animals were sold or lost, treat the
partner and does not actively participate in the chapter 6. first animals acquired as sold or lost. The ani-
management of the enterprise. mals on hand at the end of the year are consid-
Items to include in inventory. Your inventory ered those most recently acquired.
Note. If a farming business has average an- should include all items held for sale, or for use You must include in inventory all livestock
nual gross receipts of $29 million or less for the as feed, seed, etc., whether raised or pur- purchased primarily for sale. You can choose ei-
3 preceding tax years and is not a tax shelter, chased, that are unsold at the end of the year. ther to include in inventory or depreciate live-
the farm is not subject to the uniform capitaliza- stock purchased for draft, breeding, sport, or
tion rules. See Uniform capitalization rules, dairy purposes. However, you must be consis-
later. Also, see Uniform Capitalization Rules in Inventory valuation methods. The following tent from year to year, regardless of the method
chapter 6. methods, described below, are those generally you have chosen. You cannot change your
available for valuing inventory. The method you method without obtaining approval from the
Farm Inventory use must conform to generally accepted ac- IRS.
counting principles for similar businesses and You must include in inventory animals pur-
If you are required to keep an inventory, you must clearly reflect income. chased after maturity or capitalize them at their
should keep a complete record of your inven- • Cost. purchase price. If the animals are not mature at
tory as part of your farm records. This record • Lower of cost or market. purchase, increase the cost at the end of each
should show the actual count or measurement • Farm-price method. tax year according to the established unit price.
of the inventory. It should also show all factors • Unit-livestock-price method. However, in the year of purchase, do not in-
crease the cost of any animal purchased during
that enter into its valuation, including quality and Cost and lower of cost or market meth- the last 6 months of the year. This “no increase”
weight, if applicable. Below are some items that ods. See Pub. 538 for information on these val- rule does not apply to tax shelters, which must
could be included in inventory. uation methods. make an adjustment for any animal purchased
during the year. It also does not apply to taxpay-
Hatchery business. If you are in the hatchery If you value your livestock inventory at ers that must make an adjustment to reasonably
business, and use an accrual method of ac- TIP cost or the lower of cost or market, you reflect the particular period in the year in which
counting, you must include in inventory eggs in do not need IRS approval to change to animals are purchased, if necessary to avoid
the process of incubation. the unit-livestock-price method. However, if you significant distortions in income.
value your livestock inventory using the
Products held for sale. All harvested and pur- farm-price method, then you must obtain per- Note. A farmer can determine costs re-
chased farm products held for sale or for feed or mission from the IRS to change to the unit-live- quired to be allocated under the uniform capital-
seed, such as grain, hay, silage, concentrates, stock-price method. ization rules by using the farm-price or unit-live-
cotton, tobacco, etc., must be included in inven- stock-price inventory method. This applies to
tory. Farm-price method. Under this method, any plant or animal, even if the farmer does not
each item, whether raised or purchased, is val- hold or treat the plant or animal as inventory
Supplies. Supplies acquired for sale or that ued at its market price less the direct cost of property.
become a physical part of items held for sale disposition. Market price is the current price at
must be included in inventory. Deduct the cost the nearest market in the quantities you usually
of supplies in the year used or consumed in op- sell. Cost of disposition includes broker's com- Cash Versus Accrual Method
erations. Do not include incidental supplies in missions, freight, hauling to market, and other
inventory as these are deductible in the year of marketing costs. If you use this method, you The following examples compare the cash and
purchase. must use it for your entire inventory, except that accrual methods of accounting.
livestock can be inventoried under the unit-live-
Livestock. Livestock held primarily for sale stock-price method. Example 1, Accrual Method. You are a
must be included in inventory. Livestock held for farmer who uses an accrual method of account-
draft, breeding, or dairy purposes can either be Unit-livestock-price method. This method ing. You keep your books on the calendar year
depreciated or included in inventory. Also, see recognizes the difficulty of establishing the ex- basis. You sell grain in December 2023 but you
Unit-livestock-price method, later. If you are in act costs of producing and raising each animal. are not paid until January 2024. Because you
the business of breeding and raising chinchillas, You group or classify livestock according to type use the accrual method, you report the grain
mink, foxes, or other fur-bearing animals, these and age and use a standard unit price for each sale in 2023 because that is when the income
animals are livestock for inventory purposes. animal within a class or group. The unit price was earned, even though you did not receive
you assign should reasonably approximate the the income until 2024.
Growing crops. Generally, growing crops are normal costs incurred in producing the animals
not required to be included in inventory. How- in such classes. Unit prices and classifications Example 2, Cash Method. Assume the
ever, if the crop has a preproductive period of are subject to approval by the IRS on examina- same facts as in Example 1 except that you use
more than 2 years, you may have to capitalize tion of your return. You must annually reevaluate the cash method and there was no constructive
(or include in inventory) costs associated with your unit livestock prices and adjust the prices receipt of the sales proceeds in 2023. Under the
the crop. upward or downward to reflect increases or de- cash method, you include the sales proceeds in
creases in the costs of raising livestock. IRS ap- income in 2024, the year you receive payment.
proval is not required for these adjustments. You deduct the costs of producing the grain in
the year you pay for them.
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Special Methods change request procedures to request an ac- 908 908 Bankruptcy Tax Guide
counting method change. For more information, 925
of Accounting see Form 3115 and the Instructions for Form 925 Passive Activity and At-Risk Rules
3115. Also, see Pub. 538. 4681
There are special methods of accounting for 4681 Canceled Debts, Foreclosures,
certain items of income and expense. Repossessions, and Abandonments
Crop method. If you do not harvest and dis- Form (and Instructions)
pose of your crop in the same tax year that you 982 982 Reduction of Tax Attributes Due to
plant it, you can, with IRS approval, use the crop Discharge of Indebtedness
method of accounting. You cannot use the crop Sch E (Form 1040) Sch E (Form 1040) Supplemental
method for any tax return, including your first tax 3.
return, unless you receive approval from the Income and Loss
IRS. Under this method, you deduct the entire Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From
cost of producing the crop, including the ex- Farming
pense of seed or young plants, in the year you Farm Income
realize income from the crop. Sch J (Form 1040) Sch J (Form 1040) Income Averaging for
See chapter 4 for details on deducting the Farmers and Fishermen
costs of operating a farm. Also, see Regulations Reminders 1099-G 1099-G Certain Government Payments
section 1.162-12.
1099-MISC
Coronavirus Food Assistance Program 1099-MISC Miscellaneous Information
Other special methods. Other special meth- (CFAP) payments. You must report the full 1099 NEC 1099 NEC Nonemployee Compensation
ods of accounting apply to the following items. amount of the CFAP payments you received in 1099-PATR 1099-PATR Taxable Distributions
• Amortization, see chapter 7. 2023 as gross income on Schedule F (Form
• Casualties, see chapter 11. 1040). See CFAP, later. Received From Cooperatives
• Condemnations, see chapter 11. 4797 4797 Sales of Business Property
• Depletion, see chapter 7.
• Depreciation, see chapter 7. 4835 4835 Farm Rental Income and
• Farm business expenses, see chapter 4. Introduction Expenses
• Farm income, see chapter 3. You may receive income from many sources.
• Installment sales, see chapter 10. You must report the income from all the different See chapter 16 for information about getting
• Soil and water conservation expenses, see sources on your tax return, unless it is excluded publications and forms.
chapter 5. by law. Where you report the income on your
• Thefts, see chapter 11. tax return depends on its source.
This chapter discusses farm income you re- Schedule F (Form 1040)
Combination Method port on Schedule F (Form 1040), Profit or Loss
From Farming. For information on where to re- Individuals, trusts, partnerships, S corporations,
Generally, you can use any combination of port other income, see the Instructions for LLCs taxed as partnerships, and sole members
cash, accrual, and special methods of account- Forms 1040 and 1040-SR, U.S. Individual In- of a domestic LLC engaged in the business of
ing if the combination clearly shows your in- come Tax Return. farming report farm income on Schedule F
come and expenses and you use it consistently. (Form 1040). Use this schedule to figure the net
However, the following restrictions apply. Accounting method. The rules discussed in profit or loss from regular farming operations.
• If you use the cash method for figuring your this chapter assume you use the cash method Corporations use Form 1120 to report
income, you must use the cash method for of accounting. Under the cash method, you TIP the income or loss from regular farming
reporting your expenses. generally include an item of income in gross in- operations.
• If you use an accrual method for reporting come in the year you receive it. See Cash
your expenses, you must use an accrual Method in chapter 2. Income from farming reported on Sched-
method for figuring your income. If you use an accrual method of accounting, ule F includes amounts you receive from culti-
different rules may apply to your situation. See vating, operating, or managing a farm for gain or
Accrual Method in chapter 2.
Changes in Methods of profit, either as owner or tenant. This includes
income from operating a stock, dairy, poultry,
Accounting Topics fish, fruit, or truck farm and income from operat-
This chapter discusses: ing a plantation, ranch, range, orchard, or grove.
A change in your method of accounting in- It also includes income from the sale of crop
cludes a change in: shares if you materially participate in producing
• Your overall method, such as from the cash • Schedule F (Form 1040)
method to an accrual method, and • Sales of farm products the crop. See Rents (Including Crop Shares),
• Your treatment of any material item, such • Rents (including crop shares) later.
as a change in your method of valuing in- • Agricultural program payments Income received from operating a nursery,
ventory. For example, you change your in- • Income from cooperatives which specializes in growing ornamental plants,
ventory method from the farm-price • Cancellation of debt is considered to be income from farming.
method to the unit-livestock-price method. • Income from other sources
• Income averaging for farmers Income reported on Schedule F doesn't in-
Generally, once you have set up your account- clude gains or losses from sales or other dispo-
ing method, you must receive approval from the Useful Items sitions of the following farm assets.
IRS before you can change either an overall You may want to see: • Land.
method of accounting or the accounting treat- • Depreciable farm equipment.
ment of any material item. A user fee may be re- • Buildings and structures.
quired for any non-automatic change requests. Publication
• Livestock held for draft, breeding, sport, or
525
Form 3115. To obtain approval, you must gen- 525 Taxable and Nontaxable Income dairy purposes.
erally file Form 3115. There are instances when 544 544 Sales and Other Dispositions of Gains and losses from most dispositions of
you can obtain automatic consent to change Assets farm assets are discussed in chapters 8 and . 9
certain accounting methods. In other instances, Gains and losses from casualties, thefts, and
you can file Form 3115 using the non-automatic 550 550 Investment Income and Expenses condemnations are discussed in chapter 11.
Chapter 3 Farm Income Page 9

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Table 3-1. Where To Report Sales of Farm Products
Sales of Farm Products Item Sold Schedule F* Form 4797**
Where to report. Table 3-1 shows where to re- Farm products raised for sale X
port the sale of farm products on your tax return. Farm products bought for resale X
Farm assets not held primarily for sale, such as
Schedule F. Amounts received from the livestock held for draft, breeding, sport, or dairy
sales of products you raised on your farm for purposes (bought or raised), and equipment X
sale (or bought for resale), such as livestock,
produce, or grains, are reported on Schedule F. * See the Instructions for Schedule F for more information.
This includes money and the fair market value ** See the Instructions for Form 4797 for more information.
of any property or services you receive. When
you sell farm products bought for resale, your • The weather-related condition caused an generic class of animals—for example, hogs,
profit or loss is the difference between your sell- area to be designated as eligible for assis- sheep, and cattle. Don’t separate animals into
ing price (money plus the fair market value of tance by the federal government. classes based on age, sex, or breed.
any property) and your basis in the item (usually Disaster assistance and emergency Amount to be postponed. Follow these steps
the cost). See chapter 6 for information on the TIP relief for individuals and busi- to figure the amount of gain to be postponed for
basis of assets. You generally report these nesses. Special tax law provisions each class of animals.
amounts on Schedule F for the year you receive may help taxpayers and businesses recover fi-
payment. nancially from the impact of a disaster, espe- 1. Divide the total income realized from the
Example. In 2022, you bought 20 feeder cially when the federal government declares sale of all livestock in the class during the
calves for $20,000 for resale. You sold them in their location to be a major disaster area. Get tax year by the total number of such live-
2023 for $25,000. You report the $25,000 sales the latest tax relief guidance in disaster situa- stock sold. For this purpose, don't treat
price on Schedule F, line 1a, subtract your tions at IRS.gov/uac/Tax-Relief-in-Disaster- any postponed gain from the previous year
$20,000 basis on line 1b, and report the result- Situations and in disaster area losses-agricul- as income received from the sale of live-
ing $5,000 profit on line 1c. ture tax tips at IRS.gov/businesses/Small- stock.
Businesses-Self-Employed/Disaster- 2. Multiply the result in (1) by the excess
Form 4797. Sales of livestock held for draft, Assistance-and-Emergency-Relief-for- number of such livestock sold solely be-
breeding, sport, or dairy purposes may result in Individuals-and-Businesses. cause of weather-related conditions.
ordinary or capital gains or losses, depending
on the circumstances. In either case, you Sales or exchanges made before an area
should not report these sales on Schedule F. In- became eligible for federal assistance qualify if Example. You're a calendar year taxpayer
stead, report these sales on Form 4797. See the weather-related condition that caused the and you normally wean 100 beef calves in the
Livestock under Ordinary or Capital Gain or sale or exchange also caused the area to be fall and feed them through the winter, selling in
Loss in chapter 8. Animals that you don't hold designated as eligible for federal assistance. January or February. As a result of drought, you
primarily for sale are considered business as- The designation can be made by the President, decide you don't have enough feed for all of
sets of your farm. Some sales of timber/forest the Department of Agriculture (or any of its your calves, so you sell 35 head in the fall at
products are also reported on Form 4797. See agencies), or by other federal departments or weaning and plan to sell the remaining 65
Timber in chapter 8 for more information. agencies. calves in January. As a result, you sold 135
head during 2022. You realized $121,500 from
A weather-related sale or exchange of the sale ($121,500 ÷ 135 = $900 per head). On
Sale by agent. If your agent sells your farm TIP livestock (other than poultry) held for August 10, 2022, as a result of drought, the af-
products, you have constructive receipt of the draft, breeding, or dairy purposes may fected area was declared a disaster area eligi-
income when your agent receives payment and be an involuntary conversion. See Other Invol- ble for federal assistance. The income you can
you must include the net proceeds from the sale untary Conversions in chapter 11. postpone until 2023 is $31,500 [($121,500 ÷
in gross income for the year the agent receives 135) × 35].
payment. This applies even if your agent pays
you in a later year. For a discussion on con- Usual business practice. You must determine
structive receipt of income, see Cash Method the number of animals you would have sold had How to postpone gain. To postpone gain, at-
under Accounting Methods in chapter 2. you followed your usual business practice in the tach a statement to your tax return for the year
absence of the weather-related condition. Do of the sale. The statement must include your
this by considering all the facts and circumstan- name and address and give the following infor-
Sales Caused by ces, but don't take into account your sales in mation for each class of livestock for which
Weather-Related Conditions any earlier year for which you postponed the you're postponing gain.
gain. If you haven't yet established a usual busi- • A statement that you're postponing gain
If you sell or exchange more livestock, including ness practice, rely on the usual business practi- under section 451(e).
poultry, than you normally would in a year be- ces of similarly situated farmers in your general • Evidence of the weather-related conditions
cause of a drought, flood, or other weather-rela- region. that forced the early sale or exchange of
ted condition, you may be able to postpone re- the livestock and the date, if known, on
porting the gain from the additional animals until Connection with affected area. The livestock which an area was designated as eligible
the next year. This applies to livestock that are doesn't have to be raised or sold in an area af- for assistance by the federal government
held for sale (either raised or purchased) as well fected by a weather-related condition for the because of weather-related conditions.
as livestock held for draft, breeding, sport, or postponement to apply. However, the sale must • A statement explaining the relationship of
dairy purposes. You must meet all the following occur solely because of a weather-related con- the area affected by the weather-related
conditions to qualify. dition that affected the water, grazing, or other condition to your early sale or exchange of
• Your principal trade or business is farming. requirements of the livestock. This requirement the livestock.
• You use the cash method of accounting. generally won't be met if the costs of feed, wa- • The number of animals sold in each of the
• You can show that, under your usual busi- ter, or other requirements of the livestock affec- 3 preceding years.
ness practices, you wouldn't have sold or ted by the weather-related condition aren't sub- • The number of animals you would have
exchanged the additional animals this year stantial in relation to the total costs of holding sold in the tax year had you followed your
except for the weather-related condition. the livestock. normal business practice in the absence of
weather-related conditions.
Classes of livestock. You must figure the
amount to be postponed separately for each
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•   The total number of animals sold and the            See Landlord Participation in Farming in chap-          or  livestock  forage  disaster  payments  whether 
    number sold because of weather-related              ter 12. Report the rental income on Schedule F.         you receive them in cash, materials, services, or 
    conditions during the tax year.                                                                             commodity  certificates.  However,  you  can  ex-
•   A computation, as described above, of the           The  crop  share  income  isn’t  included  in           clude from income some payments you receive 
    income to be postponed for each class of            self-employment income if:                              under  certain  cost-sharing  conservation  pro-
    livestock.                                          1. Your arrangement with your tenant doesn’t            grams  if  there  is  a  corresponding  reduction  in 
   Generally,  you  must  file  the  statement  and         provide that you will materially participate        basis of a related improvement. See Cost-Shar-
the return by the due date of the return, includ-           in the production or management of pro-             ing Exclusion (Improvements), later.
ing  extensions.  However,  for  sales  or  ex-             duction of the farm products on the land,           Report the agricultural program payment on 
changes  treated  as  an  involuntary  conversion           or                                                  the appropriate line of Schedule F, Part I. Report 
from  weather-related  sales  of  livestock  in  an                                                             the full amount even if you return a government 
area  eligible  for  federal  assistance  (discussed    2. You don't materially participate in operat-
in chapter  11),  you  are  required  to  attach  a         ing the farm.                                       check  for  cancellation,  refund  any  of  the  pay-
                                                                                                                ment you receive, or the government collects all 
statement  in  the  year  you  realize  the  gain  and  Report this income on Form 4835, and carry the          or part of the payment from you by reducing the 
again in the year you replace the livestock. For        net income or loss to Schedule E (Form 1040),           amount  of  some  other  payment  or  Commodity 
other sales or exchanges, if you timely filed your      page 2.                                                 Credit  Corporation  (CCC)  loan.  However,  you 
return for the year without postponing gain, you                                                                can deduct the amount you refund or return or 
can still postpone gain by filing an amended re-        Crop shares you use to feed livestock.    Crop          that  reduces  some  other  payment  or  loan  to 
turn within 6 months of the due date of the re-         shares  you  receive  as  a  landlord  and  feed  to    you. Claim the deduction on Schedule F, Part II, 
turn  (excluding  extensions).  Attach  the  state-     your  livestock  are  considered  converted  to         for the year of repayment or reduction.
ment  to  the  amended  return  and  write  “Filed      money when fed to the livestock. You must in-
pursuant  to  section  301.9100-2”  at  the  top  of    clude the fair market value of the crop shares in 
the amended return. File the amended return at          income  at  that  time.  You're  entitled  to  a  busi- Commodity Credit 
the  same  address  you  filed  the  original  return.  ness expense deduction for the livestock feed in        Corporation (CCC) Loans
Once  you  have  filed  the  statement,  you  can       the same amount and at the same time you in-
cancel your postponement of gain only with the          clude the fair market value of the crop share as        Generally, you don't report loans you receive as 
approval of the IRS.                                    rental income. Although these two transactions          income.  However,  if  you  pledge  part  or  all  of 
                                                        cancel each other for figuring adjusted gross in-       your production to secure a CCC loan, you can 
                                                        come on Form 1040 or 1040-SR, they may be               treat the loan as if it were a sale of the crop and 
Rents (Including Crop                                   necessary  to  figure  your  self-employment  tax.      report the loan proceeds as income in the year 
                                                        See Landlord Participation in Farming and Farm          you receive them. You don't need approval from 
Shares)                                                 Optional Method in chapter 12.                          the IRS to adopt this method of reporting CCC 
                                                                                                                loans.
The  rent  you  receive  for  the  use  of  your  farm- Crop shares you give to others (gift).    Crop 
land  by  another  person  or  entity  is  generally    shares  you  receive  as  a  landlord  and  give  to    Once you report a CCC loan as income for 
rental  income,  not  farm  income.  However,  the      others  are  considered  converted  to  money           the year received, you must generally report all 
rent is farm income if:                                 when you make the gift. You must report the fair        CCC  loans  in  that  year  and  later  years  in  the 
1. Your arrangement with your tenant pro-               market value of the crop share as income, even          same way. However, you can obtain for your tax 
    vides that you will materially participate in       though someone else receives payment for the            year  an  automatic  consent  to  change  your 
    the production or management of produc-             crop share. This applies even if the gift is made       method  of  accounting  for  loans  received  from 
    tion of the farm products on the land, and          to a qualified charitable organization.                 the  CCC,  from  including  the  loan  amount  in 
                                                                                                                gross income for the tax year in which the loan 
2. You materially participate.                          Example.      A tenant farmed part of your land         is  received  to  treating  the  loan  amount  as  a 
                                                        under  a  crop-share  arrangement.  The  tenant         loan. For more information, see Part I of the In-
See Landlord Participation in Farming in chap-          harvested and delivered the crop in your name           structions  for  Form  3115  and  Revenue  Proce-
ter 12.                                                 to  an  elevator  company.  Before  selling  any  of    dure  2008-52.  Revenue  Procedure  2008-52, 
                                                        the crop, you instructed the elevator company to        2008-36 I.R.B. 587, is available at
Pasture  income  and  rental.  If  you  pasture         cancel  your  warehouse  receipt  and  make  out        IRS.gov/irb/2008-36_IRB#NOT-2008-52.
someone else's livestock and take care of them          new  warehouse  receipts  in  equal  amounts  of              You  can  request  income  tax  withhold-
for a fee, the income is from your farming busi-        the crop in the names of your children. They sell       TIP   ing  from  CCC  loan  payments  you  re-
ness.  You  must  enter  it  as  “Other  Income”  on    their  crop  shares  in  the  following  year  and  the       ceive. Use Form W-4V. See     chapter 16 
Schedule  F.  If  you  simply  rent  your  pasture  or  elevator  company  makes  payments  directly  to        for information about ordering the form.
other  farm  real  estate  for  a  flat  cash  amount   your children.
without providing services, report the income as        In  this  situation,  you're  considered  to  have 
rent on Schedule E (Form 1040), Part I.                 received rental income and then made a gift of          To elect to report a CCC loan as income, in-
                                                        that  income.  You  must  include  the  fair  market    clude the loan proceeds as income on Sched-
Crop Shares                                             value of the crop shares in your income for the         ule F for the year you receive it. Attach a state-
                                                        tax year you gave the crop shares to your chil-         ment  to  your  return  showing  the  details  of  the 
You must include rent you receive in the form of        dren.                                                   loan.
crop  shares  in  income  in  the  year  you  convert                                                           You must file the statement and the return by 
the shares to money or the equivalent of money.         Crop share loss.   If you're involved in a rental       the due date of the return, including extensions. 
It  doesn't  matter  whether  you  use  the  cash       or crop-share lease arrangement that isn't inclu-       If you timely filed your return for the year without 
method of accounting or an accrual method of            ded  in  self-employment  income,  any  loss  from      making the election, you can still make the elec-
accounting.                                             these activities may be subject to the limits un-       tion by filing an amended return within 6 months 
                                                        der the passive loss rules.                             of the due date of the return (excluding exten-
   If you receive rent in the form of crop shares                                                               sions). Attach the statement to the amended re-
or  livestock,  the  rental  income  is  included  in                                                           turn  and  write  “Filed  pursuant  to  section 
self-employment income if:                              Agricultural Program                                    301.9100-2”  at  the  top  of  the  return.  File  the 
                                                                                                                amended return at the same address you filed 
1. Your arrangement with your tenant pro-               Payments                                                the original return.
    vides that you will materially participate in 
    the production or management of produc-             You  must  include  in  income  most  government        When  you  make  this  election,  the  amount 
    tion of the farm products on the land, and          payments, such as those for approved conser-            you report as income becomes your basis in the 
2. You materially participate.                          vation practices, livestock indemnity payments,         commodity. See chapter 6 for information on the 
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basis of assets. If you later repay the loan, re- redeemed it. The $1,200 market gain isn’t rec- Individuals who are receiving social se-
deem the pledged commodity, and sell it, you ognized on the redemption. He reports it for TIP curity retirement or disability benefits
report as income at the time of sale the sale 2023 as an agricultural program payment on may exclude CRP payments when cal-
proceeds minus your basis in the commodity. If Schedule F, line 4a, but doesn't include it as a culating self-employment tax. See the Instruc-
the sale proceeds are less than your basis in taxable amount on line 4b. tions for Schedule SE (Form 1040).
the commodity, you can report the difference as Mike's basis in the cotton after he redeemed
a loss on Schedule F. it was $4,000, which is the redemption (repurch-
ase) price paid for the cotton. His gain from the Crop Insurance and Crop
If you forfeit the pledged crops to the CCC in sale is $1,200 ($5,200 – $4,000). He reports the Disaster Payments
full payment of the loan, the forfeiture is treated $5,000 sale on line 1a and the $4,000 basis on
for tax purposes as a sale of the crops. If you line 1b. After subtracting his basis from the sale, You must include in income any crop insurance
didn't report the loan proceeds as income for Mike will have a $1,200 gain for 2023 on Sched- proceeds you receive as the result of physical
the year you received them, you must include ule F, line 1c. crop damage or reduction of crop revenue, or
them in your income for the year of the forfei- both. You generally include them in the year you
ture. Excluded CCC loan. Mike didn’t elect to
report the $5,200 CCC loan as income and receive them. Treat as crop insurance proceeds
Form 1099-A. If you forfeit pledged crops to therefore didn’t include it on his 2022 Sched- the crop disaster payments you receive from the
the CCC in full payment of a loan, you may re- ule F. When he paid $4,000 to pay off the loan in federal government as the result of destruction
ceive a Form 1099-A. “CCC” should be shown 2023, he had to recognize $1,200 of income or damage to crops, or the inability to plant
in box 6. The amount of any CCC loan out- from market gain. crops, because of drought, flood, or any other
standing when you forfeited your commodity natural disaster.
should also be indicated on the form. Example 2. The facts are the same as in You can request income tax withhold-
Example 1, except that, instead of selling the TIP ing from crop disaster payments you
Market Gain cotton for $6,500 after redeeming it, Mike en- receive from the federal government.
tered into an option-to-purchase contract with a Use Form W-4V. See chapter 16 for information
Under the CCC nonrecourse marketing assis- cotton buyer before redeeming the cotton. Un- about ordering the form.
tance loan program, your repayment amount for der that contract, Mike authorized the cotton
a loan secured by your pledge of an eligible buyer to pay the CCC loan on Mike's behalf. In Election to postpone reporting until the fol-
commodity is generally based on the lower of 2023, the cotton buyer repaid the loan for lowing year. You can postpone reporting some
the loan rate or the prevailing world market price $4,000 and immediately exercised his option, or all crop insurance proceeds as income until
for the commodity on the date of repayment. If buying the cotton for $4,000. How Mike reports the year following the year the physical damage
you repay the loan when the world price is the $1,200 market gain on the redemption of the occurred if you meet all the following conditions.
lower, the difference between that repayment cotton and figures his gain or loss from its sale You use the cash method of accounting.
amount and the original loan amount is market depends on whether he included CCC loans in •
gain. Whether you use cash or CCC certificates income in 2022. • You receive the crop insurance proceeds in
the same tax year the crops are damaged.
to repay the loan, you will receive a Form Included CCC loan. As in Example 1, Mike • You can show that under your normal busi-
1099-G showing the market gain you realized. is treated as though he sold the cotton for ness practice you would have included
Market gain should be reported as follows. $5,200 when he pledged it and repurchased the more than 50% of the income from the
• If you elected to include the CCC loan in cotton for $4,000 when the cotton buyer re- damaged crops in any tax year following
income in the year you received it, don’t in- deemed it for him. The $1,200 market gain isn’t the year the damage occurred.
clude the market gain in income. However, recognized on the redemption. Mike reports it Proceeds received from revenue insurance
reduce (adjust) the basis of the commodity for 2023 as an agricultural program payment on policies may be the result of either yield loss
for the amount of the market gain. Schedule F, line 4a, but doesn't include it as a due to physical damage or to decline in price
• If you didn’t include the CCC loan in in- taxable amount on line 4b. from planting to harvest. For these policies, only
come in the year received, include the mar- Also, as in Example 1, Mike's basis in the the amount of the proceeds received as a result
ket gain in your income. cotton when the cotton buyer redeemed it for of yield loss can be deferred. Proceeds re-
him was $4,000. Mike has no gain or loss on its ceived from weather insurance policies cannot
The following examples show how to report sale to the cotton buyer for that amount. be deferred if the payment is based on rainfall
market gain.
Excluded CCC loan. As in Example 1, amounts and is not a result of physical damage
Example 1. Mike Green is a cotton farmer. Mike didn't report the $5,200 loan as income in to a crop.
He uses the cash method of accounting and 2022 and must recognize $1,200 of income To postpone reporting some or all crop in-
files his tax return on a calendar year basis. He from market gain in 2023. surance proceeds received in 2023, report the
has deducted all expenses incurred in produc- amount you received on Schedule F, line 6a, but
ing the cotton and has a zero basis in the com- don't include it as a taxable amount on line 6b.
modity. In 2022, Mike pledged 10,000 pounds Conservation Reserve Check the box on line 6c and attach a state-
of cotton as collateral for a CCC loan of $5,200 Program (CRP) ment to your tax return. The statement must in-
(a loan rate of $0.52 per pound). In 2023, he re- clude your name and address and contain the
paid the loan and redeemed the cotton for Under the CRP, if you own or operate highly following information.
$4,000 when the world price was $0.40 per erodible or other specified cropland, you may • A statement that you're making an election
pound (lower than the loan amount). Later in enter into a long-term contract with the USDA, under section 451(g) and Regulations sec-
2023, he sold the cotton for $6,500. agreeing to convert to a less intensive use of tion 1.451-6.
The market gain on the redemption was that cropland. You must include the annual pay- • The specific crop or crops physically de-
$0.12 ($0.52 – $0.40) per pound. Mike realized ments and any one-time incentive payment you stroyed or damaged.
total market gain of $1,200 ($0.12 x 10,000 receive under the program on the appropriate • A statement that under your normal busi-
pounds). How he reports this market gain and lines of Schedule F. Cost-share payments you ness practice you would have included
figures his gain or loss from the sale of the cot- receive may qualify for the cost-sharing exclu- more than 50% of the income from some
ton depends on whether he included CCC sion. See Cost-Sharing Exclusion (Improve- or all of the destroyed or damaged crops in
loans in income in 2022. ments), later. CRP payments are reported to gross income for a tax year following the
you on Form 1099-G. year the crops were destroyed or dam-
Included CCC loan. Mike reported the aged.
$5,200 CCC loan as income for 2022 on Sched- • The cause of the physical destruction or
ule F, line 5a, so he is treated as if he sold the damage and the date or dates it occurred.
cotton for $5,200 when he pledged it and re-
purchased the cotton for $4,000 when he
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• The total payments you received from in- 1. It was for a capital expense. You can't ex- • The flood prevention projects under the
surance carriers, itemized for each specific clude any part of a payment for an ex- Flood Control Act of 1944.
crop, and the date you received each pay- pense you can deduct in the year you pay • The Emergency Watershed Protection Pro-
ment. or incur it. You must include the payment gram under the Flood Control Act of 1950.
• The name of each insurance carrier from for a deductible expense in income, and • Certain programs under the Colorado
whom you received payments. you can take any offsetting deduction. See River Basin Salinity Control Act.
One election covers all crops representing a chapter 5 for information on deducting soil • The Wetlands Reserve Program author-
single trade or business. If you have more than and water conservation expenses. ized by the Food Security Act of 1985, the
one farming business, make a separate election 2. It doesn't substantially increase your an- Federal Agriculture Improvement and Re-
for each one. For example, if you operate two nual income from the property for which form Act of 1996, and the Farm Security
separate farms on which you grow different it's made. An increase in annual income is and Rural Investment Act of 2002.
crops and you keep separate books for each substantial if it's more than the greater of • The Environmental Quality Incentives Pro-
farm, you should make two separate elections the following amounts. gram (EQIP) authorized by the Federal Ag-
to postpone reporting insurance proceeds you riculture Improvement and Reform Act of
receive for crops grown on each of your farms. a. 10% of the average annual income 1996.
An election is binding for the year unless the derived from the affected property be- • The Wildlife Habitat Incentives Program
IRS approves your request to change it. To re- fore receiving the improvement. (WHIP) authorized by the Federal Agricul-
quest IRS approval to change your election, b. $2.50 times the number of affected ture Improvement and Reform Act of 1996.
write to the IRS at the following address, giving acres. • The Soil and Water Conservation Assis-
tance Program authorized by the Agricul-
your name, address, identification number, the 3. The Secretary of Agriculture certified that tural Risk Protection Act of 2000.
year you made the election, and your reasons the payment was primarily made for con- • The Agricultural Management Assistance
for wanting to change it. serving soil and water resources, protect- Program authorized by the Agricultural
Ogden Submission Processing Center ing or restoring the environment, improv- Risk Protection Act of 2000.
P. O. Box 9941 ing forests, or providing a habitat for • The Conservation Reserve Program au-
Ogden, UT 84409 wildlife. thorized by the Food Security Act of 1985
and the Federal Agriculture Improvement
Qualifying programs. If the three tests listed and Reform Act of 1996.
Feed Assistance and above are met, you can exclude part or all of the • The Forest Land Enhancement Program
Payments payments from the following programs. authorized under the Farm Security and
• The rural clean water program authorized Rural Investment Act of 2002.
by the Federal Water Pollution Control Act. • The Conservation Security Program au-
The Disaster Assistance Act of 1988 authorizes • The rural abandoned mine program au- thorized by the Food Security Act of 1985.
programs to provide feed assistance, reim- thorized by the Surface Mining Control and • The Forest Health Protection Program
bursement payments, and other benefits to Reclamation Act of 1977. (FHPP) authorized by the Cooperative For-
qualifying livestock producers if the Secretary of • The water bank program authorized by the estry Assistance Act of 1978.
Agriculture determines that, because of a natu- Water Bank Act.
ral disaster, a livestock emergency exists. • The emergency conservation measures Income realized. The gross income you real-
These programs include partial reimbursement program authorized by title IV of the Agri- ize upon getting an improvement under these
for the cost of purchased feed and for certain cultural Credit Act of 1978. cost-sharing programs is the value of the im-
transportation expenses. They also include the • The agricultural conservation program au- provement reduced by the sum of the excluda-
donation or sale at a below-market price of feed thorized by the Soil Conservation and Do- ble portion and your share of the cost of the im-
owned by the CCC. mestic Allotment Act. provement (if any).
Include in income: • The great plains conservation program au-
• The market value of donated feed re- thorized by the Soil Conservation and Do- Value of the improvement. You determine
ceived, mestic Policy Act. the value of the improvement by multiplying its
• The difference between the market value • The resource conservation and develop- fair market value (defined in chapter 6) by a
and the price you paid for feed you buy at ment program authorized by the Bank- fraction. The numerator of the fraction is the to-
below-market prices, and head-Jones Farm Tenant Act and by the tal cost of the improvement (all amounts paid ei-
• Any cost reimbursement you receive. Soil Conservation and Domestic Allotment ther by you or by the government for the im-
Act. provement) reduced by the sum of the following
You must include these benefits in income in • Certain small watershed programs, listed items.
the year you receive them. You can't postpone later. • Any government payments under a pro-
reporting them under the rules explained earlier • Any program of a state, territory of the Uni- gram not listed earlier.
for weather-related sales of livestock or crop in- ted States, a political subdivision of any of • Any part of a government payment under a
surance proceeds. Report the benefits on these, or of the District of Columbia, under program listed earlier that the Secretary of
Schedule F, Part I, as agricultural program pay- which payments are made to individuals Agriculture hasn't certified as primarily for
ments. You can usually take a current deduction primarily for conserving soil, protecting or conservation.
for the same amount as a feed expense. restoring the environment, improving for- • Any government payment to you for rent or
ests, or providing a habitat for wildlife. Sev- for your services.
eral state programs have been approved. The denominator of the fraction is the total cost
Cost-Sharing Exclusion For information about the status of those of the improvement.
(Improvements) programs, contact the state offices of the
Farm Service Agency (FSA) and the Natu- Excludable portion. The excludable por-
You can exclude from your income part or all of ral Resources and Conservation Service tion is the present fair market value of the right
a payment you receive under certain federal or (NRCS). to receive annual income from the affected
acreage of the greater of the following amounts.
state cost-sharing conservation, reclamation, Small watershed programs. If the three
and restoration programs. However, see Effects tests listed earlier are met, you can exclude part 1. 10% of the prior average annual income
of the exclusion, later. A payment is any eco- or all of the payments you receive under the fol- from the affected acreage. The prior aver-
nomic benefit you get as a result of an improve- lowing programs for improvements made in age annual income is the average of the
ment. However, this exclusion applies only to connection with a watershed. gross receipts from the affected acreage
that part of a payment that meets all three of the • The programs under the Watershed Pro- for the last 3 tax years before the tax year
following tests. tection and Flood Prevention Act. in which you started to install the improve-
ment.

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2. $2.50 times the number of affected acres. you receive under these programs. If you make Report the total amount reported to you as
this election for all of these payments, none of the payee of record on Schedule F. However,
The calculation of present fair market the above restrictions and rules apply. You must don't report as a taxable amount any amount
! value of the right to receive annual in- make this election by the due date, including ex- belonging to someone else.
CAUTION come is too complex to discuss in this
tensions, for filing your return. In the example
publication. You may need to consult your tax above, an election not to exclude payments re- See chapter 16 for information about order-
advisor for assistance. sults in $5,000 included in income and a ing Form 1099-G.
$15,000 increase in basis. If you timely filed
Example. One hundred acres of your land your return for the year without making the elec-
was reclaimed under a rural abandoned mine tion, you can still make the election by filing an Income From
program contract with the NRCS of the USDA. amended return within 6 months of the due date
The total cost of the improvement was of the return (excluding extensions). Write “Filed Cooperatives
$500,000. The USDA paid $490,000. You paid pursuant to section 301.9100-2” at the top of
$10,000. The value of the cost-sharing improve- the amended return and file it at the same ad- If you buy farm supplies through a cooperative,
ment is $15,000. dress you filed the original return. you may receive income from the cooperative in
The present fair market value of the right to the form of patronage dividends (refunds). If you
receive the annual income described in (1) sell your farm products through a cooperative,
above was calculated to be $1,380, and the CFAP you may receive either patronage dividends or a
present fair market value of the right to receive per-unit retain certificate, explained later, from
the annual income described in (2) is $1,550. The CFAP provides direct payments to produc- the cooperative.
The excludable portion is the greater amount, ers of eligible agricultural commodities ad-
$1,550. versely affected by the coronavirus (COVID-19) Form 1099-PATR. The cooperative will report
You figure the amount to include in gross in- pandemic to help offset sales losses and in- the income to you on Form 1099-PATR or a sim-
come as follows: creased marketing costs associated with the ilar form and send a copy to the IRS. Form
COVID-19 pandemic. 1099-PATR may also show an alternative mini-
mum tax adjustment that you must include on
Value of cost-sharing CFAP payments are agricultural program Form 6251 if you're required to file the form. For
improvement . . . . . . . . . . . . . . . . . . $15,000 payments that you must include in gross in- information on the alternative minimum tax, see
Minus: Your share . . . . . $10,000 come. Report the full amount of your CFAP pay- the Instructions for Form 6251.
Excludable ments on Schedule F (Form 1040), lines 4a and
portion . . . . . . . . 1,550 11,550 4b. Go to USDA.gov for more information.
Patronage Dividends
Amount included in income . . . . $ 3,450
Other Payments You generally report patronage dividends as in-
come on Schedule F for the tax year you re-
Effects of the exclusion. When you figure the ceive them. They include the following items.
basis of property you acquire or improve using You must include most other government pro-
cost-sharing payments excluded from income, gram payments in income. • Money paid as a patronage dividend, in-
cluding cash advances received (for exam-
subtract the excluded payments from your capi- ple, from a marketing cooperative).
tal costs. Any payment excluded from income Fertilizer and Lime The stated dollar value of qualified written
isn't part of your basis. In the example above, •
notices of allocation.
the increase in basis is $500,000 – $490,000 + Include in income the value of fertilizer or lime • The fair market value of other property.
$3,450 = $13,450. you receive under a government program. How
In addition, you can't take depreciation, am- to claim the offsetting deduction is explained Don’t report as income any patronage divi-
ortization, or depletion deductions for the part of under Fertilizer and Lime in chapter 4. dends you receive from expenditures that
the cost of the property for which you receive weren't deductible, such as buying personal or
family items, capital assets, or depreciable
cost-sharing payments you exclude from in- Improvements property. You must reduce the cost or other ba-
come.
sis of these items by the amount of such patron-
How to report the exclusion. Attach a state- If government payments are based on improve- age dividends received. Personal items include
ment to your tax return (or amended return) for ments, such as a pollution control facility, you fuel purchased for personal use and basic local
the tax year you receive the last government must include them in income. You must also telephone service.
payment for the improvement. The statement capitalize the full cost of the improvement.
must include the following information. Since you have included the payments in in- If you can't determine what the dividend is
• The dollar amount of the cost funded by come, they don't reduce your basis. However, for, report it as income on Schedule F, lines 3a
the government payment. see Cost-Sharing Exclusion (Improvements), and 3b.
• The value of the improvement. earlier, for additional information.
• The amount you're excluding. Qualified written notice of allocation. If you
receive a qualified written notice of allocation as
Report the total cost-sharing payments you Payment to More Than One part of a patronage dividend, you must gener-
receive on Schedule F, line 4a, and the taxable Person ally include its stated dollar value in your in-
amount on line 4b. come on Schedule F in the year you receive it.
The USDA reports program payments to the A written notice of allocation is qualified if at
Recapture. If you dispose of the property IRS. It reports a program payment intended for least 20% of the patronage dividend is paid in
within 20 years after you received the excluded more than one person as having been paid to money or by qualified check and either of the
payments, you must treat as ordinary income the person whose identification number is on following conditions is met.
part or all of the cost-sharing payments you ex- record for that payment (payee of record). If 1. The notice must be redeemable in cash for
cluded. In the above example, if the 100 acres you, as the payee of record, receive a program at least 90 days after it's issued, and you
were sold within 20 years of the exclusion for a payment belonging to someone else, such as must have received a written notice of your
gain of $2,000, $1,550 of that amount would be your landlord, the amount belonging to the other right of redemption at the same time as the
included in ordinary income. You must report person is a nominee distribution. You should file written notice of allocation.
the recapture on Form 4797. See Section 1255 Form 1099-G to report the identity of the actual
property under Other Gains in chapter 9. recipient to the IRS. You should also give this in- 2. You must have agreed to include the sta-
formation to the recipient. You can avoid the in- ted dollar value in income in the year you
Electing not to exclude payments. You can convenience of unnecessary inquiries about the receive the notice by doing one of the fol-
elect not to exclude all or part of any payments identity of the recipient if you file this form. lowing.
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a. Signing and giving a written agree- buying or selling capital assets or depreciable them that's fixed without regard to the net earn-
ment to the cooperative. property. ings of the cooperative. These allocations can
be paid in money, other property, or qualified
b. Getting or keeping membership in the Example. On July 1, 2022, Mr. Brown, a certificates.
cooperative after it adopted a bylaw patron of a cooperative association, bought a
providing that membership constitutes used machine for his dairy farm business from Per-unit retain certificates issued by a coop-
agreement. The cooperative must no- the association for $2,900. The machine has a erative generally receive the same tax treatment
tify you in writing of this bylaw and life of 7 years under MACRS. Mr. Brown files his as patronage dividends, discussed earlier.
give you a copy. return on a calendar year basis. For 2022, he
c. Endorsing and cashing a qualified claimed a depreciation deduction of $311, using Qualified certificates. Qualified per-unit retain
check paid as part of the same pa- the 10.71% depreciation rate from the 150% certificates are those issued to patrons who
tronage dividend. You must cash the declining balance, half-year convention table have agreed to include the stated dollar amount
check by the 90th day after the close (shown in Table A-14 in Appendix A of Pub. of these certificates in income in the year of re-
of the payment period for the coopera- 946). On July 2, 2023, the cooperative associa- ceipt. The agreement may be made in writing or
tive's tax year for which the patronage tion paid Mr. Brown a $300 cash patronage divi- by getting or keeping membership in a coopera-
dividend was paid. dend for buying the machine. Mr. Brown adjusts tive whose bylaws or charter states that mem-
the basis of the machine and figures his depre- bership constitutes agreement. If you receive
Qualified check. A qualified check is any ciation deduction for 2022 (and later years) as qualified per-unit retain certificates, include the
instrument that's redeemable in money and follows. stated dollar amount of the certificates in in-
meets both of the following requirements. come on Schedule F, for the tax year you re-
• It's part of a patronage dividend that also Cost of machine on July 1, 2022 . . . . . . . . . . $2,900 ceive them.
includes a qualified written notice of alloca- Minus: 2022 depreciation . . . . . . . . $311
tion for which you met condition 2c above. 2023 cash dividend . . . . . . . $300 $611 Nonqualified certificates. Don't include the
• It's imprinted with a statement that endors- stated dollar value of a nonqualified per-unit re-
ing and cashing it constitutes the payee's Adjusted basis for tain certificate in income when you receive it.
consent to include in income the stated depreciation for 2023:. . . . . . . . . . . $2,289 Your basis in the certificate is zero. You must in-
dollar value of any written notices of alloca- Depreciation rate: 1.0 ÷ 6 / (remaining recovery period 1 2 clude in income any amount you receive from its
tion paid as part of the same patronage as of 1/1/2023) = (0.1538) × 1.5 = 23.07% sale, redemption, or other disposition. Report
dividend. the amount you receive from the disposition as
Loss on redemption. You can deduct on Depreciation deduction for 2023 ordinary income on Schedule F, lines 3a and 3b,
Schedule F, Part II, any loss incurred on the re- ($2,289 × 0.2307). . . . . . . . . . . . . . $528 for the tax year of disposition.
demption of a qualified written notice of alloca-
tion you received in the ordinary course of your Exceptions. If the dividends are for buying
farming business. The loss is the difference be- or selling capital assets or depreciable property Cancellation of Debt
tween the stated dollar amount of the qualified you didn't own at any time during the year you
written notice you included in income and the received the dividends, you must include them This section explains the general rule for includ-
amount you received when you redeemed it. on Schedule F, unless one of the following rules ing canceled debt in income and the exceptions
applies. to the general rule. For more information on
Nonqualified notice of allocation. Don’t in- • If the dividends relate to a capital asset you canceled debt, see Pub. 4681.
clude the stated dollar value of any nonqualified held for more than 1 year for which a loss
notice of allocation in income when you receive was or would have been deductible, treat
it. Your basis in the notice is zero. You must in- them as gain from the sale or exchange of General Rule
clude in income for the tax year of disposition a capital asset held for more than 1 year. Generally, if your debt is canceled or forgiven,
any amount you receive from its sale, redemp- • If the dividends relate to a capital asset for other than as a gift or bequest to you, you must
tion, or other disposition. Report that amount, which a loss wasn't or wouldn't have been include the canceled amount in gross income
up to the stated dollar value of the notice, on deductible, don't report them as income for tax purposes. Report the canceled amount
Schedule F. However, don't include that amount (ordinary or capital gain). on Schedule F if you incurred the debt in your
in your income if the notice resulted from buying If the dividends are for selling capital assets farming business. If the debt is a nonbusiness
or selling capital assets or depreciable property or depreciable property during the year you re- debt, report the canceled amount as “Other in-
or from buying personal items, as explained in ceived the dividends, treat them as an addi- come” on Schedule 1 (Form 1040), line 8.
the following discussions. tional amount received on the sale.
If the amount you receive is more than the Special rules apply to C and S corporations
stated dollar value of the notice, report the ex- Personal purchases. Because you can't de- and partnerships. See section 108(i), Regula-
cess as the type of income it represents. For ex- duct the cost of personal, living, or family items, tions sections 1.108(i)-0 and 1.108(i)-2, and
ample, if it represents interest income, report it such as supplies, equipment, or services not re- Pub. 4681 for details.
on your return as interest. lated to the production of farm income, you can
omit from the taxable amount of patronage divi- Form 1099-C. If a federal agency, financial in-
Buying or selling capital assets or depreci- dends on Schedule F any dividends from buy- stitution, credit union, finance company, or
able property. Patronage dividends from buy- ing those items (and you must reduce the cost credit card company cancels or forgives your
ing capital assets or depreciable property used or other basis of those items by the amount of debt of $600 or more, you may receive a Form
in your business are not included in income. the dividends). This rule also applies to 1099-C, Cancellation of Debt. The amount of
You must, however, reduce the basis of these amounts you receive from the sale, redemption, debt canceled is shown in box 2.
assets by the dividends. This reduction is taken or other disposition of a nonqualified written no-
into account as of the first day of the tax year in tice of allocation resulting from these purcha- Exceptions
which the dividends are received. If the divi- ses.
dends are more than your unrecovered basis, The following discussion covers some excep-
reduce the unrecovered basis to zero and in- tions to the general rule for canceled debt.
clude the difference on Schedule F for the tax Per-Unit Retain Certificates
These exceptions apply before the exclusions
year you receive them. A per-unit retain certificate is any written notice discussed below.
This rule and the exceptions explained be- that shows the stated dollar amount of a
low also apply to amounts you receive from the per-unit retain allocation made to you by the co- Price reduced after purchase. If your pur-
sale, redemption, or other disposition of a non- operative. A per-unit retain allocation is an chase of property was financed by the seller
qualified notice of allocation that resulted from amount paid to patrons for products sold for and the seller reduces the amount of the debt at
a time when you aren't insolvent and the
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reduction doesn't occur in a chapter 11 bank- See Form 982, later, for information on how year of the debt cancellation. Reduce the
ruptcy case, the amount of the debt reduction to claim an exclusion for a canceled debt. carryover 33 / cents for each dollar of ex-1 3
will be treated as a reduction in the purchase cluded canceled debt.
price of the property. Reduce your basis in the Debt. For this discussion, debt includes any
property by the amount of the reduction in the debt for which you're liable or that attaches to 3. Minimum tax credit. Reduce the mini-
debt. The rules that apply to bankruptcy and in- property you hold. mum tax credit available at the beginning
solvency are explained below under Exclusions. of the tax year following the tax year of the
debt cancellation. Reduce the credit 33 /1 3
Bankruptcy and Insolvency
Deductible debt. You don't realize income cents for each dollar of excluded canceled
from a canceled debt to the extent the payment debt.
of the debt would have been a deductible ex- You can exclude a canceled debt from income if 4. Capital loss. Reduce any net capital loss
pense. This exception applies before the price you're bankrupt or to the extent you're insolvent. for the tax year of the debt cancellation,
reduction exception discussed above and the and then any capital loss carryover to that
bankruptcy and insolvency exclusions dis- Bankruptcy. A bankruptcy case is a case un-
cussed next. der title 11 of the U.S. Code if you're under the year. Reduce the capital loss or loss carry-
jurisdiction of the court and the cancellation of over 1 dollar for each dollar of excluded
Example. You get accounting services for the debt is granted by the court or is the result canceled debt.
your farm on credit. Later, you have trouble pay- of a plan approved by the court. 5. Basis. Reduce the basis of the property
ing your farm debts, but you aren't bankrupt or Don't include debt canceled in a bankruptcy you hold at the beginning of the tax year
insolvent. Your accountant forgives part of the case in your income in the year it's canceled. In- following the tax year of the debt cancella-
amount you owe for the accounting services. stead, you must use the amount canceled to re- tion in the following order.
How you treat the canceled debt depends on duce your tax attributes, explained below under a. Real property (except inventory) used
your method of accounting. Reduction of tax attributes. in your trade or business or held for in-
• Cash method—You don't include the can- vestment that secured the canceled
celed debt in income because payment of Insolvency. You're insolvent to the extent your debt.
the debt would have been deductible as a liabilities are more than the fair market value of
business expense. your assets immediately before the cancellation b. Personal property (except inventory
• Accrual method—You include the canceled of debt. and accounts and notes receivable)
debt in income because the expense was You can exclude canceled debt from gross used in your trade or business or held
deductible when you incurred the debt. income up to the amount by which you're insol- for investment that secured the can-
vent. If the canceled debt is more than this celed debt.
amount and the debt qualifies, you can apply c. Other property (except inventory and
Exclusions the rules for qualified farm debt or qualified real accounts and notes receivable) used
property business debt to the difference. Other- in your trade or business or held for in-
Don't include canceled debt in income in the fol- wise, you include the difference in gross in- vestment.
lowing situations. come. Use the amount excluded because of in-
1. The cancellation takes place in a bank- solvency to reduce any tax attributes, as d. Inventory and accounts and notes re-
ruptcy case under title 11 of the U.S. explained below under Reduction of tax attrib- ceivable.
Code. utes. You must reduce the tax attributes under e. Other property.
the insolvency rules before applying the rules
2. The cancellation takes place when you're for qualified farm debt or for qualified real prop- Reduce the basis 1 dollar for each dol-
insolvent. erty business debt. lar of excluded canceled debt. However,
3. The canceled debt is a qualified farm debt. the reduction can't be more than the total
Example. You had a $15,000 debt that basis of property and the amount of
4. The canceled debt is a qualified real prop- wasn't qualified principal residence debt can- money you hold immediately after the debt
erty business debt (in the case of a tax- celed outside of bankruptcy. Immediately before cancellation minus your total liabilities im-
payer other than a C corporation). See the cancellation, your liabilities totaled $80,000 mediately after the cancellation.
chapter 5 of Pub. 334. and your assets totaled $75,000. Since your lia- For allocation rules that apply to basis
5. The canceled debt is qualified principal bilities were more than your assets, you were in- reductions for multiple canceled debts,
residence indebtedness which is: solvent to the extent of $5,000 ($80,000 − see Regulations section 1.1017-1(b)(2).
$75,000). You can exclude this amount from in- Also see Electing to reduce the basis of
a. Discharged before 2023, or come. The remaining canceled debt ($10,000) depreciable property first, later.
b. Subject to an arrangement that is en- may be subject to the qualified farm debt or
tered into and evidenced in writing be- qualified real property business debt rules. If 6. Passive activity loss and credit carry-
fore January 1, 2026. not, you must include it in income. overs. Reduce the passive activity loss
and credit carryovers from the tax year of
The exclusions don't apply in the following Reduction of tax attributes. If you exclude the debt cancellation. Reduce the loss
situations. canceled debt from income in a bankruptcy carryover 1 dollar for each dollar of exclu-
• If a canceled debt is excluded from income case or during insolvency, you must use the ex- ded canceled debt. Reduce the credit car-
because it takes place in a bankruptcy cluded debt to reduce certain tax attributes. ryover 33 / cents for each dollar of exclu-1 3
case, the exclusions in situations (2), (3), ded canceled debt.
(4), and (5) don't apply. Order of reduction. You must use the ex- 7. Foreign tax credit. Reduce the credit car-
• If a canceled debt is excluded from income cluded canceled debt to reduce the following ryover to or from the tax year of the debt
because it takes place when you're insol- tax attributes in the order listed unless you elect cancellation. Reduce the carryover 33 /1 3
vent, the exclusions in situations (3) and to reduce the basis of depreciable property first, cents for each dollar of excluded canceled
(4) don't apply to the extent you're insol- as explained later. debt.
vent. 1. Net operating loss (NOL). Reduce any
• If a canceled debt is excluded from income NOL for the tax year of the debt cancella- How to make tax attribute reductions.
because it’s qualified principal residence tion, and then any NOL carryover to that Always make the required reductions in tax at-
indebtedness, the exclusion in situation (2) year. Reduce the NOL or NOL carryover 1 tributes after figuring your tax for the year of the
doesn't apply unless you elect to apply sit- dollar for each dollar of excluded canceled debt cancellation. In making the reductions in
uation (2) instead of the exclusion for quali- debt. (1) and (4) earlier, first reduce the loss for the
fied principal residence indebtedness. tax year of the debt cancellation. Then reduce
2. General business credit carryover. Re- any loss carryovers to that year in the order of
duce the credit carryover to or from the tax the tax years from which the carryovers arose,
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starting with the earliest year. In making the re- solvent when the debt was canceled or, if you 6. Any foreign tax credit carryovers to or from
ductions in (2) and (7) earlier, reduce the credit were insolvent, only to the extent the canceled the tax year of the debt cancellation, multi-
carryovers to the tax year of the debt cancella- debt is more than the amount by which you plied by 3.
tion in the order in which they are taken into ac- were insolvent. This exclusion doesn't apply to
count for that year. a canceled debt excluded from income because Qualified property. This is any property
it relates to your principal residence or it takes you use or hold for use in your trade or business
Electing to reduce the basis of depreciable place in a bankruptcy case. or for the production of income.
property first. You can elect to apply any por-
tion of the excluded canceled debt first to re- Your debt is qualified farm debt if both the Reduction of tax attributes. If you exclude
duce the basis of depreciable property you hold following requirements are met. canceled debt from income under the qualified
at the beginning of the tax year following the tax • You incurred it directly in operating a farm- farm debt rules, you must use the excluded debt
year of the debt cancellation in the following or- ing business. to reduce tax attributes. (If you also excluded
der. • At least 50% of your total gross receipts for canceled debt under the insolvency rules, you
1. Depreciable real property used in your the 3 tax years preceding the year of debt reduce the amount of the tax attributes remain-
trade or business or held for investment cancellation were from your farming busi- ing after reduction for the exclusion allowed un-
that secured the canceled debt. ness. der the insolvency rules.) You must generally
follow the reduction rules previously explained
For more information, see Pub. 4681.
2. Depreciable personal property used in under Bankruptcy and Insolvency. However,
don't follow the rules in (5) under Order of re-
your trade or business or held for invest- Qualified person. This is a person who is ac- duction, earlier. Instead, follow the special rules
ment that secured the canceled debt. tively and regularly engaged in the business of explained next.
3. Other depreciable property used in your lending money. A qualified person includes any
trade or business or held for investment. federal, state, or local government, or any of Special rules for reducing the basis of
their agencies or subdivisions. The USDA is a property. You must use special rules to reduce
4. Real property held as inventory if you elect qualified person. A qualified person doesn't in- the basis of property for excluded canceled
to treat it as depreciable property on Form clude any of the following. qualified farm debt. Under these special rules,
982. • A person related to you. you only reduce the basis of qualified property
The amount you apply can't be more than • A person from whom you acquired the (defined earlier). Reduce it in the following or-
the total adjusted basis of all the depreciable property (or a person related to this per- der.
properties. Depreciable property for this pur- son). 1. Depreciable qualified property. You may
pose means any property subject to deprecia- • A person who receives a fee from your in- elect on Form 982 to treat real property
tion, but only if a reduction of basis will reduce vestment in the property (or a person rela- held as inventory as depreciable property.
the depreciation or amortization otherwise al- ted to this person).
lowable for the period immediately following the For the definition of a related person, see 2. Land that's qualified property and is used
basis reduction. Related persons under At-Risk Amounts in Pub. or held for use in your farming business.
You make this reduction before reducing the 925. 3. Other qualified property.
other tax attributes listed earlier. If the excluded
canceled debt is more than the depreciable ba- Exclusion limit. The amount of canceled Form 982
sis you elect to reduce first, use the difference qualified farm debt you can exclude from in-
to reduce the other tax attributes. In figuring the come is limited. It can't be more than the sum of
limit on the basis reduction in (5) under Order of your adjusted tax attributes and the total adjus- Use Form 982 to show the amounts of canceled
reduction, earlier, use the remaining adjusted ted basis of the qualified property you hold at debt excluded from income and the reduction of
basis of your properties after making this elec- the beginning of the tax year following the tax tax attributes in the order listed on the form.
tion. year of the debt cancellation. Figure this limit af- Also use it if you're electing to apply the exclu-
See Form 982, later, for information on how ter taking into account any reduction of tax at- ded canceled debt to reduce the basis of depre-
to make this election. If you make this election, tributes because of the exclusion of canceled ciable property before reducing tax attributes.
you can revoke it only with the consent of the debt from gross income during insolvency. You make this election by showing the amount
IRS. If the canceled debt is more than this limit, you elect to apply on line 5 of the form.
you must include the difference in gross in- When to file. You must file Form 982 with your
Recapture of basis reductions. If you reduce come. timely filed income tax return (including exten-
the basis of property under these provisions (ei- sions) for the tax year in which the cancellation
ther the election to reduce basis first or the ba- Adjusted tax attributes. Adjusted tax at-
sis reduction without that election) and later sell tributes means the sum of the following items. of debt occurred. If you timely filed your return
for the year without electing to apply the exclu-
or otherwise dispose of the property at a gain, 1. Any NOL for the tax year of the debt can- ded canceled debt to reduce the basis of depre-
the part of the gain due to this basis reduction is cellation and any NOL carryover to that ciable property first, you can still make the elec-
taxable as ordinary income under the deprecia- year. tion by filing an amended return within 6 months
tion recapture provisions. Treat any property of the due date of the return (excluding exten-
that isn't section 1245 or section 1250 property 2. Any general business credit carryover to or
as section 1245 property. For section 1250 from the year of the debt cancellation, mul- sions). For more information, see When To File
property, determine the straight-line deprecia- tiplied by 3. in the Form 982 instructions.
tion adjustments as though there were no basis 3. Any minimum tax credit available at the
reduction for debt cancellation. Sections 1245 beginning of the tax year following the tax
and 1250 property and the recapture of gain as year of the debt cancellation, multiplied by Income From Other
ordinary income are explained in chapter 9. 3. Sources
More information. For more information on 4. Any net capital loss for the tax year of the
debt cancellation in bankruptcy proceedings or debt cancellation and any capital loss car- This section discusses other types of income
during insolvency, see Pub. 908. ryover to that year. you may receive.
5. Any passive activity loss and credit carry- Tax for Certain Children Who Have Un-
Qualified Farm Debt overs from the tax year of the debt cancel- earned Income. If your child was under age 19
lation. Any credit carryover is multiplied by (24 if a full-time student) at the end of the tax
You can exclude from income a canceled debt 3. year and had unearned income of more than
that's qualified farm debt owed to a qualified $1,250 but less than $12,500, this income will
person. This exclusion applies only if you were be taxed at the parent’s tax rate if the parent’s

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tax rate is higher than the child’s rate. For more gain if you held the land for more than 1 tion in income. See chapter 7 for information on
information, see the Instructions for Form 8615. year. See chapter 9. the section 179 expense deduction and when to
recapture that deduction.
Barter income. If you're paid for your work in The contract also contained a provision for a In addition, if the percentage of business
farm products, other property, or services, you temporary workspace (temporary easement) to use of listed property (see chapter 7) falls to
must report as income the fair market value of allow for the collection of topsoil and for equip- 50% or less in any tax year during the recovery
what you receive. The same rule applies if you ment movement. This temporary easement is period, you must include in income any excess
trade farm products for other farm products, only for the construction period (usually a pe- section 179 expense deduction you took on the
property, or someone else's labor. This is called riod of months). The gain is reported on Sched- property.
barter income. For example, if you help a neigh- ule E and does not affect the basis of the land.
Both of these amounts are farm income. Use
bor build a barn and receive a cow for your Easement contracts usually describe Form 4797, Part IV, to figure how much to in-
work, you must report the fair market value of TIP the affected land using square feet. clude in income.
the cow as ordinary income. Your basis for Your basis may be figured per acre.
property you receive in a barter transaction is One acre equals 43,560 square feet. Refund or reimbursement. You must gener-
usually the fair market value that you include in ally include in income a reimbursement, refund,
income. If you pay someone with property, see If construction of the pipeline damaged
Property for services under Labor Hired in growing crops and you later receive a settle- or recovery of an item for which you took a de-
chapter 4. ment of $250 for this damage, the $250 is in- duction in an earlier year. Include it for the tax
come and is included on Schedule F. It doesn't year you receive it. However, if any part of the
Below-market loans. A below-market loan is a affect the basis of your land. earlier deduction didn't decrease your income
tax, you don't have to include that part of the re-
loan on which either no interest is charged or in- imbursement, refund, or recovery.
terest is charged at a rate below the applicable Fuel tax credit and refund. Include any credit
federal rate. If you make a below-market loan, or refund of federal excise taxes on fuels in your
you may have to report income from the loan in gross income if you deducted the cost of the Example. A tenant farmer purchased fertil-
addition to any stated interest you receive from fuel (including excise tax) as an expense that izer for $1,000 in April 2022. He deducted
the borrower. See chapter 1 of Pub. 550 for reduced your income tax. See chapter 14 for $1,000 on his 2022 Schedule F and the entire
more information on below-market loans. more information about fuel tax credits and re- deduction reduced his tax. The landowner reim-
funds. bursed him $500 of the cost of the fertilizer in
February 2023. The tenant farmer must include
Commodity futures and options. See Hedg- $500 in income on his 2023 tax return because
ing in chapter 8 for information on gains and Illegal federal irrigation subsidy. The federal
losses from commodity futures and options government, operating through the Bureau of the entire deduction decreased his 2022 tax.
transactions. Reclamation, has made irrigation water from
certain reclamation and irrigation projects avail- Sale of soil and other natural deposits. If
Custom hire (machine work). Pay you re- able for agricultural purposes. The excess of the you remove and sell topsoil, loam, fill dirt, sand,
ceive for contract work or custom work that you amount required to be paid for water from these gravel, or other natural deposits from your prop-
or your hired help perform off your farm for oth- projects over the amount you actually paid is an erty, the proceeds are ordinary income. A rea-
ers, or for the use of your property or machines, illegal subsidy. sonable allowance for depletion of the natural
deposit sold may be claimed as a deduction.
is income to you whether or not income tax was For example, if the amount required to be See Depletion in chapter 7.
withheld. This rule applies whether you receive paid is full cost and you paid less than full cost,
the pay in cash, services, or merchandise. Re- the difference is an illegal subsidy and you must Sod. Report proceeds from the sale of sod
port this income on Schedule F. If you perform include it in income. Report this on Schedule F, on Schedule F. A deduction for cost depletion is
custom work activities that are more than inci- line 8. You can't take a deduction for the amount allowed, but only for the topsoil removed with
dental to your farming business, include the in- you must include in income. the sod.
come and expenses from the custom work on For more information on reclamation and irri-
Schedule C. gation projects, contact your local Bureau of Granting the right to remove deposits. If
Reclamation. you enter into a legal relationship granting
Easements and rights-of-way. Income you someone else the right to excavate and remove
receive for granting easements or rights-of-way Prizes. Report prizes you win on farm livestock natural deposits from your property, you must
on your farm or ranch for flooding land, laying or products at contests, exhibitions, fairs, etc., determine whether the transaction is a sale or
pipelines, constructing electric or telephone on Schedule F, line 8. If you receive a prize in another type of transaction (for example, a
lines, etc., may result in income, a reduction in cash, include the full amount in income. If you lease).
the basis of all or part of your farmland, or both. receive a prize in produce or other property, in- If you receive a specified sum or an amount
Income you received for granting a tempo- clude the fair market value of the property. For fixed without regard to the quantity produced
rary construction easement is rental income. prizes of $600 or more, you should receive a and sold from the deposit and you retain no
Report the income as rent on Part I of Sched- Form 1099-MISC. economic interest in the deposit, your transac-
ule E (Form 1040). See chapter 12 for information about prizes tion is a sale. You're considered to retain an
related to 4-H Club or FFA projects. See Pub. economic interest if, under the terms of the legal
Example. You granted a permanent 525 for information about other prizes. relationship, you depend on the income derived
right-of-way for a gas pipeline through your from extraction of the deposit for a return of your
property for $10,000. Only a specific part of Property sold, destroyed, stolen, or con- capital investment in the deposit.
your farmland was affected. You reserved the demned. You may have an ordinary or capital Your income from the deposit is capital gain
right to continue farming the surface land after gain if property you own is sold or exchanged; if the transaction is a sale. Otherwise, it's ordi-
the pipe was laid. Treat the payment for the stolen; destroyed by fire, flood, or other casu- nary income subject to an allowance for deple-
right-of-way in one of the following ways. alty; or condemned by a public authority. In tion. See chapter 7 for information on depletion
some situations, you can postpone the tax on and chapter 8 for the tax treatment of capital
1. If the payment is less than the basis prop- the gain to a later year. See chapters 8 through gains.
erly allocated to the part of your land affec- 11.
ted by the right-of-way, reduce the basis by Timber sales. Timber sales, including sales of
$10,000. Recapture of section 179 expense deduc- logs, firewood, and pulpwood, are discussed in
2. If the payment is equal to or more than the tion. If you took a section 179 expense deduc- chapter 8.
basis of the affected part of your land, re- tion for property used in your farming business Tree farmers, in the business of tree
duce the basis to zero and the rest, if any, and at any time during the property's recovery TIP farming, may use section 631(a) to
is gain from a sale. The gain is reported on period you don't use it more than 50% in your capture favorable income tax treatment
Form 4797 and is treated as section 1231 business, you must include part of the deduc- of timber sales and then report the actual cash

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sale of timber on Schedule F. Section 2032A from the sale or other disposition of farm prop- averaging isn't used to determine your regular
defines sale of trees as farm income (under the erty other than land can be designated as EFI if tax or tentative minimum tax when figuring your
special use valuation for estate tax purposes). you (or your partnership or S corporation) used AMT. Using income averaging may reduce your
However, land owners who make frequent sales the property regularly for a substantial period in total tax even if you owe AMT.
(for example, two to three within 5 years, per a farming business. Whether the property has
case law) may use Schedule F to report this been regularly used for a substantial period de- Credit for prior year minimum tax. You may
business income. pends on all the facts and circumstances. be able to claim a nonrefundable tax credit if
you owed AMT in a prior year. See the Instruc-
Liquidation of a farming business. If you tions for Form 8801.
(or your partnership or S corporation) liquidate
Income Averaging for your farming business, gains or losses on prop-
erty sold within a reasonable time after opera- Schedule J
Farmers tions stop can be designated as EFI. A period of
1 year after stopping operations is a reasonable You can use income averaging by filing Sched-
If you're engaged in a farming business, you time. After that, what is a reasonable time de- ule J (Form 1040) with your timely filed (includ-
may be able to average all or some of your farm pends on the facts and circumstances. ing extensions) return for the year. You can also
income by using income tax rates from the 3 use income averaging on a late return, or use,
prior years (base years) to calculate the tax on EFI and base year rates. If your EFI includes change, or cancel it on an amended return if the
that income. Income averaging may lower your both ordinary income and capital gains, you time for filing a claim for refund hasn't expired
income tax liability in a year when farm income must use tax rates from each base year to com- for that election year. You must generally file the
and taxable income are higher compared to 1 or pute tax on an equal portion of each type of in- claim for refund within 3 years from the date you
more of the 3 prior years. See the Instructions come. For example, you can't tax all of the capi- filed your original return or 2 years from the date
for Schedule J (Form 1040) for the definition of tal gains at the rate for capital gains from a you paid the tax, whichever is later.
the term “farming business.” single base year.
Farmers electing farm income averag-
TIP ing may want to include taxable income How To Figure the Tax
from the fair market value (trade value)
of traded farm assets as electable farm income. If you average your farm income, you will figure
Under the Tax Cuts and Jobs Act, personal your tax on Schedule J (Form 1040).
property, such as tractors and equipment, no 4.
longer qualifies for a like-kind exchange and is Negative taxable income for base year. If
now subject to depreciation recapture on the your taxable income for any base year was zero
fair market value of the trade as if cash was ex- because your deductions were more than your
changed. income, you may have negative taxable income Farm Business
for that year to combine with your EFI on
Who can use income averaging? You can Schedule J. Expenses
use income averaging to figure your tax for any
year in which you were engaged in a farming Filing status. You aren't prohibited from using
business as an individual, a partner in a part- income averaging solely because your filing sta-
nership, or a shareholder in an S corporation. tus isn't the same as your filing status in the What's New
Services performed as an employee are disre- base years. For example, if you're married and
garded in determining whether an individual is file jointly, but filed as single in all of the base Standard mileage rate. The standard mileage
engaged in a farming business. However, if years, you may still average farm income. rate for the cost of operating your car, van,
you're a shareholder of an S corporation en- pickup, or panel truck for each mile of business
gaged in a farming business, you may treat Effect on Other Tax use is 65.5 cents per mile. See Truck and Car
compensation received from the corporation Expenses, later.
that's attributable to the farming business as Determinations
Business meals deduction. The temporary
farm income. You don't need to have been en- You subtract your EFI from your taxable income 100% deduction for food or beverages provided
gaged in a farming business in any base year. and add one-third of it to the taxable income of by a restaurant has expired. The business meal
Corporations, partnerships, S corporations, each of the base years to determine the tax rate deduction reverts back to the previous 50% al-
estates, and trusts can't use income averaging. to use for income averaging. The allocation of lowable deduction beginning January 1, 2023.
your EFI to the base years doesn't affect other
Elected Farm Income (EFI) tax determinations. For example, you make the Topics
following determinations before subtracting your This chapter discusses:
EFI is the amount of income from your farming EFI (or adding it to income in the base years).
business that you elect to have taxed at base • The amount of your self-employment tax. • Deductible expenses
year rates. You can designate as EFI any type of • Whether, in the aggregate, sales and other • Capital expenses
income attributable to your farming business. dispositions of business property (section • Nondeductible expenses
However, your EFI can't be more than your taxa- 1231 transactions) produce long-term cap- • Losses from operating a farm
ble income, and any EFI from a net capital gain ital gain or ordinary loss. • Not-for-profit farming
attributable to your farming business can't be • The amount of any NOL carryover or net
more than your total net capital gain. capital loss carryover applied and the
amount of any carryover to another year. Useful Items
Income from your farming business is the • The limit on itemized deductions based on You may want to see:
sum of any farm income or gain minus any farm your adjusted gross income.
expenses or losses allowed as deductions in • The amount of any net capital loss or NOL Publication
figuring your taxable income. However, it in a base year. 463 463 Travel, Gift, and Car Expenses
doesn't include gain or loss from the sale or
other disposition of land, or from the sale of de- 334 334 Tax Guide for Small Business
velopment rights, grazing rights, and other simi- Alternative Minimum Tax
lar rights. (AMT) 587 587 Business Use of Your Home
925 925 Passive Activity and At-Risk Rules
Gains or losses from the sale or other dis- You can elect to use income averaging to com-
position of farm property. Gains or losses pute your regular tax liability. However, income 936 936 Home Mortgage Interest Deduction
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Form (and Instructions) year, but not including farm supplies that 3. A member of your family meets (1) or (2).
Sch A (Form 1040) Sch A (Form 1040) Itemized you would have consumed during the year
Deductions if not for a fire, storm, flood, other casualty, For this purpose, your family includes your
disease, or drought. brothers and sisters, half brothers and half sis-
Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From • Poultry (including egg-laying hens and ters, spouse, parents, grandparents, children,
Farming baby chicks) bought for use (or for both grandchildren, and aunts and uncles and their
461 461 Limitation on Business Losses use and resale) in your farm business. children.
However, include only the amount that Whether or not the deduction limit for
1045 1045 Application for Tentative Refund would be deductible in the following year if ! prepaid farm supplies applies, your ex-
5213 5213 Election To Postpone you had capitalized the cost and deducted CAUTION penses for prepaid livestock feed may
Determination as To Whether the it ratably over the lesser of 12 months or be subject to the rules for advance payment of
Presumption Applies That an the useful life of the poultry. livestock feed, discussed next.
Activity Is Engaged in for Profit • Poultry bought for resale and not resold
during the year.
8990 8990 Limitation on Business Interest
Prepaid Livestock Feed
Expense IRC 163(j) Deduction limit. If you use the cash method of
See chapter 16 for information about getting accounting to report your income and expen- If you report your income and expenses under
publications and forms. ses, your deduction for prepaid farm supplies in the cash method of accounting, you can't de-
the year you pay for them may be limited to 50% duct in the year paid the cost of feed your live-
of your other deductible farm expenses for the stock will consume in a later year unless you
Deductible Expenses year (all Schedule F deductions except prepaid meet all the following tests.
farm supplies). This limit doesn't apply if you
The ordinary and necessary costs of operating meet one of the exceptions described later. See 1. The payment is for the purchase of feed
a farm for profit are deductible business expen- chapter 2 for a discussion of the Cash Method rather than a deposit.
ses. “Ordinary” means what most farmers do, of accounting. 2. The prepayment has a business purpose
and “necessary” means what is useful and help- If the limit applies, you can deduct the ex- and isn't merely for tax avoidance.
ful in farming. Schedule F, Part II, lists some cess cost of farm supplies other than poultry in
common farm expenses that are typically de- the year you use or consume the supplies. The 3. Deducting the prepayment doesn't result
ductible. This chapter discusses many of these excess cost of poultry bought for use (or for in a material distortion of your income.
expenses, as well as others not listed on both use and resale) in your farm business is If you meet all three tests, you can deduct
Schedule F. deductible in the year following the year you pay the prepaid feed, subject to the limit on prepaid
for it. The excess cost of poultry bought for re- farm supplies discussed earlier.
Reimbursed expenses. If the reimbursement sale is deductible in the year you sell or other-
is received in the same year that the expense is wise dispose of that poultry. If you fail any of these tests, you can deduct
claimed, reduce the expense by the amount of the prepaid feed only in the year it is consumed.
the reimbursement. If the reimbursement is re- Example. During 2023, you bought fertilizer
ceived in a year after the expense is claimed, in- ($40,000), feed ($10,000), and seed ($5,000) This rule doesn't apply to the purchase
clude the reimbursement amount in income. for use on your farm in the following year. Your ! of commodity futures contracts.
See Refund or reimbursement under Income total prepaid farm supplies expense for 2023 is CAUTION
From Other Sources in chapter 3. $55,000. Your other deductible farm expenses
totaled $100,000 for 2023. Therefore, your de- Payment for the purchase of feed. Whether
Personal and business expenses. Some ex- duction for prepaid farm supplies can't be more a payment is for the purchase of feed or a de-
penses you pay during the tax year may be part than $50,000 (50% of $100,000) for 2023. The posit depends on the facts and circumstances
personal and part business. These may include excess prepaid farm supplies expense of in each case. It is for the purchase of feed if you
expenses for gasoline, oil, fuel, water, rent, $5,000 ($55,000 − $50,000) is deductible in a can show you made it under a binding commit-
electricity, telephone, automobile upkeep, re- later tax year when you use or consume the ment to accept delivery of a specific quantity of
pairs, insurance, interest, and taxes. supplies. However, the deduction limit doesn't feed at a fixed price and you aren't entitled, by
You must allocate these mixed expenses be- apply if you qualify for the exceptions listed contract or business custom, to a refund or re-
tween their business and personal parts. Gen- next. purchase.
The following are some factors that show a
erally, the personal part of these expenses isn't Exceptions. This limit on the deduction for payment is a deposit rather than for the pur-
deductible. The business portion of the expen- prepaid farm supplies expense doesn't apply if chase of feed.
ses is deductible on Schedule F. you are a farm-related taxpayer and either of the • The absence of specific quantity terms.
following apply.
Example. You paid $3,600 for electricity • The right to a refund of any unapplied pay-
during the tax year. You used / of the electric-1 3 1. Your prepaid farm supplies expense is ment credit at the end of the contract.
ity for personal purposes and / for farming. 2 3 more than 50% of your other deductible • The seller's treatment of the payment as a
Under these circumstances, you can deduct farm expenses because of a change in deposit.
$2,400 ( / of $3,600) of your electricity ex-2 3 business operations caused by unusual • The right to substitute other goods or prod-
pense as a farm business expense. circumstances. ucts for those specified in the contract.
Reasonable allocation. It isn't always easy 2. Your total prepaid farm supplies expense A provision permitting substitution of ingredi-
to determine the business and nonbusiness for the preceding 3 tax years is less than ents to vary the particular feed mix to meet your
parts of an expense. There is no method of allo- 50% of your total other deductible farm ex- livestock's current diet requirements won't sug-
cation that applies to all mixed expenses. Any penses for those 3 tax years. gest a deposit. Further, a price adjustment to re-
flect market value at the date of delivery isn't, by
reasonable allocation is acceptable. What is If one of the exceptions is applicable, then itself, proof of a deposit.
reasonable depends on the circumstances in the 50% limit on the deduction doesn't apply.
each case. Therefore, you can deduct more than 50% of Business purpose. The prepayment has a
prepaid farm supplies. business purpose only if you have a reasonable
Prepaid Farm Supplies You are a farm-related taxpayer if any of the expectation of receiving some business benefit
following tests apply. from prepaying the cost of livestock feed. The
Prepaid farm supplies include the following 1. Your main home is on a farm. following are some examples of business bene-
items if paid for during the year. fits.
• Feed, seed, fertilizer, and similar farm sup- 2. Your principal business is farming. • Fixing maximum prices and securing an
plies not used or consumed during the assured feed supply.
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• Securing preferential treatment in anticipa- A Form W-2 should be issued to the substantial structural parts, or if your expendi-
tion of a feed shortage. TIP child employee. tures adapt your property to a new or different
Other factors considered in determining the use. For example, if you replace a few shingles
existence of a business purpose are whether The fact that your child spends the wages to on the barn roof, these expenses are generally
the prepayment was a condition imposed by the buy clothes or other necessities you normally deductible as repairs and maintenance. If you
seller and whether that condition was meaning- furnish doesn't prevent you from deducting your replace (not repair) the entire barn roof with a
ful. child's wages as a farm expense. new roof, then this expense is generally a capi-
tal expenditure. For more information, see Capi-
The amount of wages paid to the child tal Expenses, later.
No material distortion of income. The fol- ! could cause a loss of the dependency Under certain conditions, you can elect to
lowing are some factors considered in deter- CAUTION exemption depending on how the child
mining whether deducting prepaid livestock uses the money. capitalize amounts paid for repair and mainte-
feed materially distorts income. nance. See Regulations section 1.263(a)-3(n)
• Your customary business practice in con- for more information.
ducting your livestock operations. Spouse as an employee. You can deduct rea-
• The expense in relation to past purchases. sonable wages or other compensation you pay
• The time of year you made the purchase. to your spouse if a true employer-employee re- Interest
• The expense in relation to your income for lationship exists between you and your spouse.
the year. Wages you pay to your spouse are subject to There may be a limit on the amount you can de-
social security and Medicare taxes. For more in- duct as farming business interest paid or ac-
formation, see Family Employees in chapter 13. crued during the tax year related to your farming
Labor Hired business, such as for farm mortgages and other
You can deduct reasonable wages paid for reg- Nondeductible Pay farm obligations. However, a small business
taxpayer is not subject to the business interest
ular farm labor, piecework, contract labor, and expense limitation and is not required to file
other forms of labor hired to perform your farm- You can't deduct wages paid for certain house- Form 8990. A small business taxpayer is a tax-
ing operations. You can pay wages in cash or in hold work, construction work, and maintenance payer that is not a tax shelter (as defined in sec-
noncash items such as inventory, capital as- of your home. However, those wages may be tion 448(d)(3)) and has average annual gross
sets, or assets used in your business. The cost subject to the employment taxes discussed in receipts of $29 million or less for the 3 prior tax
of boarding farm labor is a deductible labor chapter 13. years under the gross receipts test of section
cost. Other deductible costs you incur for farm 448(c). Gross receipts include the aggregate
labor include health insurance, workers' com- Household workers. Do not deduct amounts gross receipts from all persons treated as a sin-
pensation insurance, and other benefits. paid to persons engaged in household work, gle employer, such as a controlled group of cor-
except to the extent their services are used in
If you must withhold social security, Medi- boarding or otherwise caring for farm laborers. porations, commonly controlled partnerships or
care, and income taxes from your employees' proprietorships, and affiliated service groups.
cash wages, you can still deduct the full amount Construction labor. Do not deduct wages The gross receipts test of section 448(c) ap-
of wages before withholding. See chapter 13 for paid to hired help for the construction of new plies only to corporations and partnerships, but
more information on Employment Taxes. Also, buildings or other improvements. These wages for purposes of the business interest limitation
deduct the employer's share of the social secur- are part of the cost of the building or other im- the gross receipts test applies to individuals as
ity and Medicare taxes you must pay on your provement. You must capitalize them. if they were corporations or partnerships. Thus,
employees' wages as a farm business expense any individual with a farming trade or business
on Schedule F, line 29. See Taxes, later. Maintaining your home. If your farm em- operating as a sole proprietorship is subject to
ployee spends time maintaining or repairing the gross receipts test.
Property for services. If you transfer property your home, the wages and employment taxes
to an employee in payment for services, you you pay for that work are nondeductible per- Certain businesses subject to the business
can deduct as wages paid the fair market value sonal expenses. For example, assume you have interest expense limitation may elect out of the
of the property on the date of transfer. If the em- a farm employee for the entire tax year and the limitation. Certain farming businesses and
ployee pays you anything for the property, de- employee spends 5% of the time maintaining specified agricultural or horticultural coopera-
duct as wages the fair market value of the prop- your home. The employee devotes the remain- tives (as defined in section 199A(g)(4)) qualify
erty minus the payment by the employee for the ing time to work on your farm. You can't deduct to make an election not to limit business interest
property. 5% of the wages and employment taxes you expenses. This is an irrevocable election. If you
Treat the wages deducted as an amount re- pay for that employee. make this election, you are required to use the
alternative depreciation system (ADS), dis-
ceived for the property. You may have a gain or cussed later in chapter 7, to depreciate any
loss to report if the property's adjusted basis on Employment Credits farming property with a recovery period of 10
the date of transfer is different from its fair mar- years or more. Also, you are not entitled to the
ket value. Any gain or loss has the same char- Reduce your deduction for wages by the special depreciation allowance for that property.
acter the exchanged property had in your amount of any employment credits you claim For an individual with more than one qualifying
hands. For more information, see chapter 8. such as the work opportunity credit (Form business, the election is made with respect to
5884).
Child as an employee. You can deduct rea- each business. If you are required to limit your
sonable wages or other compensation you pay business interest expense, the amount you can-
to your child for doing farmwork if a true em- Repairs and Maintenance not deduct for the tax year is generally carried
ployer-employee relationship exists between forward to the next tax year. However, there are
you and your child. Include these wages in the You can deduct most expenses for the repair special rules for partnership treatment of disal-
child's income. The child may have to file an in- and maintenance of your farm property. Com- lowed business interest. See the Instructions for
come tax return. These wages may also be sub- mon items of repair and maintenance are re- Form 8990 for more information.
ject to social security and Medicare taxes if your painting, sealing cracks or replacing broken Subject to the preceding rules, and assum-
child is age 18 or older. Wages paid to minor windows on a farm building, and routine mainte- ing other limitations do not apply, you can de-
children become subject to social security and nance of trucks, tractors, and other farm machi- duct as a farm business expense interest paid
Medicare taxes in the month the dependent nery. However, expenses for improvements to or accrued during the tax year related to your
child turns 18 years of age. For more informa- depreciable property are generally capital ex- farming business, such as for farm mortgages
tion, see Family Employees in chapter 13. penditures. Amounts are paid for improvements and other farm obligations.
if they are for the betterment of your property,
are for a restoration of your property, such as Cash method. If you use the cash method of
the replacement of major components and accounting, you can generally deduct interest
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paid during the tax year. You can't deduct inter- fees and allocate them to the cost basis of the and local general sales taxes imposed on the
est paid with funds received from the original calf, foal, etc. For more information on who must purchase of assets for use in your farm busi-
lender through another loan, advance, or other use an accrual method of accounting, see Ac- ness as part of the cost you depreciate. Also
arrangement similar to a loan. You can, how- crual Method Required under Accounting Meth- treat the taxes as part of your cost if they are im-
ever, deduct the interest when you start making ods in chapter 2. posed on the seller and passed on to you.
payments on the new loan. For more informa-
tion, see Cash Method in chapter 2. State and federal income taxes. Individuals
Fertilizer and Lime can't deduct state and federal income taxes as
Prepaid interest. Under the cash method, farm business expenses. Individuals can deduct
you generally can't deduct any interest paid be- You can deduct in the year paid or incurred the state and local income taxes only as an item-
fore the year it is due. Interest paid in advance cost of fertilizer, lime, and other materials ap- ized deduction on Schedule A (Form 1040). For
may be deducted only in the tax year in which it plied to farmland to enrich, neutralize, or condi- tax years after 2017 and before 2026, the
is due. tion it if the benefits last a year or less. You can Schedule A (Form 1040) deduction for com-
also deduct the cost of applying these materials bined state and local income and property taxes
Accrual method. If you use an accrual method in the year you pay or incur it. However, see is limited to $10,000 ($5,000 if married filing
of accounting, you can deduct only interest that Prepaid Farm Supplies, earlier, for a rule that separately). However, you can't deduct federal
has accrued during the tax year. However, you may limit your deduction for these materials. income tax.
can't deduct interest owed to a related person If the benefits of the fertilizer, lime, or other
who uses the cash method until payment is materials last substantially more than 1 year, Highway use tax. You can deduct the federal
made and the interest is includible in the gross you generally capitalize their cost and deduct a use tax on highway motor vehicles paid on a
income of that person. For more information, part each year the benefits last. However, you truck or truck tractor used in your farm business.
see Accrual Method in chapter 2. can choose to deduct these expenses in the For information on the tax itself, including infor-
year paid or incurred. If you make this choice, mation on vehicles subject to the tax, see the
Allocation of interest. If you use the proceeds you will need IRS approval if you later decide to Instructions for Form 2290.
of a loan for more than one purpose, you must capitalize the cost of previously deducted items.
allocate the interest on that loan to each use. If you sell farmland on which fertilizer or lime Self-employment tax. You cannot deduct the
Allocate the interest to the following categories. has been applied and if the selling price of the self-employment tax you pay as a farm busi-
• Trade or business interest. land includes part or all of the cost of the fertil- ness expense. However, you can deduct as an
• Passive activity interest. izer or lime, you report the sale amount attribut- adjustment to income on Schedule 1 (Form
• Investment interest. able to the fertilizer or lime as ordinary income. 1040), line 15, one-half of your self-employment
• Portfolio interest. See section 180 for more information. tax in figuring your adjusted gross income. For
• Personal interest. more information, see chapter 12.
You generally allocate interest on a loan the Farmland, for these purposes, is land used
same way you allocate the loan proceeds. You for producing crops, fruits, or other agricultural
allocate loan proceeds by tracing disburse- products or for sustaining livestock. It doesn't in- Insurance
ments to specific uses. clude land you have never used previously for
producing crops or sustaining livestock. You You can generally deduct the ordinary and nec-
The easiest way to trace disburse- can't deduct initial land preparation costs. (See essary cost of insurance for your farm business
TIP ments to specific uses is to keep the Capital Expenses, later.) as a business expense. This includes premiums
proceeds of a particular loan separate you pay for the following types of insurance.
from any other funds. Include government payments you receive
for lime or fertilizer in income. See Fertilizer and • Fire, storm, crop, theft, liability, and other
Secured loan. The allocation of loan pro- Lime under Agricultural Program Payments in insurance on farm business assets.
ceeds and the related interest is generally not chapter 3. • Health and accident insurance on your
farm employees.
affected by the use of property that secures the • Workers' compensation insurance set by
loan. Taxes state law that covers any claims for job-re-
lated bodily injuries or diseases suffered by
Example. You secure a loan with property You can deduct as a farm business expense the employees on your farm, regardless of
used in your farming business. You use the loan real estate and personal property taxes on farm fault.
proceeds to buy a car for personal use. You business assets, such as farm equipment, ani- • Business interruption insurance.
must allocate interest expense on the loan to mals, farmland, and farm buildings. You can • State unemployment insurance on your
personal use (purchase of the car) even though also deduct the social security and Medicare farm employees (deductible as taxes if
the loan is secured by farm business property. taxes you pay to match the amount withheld they are considered taxes under state law).
from the wages of farm employees and any fed-
Allocation period. The period for which a eral unemployment tax you pay. For information Insurance to secure a loan. If you take out a
loan is allocated to a particular use begins on on employment taxes, see chapter 13. policy on your life or on the life of another per-
the date the proceeds are used and ends on the son with a financial interest in your farm busi-
earlier of the following dates. Allocation of taxes. The taxes on the part of ness to get or protect a business loan, you can't
• The date the loan is repaid. your farm you use as your home (including the deduct the premiums as a business expense. In
• The date the loan is reallocated to another furnishings and surrounding land not used for the event of death, the proceeds of the policy
use. farming) are nonbusiness taxes. You may be aren't taxed as income even if they are used to
able to deduct these nonbusiness taxes as liquidate the debt.
More information. For more information on in- itemized deductions on Schedule A (Form
terest, see chapter 8 of Pub. 334. 1040). To determine the nonbusiness part, allo- Advance premiums. Deduct advance pay-
cate the taxes between the farm assets and ments of insurance premiums only in the year to
Breeding Fees nonbusiness assets. The allocation can be which they apply, regardless of your accounting
done from the assessed valuations. If your tax method.
You can generally deduct breeding fees as a statement doesn't show the assessed valua-
farm business expense. However, if the breeder tions, you can usually get them from the tax as- Example. On June 29, 2023, you paid a
guarantees live offspring as a result of the sessor. premium of $3,000 for fire insurance on your
breeding or other veterinary procedure, you barn. The policy will cover a period of 3 years
must capitalize these costs as the cost basis of State and local general sales taxes. State beginning on July 1, 2023. Only the cost for the
the offspring. Also, if you use an accrual method and local general sales taxes on nondeprecia- 6 months in 2023 is deductible as an insurance
of accounting, you must capitalize breeding ble farm business expense items are deductible expense on your 2023 calendar year tax return.
as part of the cost of those items. Include state Deduct $500, which is the premium for 6
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months of the 36-month premium period, or /6 36 these payments as rent, but capitalize the cost Depreciation
of $3,000. In both 2024 and 2025, deduct of the property and recover this cost through
$1,000 ( / of $3,000). Deduct the remaining 12 36 depreciation. If property you acquire to use in your farm busi-
$500 in 2026. Had the policy been effective on ness is expected to last more than 1 year, you
January 1, 2023, the deductible expense would Conditional sales contract. Whether an generally can't deduct the entire cost in the year
have been $1,000 for each of the years 2023, agreement is a conditional sales contract de- you acquire it. You must recover the cost over
2024, and 2025, based on one-third of the pre- pends on the intent of the parties. Determine more than 1 year and deduct part of it each year
mium used each year. intent based on the provisions of the agreement on Schedule F as depreciation or amortization.
and the facts and circumstances that exist when However, you can choose to deduct part or all
Business interruption insurance. Use and you make the agreement. No single test, or spe- of the cost of certain qualifying property, up to a
occupancy and business interruption insurance cial combination of tests, always applies. How- limit, as a section 179 deduction or special de-
premiums are deductible as a business ex- ever, in general, an agreement may be consid- preciation in the year you place it in service.
pense. This insurance pays for lost profits if ered a conditional sales contract rather than a
your business is shut down due to a fire or other lease if any of the following is true. Depreciation, amortization, and the section
cause. Report any proceeds in full on Sched- • The agreement applies part of each pay- 179 deduction are discussed in chapter 7.
ule F, Part I. ment toward an equity interest you will re-
ceive.
Self-employed health insurance deduction. • You get title to the property after you make Business Use of Your Home
If you are self-employed, you can deduct as an a stated amount of required payments.
adjustment to income on Schedule 1 (Form • The amount you must pay to use the prop- You can deduct expenses for the business use
1040) your payments for medical, dental, and erty for a short time is a large part of the of your home if you use part of your home exclu-
qualified long-term care insurance coverage for amount you would pay to get title to the sively and regularly:
yourself (including Medicare premiums), your property. • As the principal place of business for any
spouse, and your dependents when figuring • You pay much more than the current fair trade or business in which you engage;
your adjusted gross income on your Schedule 1 rental value of the property. • As a place to meet or deal with patients,
(Form 1040). The insurance can also cover any • You have an option to buy the property at a clients, or customers in the normal course
child of yours under age 27 at the end of 2023, nominal price compared to the value of the of your trade or business; or
even if the child was not your dependent. Gen- property when you may exercise the op- • In connection with your trade or business,
erally, this deduction can't be more than the net tion. Determine this value when you make if you are using a separate structure that
profit from the business under which the plan the agreement. isn't attached to your home.
was established. • You have an option to buy the property at a Your home office will qualify as your princi-
If you or your spouse is also an employee of nominal price compared to the total pal place of business for deducting expenses
another person, you can't take the deduction for amount you have to pay under the agree- for its use if you meet both of the following re-
any month in which you are eligible to partici- ment. quirements.
pate in a subsidized health plan maintained by • The agreement designates part of the pay- You use it exclusively and regularly for the
your employer or your spouse's employer. ments as interest, or part of the payments •
Generally, use the Self-Employed Health In- can be easily recognized as interest. administrative or management activities of
your trade or business.
surance Deduction Worksheet in the Instruc- • You have no other fixed location where you
tions for Schedule 1 (Form 1040) to figure your Example. You lease new farm equipment
deduction. Include the remaining part of the in- from a dealer who both sells and leases. The conduct substantial administrative or man-
surance payment in your medical expenses on agreement includes an option to purchase the agement activities of your trade or busi-
Schedule A (Form 1040) if you itemize your de- equipment for a specified price. The lease pay- ness.
ductions. ments and the specified option price equal the If you use part of your home for business,
For more information, see Deductible Premi- sales price of the equipment plus interest. Un- you must divide the expenses of operating your
ums in chapter 8 of Pub. 334. der the agreement, you are responsible for home between personal and business use.
maintenance, repairs, and the risk of loss. For
federal income tax purposes, the agreement is The IRS now provides a simplified method
Rent and Leasing a conditional sales contract. You can't deduct to determine your expenses for business use of
any of the lease payments as rent. You can de- your home. For more information, see Pub. 587.
If you lease property for use in your farm busi- duct interest, repairs, insurance, depreciation,
ness, you can generally deduct the rent you pay and other expenses related to the equipment. Deduction limit. If your gross income from
on Schedule F. However, you can't deduct rent farming equals or exceeds your total farm ex-
you pay in crop shares if you deduct the cost of Motor vehicle leases. Special rules apply to penses (including expenses for the business
raising the crops as farm expenses. lease agreements that have a terminal rental use of your home), you can deduct all your farm
adjustment clause. In general, this is a clause expenses. But if your gross income from farm-
Advance payments. Deduct advance pay- that provides for a rental price adjustment ing is less than your total farm expenses, your
ments of rent only in the year to which they ap- based on the amount the lessor is able to sell deduction for certain expenses for the use of
ply, regardless of your accounting method. the vehicle for at the end of the lease. If your your home in your farming business is limited.
rental agreement contains a terminal rental ad- Your deduction for otherwise nondeductible
Farm home. If you rent a farm, don't deduct justment clause, treat the agreement as a lease expenses, such as utilities, insurance, and de-
the part of the rental expense that represents if the agreement otherwise qualifies as a lease. preciation (with depreciation taken last), can't
the fair rental value of the farm home in which For more information, see section 7701(h). be more than the gross income from farming mi-
you live. nus the following expenses.
Leveraged leases. Special rules apply to • The business part of expenses you could
Lease or Purchase leveraged leases of equipment (arrangements deduct even if you didn't use your home for
in which the equipment is financed by a nonre- business (such as deductible mortgage in-
course loan from a third party). For more infor- terest, real estate taxes, and casualty and
If you lease a farm building or equipment, you mation, see Revenue Procedure 2001-28, theft losses).
must determine whether or not the agreement which begins on page 1156 of Internal Revenue • Farm expenses other than expenses that
must be treated as a conditional sales contract Bulletin 2001-19 at IRS.gov/pub/irs-irbs/ relate to the use of your home. If you are
rather than a lease. If the agreement is treated irb01-19.pdf. self-employed, don't include your deduc-
as a conditional sales contract, the payments
under the agreement (so far as they don't repre- tion for half of your self-employment tax.
sent interest or other charges) are payments for Deductions over the current year's limit can
the purchase of the property. Do not deduct be carried over to your next tax year. They are
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subject to the deduction limit for the next tax able to claim more. See Recordkeeping require- You should keep an account book or similar
year. ments under Travel Expenses, later. record, supported by adequate documentary
evidence, such as receipts, that together sup-
More information. See Pub. 587 for more in- More information. For more information on port each element of an expense. Generally, it is
formation on deducting expenses for the busi- deductible truck and car expenses and disposi- best to record the expense and get documenta-
ness use of your home. tion of truck or car in reference, see chapter 4 of tion of it at the time you pay it.
Pub. 463. If you pay your employees for the use
Telephone expense. You can't deduct the cost of their truck or car in your farm business, see If you choose to deduct a standard meal al-
of basic local telephone service (including any Reimbursements to employees under Travel Ex- lowance rather than the actual expense, you
taxes) for the first telephone line you have in penses next. don't have to keep records to prove amounts
your home, even if you have an office in your spent for meals and incidental items. However,
home. However, charges for business long-dis- you must still keep records to prove the actual
tance phone calls on that line, as well as the Travel Expenses amount of other travel expenses, and the time,
cost of a second line into your home used ex- place, and business purpose of your travel.
clusively for your farm business, are deductible You can deduct ordinary and necessary expen-
business expenses. Cell phone charges for ses you incur while traveling away from home More information. For detailed information on
calls relating to your farm business are deducti- for your farm business. You can't deduct lavish travel, recordkeeping, and the standard meal al-
ble. If the cell phone you use for your farm busi- or extravagant expenses. Usually, the location lowance, see Pub. 463.
ness is part of a family cell phone plan, you of your farm business is considered your home
must allocate and deduct only the portion of the for tax purposes. You are traveling away from Reimbursements to employees. You can
charges attributable to farm business calls. home if: generally deduct reimbursements you pay to
• Your duties require you to be absent from your employees for travel and transportation ex-
your farm substantially longer than an ordi- penses they incur in the conduct of your busi-
Truck and Car Expenses nary workday, and ness. Employees may be reimbursed under an
• You need to get sleep or rest to meet the accountable or nonaccountable plan. Under an
You can deduct the actual cost of operating a demands of your work while away from accountable plan, the employee must provide
truck or car in your farm business. Only expen- home. evidence of expenses. Under a nonaccountable
ses for business use are deductible. These in- plan, no evidence of expenses is required. If
clude such items as gasoline, oil, repairs, li- If you meet these requirements and can you reimburse expenses under an accountable
cense tags, insurance, and depreciation prove the time, place, and business purpose of plan, deduct them as travel and transportation
(subject to certain limits). your travel, you can deduct your ordinary and expenses. If you reimburse expenses under a
necessary travel expenses. nonaccountable plan, you must report the reim-
Standard mileage rate. Instead of using ac- bursements as wages on Form W-2 and deduct
tual costs, under certain conditions you can use The following are some types of deductible them as wages. For more information, see
the standard mileage rate. The standard mile- travel expenses. chapter 8 of Pub. 334.
age rate for 2023 is 65.5 cents per mile. You • Air, rail, bus, and car transportation.
can use the standard mileage rate for a car or a • Meals and lodging.
light truck, such as a van, pickup, or SUV, you • Dry cleaning and laundry. Marketing Quota Penalties
own or lease. • Telephone and fax.
You can't use the standard mileage rate if • Transportation between your hotel and You can deduct as Other expenses on Sched-
you operate five or more cars or light trucks at your temporary work or business meeting ule F penalties you pay for marketing crops in
the same time. You aren't using five or more ve- location. excess of farm marketing quotas. However, if
hicles at the same time if you alternate using the • Tips for any of the above expenses. you don't pay the penalty, but instead the pur-
vehicles (you use them at different times) for chaser of your crop deducts it from the payment
business. Meals. You can deduct only 50% of your non- to you, include in gross income only the amount
entertainment business-related meal expenses. you received. Do not take a separate deduction
Example. You own a car and four pickup You can deduct the cost of your meals while for the penalty.
trucks that are used in your farm business. Your traveling on business only if your business trip is
farm employees use the trucks and you use the overnight or long enough to require you to stop
car for business. You can't use the standard for sleep or rest to properly perform your duties. Tenant House Expenses
mileage rate for the car or the trucks. This is be- You can't deduct any of the cost of meals if it
cause all five vehicles are used in your farm isn't necessary for you to rest. For information You can deduct the costs of maintaining houses
business at the same time. You must use actual on entertainment expenses, see chapter 2 of and their furnishings for tenants or hired help as
expenses for all vehicles. Pub. 463. farm business expenses. These costs include
The expense of a meal includes amounts repairs, utilities, insurance, and depreciation.
Business use percentage. You can claim you spend for your food, beverages, taxes, and The value of a dwelling you furnish to a ten-
75% of the use of a car or light truck as busi- tips relating to the meal. You can deduct either ant under the usual tenant-farmer arrangement
ness use without any allocation records if you 50% of the actual cost or 50% of a standard isn't taxable income to the tenant.
used the vehicle during most of the normal busi- meal allowance that covers your daily meal and
ness day directly in connection with the busi- incidental expenses.
ness of farming. You choose this method of Items Purchased for Resale
substantiating business use the first year the Note. No deduction is allowed for certain
vehicle is placed in service. Once you make this entertainment expenses, membership dues, If you use the cash method of accounting, you
choice, you may not change to another method and facilities used in connection with these ac- ordinarily deduct the cost of livestock and other
later. The following are uses directly connected tivities for amounts paid or incurred after De- items purchased for resale only in the year of
with the business of farming. cember 31, 2017. See section 274, as amen- sale. You deduct this cost, including freight
• Cultivating land. ded by the Tax Cuts and Jobs Act, section charges for transporting the livestock to the
• Raising or harvesting any agricultural or 13304. farm, on Schedule F, Part I. However, see
horticultural commodity. Chickens, seeds, and young plants below.
• Raising, shearing, feeding, caring for, train- Recordkeeping requirements. You
ing, and managing animals. must be able to prove your deductions Example. You use the cash method of ac-
• Driving to the feed or supply store. RECORDS for travel by adequate records or other
counting. In 2023, you buy 50 steers you will
evidence that will support your own statement. sell in 2024. You can't deduct the cost of the
If you keep records and they show that your Estimates or approximations don't qualify as steers on your 2023 tax return. You deduct their
business use was more than 75%, you may be proof of an expense. cost on your 2024 Schedule F, Part I.
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Chickens, seeds, and young plants. If you (1) paid, if you use the cash method of account- • Business start-up costs. (See Business
are a cash method farmer, you can deduct the ing; or (2) incurred, if you use an accrual start-up and organizational costs, later.)
cost of hens and baby chicks bought for com- method of accounting. • Forestation and reforestation costs. (See
mercial egg production, or for raising and re- • Accounting fees. Forestation and reforestation costs, later.)
sale, as an expense on Schedule F, Part I, in the • Advertising. Generally, the costs of the following items,
year paid if you do it consistently and it doesn't • Business travel and meals. including the costs of material, hired labor, and
distort income. You can also deduct the cost of • Commissions. installation, are capital expenses.
seeds and young plants bought for further de- • Consultant fees.
velopment and cultivation before sale as an ex- • Crop scouting expenses. 1. Land and buildings.
pense on Schedule F, Part I, when paid if you do • Dues to cooperatives. 2. Additions, alterations, and improvements
this consistently and you don't figure your in- • Educational expenses (to maintain and im- to buildings, etc.
come on the crop method. However, see Pre- prove farming skills).
paid Farm Supplies, earlier, for a rule that may • Farm-related attorney fees. 3. Cars and trucks.
limit your deduction for these items. • Farm magazines. 4. Equipment and machinery.
If you deduct the cost of chickens, seeds, • Ginning.
and young plants as an expense, report their • Insect sprays and dusts. 5. Fences.
entire selling price as income. You also can't de- • Litter and bedding. 6. Draft, breeding, sport, and dairy livestock.
duct the cost from the selling price. • Livestock fees.
You can't deduct the cost of seeds and • Marketing fees. 7. Repairs to machinery, equipment, trucks,
young plants for Christmas trees and timber as • Milk assessment. and cars that prolong their useful life, in-
an expense. Capitalize the cost of these seeds • Recordkeeping expenses. crease their value, or adapt them to differ-
and plants, and later deduct, through depletion. • Service charges. ent use.
For more information, see Depletion in chap- • Small tools expected to last 1 year or less. 8. Water wells, including drilling and equip-
ter 7. • Stamps and stationery. ping costs.
The cost of chickens and plants used as • Subscriptions to professional, technical,
food for your family is never deductible. and trade journals that deal with farming. 9. Land preparation costs, such as:
Capitalize the cost of plants with a prepro- • Tying material and containers. a. Clearing land for farming;
ductive period of more than 2 years, unless you • Utilities and Internet
b. Leveling and conditioning land;
can elect out of the uniform capitalization rules.
These rules are discussed in chapter 6. De minimis safe harbor for tangible prop- c. Purchasing and planting trees;
erty. If you elected to use the de minimis safe
Example. You use the cash method of ac- harbor for tangible property for the tax year, you d. Building irrigation canals and ditches;
counting. In 2023, you buy 500 baby chicks to can deduct as a farm business expense on e. Laying irrigation pipes;
raise for resale in 2024. You also buy 50 bush- Schedule F amounts paid for tangible property
els of winter wheat seed in 2023 that you sow in qualifying under the de minimis safe harbor. For f. Installing drain tile;
the fall. Unless you previously adopted the more information, see Capital Expenses, later. g. Modifying channels or streams;
method of deducting these costs in the year you h. Constructing earthen, masonry, or
sell the chickens or the harvested crops, you Loan expenses. You prorate and deduct loan
can deduct the cost of both the baby chicks and expenses, such as legal fees and commissions, concrete tanks, reservoirs, or dams;
the seed wheat in 2023. you pay to get a farm loan over the term of the and
loan. i. Building roads.
Election to use crop method. If you use
the crop method, you can delay deducting the Tax preparation fees. You can deduct as a Business start-up and organizational costs.
cost of seeds and young plants until you sell farm business expense on Schedule F the cost You can elect to deduct up to $5,000 of busi-
them. You must get IRS approval to use the of preparing that part of your tax return relating ness start-up costs and $5,000 of organiza-
crop method. If you follow this method, deduct to your farm business. tional costs paid or incurred after October 22,
the cost from the selling price to determine your You can also deduct on Schedule F the 2004. The $5,000 deduction is reduced by the
profit on Schedule F, Part I. For more informa- amount you pay or incur in resolving tax issues amount your total start-up or organizational
tion, see Crop method under Special Methods relating to your farm business. costs exceed $50,000. Any remaining costs
of Accounting in chapter 2. must be amortized. See chapter 7 for more in-
Choosing a method. You can adopt either formation.
the crop method or the cash method for deduct- Capital Expenses You elect to deduct start-up or organiza-
ing the cost in the first year you buy egg-laying tional costs by claiming the deduction on the in-
hens, pullets, chicks, or seeds and young A capital expense is payment, or debt incurred, come tax return filed by the due date (including
plants. for the acquisition, production, or improvement extensions) for the tax year in which the active
Although you must use the same method for of a unit of property. You include the expense in trade or business begins. However, if you timely
egg-laying hens, pullets, and chicks, you can the basis of the asset. Uniform capitalization filed your return for the year without making the
use a different method for seeds and young rules also require you to capitalize or include in election, you can still make the election by filing
plants. Once you use a particular method for inventory certain other expenses. See chapters an amended return within 6 months of the due
any of these items, use it for those items until 2 and for more information.6 date of the return (excluding extensions).
you get IRS approval to change your method. Capital expenses are generally not deducti- Clearly indicate the election on your amended
For more information, see Change in Account- ble, but they may be depreciable. However, you return and write “Filed pursuant to section
ing Method in chapter 2. can elect to deduct certain capital expenses, 301.9100-2” at the top of the amended return.
such as the following. File the amended return at the same address
Other Expenses • The cost of fertilizer, lime, etc. (See Fertil- you filed the original return. The election applies
izer and Lime under Deductible Expenses, when figuring taxable income for the current tax
The following list, while not all-inclusive, shows earlier.) year and all subsequent years.
some expenses you can deduct as other farm • Soil and water conservation expenses. You can choose to forgo the election by
expenses on Schedule F, Part II. These expen- (See chapter 5.) clearly electing to capitalize your start-up or or-
ses must be for business purposes and • The cost of property that qualifies for a de- ganizational costs on an income tax return filed
duction under section 179. (See chap- by the due date (including extensions) for the
ter 7.) tax year in which the active trade or business
begins. For more information about start-up and
organizational costs, see chapter 7.
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Exception for tangible real and personal income tax return filed by the due date (includ- Personal, Living, and Family
property under the de minimis safe harbor. ing extensions) for the tax year in which the ex-
If you elect the de minimis safe harbor for your penses were paid or incurred. If you are filing Expenses
farming business for the tax year, you’re not re- Form T (Timber), Forest Activities Schedule,
quired to capitalize the de minimis costs of ac- also complete Form T (Timber), Part IV. If you You can't deduct certain personal, living, and
quiring or producing certain real and tangible aren't filing Form T (Timber), attach a statement family expenses as business expenses. These
personal property and may deduct these to your return with the following information. include rent and insurance premiums paid on
amounts as farm expenses on Schedule F. For • The unique stand identification numbers. property used as your home; life insurance pre-
more information on electing and using the de • The total number of acres reforested dur- miums on yourself or your family; the cost of
minimis safe harbor, see chapter 8 of Pub. 334. ing the tax year. maintaining cars, trucks, or horses for personal
• The nature of the reforestation treatments. use; allowances to minor children; attorneys'
Crop production expenses. The uniform cap- • The total amounts of the qualified refores- fees and legal expenses incurred in personal
italization rules generally require you to capital- tation expenditures eligible to be amortized matters; and household expenses. Likewise,
ize expenses incurred in producing plants. How- or deducted. the cost of purchasing or raising produce or
livestock consumed by you or your family isn't
ever, except for certain taxpayers required to However, if you timely filed your return for deductible.
use an accrual method of accounting, the capi- the year without making the election, you can
talization rules don't apply to plants with a pre- still make the election by filing an amended re-
productive period of 2 years or less. For more turn within 6 months of the due date of the re- Other Nondeductible Items
information, see Uniform Capitalization Rules in turn (excluding extensions). Clearly indicate the
chapter 6. election on your amended return and write You can't deduct the following items on your tax
Timber. Capitalize the cost of acquiring timber. “Filed pursuant to section 301.9100-2” at the return.
Do not include the cost of land in the cost of the top of the amended return. File the amended re-
timber. You must generally capitalize direct turn at the same address you filed the original Loss of growing plants, produce, and
costs incurred in reforestation. However, you return. crops. Losses of plants, produce, and crops
can elect to deduct some forestation and refor- For more information about forestation and raised for sale are generally not deductible.
estation costs. See Forestation and reforesta- reforestation costs, see chapter 7. However, you may have a deductible loss on
tion costs next. Reforestation costs include the For more information about timber, the plants with a preproductive period of more than
following. Agriculture Handbook Number 731, 2 years. See chapter 11 for more information.
1. Site preparation costs, such as: Form T (Timber), and the Hardwood
Industry Audit Technique Guide. Repayment of loans. You can't deduct the re-
a. Girdling, payment of a loan. However, if you use the pro-
ceeds of a loan for farm business expenses,
b. Applying herbicide, Christmas tree cultivation. If you are in the you can deduct the interest on the loan. See In-
business of planting and cultivating Christmas terest, earlier.
c. Baiting rodents, and trees to sell when they are more than 6 years
d. Clearing and controlling brush. old, capitalize expenses incurred for planting Estate, inheritance, legacy, succession, and
and stump culture and add them to the basis of gift taxes. You can't deduct estate, inheritance,
2. The cost of seed or seedlings. the standing trees. Recover these expenses as legacy, succession, and gift taxes.
3. Labor and tool expenses. part of your adjusted basis when you sell the
standing trees or as depletion allowances when Loss of livestock. You can't deduct as a loss
4. Depreciation on equipment used in plant- you cut the trees. For more information, see the value of raised livestock that die if you de-
ing or seeding. Timber Depletion under Depletion in chapter 7. ducted the cost of raising them as an expense.
5. Costs incurred in replanting to replace lost You can deduct as business expenses the
seedlings. costs incurred for shearing and basal pruning of Losses from sales or exchanges between
these trees. Expenses incurred for silviculture related persons. You can't deduct losses from
You can choose to capitalize certain indirect re- practices, such as weeding or cleaning, and sales or exchanges of property between you
forestation costs. noncommercial thinning are also deductible as and certain related persons, including your
These capitalized amounts are your basis business expenses. spouse, brother, sister, ancestor, or lineal de-
for the timber. Recover your basis when you sell Capitalize the cost of land improvements, scendant. For more information, see chapter 2
the timber or take depletion allowances when such as road grading, ditching, and fire breaks, of Pub. 544.
you cut the timber. See Depletion in chapter 7. that have a useful life beyond the tax year. If the
Forestation and reforestation costs. You improvements don't have a determinable useful Cost of raising unharvested crops. You
can elect to deduct up to $10,000 ($5,000 if life, add their cost to the basis of the land. The can't deduct the cost of raising unharvested
married filing separately; $0 for a trust) of quali- cost is recovered when you sell or otherwise crops sold with land owned more than 1 year if
fying reforestation costs paid or incurred after dispose of it. If the improvements have a deter- you sell both at the same time and to the same
October 22, 2004, for each qualified timber minable useful life, recover their cost through person. Add these costs to the basis of the land
property. Any remaining costs can be amortized depreciation. Capitalize the cost of equipment to determine the gain or loss on the sale. For
over an 84-month period. See chapter 7. If you and other depreciable assets, such as culverts more information, see Section 1231 Gains and
make an election to deduct or amortize qualify- and fences, to the extent you don't use them in Losses in chapter 9.
ing reforestation costs, you should create and planting Christmas trees. Recover these costs
maintain separate timber accounts for each through depreciation. Cost of unharvested crops bought with
land. Capitalize the purchase price of land, in-
qualified timber property. The accounts should cluding the cost allocable to unharvested crops.
include all reforestation treatments and the You can't deduct the cost of the crops at the
dates they were applied. Any qualified timber Nondeductible time of purchase. However, you can deduct this
property that is subject to the deduction or am- cost in figuring net profit or loss in the tax year
ortization election can't be included in any other Expenses
you sell the crops.
timber account for which depletion is allowed.
The timber account should be maintained until You can't deduct personal expenses and certain
the timber is disposed of. For more information, other items on your tax return even if they relate Cost related to gifts. You can't deduct costs
see Notice 2006-47, 2006-20 I.R.B. 892, availa- to your farm. related to your gifts of agricultural products or
property held for sale in the ordinary course of
ble at IRS.gov/irb/2006-20_IRB/ar11.html. your business. The costs aren't deductible in
You elect to deduct forestation and refores- the year of the gift or any later year. For exam-
tation costs by claiming the deduction on the ple, you can't deduct the cost of raising cattle or

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the cost of planting and raising unharvested year, you may have a net operating loss. See Taxpayers with losses from a farming busi-
wheat on parcels of land given as a gift to your Pub. 536. ness must apply the excess business loss limi-
children. tation before carrying any net operating losses
If you don't carry on your farming activ- back 2 years. See the Instructions for Form
Club dues and membership fees. Generally, ! ity to make a profit, your loss deduction 1045, Application for Tentative Refund.
you can't deduct amounts you pay or incur for CAUTION may be limited by the not-for-profit
membership in any club organized for business, rules. See Not-for-Profit Farming, later. If you incur both farming and nonfarming
pleasure, recreation, or any other social pur- business losses that are more than the thresh-
pose. This includes country clubs, golf and ath- old amount you must allocate the threshold
letic clubs, hotel clubs, sporting clubs, airline At-Risk Limits amount first to the farming losses to the extent
you have a net operating loss.
clubs, and clubs operated to provide meals un- The at-risk rules limit your deduction for losses
der circumstances generally considered to be from most business or income-producing activi- Excess farm losses that are disallowed can
conducive to business discussions. ties, including farming. These rules limit the los- be carried forward to the next tax year and trea-
Exception. The following organizations ses you can deduct when figuring your taxable ted as a net operating loss deduction from that
won't be treated as a club organized for busi- income. The deductible loss from an activity is year.
ness, pleasure, recreation, or other social pur- limited to the amount you have at risk in the ac-
poses, unless one of its main purposes is to tivity.
conduct entertainment activities for members or You are at risk in any activity for: Net Operating Loss
their guests or to provide members or their
guests with access to entertainment facilities. 1. The money and adjusted basis of property Limitation
• Boards of trade. you contribute to the activity; and
If you have a 2023 net operating loss attributa-
• Business leagues. 2. Amounts you borrow for use in the activity ble to farming, you must carry it back two years,
• Chambers of commerce. if: unless you elect to forgo the carryback. Farming
• Civic or public service organizations.
• Professional associations. a. You are personally liable for repay- businesses can elect to forgo the carryback and
• Trade associations. ment, or carry forward the farm net operating loss to a
later year. See the Instructions for Form 1045 or
• Real estate boards. b. You pledge property (other than prop- Form 1138 for more information.
erty used in the activity) as security for
Fines and penalties. Generally, no deduction the loan.
is allowed for fines and penalties paid to a gov-
ernment or specified nongovernmental entity for You aren't at risk, however, for amounts you Not-for-Profit Farming
the violation of any law except: borrow for use in a farming activity from a per-
• Amounts that constitute restitution, son who has an interest in the activity (other If you operate a farm for profit, you can deduct
• Amount paid to come into compliance with than as a creditor) or a person related to some- all the ordinary and necessary expenses of car-
the law, one (other than you) having such an interest. rying on the business of farming on Schedule F.
• Amounts paid or incurred as the result of However, if you don't carry on your farming ac-
certain court orders in which no govern- For more information, see Pub. 925. tivity, or other activity you engage or invest in, to
ment or specified non-governmental make a profit, you report the income from the
agency is a party, and Passive Activity Limits activity on Schedule 1 (Form 1040), line 8i. You
• Amounts paid or incurred for taxes due. can no longer deduct expenses of carrying on
A passive activity is generally any activity involv- the activity, even if you itemize your deductions
On or after December 22, 2017, no deduc- ing the conduct of any trade or business in on Schedule A (Form 1040).
tion is allowed for the restitution amount or which you don't materially participate. Gener-
amount paid to come into compliance with the ally, a rental activity is a passive activity. Expenses for activities you do as a hobby, or
law unless the amounts are specifically identi- mainly for sport or recreation can not be deduc-
fied in the settlement agreement or court order. If you have a passive activity, special rules ted. This also applies to an investment activity
Also, any amount paid or incurred as reimburse- limit the loss you can deduct in the tax year. You intended only to produce tax losses for the in-
ment to the government for the costs of any in- can generally deduct losses from passive activi- vestors.
vestigation or litigation are not eligible for the ties only up to income from passive activities.
exceptions and are nondeductible. Credits are similarly limited. The deductibility of not-for-profit losses ap-
plies to individuals, partnerships, estates, trusts,
See section 162(f), as amended by the Tax For more information, see Pub. 925. and S corporations. It doesn't apply to corpora-
Cuts and Jobs Act, section 13306. tions other than S corporations.
For the deductibility of penalites for exceed- Excess Business Loss In determining whether you are carrying on
ing marketing quotas, see Marketing Quota Limitation your farming activity for profit, all the facts are
Penalties, discussed earlier. taken into account. No one factor alone is deci-
Noncorporate taxpayers may be subject to ex- sive. Among the factors to consider are
cess business loss limitations. The at-risk limits whether:
Losses From Operating and the passive activity limits are applied before • You operate your farm in a businesslike
calculating the amount of any excess business manner;
a Farm loss. An excess business loss is the amount by • The time and effort you spend on farming
which the total deductions attributable to all of indicate you intend to make it profitable;
If your deductible farm expenses are more than your trades or businesses exceed your total • You depend on income from farming for
your farm income, you have a loss from the op- gross income and gains attributable to those your livelihood;
eration of your farm. The amount of the loss you trades or businesses plus $289,000 (or • Your losses are due to circumstances be-
can deduct when figuring your taxable income $578,000 in the case of a joint return). Business yond your control or are normal in the
may be limited. To figure your deductible loss, gains and losses reported on Form 4797 and start-up phase of farming;
you must apply the following limits. Form 8949 are included in the excess business • You change your methods of operation in
• The at-risk limits. loss calculation. This includes farming losses an attempt to improve profitability;
• The passive activity limits. from casualty losses or losses by reason of dis- • You, or your advisors, have the knowledge
The following discussions explain these limits. ease or drought. Excess business losses that needed to carry on the farming activity as a
are disallowed are treated as a net operating successful business;
If your deductible loss after applying these loss carryover to the following tax year. See • You were successful in making a profit in
limits is more than your other income for the Form 461 and its instructions for details. similar activities in the past;
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• You make a profit from farming in some only in the following order, only to the extent sta- The deduction for conservation expenses
years and the amount of profit you make; ted in the three categories. cannot be more than 25% of your gross income
and from farming. See 25% Limit on Deduction,
• You can expect to make a future profit from Category 1. Deductions you can take for later.
the appreciation of the assets used in the personal as well as for business activities are
farming activity. allowed in full. For individuals, all nonbusiness Conservation expenses for land in a
deductions, such as those for home mortgage foreign country do not qualify for this
Presumption of profit. Your farming or other interest, taxes, and casualty losses (attributable CAUTION! special treatment.
activity is presumed carried on for profit if it pro- to a federally declared disaster), belong in this Although some expenses are not deductible
duced a profit in at least 3 of the last 5 tax category. See chapter 11 for more information. as soil and water conservation expenses, they
years, including the current year. Activities that For the limits that apply to mortgage interest, may be deductible as ordinary and necessary
consist primarily of breeding, training, showing, see Pub. 936. farm expenses. These include interest and
or racing horses are presumed carried on for Category 2. Deductions that don't result in taxes, the cost of periodically clearing brush
profit if they produced a profit in at least 2 of the an adjustment to the basis of property are al- from productive land, the regular removal of
last 7 tax years, including the current year. The lowed next, but only to the extent your gross in- sediment from a drainage ditch, and expenses
activity must be substantially the same for each come from the activity is more than the deduc- paid or incurred primarily to produce an agricul-
year within this period. You have a profit when tions you take (or could take) under the first tural crop that may also conserve soil.
the gross income from an activity is more than category. Most business deductions, such as You must include in income most govern-
the deductions for it. those for fertilizer, feed, insurance premiums, ment payments for approved conservation prac-
If a taxpayer dies before the end of the utilities, wages, etc., belong in this category. tices. However, you can exclude some pay-
5-year (or 7-year) period, the period ends on ments you receive under certain cost-sharing
the date of the taxpayer's death. Category 3. Business deductions that de- conservation programs. For more information,
If your business or investment activity crease the basis of property are allowed last, see Agricultural Program Payments in chap-
passes this 3- (or 2-) years-of-profit test, pre- but only to the extent the gross income from the ter 3.
sume it is carried on for profit. This means the activity is more than deductions you take (or
limits discussed here don't apply. You can take could take) under the first two categories. The To get the full deduction to which you
all your business deductions from the activity on deductions for depreciation, amortization, and TIP are entitled, you should maintain your
Schedule F, even for the years that you have a the part of a casualty loss an individual could records to clearly distinguish between
loss. You can rely on this presumption in every not deduct in category 1 belong in this category. your ordinary and necessary farm business ex-
case, unless the IRS shows it isn't valid. Where more than one asset is involved, divide penses and your soil and water conservation
If you fail the 3- (or 2-) years-of-profit test, depreciation and these other deductions pro- expenses.
you may still be considered to operate your farm portionally among those assets.
Topics. This chapter discusses the following.
for profit by considering the factors listed earlier. • Business of farming,
Partnerships and S corporations. If a part-
Using the presumption later. If you are nership or S corporation carries on a • Plan certification,
starting out in farming and don't have 3 (or 2) not-for-profit activity, these limits apply at the • Conservation expenses,
years showing a profit, you may want to take ad- partnership or S corporation level. They are re- • Assessment by conservation district,
vantage of this presumption later, after you have flected in the individual shareholder's or part- • 25% limit on deduction,
had the 5 (or 7) years of experience allowed by ner's distributive shares. • When to deduct or capitalize, and
the test. • Sale of a farm.
You can choose to do this by filing Form More information. For more information on
5213. Filing this form postpones any determina- not-for-profit activities, see Not-for-Profit Activi-
tion that your farming activity isn't carried on for ties in chapter 9 of Pub. 334. Business of Farming
profit until 5 (or 7) years have passed since you
first started farming. You must file Form 5213 For purposes of soil and water conservation ex-
within 3 years after the due date of your return penses, you are in the business of farming if you
for the year in which you first carried on the ac- cultivate, operate, or manage a farm for profit,
tivity, or, if earlier, within 60 days after receiving either as an owner or a tenant. You are not in
a written notice from the IRS proposing to disal- the business of farming if you cultivate or oper-
low deductions attributable to the activity. 5. ate a farm for recreation or pleasure, rather than
The benefit gained by making this choice is for profit. You are not farming if you are engaged
that the IRS won't immediately question only in forestry or the growing of timber.
whether your farming activity is engaged in for
profit. Accordingly, it won't limit your deductions. Soil and Water Farm defined. A farm includes livestock, dairy,
Rather, you will gain time to earn a profit in 3 (or poultry, fish, fruit, and truck farms. It also in-
2) out of the first 5 (or 7) years you carry on the cludes plantations, ranches, ranges, and or-
farming activity. If you show 3 (or 2) years of Conservation chards. A fish farm is an area where fish and
profit at the end of this period, your deductions other marine animals are grown or raised and
artificially fed, protected, etc. It doesn't include
aren't limited under these rules. If you don't Expenses an area where they are merely caught or har-
have 3 (or 2) years of profit (and can't otherwise
show that you operated your farm for profit), the vested. A plant nursery is a farm for purposes of
limit applies retroactively to any year in the deducting soil and water conservation expen-
5-year (or 7-year) period with a loss. Introduction ses.
Filing Form 5213 automatically extends the
period of limitations on any year in the 5-year If you are in the business of farming, you can Farm rental. If you own a farm and receive
(or 7-year) period to 2 years after the due date choose to deduct certain expenses for: farm rental payments based on farm production,
of the return for the last year of the period. The • Soil or water conservation, either in cash or crop shares, you are in the
period is extended only for deductions of the • Prevention of erosion of land used in farm- business of farming.
activity and any related deductions that might ing, or If you receive a fixed rental payment that is
be affected. • Endangered species recovery. not based on farm production, you are in the
Otherwise, these are capital expenses that business of farming only if you materially partici-
Limit on deductions and losses. If your ac- must be added to the basis of the land. (See pate in operating or managing the farm.
tivity isn't carried on for profit, take deductions chapter 6 for information on determining basis.)

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If you get cash rental for a farm you f. Restoration of soil fertility. metal, or wood. You recover your capital invest-
! own that is not used in farm production, 2. The construction, control, and protection ment through annual allowances for deprecia-
CAUTION you can't deduct soil and water conser- tion.
vation expenses for that farm. of:
You can deduct soil and water conservation
a. Diversion channels; expenses for nondepreciable earthen items.
Example. You own a farm in Iowa. You rent b. Drainage ditches; Nondepreciable earthen items include certain
out the farm for $250 in cash per acre and don't dams, ponds, and terraces described under
materially participate in producing or managing c. Irrigation ditches; Property Having a Determinable Useful Life in
production of the crops grown on the farm. You d. Earthen dams; and chapter 7.
can't deduct your soil conservation expenses Water well. You can't deduct the cost of
for this farm. You must capitalize the expenses e. Watercourses, outlets, and ponds.
drilling a water well for irrigation and other agri-
and add them to the basis of the land. 3. The eradication of brush. cultural purposes as a soil and water conserva-
For more information, see Material participa- tion expense. It is a capital expense. You re-
tion for landlords under Landlord Participation in 4. The planting of windbreaks.
cover your cost through depreciation. You must
Farming in chapter 12. You can't deduct expenses to drain or fill wet- also capitalize your cost for drilling a test hole. If
lands, or to prepare land for center pivot irriga- the test hole produces no water and you con-
tion systems, as soil and water conservation ex- tinue drilling, the cost of the test hole is added
Plan Certification penses. These expenses are added to the to the cost of the producing well. You can re-
basis of the land. cover the total cost through depreciation deduc-
You can deduct soil and water conservation ex- If you choose to deduct soil and water tions.
If a test hole, dry hole, or dried-up well (re-
penses only if they are consistent with a plan ! conservation expenses, you must in- sulting from prolonged lack of rain, for instance)
approved by the Natural Resources Conserva- CAUTION clude as gross income any cost-shar-
tion Service (NRCS) of the Department of Agri- ing payments you receive for those expenses. is abandoned, you can deduct your unrecov-
culture. If no such plan exists, the expenses See chapter 3 for information about payments ered cost in the year of abandonment. Aban-
must be consistent with a soil conservation plan eligible for the cost-sharing exclusion. donment means that all economic benefits from
of a comparable state agency. Keep a copy of the well are terminated. For example, filling or
the plan with your books and records to support sealing a well excavation or casing so that all
your deductions. New farm or farmland. If you acquire a new economic benefits from the well are terminated
farm or new farmland from someone who was constitutes an abandonment.
Conservation plan. A conservation plan in- using it in farming immediately before you ac-
cludes the farming conservation practices ap- quired the land, soil and water conservation ex- Endangered species recovery expenses. If
proved for the area where your farmland is loca- penses you incur on it will be treated as made you are in the business of farming and meet
ted. There are three types of approved plans. on land used in farming at the time the expen- other specific requirements, you can choose to
• NRCS individual site plans. These plans ses were paid or incurred. You can deduct soil deduct the conservation expenses discussed
are issued individually to farmers who re- and water conservation expenses for this land if earlier as endangered species recovery expen-
quest assistance from NRCS to develop a your use of it is substantially a continuation of its ses. Otherwise, these are capital expenses that
conservation plan designed specifically for use in farming. The new farming activity doesn't must be added to the basis of the land.
their farmland. have to be the same as the old farming activity. The expenses must be paid or incurred for
• NRCS county plans. These plans include a For example, if you buy land that was used for the purpose of achieving site-specific manage-
listing of farm conservation practices ap- grazing cattle and then prepare it for use as an ment actions recommended in a recovery plan
proved for the county where the farmland is apple orchard, you can deduct your conserva- approved under section 4(f) of the Endangered
located. You can deduct expenses for con- tion expenses. Species Act of 1973. See section 175 for more
servation practices not included on the information.
NRCS county plans only if the practice is a Land not used for farming. If your conserva-
part of an individual site plan. tion expenses benefit both land that doesn’t
• Comparable state agency plans. These qualify as land used for farming and land that
plans are approved by state agencies and does qualify, you must allocate the expenses Assessment by
can be approved individual site plans or between the two types of land. For example, if Conservation District
county plans. the expenses benefit 200 acres of your land, but
only 120 acres of this land are used for farming, In some localities, a soil or water conservation
A list of NRCS conservation programs is then you can deduct 60% (120 ÷ 200) of the ex- or drainage district incurs expenses for soil or
available at NRCS.USDA.gov/programs- penses. You can use another method to allo- water conservation and levies an assessment
initiatives. Individual site plans can be obtained cate these expenses if you can clearly show against the farmers who benefit from the expen-
from NRCS offices and the comparable state that your method is more reasonable. ses. You can deduct as a conservation expense
agencies.
amounts you pay or incur for the part of an as-
Depreciable conservation assets. You gen- sessment that:
erally can't deduct your expenses for deprecia- • Covers expenses you could deduct if you
Conservation Expenses ble conservation assets. However, you can de- had paid them directly, or
duct certain amounts you pay or incur for an • Covers expenses for depreciable property
You can deduct conservation expenses only for assessment for depreciable property that a soil used in the district's business.
land you or your tenant are using, or have used and water conservation or drainage district lev-
in the past, for farming. These expenses in- ies against your farm. See Assessment for De- A water or drainage district assessment for
clude, but are not limited to, the following. preciable Property, later. repairs or maintenance of district property or for
1. The treatment or movement of earth, such You must capitalize expenses to buy, build, interest paid by the district for a loan to buy
as: install, or improve depreciable structures or fa- property may qualify as a business deduction.
cilities. These expenses include those for mate- See Regulations section 1.164-4(b)(1).
a. Leveling, rials, tile (including drainage tile), pipe, pumps
b. Conditioning, (and other equipment), supplies, wages, fuel,
hauling, and moving dirt when making or instal- Assessment for Depreciable
c. Grading, ling structures such as tanks, reservoirs, cul- Property
d. Terracing, verts, canals, dams, drainage systems, waste
management systems or wells composed of You can generally deduct as a conservation ex-
e. Contour furrowing, and masonry, concrete, tile (including drainage tile), pense amounts you pay or incur for the part of a
conservation or drainage district assessment
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Table 5-1. Limits on Deducting an Assessment by a Conservation Example 2. Assume the same facts as in
District for Depreciable Property Example 1 except that $1,850 of the $2,400 as-
sessment is for digging drainage ditches and
Total Limit on Deduction Yearly Limit on Deduction $550 is for depreciable equipment. The total
for Assessment for for Assessment for Yearly Limit for All amount assessed by the district against all its
Depreciable Property Depreciable Property Conservation Expenses members for depreciable equipment is $5,500.
The total amount you can deduct for the depre-
10% of: $500 + 10% of: 25% of: ciable equipment is limited to 10% of this
Total assessment against all Your deductible share of the Your gross income from amount, or $550.
members of the district for the cost to the district for the farming. The maximum amount you can deduct this
property. property. year for the depreciable equipment is $555
(10% of your deductible share of the total as-
• No one taxpayer can • If the amount you pay or • Limit for all conservation sessment, $55, plus $500). Since your deducti-
deduct more than 10% of incur for any year is expenses, including ble share is less than the maximum amount de-
the total assessment. more than the limit, you assessments for ductible in 1 year, you can deduct the entire
• Any amount over 10% is can deduct for that year depreciable property. $550 this year. You can deduct the entire as-
a capital expense and is only 10% of your • Amounts greater than sessment, $2,400, as a soil and water conser-
added to the basis of deductible share of the 25% can be carried to the vation expense this year, subject to the 25% of
your land. cost. following year and added gross income from farming limit on the deduc-
• If an assessment is paid • You can deduct the to that year's expenses. tion, discussed below.
in installments, each remainder in equal The total is then subject Sale or other disposal of land during 9-year
payment must be amounts over the next 9 to the 25% of gross period. If you dispose of the land during the
prorated between the tax years. income from farming limit 9-year period for deducting conservation expen-
conservation expense in that year. ses subject to the yearly limit, any amounts you
and the capital expense. have not yet deducted because of this limit are
added to the basis of the property.
that covers expenses for depreciable property. pay or incur is equal to or less than the maxi-
This includes items such as pumps, locks, con- mum amount, you can deduct it in the year it is Death of farmer during 9-year period. If a
crete structures (including dams and weir paid or incurred. If the amount you pay or incur farmer dies during the 9-year period, any re-
gates), draglines, and similar equipment. The is more, you can deduct in that year only 10% of maining amounts not yet deducted are deduc-
depreciable property must be used in the dis- your deductible share of the cost. You can de- ted in the year of death.
trict's soil and water conservation activities. duct the remainder in equal amounts over the
However, the following limits apply to these as- next 9 tax years. Your total conservation ex-
sessments. pense deduction for each year is also subject to 25% Limit on Deduction
• The total assessment limit. the 25% of gross income from farming limit on
• The yearly assessment limit. the deduction, discussed later. The total deduction for conservation expenses
After you apply these limits, the amount you Example 1. This year, the soil conservation in any tax year is limited to 25% of your gross in-
can deduct is added to your other conservation district levies, and you pay, an assessment of come from farming for that year.
expenses for the year. The total for these ex- $2,400 against your farm. Of the assessment, Gross income from farming. Gross income
penses is then subject to the 25% of gross in- $1,500 is for digging drainage ditches. You can from farming is the income you derive in the
come from farming limit on the deduction, dis- deduct this part as a soil or conservation ex- business of farming from the production of
cussed later. See Table 5-1 for a brief summary pense as if you had paid it directly. The remain- crops, fish, fruits, other agricultural products, or
of these limits. ing $900 is for depreciable equipment to be livestock. Gains from sales of draft, breeding, or
To ensure your deduction is within the used in the district's irrigation activities. The to- dairy livestock are included. Gains from sales of
TIP deduction limits, keep records to show tal amount assessed by the district against all assets such as farm machinery, or from the dis-
the following. its members for the depreciable equipment is position of land, are not included.
$7,000.
• The total assessment against all members The total amount you can deduct for the de- Example. In 2023, you report gross income
of the district for the depreciable property. preciable equipment is limited to 10% of the to- from farming for your single-member LLC
• Your deductible share of the cost to the tal amount assessed by the district against all (SMLLC) on Schedule F (Form 1040) of
district for the depreciable property. its members for depreciable equipment, or $85,000. Additionally, your gain from sales of
• Your gross income from farming. $700. The $200 excess ($900 − $700) is a capi- cull raised breeding animals reported on Form
tal expense you must add to the basis of your 4797, line 2(g), is $15,000. Therefore, your
Total assessment limit. You can't deduct farm. gross income from farming is $100,000
more than 10% of the total amount assessed to To figure the maximum amount you can de- ($85,000 + $15,000). Thus, the applicable 25%
all members of the conservation or drainage duct for the depreciable equipment this year, limitation ($100,000 x 25% (0.25)) is $25,000
district for the depreciable property. This applies multiply your deductible share of the total as- for soil and water expenses in 2023.
whether you pay the assessment in one pay- sessment ($700) by 10% (0.10). Add $500 to
ment or in installments. If your assessment is the result for a total of $570. Your deductible The calculation of farm income for soil
more than 10% of the total amount assessed, share, $700, is greater than the maximum TIP and water conservation expenses dif-
both the following rules apply. amount deductible in 1 year, so you can deduct fers from the calculations for income
• The amount over 10% is a capital expense only $70 of the amount you paid or incurred for averaging and estimated tax payments. For
and is added to the basis of your land. depreciable property this year (10% of $700). more information, see Income Averaging for
• If the assessment is paid in installments, You can deduct the balance at the rate of $70 a Farmers in chapter 3 and Gross Income in
each payment must be prorated between year over the next 9 years. chapter 15.
the conservation expense and the capital You add $70 to the $1,500 portion of the as-
expense. sessment for drainage ditches. You can deduct Carryover of deduction. If your deductible
$1,570 of the $2,400 assessment as a soil and conservation expenses in any year are more
Yearly assessment limit. The maximum water conservation expense this year, subject to than 25% of your gross income from farming for
amount you can deduct in any 1 year is the total the 25% of gross income from farming limit on that year, you can carry the unused deduction
of 10% of your deductible share of the cost as the deduction, discussed later. over to later years. However, the deduction in
explained earlier, plus $500. If the amount you

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any later year is limited to 25% of the gross in- Send your request to the following ad- Topics
come from farming for that year as well. dress. This chapter discusses:

Example. In 2023, you have gross income • Cost basis
of $32,000. During the year, you incurred Department of the Treasury • Adjusted basis
$10,000 of deductible soil and water conserva- Internal Revenue Service Center • Basis other than cost
tion expenses. However, your deduction is limi- Cincinnati, OH 45999
ted to 25% of $32,000, or $8,000. The $2,000
Useful Items
excess ($10,000 − $8,000) is carried over to For more information, see Change in You may want to see:
2024 and added to deductible soil and water Accounting Method in chapter 2.
conservation expenses made in that year. The
total of the 2023 carryover plus 2024 expenses Publication
is deductible in 2024, subject to the limit of 25% 544 544 Sales and Other Dispositions of
of your gross income from farming in 2024. Any Sale of a Farm
expenses over the limit in that year are carried Assets
to 2025 and later years. If you sell your farm, you can't adjust the basis 551 551 Basis of Assets
of the land at the time of the sale for any unused
Net operating loss (NOL). The deduction carryover of soil and water conservation expen- 946 946 How To Depreciate Property
for soil and water conservation expenses, after ses (except for deductions of assessments for
applying the 25% limit, is included when figuring depreciable property, discussed earlier). How- See chapter 16 for information about getting
an NOL for the year. If the NOL is carried to an- ever, if you acquire another farm and return to publications and forms.
other year, the soil and water conservation de- the business of farming, you can start taking de-
duction included in the NOL is not subject to the ductions again for the unused carryovers.
25% limit in the year to which it is carried. Cost Basis
Gain on sale of farmland. If you held the land
5 years or less before you sold it, gain on the The basis of property you buy is usually its cost.
When To Deduct or sale of the land is treated as ordinary income up Cost is the amount you pay in cash, debt obliga-
to the amount you previously deducted for soil tions, other property, or services. Your cost in-
Capitalize and water conservation expenses. If you held cludes amounts you pay for sales tax, freight,
the land less than 10 but more than 5 years, the installation, and testing. The basis of real estate
If you choose to deduct soil and water conser- gain is treated as ordinary income up to a speci- and business assets will include other items,
vation expenses, you must deduct the total al- fied percentage of the previous deductions. See discussed later. Basis generally does not in-
lowable amount on your tax return for the first Section 1252 property under Other Gains in clude interest payments.
year you pay or incur these expenses. If you chapter 9.
choose not to deduct the expenses, you must You may also have to capitalize (add to ba-
capitalize them. sis) certain other costs related to buying or pro-
ducing property. Under the uniform capitaliza-
Change of method. If you want to change tion rules, discussed later, you may have to
your method for the treatment of soil and water capitalize direct costs and certain indirect costs
conservation expenses, or you want to treat the of producing property.
expenses for a particular project or a single 6. Loans with low or no interest. If you buy
farm in a different manner, you must get the ap-
proval of the IRS. To get this approval, submit a property on a time-payment plan that charges
written request by the due date of your return for little or no interest, the basis of your property is
the first tax year you want the new method to Basis of Assets your stated purchase price minus the amount
apply. You or your authorized representative considered to be unstated interest. You gener-
must sign the request. Do not use Form 3115 ally have unstated interest if your interest rate is
for this request. Use the procedure outlined be- less than the applicable federal rate. See the
low. Introduction discussion of unstated interest in Pub. 537, In-
stallment Sales.
Your request must include the following in- Your basis is the amount of your investment in
formation. property for tax purposes. Use basis to figure
• Your name and address. the gain or loss on the sale, exchange, or other Real Property
• The first tax year the method or change of disposition of property. Also use basis to figure
method is to apply. depreciation, amortization, depletion, and casu- Real property, also called real estate, is land
• Whether the method or change of method alty losses. You may have property that you use and generally anything built on, growing on, or
applies to all your soil and water conserva- for both business or the production of income attached to land.
tion expenses or only to those for a particu- purposes and for personal purposes. You must
lar project or farm. If the method or change allocate the basis of this property based on its If you buy real property, certain fees and
of method doesn't apply to all your expen- use. Only the basis allocated to the business or other expenses related to the purchase of the
ses, identify the project or farm to which the production of income use of the property property are part of your cost basis in the prop-
the expenses apply. can be depreciated. erty. Some of these expenses are discussed
• The total expenses you paid or incurred in Your original basis in property is adjusted next.
the first tax year the method or change of (increased or decreased) by certain events. For
method is to apply. example, if you make improvements to the prop- Lump-sum purchase. If you buy improve-
• A statement that you will account sepa- erty, increase your basis. If you take deductions ments, such as buildings, and the land on which
rately in your books for the expenses to for depreciation, or casualty losses, or claim they stand for a lump sum, allocate your cost
which this method or change of method re- certain credits, reduce your basis. basis between the land and improvements. See
lates. Allocating the Basis, later.
Keep accurate records of all items that
affect the basis of your assets. For in- Real estate taxes. If you pay the real estate
RECORDS formation on keeping records, see taxes the seller owed on real property you
chapter 1. bought, and the seller did not reimburse you,
treat those taxes as part of your basis. If the
seller reimburses you for the portion of real es-
tate taxes from the time they owned the
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property, reduce your deductible real estate tax same transaction or to property that consists of Generally, you are subject to the uniform
expense by the amount of the reimbursement. separate items. To determine the basis of these capitalization rules if you do either of the follow-
If you reimburse the seller for taxes the seller assets or separate items, there must be an allo- ing.
paid for you, you can generally deduct that cation of basis. 1. Produce real property or tangible personal
amount as a tax expense in the year of pur- property.
chase. If you do not reimburse the seller for real Land and buildings. Allocate the cost basis
estate taxes, you cannot deduct the amount according to the respective fair market values 2. Acquire property for resale.
paid on your behalf as a tax expense. In either (FMVs) of the land and improvements at the
case, do not include that amount in the basis of time of purchase. Figure the basis of each asset You produce property if you construct, build,
your property. by multiplying the lump sum by a fraction. The install, manufacture, develop, improve, or create
numerator is the FMV of that asset, and the de- the property.
Settlement costs. Your basis includes the set- nominator is the FMV of the whole property at You are not subject to the uniform capi-
tlement fees and closing costs for buying the the time of purchase. TIP talization rules if the property is pro-
property. See Pub. 551 for a detailed list of duced for personal use.
items you can and cannot include in basis. Fair market value (FMV). FMV is the price at
Do not include fees and costs for getting a which property would change hands between a In a farming business, you produce property
loan on the property. Also, do not include willing buyer and a willing seller, neither having if you raise or grow any agricultural or horticul-
amounts placed in escrow for the future pay- to buy or sell, and both having reasonable tural commodity, including plants and animals.
ment of items such as taxes and insurance. knowledge of all necessary facts. Sales of simi-
lar property on or about the same date may help Plants. A plant produced in a farming business
Points. If you pay points to get a loan (includ- in figuring the FMV of the property. includes the following items.
ing a mortgage, second mortgage, home equity • A fruit, nut, or other crop-bearing tree.
loan, or line of credit), do not add the points to Group of assets acquired. If you buy multiple • An ornamental tree.
the basis of the related property. You may be assets for a lump sum, allocate the amount you • A vine.
able to deduct the points currently or over the pay among the assets. Use this allocation to fig- • A bush.
term of the loan. ure your basis for depreciation and gain or loss • Sod.
on a later disposition of any of these assets. You • The crop or yield of a plant that will have
Assumption of a mortgage. If you buy prop- and the seller may agree in the sales contract to more than one crop or yield.
erty and assume (or buy the property subject a specific allocation of the purchase price
to) an existing mortgage, your basis includes among the assets. If this allocation is based on Animals. An animal produced in a farming
the amount you pay for the property plus the the value of each asset and you and the seller business includes any stock, poultry or other
amount of the mortgage that you assumed. have adverse tax interests, the allocation will bird, and fish or other sea life.
generally be accepted.
Example. If you buy a farm for $100,000 The direct and indirect costs of producing
cash and assume a mortgage of $400,000, your Farming business acquired. If you buy a plants or animals include preparatory costs and
basis is $500,000. group of assets that make up a farming busi- preproductive period costs. Preparatory costs
ness, there are special rules you must use to al- include the acquisition costs of the seed, seed-
Constructing assets. If you build property or locate the purchase price among the assets. ling, plant, or animal. For plants, preproductive
have assets built for you, your expenses for this Generally, reduce the purchase price by any period costs include the costs of items such as
construction are part of your basis. Some of cash received. Allocate the remaining purchase irrigation, pruning, frost protection, spraying,
these expenses include the following costs. price to the other business assets received in and harvesting. For animals, preproductive pe-
• Land. proportion to (but not more than) their FMVs riod costs include the costs of items such as
• Labor and materials. and in a certain order. See Trade or Business feed, maintaining pasture or pen areas, breed-
• Architect's fees. Acquired under Allocating the Basis in Pub. 551 ing, veterinary services, and bedding.
• Building permit charges. for more information. Also, see the examples
• Payments to contractors. under Sale of a Farm in chapter 8. Exceptions. In a farming business, the uniform
• Payments for rental equipment. capitalization rules do not apply to:
• Inspection fees. Transplanted embryo. If you buy a cow that is 1. Any animal,
pregnant with a transplanted embryo, allocate
In addition, if you use your own employees, to the basis of the cow the part of the purchase 2. Any plant with a preproductive period of 2
farm materials, and equipment to build an as- price equal to the FMV of the cow without the years or less, or
set, do not deduct the following expenses. implant. Allocate the rest of the purchase price 3. Any costs of replanting certain plants lost
• Employee wages paid for the construction to the basis of the calf. Neither the cost alloca- or damaged due to casualty.
work, reduced by any employment credits ted to the cow nor the cost allocated to the calf
allowed. is deductible as a current business expense, Exceptions (1) and (2) do not apply to a cor-
• Depreciation on equipment you own while however, you may be able to take a deduction poration, partnership, or tax shelter required to
it is used in the construction. for depreciation for the cow. use an accrual method of accounting. See Ac-
• Operating and maintenance costs for crual Method Required under Accounting Meth-
equipment used in the construction. ods in chapter 2.
• The cost of business supplies and materi- Uniform Capitalization Rules In addition, you can elect not to use the uni-
als used in construction. form capitalization rules for plants with a prepro-
Under the uniform capitalization rules, you must ductive period of more than 2 years. This elec-
You must capitalize these expenses by in- include certain direct and indirect costs in the tion cannot be made by a corporation,
cluding them in the asset's basis. basis of property you produce or in your inven- partnership, or tax shelter required to use an ac-
Do not include the value of your own la- tory costs, rather than claim them as a current crual method of accounting. This election also
year deduction. You recover these costs does not apply to any costs incurred for the
CAUTION for, in the basis of any property you
! bor, or any other labor you did not pay through depreciation, amortization, or cost of planting, cultivation, maintenance, or develop-
construct. goods sold when you use, sell, or otherwise dis- ment of any citrus or almond grove (or any part
pose of the property. thereof) within the first 4 years the trees were
Any farming business that has average planted.
Allocating the Basis TIP annual gross receipts of $29 million or
less for the 3 preceding tax years and
In some instances, the rules for determining ba- is not a tax shelter is not subject to the uniform
sis apply to a group of assets acquired in the capitalization rules.

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If you elect not to use the uniform capi- Table 6-1. Plants With a Preproductive Period of More Than 2 Years
! talization rules, you must use the alter- Plants producing the following crops or yields have a nationwide weighted average
CAUTION native depreciation system for all prop-
erty used in any of your farming businesses and preproductive period of more than 2 years.
placed in service in any tax year during which Almonds • Dates • Macadamia nuts • Pistachio nuts
the election is in effect. See chapter 7 for addi- •
tional information on depreciation. • Apples • Figs • Mangoes • Plums
• Apricots • Grapefruit • Nectarines • Pomegranates
Example. You grow trees that have a pre- • Avocados • Grapes • Olives • Prunes
productive period of more than 2 years. The • Blueberries • Guavas • Oranges • Tangelos
trees produce an annual crop. You are an indi- • Cherries • Kiwifruit • Peaches • Tangerines
vidual and the uniform capitalization rules apply • Chestnuts • Kumquats • Pears • Tangors
to your farming business. You must capitalize • Coffee beans • Lemons • Pecans • Walnuts
the direct costs and an allocable part of indirect • Currants • Limes • Persimmons
costs incurred due to the production of the
trees. You are not required to capitalize the If you make additions or improvements to • Payments you receive for granting an
costs of producing the annual crop because its business property, depreciate the basis of each easement.
preproductive period is 2 years or less. addition or improvement as separate deprecia- • Exclusion from income of subsidies for en-
ble property using the rules that would apply to ergy conservation measures.
Preproductive period of more than 2 years. the original property if you had placed it in serv- • Certain canceled debt excluded from in-
The preproductive period of plants grown in ice at the same time you placed the addition or come.
commercial quantities in the United States is improvement in service. See chapter 7 for more • Rebates from a manufacturer or seller.
based on their nationwide weighted average information. • Patronage dividends received from a coop-
preproductive period. Plants producing the erative association as a result of a pur-
crops or yields shown in Table 6-1 have a na- Deducting vs. capitalizing costs. Do not add chase of property. See Patronage Divi-
tionwide weighted average preproductive period to your basis costs that you can deduct as cur- dends in chapter 3.
of more than 2 years. Other plants (not shown in rent expenses. For example, amounts paid for • Gas-guzzler tax. See Form 6197.
Table 6-1) may also have a nationwide weighted incidental repairs or maintenance are deducti- Some of these items are discussed next. For a
average preproductive period of more than 2 ble as business expenses and are not added to more detailed list of items that decrease basis,
years. basis. However, you can elect either to deduct see section 1016 of the Internal Revenue Code
or to capitalize certain other costs. See Deduct- and Pub. 551.
More information. For more information on ing vs. Capitalizing Costs under Increase to Ba-
the uniform capitalization rules that apply to sis in Pub. 551. Depreciation and section 179 deduction.
property produced in a farming business, see The adjustments you must make to the basis of
Regulations section 1.263A-4. Note. Generally, you can deduct amounts the property if you take the section 179 deduc-
paid for repairs and maintenance to your tangi- tion or depreciate the property are explained
ble property if the amounts paid are not other- next. For more information on these deductions,
Adjusted Basis wise required to be capitalized. However, you see chapter 7.
may elect to capitalize amounts paid for repair
Before figuring gain or loss on a sale, exchange, and maintenance consistent with the treatment Section 179 deduction. If you take the
or other disposition of property or figuring allow- on your books and records. If you make this section 179 expense deduction for all or part of
able depreciation, depletion, or amortization, election, it applies to all amounts paid for repair the cost of qualifying business property, de-
you must usually make certain adjustments to and maintenance to tangible property that you crease the basis of the property by the deduc-
the cost basis or basis other than cost (dis- treat as capital expenditures on your books and tion.
cussed later) of the property. The adjustments records for the tax year. To make the election to
to the original basis are increases or decreases treat repairs and maintenance as capital expen- Depreciation. Decrease the basis of prop-
to the cost basis or other basis which result in ditures, attach a statement titled “Section erty by the depreciation you deducted or could
the adjusted basis of the property. 1.263(a)-3(n) Election” to your timely filed return have deducted on your tax returns under the
(excluding extensions). For more information on method of depreciation you chose. If you took
what to include in the statement, see Regula- less depreciation than you could have under the
Increases to Basis tions section 1.263(a)-3(n). If you timely filed method chosen, decrease the basis by the
your return for the year without making the elec- amount you could have taken under that
Increase the basis of any property by all items tion, you can still make the election by filing an method. If you did not take a depreciation de-
properly added to a capital account. These in- amended return within 6 months of the due date duction, reduce the basis by the full amount of
clude the cost of any improvements having a of the return (excluding extensions). Attach the the depreciation you could have taken.
useful life of more than 1 year. statement to the amended return and enter If you deducted more depreciation than you
“Filed pursuant to section 301.9100-2” on the should have, decrease your basis by the
The following costs increase the basis of statement. File the amended return at the same amount you should have deducted plus the part
property. address you filed the original return. of the excess depreciation you deducted that
• The cost of extending utility service lines to actually reduced your tax liability for any year.
property. See chapter 7 for information on figuring the
• Legal fees, such as the cost of defending Decreases to Basis depreciation you should have claimed.
and perfecting title. In decreasing your basis for depreciation,
• Legal fees for seeking a decrease in an as- The following are some items that reduce the take into account the amount deducted on your
sessment levied against property to pay for basis of property. tax returns as depreciation and any deprecia-
local improvements. • Section 179 deduction. tion you must capitalize under the uniform capi-
• Assessments for items such as paving • Deductions previously allowed or allowable talization rules.
roads and building ditches that increase for amortization, depreciation, and deple-
the value of the property assessed. Do not tion. Casualty and theft losses. If you have a
deduct these expenses as taxes. However, • Residential energy efficient property cred- casualty or theft loss, decrease the basis in your
you can deduct as taxes amounts as- its. See Form 5695. property by any insurance or other reimburse-
sessed for maintenance or repairs, or for • Investment credit (part or all) taken. ment and by any deductible loss not covered by
meeting interest charges related to the im- • Casualty and theft losses and insurance insurance. See chapter 11 for information about
provements. reimbursements. figuring your casualty or theft loss.

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You must increase your basis in the property be changing the use of your pickup truck that condemnation, figure the basis of the replace-
by the amount you spend on clean-up costs you originally purchased for your personal use ment property you receive using the basis of the
(such as debris removal) and repairs that sub- to use in your farming business. converted property.
stantially prolong the life of the property, in- The basis for depreciation is the lesser of:
crease its value, or adapt it to a different use. To • The FMV of the property on the date of the Similar or related property. If the replace-
make this determination, compare the repaired change, or ment property is similar or related in service or
property to the property before the casualty. For • Your adjusted basis on the date of the use to the converted property, the replacement
more information on casualty and theft losses, change. property's basis is the same as the old proper-
see Pub. 547. ty's basis on the date of the conversion. How-
If you later sell or dispose of this property, ever, make the following adjustments.
Easements. The amount you receive for grant- the basis you use will depend on whether you
ing an easement is usually considered to be are figuring a gain or loss. The basis for figuring 1. Decrease the basis by the following
proceeds from the sale of an interest in the real a gain is your adjusted basis in the property amounts.
property. It reduces the basis of the affected when you sell the property. Figure the basis for a. Any loss you recognize on the invol-
part of the property. If the amount received is a loss starting with the smaller of your adjusted untary conversion.
more than the basis of the part of the property basis or the FMV of the property at the time of
affected by the easement, reduce your basis in the change to business or rental use. Then b. Any money you receive that you do
that part to zero and treat the excess as a rec- make adjustments (increases and decreases) not spend on similar property.
ognized gain. See Easements and rights-of-way for the period after the change in the property's 2. Increase the basis by the following
in chapter 3. use, as discussed earlier under Adjusted Basis. amounts.
Exclusion from income of subsidies for en- Property received for services. If you receive a. Any gain you recognize on the invol-
ergy conservation measures. You can ex- property for services, include the property's untary conversion.
clude from gross income any subsidy you re- FMV in income. The amount you include in in- b. Any cost of acquiring the replacement
ceived from a public utility company for the come becomes your basis. If the services were property.
purchase or installation of an energy conserva- performed for a price agreed on beforehand, it
tion measure for a dwelling unit. Reduce the ba- will be accepted as the FMV of the property if Money or property not similar or related. If
sis of the property by the excluded amount. there is no evidence to the contrary. you receive money or property not similar or re-
Canceled debt excluded from income. If a Example. Rocco Stowsa is an accountant lated in service or use to the converted property
debt you owe is canceled or forgiven, other than and also operates a farming business. Rocco and you buy replacement property similar or re-
as a gift or bequest, you must generally include agreed to do some accounting work for his lated in service or use to the converted prop-
the canceled amount in your gross income for neighbor in exchange for a dairy cow. The ac- erty, the basis of the replacement property is its
tax purposes. A debt includes any indebted- counting work and the cow are each worth cost decreased by the gain not recognized on
ness for which you are liable or which attaches $1,500. Rocco must include $1,500 in income the involuntary conversion.
to property you hold. for his accounting services. Rocco's basis in the Allocating the basis. If you buy more than
cow is $1,500.
You can exclude your canceled debt from in- one piece of replacement property, allocate
come if the debt is any of the following. your basis among the properties based on their
1. Debt canceled in a bankruptcy case or Taxable Exchanges respective costs.
when you are insolvent. A taxable exchange is one in which the gain is Basis for depreciation. Special rules apply in
2. Qualified farm debt. taxable, or the loss is deductible. A taxable gain determining and depreciating the basis of
or deductible loss is also known as a recog- MACRS property acquired in an involuntary
3. Qualified real property business debt (pro- nized gain or loss. A taxable exchange occurs conversion. For more information, see Figuring
vided you are not a C corporation). when you receive cash or get property that is the Deduction for Property Acquired in a Non-
If you exclude canceled debt from income as not similar or related in use to the property ex- taxable Exchange under Figuring Depreciation
described in (1) or (2), you may have to reduce changed. If you receive property in exchange Under MACRS in chapter 7.
the basis of your depreciable and nondeprecia- for other property in a taxable exchange, the ba-
ble property. If you exclude canceled debt de- sis of the property you receive is usually its FMV For more information about involuntary con-
scribed in (3), you must only reduce the basis of at the time of the exchange. versions, see chapter 11.
your depreciable property by the excluded
amount. Example. You trade a tract of farmland with Like-Kind Exchanges
For more information about canceled debt in an adjusted basis of $20,000 for a tractor that
a bankruptcy case, see Pub. 908, Bankruptcy has an FMV of $60,000. You must report a taxa- Generally, if you exchange real property you use
Tax Guide. For more information about insol- ble gain of $40,000 for the land. The tractor has in your business or hold for investment solely for
vency and canceled debt that is qualified farm a basis of $60,000. other business or investment real property of a
debt, see chapter 3. For more information about like kind, you do not recognize the gain or loss
qualified real property business debt, see Pub. Nontaxable Exchanges from the exchange. If you also receive
334, Tax Guide for Small Business. non-like-kind property or money as part of the
A nontaxable exchange is an exchange in which exchange, you do recognize gain, but only to
you are not taxed on any gain and you cannot the extent of the value of the other property or
Basis Other Than Cost deduct any loss. A nontaxable gain or loss is money you received in the exchange, and you
also known as an unrecognized gain or loss. If do not recognize any loss.
There are times when you cannot use cost as you receive property in a nontaxable exchange,
basis. In these situations, the FMV or the adjus- its basis is usually the same as the basis of the For an exchange to qualify as a like-kind ex-
ted basis of property may be used. Examples property you transferred. change, you must hold for business or invest-
are discussed next. ment purposes both the property you transfer
and the property you receive. There must also
Involuntary Conversions
Property changed from personal to busi- be an exchange of like-kind property. For more
information, see Like-Kind Exchanges in chap-
ness or rental use. When you hold property If you receive property as a result of an involun- ter 8.
for personal use and then change it to business tary conversion, such as a casualty, theft, or
use or use it to produce rent, you must figure its
basis for depreciation. An example of changing
property from personal to business use would
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The basis of the property you receive is gen- 2. Increase the basis by the following Sale and Purchase
erally the same as the adjusted basis of the amounts.
property you gave up. a. Any additional costs you incur. If you sell property and buy similar property in
two mutually dependent transactions, you may
Example. You trade farmland for another b. Any gain you recognize on the ex- have to treat the sale and purchase as a single
larger tract of farmland. Your adjusted basis in change. nontaxable exchange.
your farmland is $110,000. The FMV of the new
tract of farmland is $150,000. Because this is a If the other party to the exchange assumes your Example. You own farmland with a barn.
nontaxable exchange, you do not recognize any liabilities, treat the debt assumption as money The properties have a combined adjusted basis
gain and your basis in the farmland you receive you received in the exchange. of $70,000, and an FMV of $150,000. You are
is $110,000, the same as the adjusted basis in interested in another tract of farmland with a
the farmland you exchanged. Example. You trade farmland (basis of
$100,000) for another tract of farmland (FMV of larger barn owned by your neighbor who is in-
Note. An exchange of personal property, $110,000) and $30,000 cash. You realize a gain terested in exchanging the property with you.
such as machinery or equipment, does not of $40,000. This is the FMV of the land received The total FMV of your neighbor's farmland and
qualify as a like-kind exchange. plus the cash minus the basis of the land you barn is $200,000. You want the new barn to
traded ($110,000 + $30,000 − $100,000). In- have a larger basis for depreciation, so you ar-
Exchange expenses. Exchange expenses are clude your gain in income (recognize gain) only range to sell your old farmland and barn to your
generally the closing costs that you pay. They to the extent of the cash received. Your basis in neighbor for $150,000. Your neighbor then sells
include such items as brokerage commissions, the land you received is figured as follows. his farmland and barn to you for $200,000.
However, you are treated as having exchanged
attorney fees, and deed preparation fees. Add the old property for the new property because
them to the basis of the like-kind property you Basis of land traded . . . . . . . . . . . . . $100,000 the sale and purchase are reciprocal and mutu-
receive. Minus: Cash received (adjustment ally dependent. Your basis in the new property
1a) . . . . . . . . . . . . . . . . . . . . . . . . . . − 30,000 is $120,000 ($50,000 cash paid plus $70,000
Property plus cash. If you trade property in a $70,000 adjusted basis in your old property), which must
like-kind exchange and also pay money, the ba- Plus: Gain recognized (adjustment be allocated between the farmland and the
sis of the property you receive is increased by 2b) . . . . . . . . . . . . . . . . . . . . . . . . . . + 30,000 barn.
the money you paid. Basis of land received. . . . . . . $100,000
Example. Assume the same facts from the Property Received as a Gift
previous example except you pay an additional Allocation of basis. If you receive like-kind
$20,000 in cash. Your adjusted basis in the and unlike properties in the exchange, allocate To figure the basis of property you receive as a
newly acquired farming real estate is $130,000 the basis first to the unlike property, other than gift, you must know the donor's adjusted basis
($110,000 adjusted basis of your old farmland money, up to its FMV on the date of the ex- (defined earlier) just before it was given to you.
plus the $20,000 cash you paid). change. The rest is the basis of the like-kind You must also know its FMV at the time it was
property. given to you and any gift tax paid on it.
Special rules for related persons. If a
like-kind exchange takes place directly or indi- Example. You trade a tract of farmland with FMV equal to or greater than donor's adjus-
rectly between related persons and either party an adjusted basis of $100,000 for another tract ted basis. If the FMV of the property is equal
disposes of the property within 2 years after the of farmland that has an FMV of $92,500. You to or greater than the donor's adjusted basis,
exchange, the exchange no longer qualifies for also receive $4,000 in cash and a pickup truck your basis is the donor's adjusted basis when
like-kind exchange treatment. Each person with an FMV of $11,000. Since only real prop- you received the gift. Increase your basis by all
must report any gain or loss not recognized on erty qualifies for like-kind exchange treatment, or part of any gift tax paid, depending on the
the original exchange unless the loss is not de- your receipt of the truck and cash means you date of the gift.
ductible under the related-party rules. Each per- must recognize gain on the exchange. You real- Also, for figuring gain or loss from a sale or
son reports it on the tax return filed for the year ize a gain of $7,500. This is the sum of the FMV other disposition of the property, or for figuring
in which the later disposition occurred. If this of the tract of farmland you receive, the FMV of depreciation, depletion, or amortization deduc-
rule applies, the basis of the property received the truck you receive, and the cash you receive, tions on business property, you must increase
in the original exchange will be its FMV. For minus the adjusted basis of the farmland you or decrease your basis (the donor's adjusted
more information, see chapter 8. traded ($92,500 + $11,000 + $4,000 – basis) by any required adjustments to basis
$100,000). You include in income (recognize) while you held the property. See Adjusted Ba-
Basis for depreciation. Special rules apply in all $7,500 of the gain because it is the lesser of sis, earlier.
determining and depreciating the basis of the realized gain ($7,500) and the sum of the If you received a gift during the tax year, in-
MACRS property acquired in a like-kind trans- FMV of the unlike property and the cash re- crease your basis in the gift (the donor's adjus-
action. For more information, see Figuring the ceived ($15,000). Your basis in the properties ted basis) by the part of the gift tax paid on it
Deduction for Property Acquired in a Nontaxa- you received is figured as follows. due to the net increase in value of the gift. Fig-
ble Exchange under Figuring Depreciation Un- ure the increase by multiplying the gift tax paid
der MACRS in chapter 7. Adjusted basis old farmland . . . . . . $100,000 by the following fraction.
Minus: Cash received (adjustment
Partially Nontaxable Exchanges 1a) . . . . . . . . . . . . . . . . . . . . . . . . . . − 4,000
$96,000 Net increase in value of the gift
A partially nontaxable exchange is an exchange Plus: Gain recognized (adjustment Amount of the gift
in which you receive property that is not a 2b) . . . . . . . . . . . . . . . . . . . . . . . . . . + 7,500
like-kind property or money in addition to a Total basis of properties The net increase in value of the gift is the
like-kind property. The basis of the property you received. . . . . . . . . . . . . . . . $103,500 FMV of the gift minus the donor's adjusted ba-
receive is the same as the adjusted basis of the sis. The amount of the gift is its value for gift tax
property you gave up with the following adjust- Allocate the basis of $103,500 first to the unlike purposes after reduction by any annual exclu-
ments. property, the truck ($11,000). This is the truck's sion and marital or charitable deduction that ap-
FMV. The rest ($92,500) is the basis in the farm- plies to the gift.
1. Decrease the basis by the following land.
amounts. Example. In 2022, you received a gift of
a. Any money you receive. property from your mother that had an FMV of
$50,000. Her adjusted basis was $20,000. The
b. Any loss you recognize on the ex- amount of the gift for gift tax purposes was
change. $34,000 ($50,000 minus the $16,000 annual
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exclusion). She paid a gift tax of $6,880. Your Property Transferred From a stops being used as a farm. This tax does not
basis, $26,054, is figured as follows. apply if you dispose of the property in a like-kind
Spouse exchange or in an involuntary conversion in
which all of the proceeds are reinvested in
Fair market value . . . . . . . . . . . . . . . . . . $50,000 The basis of property transferred to you or qualified replacement property. The tax also
Minus: Adjusted basis . . . . . . . . . . . . . . − 20,000 transferred in trust for your benefit by your does not apply if you transfer the property to a
Net increase in value . . . . . . . . . . . . . . . $30,000 spouse is the same as your spouse's adjusted member of your family and certain requirements
Gift tax paid . . . . . . . . . . . . . . . . . . . . . $6,880 basis. The same rule applies to a transfer by are met.
Multiplied by ($30,000 ÷ $34,000) . . . . . . × 0.88 your former spouse if the transfer is incident to
Gift tax due to net increase in value . . . . . $6,054 divorce. However, for property transferred in You can elect to increase your basis in spe-
Adjusted basis of property to your trust, adjust your basis for any gain recognized cial-use valuation property if it becomes subject
mother . . . . . . . . . . . . . . . . . . . . . . . + 20,000 to the additional estate tax. To increase your ba-
Your basis in the property. . . . . . . $26,054 by your spouse or former spouse if the liabilities
assumed plus the liabilities to which the prop- sis, you must make an irrevocable election and
erty is subject are more than the adjusted basis pay interest on the additional estate tax figured
Note. If you received a gift before 1977, of the property transferred. from the date 9 months after the decedent's
your basis in the gift (the donor's adjusted ba- death until the date of payment of the additional
sis) includes any gift tax paid on it. However, The transferor must give you the records estate tax. If you meet these requirements, in-
your basis cannot exceed the FMV of the gift needed to determine the adjusted basis and crease your basis in the property to its FMV on
when it was given to you. holding period of the property as of the date of the date of the decedent's death or the alternate
the transfer. valuation date. The increase in your basis is
FMV less than donor's adjusted basis. If the considered to have occurred immediately be-
FMV of the property at the time of the gift is less For more information, see Property Settle- fore the event that resulted in the additional es-
than the donor's adjusted basis, your basis de- ments in Pub. 504, Divorced or Separated Indi- tate tax.
pends on whether you have a gain or a loss viduals. You make the election by filing, with Form
when you dispose of the property. Your basis for 706-A, United States Additional Estate Tax Re-
figuring gain is the donor's adjusted basis plus Inherited Property turn, a statement that:
or minus any required adjustments to basis • Contains your (and the estate's) name, ad-
while you held the property. Your basis for figur- Your basis in property you inherited from a de- dress, and taxpayer identification number;
ing loss is its FMV when you received the gift cedent is generally one of the following. • Identifies the election as an election under
plus or minus any required adjustments to basis • The FMV of the property at the date of the section 1016(c) of the Internal Revenue
while you held the property. (See Adjusted Ba- decedent's death. If Form 706, United Code;
sis, earlier.) States Estate (and Generation-Skipping • Specifies the property for which you are
If you use the donor's adjusted basis for fig- Transfer) Tax Return, you can use its ap- making the election; and
uring a gain and get a loss, and then use the praised value. • Provides any additional information re-
FMV for figuring a loss and get a gain, you have • The FMV on the alternate valuation date if quired by the Form 706-A instructions.
neither gain nor loss on the sale or other dispo- the personal representative for the estate For more information, see Form 706; Form
sition of the property. elects to use alternate valuation. For infor- 706-A; and the related instructions.
mation on the alternate valuation, see the
Example. You received farmland as a gift Instructions for Form 706.
from your parents when they retired from farm- • The decedent's adjusted basis in land to Property Distributed From a
ing. At the time of the gift, the land had an FMV the extent of the value that is excluded Partnership or Corporation
of $80,000. Your parents' adjusted basis was from the decedent's taxable estate as a
$100,000. After you received the land, no qualified conservation easement. The following rules apply to determine a part-
events occurred that would increase or de- ner's basis and a shareholder's basis in prop-
crease your basis. If a federal estate tax return does not have to erty distributed respectively from a partnership
If you sell the land for $120,000, you will be filed, your basis in the inherited property is to the partner with respect to the partner's inter-
have a $20,000 gain because you must use the its appraised value at the date of death for state est in the partnership and from a corporation to
donor's adjusted basis at the time of the gift inheritance or transmission taxes. the shareholder with respect to the sharehold-
($100,000) as your basis to figure a gain. If you er's ownership of stock in the corporation.
sell the land for $70,000, you will have a Special-use valuation method. Under certain
$10,000 loss because you must use the FMV at conditions, when a person dies, the executor or Partner's basis. Unless there is a complete
the time of the gift ($80,000) as your basis to personal representative of that person's estate liquidation of a partner's interest, the basis of
figure a loss. may elect to value qualified real property at property (other than money) distributed by a
If the sales price is between $80,000 and other than its FMV. If so, the executor or per- partnership to the partner is its adjusted basis
$100,000, you have neither gain nor loss. For sonal representative values the qualified real to the partnership immediately before the distri-
instance, if the sales price was $90,000 and you property based on its use as a farm or other bution. However, the basis of the property to the
tried to figure a gain using the donor's adjusted closely held business. If the executor or per- partner cannot be more than the adjusted basis
basis ($100,000), you would get a $10,000 loss. sonal representative elects this method of valu- of his or her interest in the partnership reduced
If you then tried to figure a loss using the FMV ation for estate tax purposes, this value is the by any money received in the same transaction.
($80,000), you would get a $10,000 gain. basis of the property for the qualified heirs. The For more information, see Partner's Basis for
qualified heirs should be able to get the neces- Distributed Property in Pub. 541, Partnerships.
Business property. If you hold the gift as sary value from the executor or personal repre-
business property, your basis for figuring any sentative of the estate. Shareholder's basis. The basis of property
depreciation, depletion, or amortization deduc- If you are a qualified heir who received spe- distributed by a corporation to a shareholder is
tions is the same as the donor's adjusted basis cial-use valuation property, increase your basis its FMV. For more information about corporate
plus or minus any required adjustments to basis by any gain recognized by the estate or trust be- distributions, see Distributions to Shareholders
while you hold the property. For more informa- cause of post-death appreciation. Post-death in Pub. 542, Corporations.
tion on depreciation, depletion or amortization, appreciation is the property's FMV on the date
see chapter 7. of distribution minus the property's FMV either
on the date of the individual's death or on the al-
ternate valuation date. Figure all FMVs without
regard to the special-use valuation.
You may be liable for an additional estate tax
if, within 10 years after the death of the dece-
dent, you transfer the property or the property
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part of it each year. For most types of property, • What property cannot be depreciated.
this is called depreciation. • When depreciation begins and ends.
This chapter gives information on deprecia- • Whether MACRS can be used to figure de-
7. tion methods that generally apply to property preciation.
placed in service after 1986. For information on • What is the basis of your depreciable prop-
depreciating pre-1987 property, see Pub. 534, erty.
Depreciating Property Placed in Service Before • How to treat repairs and improvements.
Depreciation, 1987. • When you must file Form 4562.
• How you can correct depreciation claimed
Depletion, and Topics incorrectly.
This chapter discusses:
Amortization What Property Can Be
• Overview of depreciation Depreciated?
• Section 179 expense deduction
• Special depreciation allowance You can depreciate most types of tangible prop-
What's New for 2023 • Modified Accelerated Cost Recovery erty (except land), such as buildings, machi-
System (MACRS) nery, equipment, vehicles, certain livestock, and
Increased section 179 expense deduction • Listed property furniture. You can also depreciate certain intan-
dollar limits. The maximum amount you can • Basic information on cost depletion gible property, such as copyrights, patents, and
elect to deduct for most section 179 property (including timber depletion) and computer software. To be depreciable, the prop-
you placed in service in 2023 is $1,160,000. percentage depletion erty must meet all the following requirements.
This limit is reduced by the amount by which the • Amortization of the costs of going into It must be property you own.
cost of the property placed in service during the business, reforestation costs, the costs of •
tax year exceeds $2,890,000. Also, the maxi- pollution control facilities, and the costs of • It must be used in your business or in-
come-producing activity.
mum section 179 expense deduction for sport section 197 intangibles It must have a determinable useful life.
•
utility vehicles placed in service in tax years be- • It must have a useful life that extends sub-
ginning in 2023 is $28,900. See Dollar Limits Useful Items stantially beyond the year you place it in
under Section 179 Expense Deduction, later. You may want to see: service.
Phase down of special depreciation allow-
ance. The special depreciation allowance is Publication Property You Own
80% for certain qualified property acquired after
September 27, 2017, and placed in service af- 463 463 Travel, Gift, and Car Expenses
To claim depreciation, you must usually be the
ter December 31, 2022, and before January 1, 534 534 Depreciating Property Placed in owner of the property. You are considered as
2024 (other than certain property with a long Service Before 1987 owning property even if it is subject to a debt.
production period and certain aircraft). The spe-
cial depreciation allowance is also 80% for cer- 544 544 Sales and Other Dispositions of
tain specified plants bearing fruits and nuts Assets Leased property. You can depreciate leased
property only if you retain the incidents of own-
planted or grafted after December 31, 2022, 551 551 Basis of Assets ership in the property (explained below). This
and before January 1, 2024. See Certain quali-
fied property acquired after September 27, 946 946 How To Depreciate Property means you bear the burden of exhaustion of the
2017 and Certain specified plants under What capital investment in the property. If you lease
Is Qualified Property, later. Form (and Instructions) property from someone to use in your trade or
business or for the production of income, you
T T (Timber), Forest Activities Schedule generally cannot depreciate its cost because
What’s New for 2024 3115 3115 Application for Change in you do not have the incidents of ownership. You
Accounting Method can, however, depreciate any capital improve-
ments you make to the leased property. See Ad-
Phase down of special depreciation allow- 4562 4562 Depreciation and Amortization ditions and Improvements under Which Recov-
ance. The special depreciation allowance is
60% for certain qualified property acquired after 4797 4797 Sales of Business Property ery Period Applies? in chapter 4 of Pub. 946.
September 27, 2017, and placed in service af- You can generally depreciate the cost of
ter December 31, 2023, and before January 1, See chapter 16 for information about getting property you lease to someone even if the les-
2025 (other than certain property with a long publications and forms. see (the person leasing from you) has agreed to
production period and certain aircraft). For It is important to keep good records for preserve, replace, renew, and maintain the
property with a long production period and cer- property you depreciate. Do not file property. However, you cannot depreciate the
tain aircraft placed in service after December RECORDS these records with your return. Instead, cost of the property if the lease provides that the
31, 2023, and before January 1, 2025, the spe- you should keep them as part of the permanent lessee is to maintain the property and return to
cial depreciation allowance is 80%. The special records of the depreciated property. They will you the same property or its equivalent in value
depreciation allowance is also 60% for certain help you verify the accuracy of the depreciation at the expiration of the lease in as good condi-
specified plants bearing fruits and nuts planted of assets placed in service in the current and tion and value as when leased.
or grafted after December 31, 2023, and before previous tax years. For general information on Incidents of ownership. Incidents of own-
January 1, 2025. See Certain qualified property recordkeeping, see Pub. 583, Starting a Busi- ership in property include the following.
acquired after September 27, 2017 and Certain ness and Keeping Records. For specific infor- • The legal title to the property.
specified plants under What Is Qualified Prop- mation on keeping records for section 179 prop- • The legal obligation to pay for the property.
erty, later. erty and listed property, see Pub. 946. • The responsibility to pay maintenance and
operating expenses.
• The duty to pay any taxes on the property.
Introduction • The risk of loss if the property is destroyed,
Overview of
If you buy or make improvements to farm prop- condemned, or diminished in value
erty, such as machinery, equipment, livestock, Depreciation through obsolescence or exhaustion.
or a structure with a useful life of more than a
year, you generally cannot deduct its entire cost This overview discusses basic information on Life tenant. Generally, if you hold business or
in one year. Instead, you must spread the cost the following. investment property as a life tenant, you can de-
over the time you use the property and deduct • What property can be depreciated. preciate it as if you were the absolute owner of
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the property. See Certain term interests in prop- Dams, ponds, and terraces. In general, you depreciating property either when you have fully
erty, later, for an exception. cannot depreciate earthen dams, ponds, and recovered your cost or other basis or when you
terraces unless the structures have a determi- retire it from service, whichever happens first.
Property Used in Your Business or nable useful life.
Income-Producing Activity Placed in Service
What Property Cannot Be
To claim depreciation on property, you must use Depreciated? Property is placed in service when it is ready
it in your business or income-producing activity. and available for a specific use, whether in a
If you use property to produce income (invest- business activity, an income-producing activity,
ment use), the income must be taxable. You Certain property cannot be depreciated, even if
cannot depreciate property that you use solely the requirements explained earlier are met. This a tax-exempt activity, or a personal activity.
for personal activities. However, if you use prop- includes the following. Even if you are not using the property, it is in
erty for business or investment purposes and • Land. You can never depreciate the cost of service when it is ready and available for its
for personal purposes, you can deduct depreci- land because land does not wear out, be- specific use.
ation based only on the percentage of business come obsolete, or get used up. The cost of Example. You bought a planter for use in
or investment use. land generally includes the cost of clear- your farm business. The planter was delivered
ing, grading, planting, and landscaping. Al- in December 2022 after harvest was over. You
Example 1. If you use your car for farm though you cannot depreciate land, you begin to depreciate the planter in 2022 because
business, you can deduct depreciation based can depreciate certain costs incurred in it was ready and available for its specific use in
on its percentage of use in farming. If you also preparing land for business use. See chap- 2022, even though it will not be used until the
use it for investment purposes, you can depreci- ter 1 of Pub. 946. spring of 2023.
ate it based on its percentage of investment • Property placed in service and disposed of If your planter comes unassembled in De-
use. in the same year. Determining when prop- cember 2022 and is put together in February
erty is placed in service is explained later. 2023, it is not placed in service until 2023. You
business, you may be able to deduct deprecia- •
Example 2. If you use part of your home for Equipment used to build capital improve- begin to depreciate it in 2023.
ments. You must add otherwise allowable If your planter was delivered and assembled
tion on that part based on its business use. For depreciation on the equipment during the in February 2023 but not used until April 2023, it
more information, see Business Use of Your period of construction to the basis of your is placed in service in February 2023, because
Home in chapter 4. improvements. this is when the planter was ready for its speci-
You may be able to use the simplified • Intangible property such as section 197 in- fied use. You begin to depreciate it in 2023.
TIP method to determine your business tangibles. This property does not have a
use of the home deduction. If you determinable useful life and generally can- Fruit or nut trees and vines. If you acquire an
choose to use the simplified method, you can- not be depreciated. However, see Amorti- orchard, grove, or vineyard before the trees or
not also deduct depreciation on the part of the zation, later. Special rules apply to com- vines have reached the income-producing
home used for business. For more information puter software (discussed below). stage, and they have a preproductive period of
about the simplified method, see Pub. 587, • Certain term interests (discussed below). more than 2 years, you must capitalize the pre-
Business Use of Your Home. productive-period costs under the uniform capi-
Computer software. Computer software is talization rules (unless you meet the small busi-
Inventory. You can never depreciate inventory generally not a section 197 intangible even if ness taxpayer exception or elect not to use
because it is not held for use in your business. acquired in connection with the acquisition of a these rules). See chapter 6 for information
Inventory is any property you hold primarily for business, if it meets all of the following tests. about the uniform capitalization rules. Your de-
sale to customers in the ordinary course of your • It is readily available for purchase by the preciation begins when the trees and vines
business. general public. reach the income-producing stage (that is,
• It is subject to a nonexclusive license. when they bear fruits, nuts, or grapes in quanti-
Livestock. Livestock purchased for draft, • It has not been substantially modified. ties sufficient to commercially warrant harvest-
breeding, or dairy purposes can be depreciated If the software meets the tests above, it can ing). For information on claiming the special de-
only if they are not kept in an inventory account. be depreciated and may qualify for the section preciation allowance for certain specified plants
Livestock you raise usually has no depreciable 179 expense deduction and the special depre- bearing fruits and nuts, see Certain specified
basis because the costs of raising them are de- ciation allowance (if applicable), discussed plants, later.
ducted and not added to their basis. However, later.
see Immature livestock under When Does De- Note. Any farming business that has aver-
preciation Begin and End, later, for a special Certain term interests in property. You can- age annual gross receipts of $29 million or less
rule. not depreciate a term interest in property cre- for the 3 preceding tax years and is not a tax
ated or acquired after July 27, 1989, for any pe- shelter is not subject to the uniform capitaliza-
Property Having a Determinable riod during which the remainder interest is held, tion rules.
Useful Life directly or indirectly, by a person related to you.
This rule does not apply to the holder of a term Immature livestock. Depreciation for livestock
To be depreciable, your property must have a interest in property acquired by gift, bequest, or begins when the livestock reaches the age of
determinable useful life. This means it must be inheritance. For more information, see chapter 1 maturity. If you bought immature livestock for
something that wears out, decays, gets used of Pub. 946. drafting purposes, depreciation begins when
up, becomes obsolete, or loses its value from they can be worked. If you bought immature
natural causes. Example. You retain a life interest in a dairy livestock for breeding or dairy purposes, depre-
facility but transfer the remainder interest to ciation begins when they can be bred. Your ba-
Irrigation systems and water wells. Irrigation your daughter. Your term interest in the dairy fa- sis for depreciation is your initial cost for the im-
systems and water wells used in a trade or busi- cility is not depreciable even though you may mature livestock.
ness can be depreciated if their useful life can still be using it in your dairy operation.
be determined. You can depreciate irrigation Idle Property
systems and water wells composed of masonry, When Does Depreciation
concrete, tile (including drainage tile), metal, or
wood. In addition, you can depreciate costs for Begin and End? Continue to claim a deduction for depreciation
moving dirt to construct irrigation systems and on property used in your business or for the pro-
water wells composed of these materials. How- You begin to depreciate your property when you duction of income even if it is temporarily idle.
ever, land preparation costs for center pivot irri- place it in service for use in your trade or busi- For example, if you stop using a machine be-
gation systems are not depreciable. ness or for the production of income. You stop cause there is a temporary lack of a market for a

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product made with that machine, continue to obligations, other property, or services. For Claiming the Special Depreciation Allowance,
deduct depreciation on the machine. more information, see chapter 6. Figuring Depreciation Under MACRS, later.
There are times when you cannot use cost
Cost or Other Basis Fully as basis. In these situations, the fair market Do You Have To File
Recovered value (FMV) or the adjusted basis of the prop-
erty may be used. Form 4562?
You stop depreciating property when you have Use Form 4562 to claim your deduction for de-
fully recovered your cost or other basis. This Adjusted basis. To find your property's basis
happens when your section 179 and allowed or for depreciation, you may have to make certain preciation and amortization. You must complete
allowable depreciation deductions equal your adjustments (increases and decreases) to the and attach Form 4562 to your tax return if you
cost or investment in the property. basis of the property for events occurring be- are claiming any of the following.
tween the time you acquired the property and • A section 179 expense deduction for the
the time you placed it in service. current year or a section 179 carryover
Retired From Service from a prior year.
Basis adjustment for depreciation allowed • Depreciation for property placed in service
You stop depreciating property when you retire or allowable. After you place your property in during the current year.
it from service, even if you have not fully recov- service, you must reduce the basis of the prop- • Depreciation on any vehicle or other listed
ered its cost or other basis. You retire property erty by the depreciation allowed or allowable, property, regardless of when it was placed
from service when you permanently withdraw it whichever is greater. Depreciation allowed is in service.
from use in a trade or business or from use in depreciation you actually deducted (from which • Amortization of costs that began in the cur-
the production of income because of any of the you received a tax benefit). Depreciation allowa- rent year.
following events. ble is depreciation you are entitled to deduct. For more information, see the Instructions
• You sell or exchange the property. If you do not claim depreciation you are enti- for Form 4562.
• You convert the property to personal use. tled to deduct, you must still reduce the basis of
• You abandon the property. the property by the full amount of depreciation
• You transfer the property to a supplies or allowable. How Do You Correct
scrap account. If you deduct more depreciation than you Depreciation Deductions?
• The property is destroyed. should, you must reduce your basis by any
amount deducted from which you received a tax If you deducted an incorrect amount of depreci-
For information on abandonment of property, benefit (the depreciation allowed). ation in any year, you may be able to make a
see chapter 8. For information on destroyed For more information, see chapter 6. correction by filing an amended return for that
property, see chapter 11, and Pub. 547, Casual- year. You can file an amended return to correct
ties, Disasters, and Thefts. the amount of depreciation claimed for any
How Do You Treat Repairs property in any of the following situations.
Can You Use MACRS To and Improvements? • You claimed the incorrect amount because
of a mathematical error made in any year.
Depreciate Your Property? If you improve depreciable property, you must • You claimed the incorrect amount because
treat the improvement as separate depreciable of a posting error made in any year, for ex-
You must use the Modified Accelerated Cost property. Improvement means an addition to or ample, omitting an asset from the depreci-
Recovery System (MACRS) to depreciate most partial replacement of property that is a better- ation schedule.
business and investment property placed in ment to the property, restores the property, or • You have not adopted a method of ac-
service after 1986. MACRS is explained later adapts it to a new or different use. See Regula- counting for the property placed in service
under Figuring Depreciation Under MACRS. tions section 1.263(a)-3. by you in tax years ending after December
29, 2003.
You cannot use MACRS to depreciate the You generally deduct the cost of repairing • You claimed the incorrect amount on prop-
following property. business property in the same way as any other erty placed in service by you in tax years
• Property you placed in service before business expense. However, if the cost is for a ending before December 30, 2003.
1987. Use the methods discussed in Pub. betterment to the property, restores the prop-
534. erty, or adapts it to a new or different use, you Note. You have adopted a method of account-
• Certain property owned or used in 1986. must treat it as an improvement and depreciate ing if you used the same incorrect method of
See chapter 1 of Pub. 946. it. See chapter 1 of Pub. 946 for more informa- depreciation for two or more consecutively filed
• Intangible property. tion. returns.
• Films, videotapes, and recordings. If you are not allowed to make the correction
• Certain corporate or partnership property Example. You repair a small section on a on an amended return, you may be able to
acquired in a nontaxable transfer. corner of the roof of a barn that you rent to oth- change your accounting method to claim the
• Property you elected to exclude from ers. You deduct the cost of the repair as a busi- correct amount of depreciation. See the Instruc-
MACRS. ness expense. However, if you replace the en- tions for Form 3115.
tire roof, the new roof is considered to be an
For more information, see chapter 1 of Pub. improvement because it increases the value
946. and lengthens the life of the property. You de-
preciate the cost of the new roof. Section 179 Expense
What Is the Basis of Your Improvements to rented property. You can Deduction
Depreciable Property? depreciate permanent improvements you make You can elect to recover all or part of the cost of
to business property you rent from someone certain qualifying property, up to a limit, by de-
To figure your depreciation deduction, you must else. ducting it in the year you place the property in
determine the basis of your property. To deter- service. This is the section 179 expense deduc-
mine basis, you need to know the cost or other Example. You rent 100 acres from your
basis of your property. landlord on a 5-year term. You install $25,000 of tion. You can elect the section 179 expense de-
drainage tile. The recovery period for drainage duction instead of recovering the cost by taking
Cost or other basis. The basis of property tile is 15 years, not the term of the lease. You depreciation deductions.
you buy is usually its cost plus amounts you may be able to take a section 179 expense de- This part of the chapter explains the rules for
paid for items such as sales tax, freight duction, special depreciation allowance, or de- the section 179 expense deduction. It explains
charges, and installation and testing fees. The preciation expense under MACRS for the drain- what property qualifies for the deduction, what
cost includes the amount you pay in cash, debt age tile. See Section 179 Expense Deduction, property does not qualify for the deduction, the
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limits that may apply, how to elect the deduc- Facility used for the bulk storage of fungi- property placed in service after the date such
tion, and when you may have to recapture the ble commodities. A facility used for the bulk qualified real property was first placed in serv-
deduction. storage of fungible commodities is qualifying ice.
property for purposes of the section 179 ex- • Roofs.
For more information, see chapter 2 of Pub. pense deduction if it is used in connection with • Heating, ventilation, and air conditioning.
946. any of the activities listed earlier in item 2c un- • Fire protection and alarms.
der Eligible Property. Bulk storage means the • Security systems.
storage of a commodity in a large mass before it
What Property Qualifies? is used. Property Acquired by Purchase
To qualify for the section 179 expense deduc- Grain bins. A grain bin is an example of a
tion, your property must meet all the following storage facility that is qualifying section 179 To qualify for the section 179 expense deduc-
requirements. property. It is a facility used in connection with tion, your property must have been acquired by
• It must be eligible property. the production of grain or livestock for the bulk purchase. For example, property acquired by
• It must be acquired primarily for business storage of fungible commodities. gift or inheritance does not qualify. Property ac-
use. quired from a related person (that is, your
• It must have been acquired by purchase. Single-purpose agricultural or horticultural spouse, ancestors, or lineal descendants) is not
structures. A single-purpose agricultural (live- considered acquired by purchase. New or used
stock) or horticultural structure is qualifying equipment you acquired by purchase during the
Eligible Property property for purposes of the section 179 ex- current tax year qualifies for the section 179 de-
pense deduction. duction.
To qualify for the section 179 expense deduc-
tion, your property must be one of the following Agricultural structure. A single-purpose Example. You are a farmer. You purchased
types of depreciable property. agricultural (livestock) structure is any building two tractors, one from your sibling and one from
or enclosure specifically designed, constructed, your parent. You placed both tractors in service
1. Tangible personal property. and used for both the following reasons. in the same year you bought them. The tractor
2. Other tangible property (except buildings • To house, raise, and feed a particular type purchased from your parent does not qualify for
and their structural components) used as: of livestock and its produce. the section 179 expense deduction because
• To house the equipment, including any re- you are a related person (as defined above).
a. An integral part of manufacturing, pro- placements, needed to house, raise, or The tractor purchased from your sibling does
duction, or extraction or of furnishing feed the livestock. qualify for the deduction because you are not a
transportation, communications, elec- related person (as defined above).
tricity, gas, water, or sewage disposal For this purpose, livestock includes poultry.
services; Single-purpose structures are qualifying
property if used, for example, to breed chickens What Property Does Not
b. A research facility used in connection or hogs, produce milk from dairy cattle, or pro- Qualify?
with any of the activities in (a) above; duce feeder cattle or pigs, broiler chickens, or
or eggs. The facility must include, as an integral Land and improvements. Land and land im-
c. A facility used in connection with any part of the structure or enclosure, equipment provements do not qualify as section 179 prop-
of the activities in (a) for the bulk stor- necessary to house, raise, and feed the live- erty. Land improvements include swimming
age of fungible commodities. stock. pools, paved parking areas, wharves, docks,
3. Single-purpose agricultural (livestock) or Horticultural structure. A single-purpose bridges, and nonagricultural fences. However,
horticultural structures. horticultural structure is either of the following. agricultural fences do qualify as section 179
4. Storage facilities (except buildings and • A greenhouse specifically designed, con- property. Similarly, field drainage tile also quali-
structed, and used for the commercial pro- fies as section 179 property.
their structural components) used in con- duction of plants.
nection with distributing petroleum or any • A structure specifically designed, construc- Excepted property. Even if the requirements
primary product of petroleum. ted, and used for the commercial produc- explained in the preceding discussions are met,
5. Qualified real property. (Special rules ap- tion of mushrooms. farmers cannot elect the section 179 expense
ply to qualified real property that you elect deduction for the following property.
to treat as qualified section 179 real prop- Use of structure. A structure must be used • Certain property you lease to others (if you
erty. For more information, see chapter 2 only for the purpose that qualified it. For exam- are a noncorporate lessor).
of Pub. 946, and section 179(f) of the In- ple, a hog barn will not be qualifying property if • Certain property used predominantly to fur-
ternal Revenue Code.) you use it to house poultry. Similarly, using part nish lodging or in connection with the fur-
of your greenhouse to sell plants will make the nishing of lodging.
6. Off-the-shelf computer software that is greenhouse nonqualifying property. • Property used by a tax-exempt organiza-
readily available for purchase by the gen- If a structure includes work space, the work tion (other than a tax-exempt farmers' co-
eral public, is subject to a nonexclusive space can be used only for the following activi- operative) unless the property is used
lease, and has not been substantially ties. mainly in a taxable unrelated trade or busi-
modified. • Stocking, caring for, or collecting livestock ness.
or plants or their produce. • Property used by governmental units or
Tangible personal property. Tangible per- • Maintaining the enclosure or structure. foreign persons or entities (except property
sonal property is any tangible property that is • Maintaining or replacing the equipment or used under a lease with a term of less than
not real property. It includes the following prop- stock enclosed or housed in the structure. 6 months).
erty.
• Machinery and equipment. Note. Recent legislation has changed the
• Property contained in or attached to a treatment of qualified improvement property How Much Can You Deduct?
building (other than structural compo- placed in service after December 31, 2017, to
nents), such as milk tanks, automatic feed- 15-year property under MACRS. See chapter 3 Your section 179 expense deduction is gener-
ers, barn cleaners, and office equipment. of Pub. 946 for more information. ally the cost of the qualifying property. However,
• Gasoline storage tanks and pumps at retail the total amount you can elect to deduct under
service stations. Qualified real property. Qualified real section 179 is subject to a dollar limit and a
• Livestock, including horses, cattle, hogs, property is any qualified improvement property business income limit. These limits apply to
sheep, goats, and mink and other fur-bear- described in section 168(e)(6), and any of the each taxpayer, not to each business. However,
ing animals. following improvements to nonresidential real see Married individuals under Dollar Limits,
later. Also, see the special rules for applying the
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limits for partnerships and S corporations under MACRS. See Figuring Depreciation Under • Interest from working capital of your trade
Partnerships and S Corporations, later. MACRS, later. or business.
• Wages, salaries, tips, or other pay earned
If you deduct only part of the cost of qualify- Limits for sport utility vehicles. The total by you (or your spouse if you file a joint re-
ing property as a section 179 expense deduc- amount you can elect to deduct for certain sport turn) as an employee of any employer.
tion, you can generally depreciate the cost you utility vehicles and certain other vehicles placed In addition, figure taxable income without re-
do not deduct. in service in 2023 is $28,900. This rule applies gard to any of the following.
Use Part I of Form 4562 to figure your sec- to any 4-wheeled vehicle primarily designed or The section 179 expense deduction.
tion 179 expense deduction. used to carry passengers over public streets, •
roads, and highways that is rated at more than • The self-employment tax deduction.
Partial business use. When you use property 6,000 pounds gross vehicle weight and not • Any net operating loss carryback or carry-
forward.
for business and nonbusiness purposes, you more than 14,000 pounds gross vehicle weight. Any unreimbursed employee business ex-
•
can elect the section 179 expense deduction For more information, see chapter 2 of Pub. penses.
only if you use it more than 50% for business in 946.
the year you place it in service. If you used the Also, see chapter 2 of Pub. 946.
property more than 50% for business, multiply Limits for passenger automobiles. For a
the cost of the property by the percentage of passenger automobile that is placed in service Two different taxable income limits. In addi-
business use. Use the resulting business cost in 2023, the total section 179 and depreciation tion to the business income limit for your section
to figure your section 179 expense deduction. deduction is limited. See Do the Passenger Au- 179 expense deduction, you may have a taxa-
tomobile Limits Apply, later. ble income limit for some other deduction (for
Trade-in of other property. If you buy qualify- example, charitable contributions). You may
ing property with cash and a trade-in, its cost for Married individuals. If you are married, how have to figure the limit for this other deduction
purposes of the section 179 expense deduction you figure your section 179 expense deduction taking into account the section 179 expense de-
includes only the cash you paid. depends on whether you file jointly or sepa- duction. If so, complete the following steps.
rately. If you file a joint return, you and your
Example. Adyo Farms traded real property spouse are treated as one taxpayer in determin- Step Action
X having a total adjusted basis of $6,800 for ing any reduction to the dollar limit, regardless 1 Figure taxable income without the
new real property Z costing $13,200. They re- of which of you purchased the property or section 179 expense deduction or the
ceived an $8,000 trade-in allowance for the old placed it in service. If you and your spouse file other deduction.
real property X, and paid $5,200 in cash for the separate returns, you are treated as one tax- 2 Figure a hypothetical section 179
new real property Z. payer for the dollar limit, including the reduction expense deduction using the taxable
For purposes of the section 179 expense for costs over $2,890,000. You must allocate the income figured in Step 1.
deduction, only the cash paid by Adyo qualifies dollar limit (after any reduction) equally between 3 Subtract the hypothetical section 179
for the section 179 expense deduction. Adyo's you, unless you both elect a different allocation. expense deduction figured in Step 2
business costs that qualify for a section 179 ex- If the percentages elected by each of you do not from the taxable income figured in Step
pense deduction are $5,200. For information on total 100%, 50% will be allocated to each of 1.
the maximum amount you can elect to deduct, you. 4 Figure a hypothetical amount for the
other deduction using the amount
see Dollar Limits next. Joint return after separate returns. If you figured in Step 3 as taxable income.
and your spouse elect to amend your separate 5 Subtract the hypothetical other
Dollar Limits returns by filing a joint return after the due date deduction figured in Step 4 from the
for filing your return, the dollar limit on the joint taxable income figured in
The total amount you can elect to deduct under return is the lesser of the following amounts. Step 1.
section 179 for most property placed in service • The dollar limit (after reduction for any cost 6 Figure your actual section 179 expense
in 2023 is $1,160,000. If you acquire and place of section 179 property over $2,890,000). deduction using the taxable income
in service more than one item of qualifying • The total cost of section 179 property you figured in Step 5.
property during the year, you can allocate the and your spouse elected to expense on 7 Subtract your actual section 179
section 179 expense deduction among the your separate returns. expense deduction figured in Step 6
from the taxable income figured in Step
items in any way, as long as the total deduction 1.
is not more than $1,160,000. You cannot carry Business Income Limit 8 Figure your actual other deduction using
costs in excess of the $1,160,000 limit over to the taxable income figured in Step 7.
future years.
The total cost you can deduct each year after
Reduced dollar limit for cost exceeding you apply the dollar limit is limited to the taxable Example. On February 1, 2023, the XYZ
$2,890,000. If the cost of your qualifying sec- income from the active conduct of any trade or farm corporation purchased and placed in serv-
tion 179 property placed in service in 2023 is business during the year. Generally, you are ice qualifying section 179 property that cost
over $2,890,000, you must reduce the dollar considered to actively conduct a trade or busi- $500,000. It elects to expense the entire
limit (but not below zero) by the amount of cost ness if you meaningfully participate in the man- $500,000 cost under section 179. In June, the
over $2,890,000. If the cost of your section 179 agement or operations of the trade or business. corporation gave a charitable contribution of
property placed in service during 2023 is $100,000. A corporation's limit on charitable
$4,050,000 or more, you cannot take a section Any cost not deductible in one year under contributions is figured after subtracting any
179 expense deduction and you cannot carry section 179 because of this limit can be carried section 179 expense deduction. The business
over any of the cost that is more than to the next year. See Carryover of disallowed income limit for the section 179 expense deduc-
$4,050,000. deduction, later. tion is figured after subtracting any allowable
charitable contributions. XYZ's taxable income
Example. This year, George Thomas Taxable income. In general, figure taxable in- figured without the section 179 expense deduc-
placed in service machinery costing come for this purpose by totaling the net income tion or the deduction for charitable contributions
$2,990,000. Because this cost is $100,000 and losses from all trades and businesses you is $700,000. XYZ figures its section 179 ex-
more than $2,890,000, George must reduce the actively conducted during the year. In addition pense deduction and its deduction for charita-
dollar limit to $1,060,000 ($1,160,000 − to net income or loss from a sole proprietorship, ble contributions as follows.
$100,000). George cannot carry over any of the partnership, or S corporation, net income or Step 1. Taxable income figured without ei-
costs that exceed the $1,060,000 reduced limit. loss derived from a trade or business also in- ther deduction is $700,000.
The remaining cost of the machinery not al- cludes the following items.
lowed as a section 179 expense deduction is el- • Section 1231 gains (or losses) as dis-
igible for a depreciation expense under cussed in chapter 9.
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Step 2. Using $700,000 as taxable in- in the dollar limit for costs over $2,890,000, you When Must You Recapture
come, XYZ's hypothetical section 179 ex- do not include any of the cost of section 179
pense deduction is $500,000. property placed in service by the partnership or the Deduction?
Step 3. $200,000 ($700,000 − $500,000). S corporation. After you apply the dollar limit,
Step 4. Using $200,000 (from Step 3) as you apply the business income limit to any re- You may have to recapture the section 179 ex-
taxable income, XYZ's hypothetical charita- maining section 179 costs. For more informa- pense deduction if, in any year during the prop-
ble contribution (limited to 10% of taxable tion, see chapter 2 of Pub. 946. erty's recovery period, the percentage of busi-
income) is $20,000. ness use drops to 50% or less. In the year the
Step 5. $680,000 ($700,000 − $20,000). Example. In 2023, Partnership P placed in business use drops to 50% or less, you include
Step 6. Using $680,000 (from Step 5) as service section 179 property with a total cost of the recapture amount as ordinary income. You
taxable income, XYZ figures the actual sec- $2,990,000. P must reduce its dollar limit by also increase the basis of the property by the
tion 179 expense deduction. Because the $100,000 ($2,990,000 − $2,890,000). Its maxi- recapture amount. Recovery periods for prop-
taxable income is at least $500,000, XYZ mum section 179 expense deduction is erty are discussed later.
can take a $500,000 section 179 expense $1,060,000 ($1,160,000 − $100,000), and it If you sell, exchange, or otherwise dis-
deduction. elects to expense that amount. Because P's ! pose of the property, do not figure the
Step 7. $200,000 ($700,000 − $500,000). taxable income from the active conduct of all its CAUTION recapture amount under the rules ex-
Step 8. Using $200,000 (from Step 7) as trades or businesses for the year was plained in this discussion. Instead, use the rules
taxable income, XYZ's actual charitable $2,000,000, it can deduct the full $1,060,000. P for recapturing depreciation explained under
contribution (limited to 10% of taxable in- allocates $200,000 of its section 179 expense Section 1245 Property in chapter 9.
come) is $20,000. deduction and $500,000 of its taxable income
to John, one of its partners. If the property is listed property, do not
Carryover of disallowed deduction. You can John also conducts a business as a sole ! figure the recapture amount under the
carry over for an unlimited number of years the proprietor and, in 2023, placed in service in that CAUTION rules explained in this discussion when
cost of any section 179 property you elected to business, section 179 property costing the percentage of business use drops to 50% or
expense but were unable to because of the $800,000. John's taxable income from that less. Instead, use the rules for recapturing de-
business income limit. business was $200,000. In addition to the preciation explained under Recapture of Excess
The amount you carry over is used in deter- $200,000 allocated from P, John elects to ex- Depreciation in chapter 5 of Pub. 946.
mining your section 179 expense deduction in pense the $550,000 of the sole proprietorship's
the next year. However, it is subject to the limits section 179 costs. However, John's deduction is
in that year. If you place more than one property limited to the business taxable income of Figuring the recapture amount. To figure the
in service in a year, you can select the proper- $700,000 ($500,000 from P plus $200,000 from amount to recapture, take the following steps.
ties for which all or a part of the cost will be car- the sole proprietorship). John carries over 1. Figure the allowable depreciation for the
ried forward. Your selections must be shown in $50,000 ($750,000 − $700,000) of the elected section 179 expense deduction you
your books and records. section 179 costs to 2024. claimed. Begin with the year you placed
the property in service and include the
Example. Last year, Diana Reynolds year of recapture.
placed in service a machine that cost $100,000 How Do You Elect the
and elected to deduct all $100,000 under sec- Deduction? 2. Subtract the depreciation figured in (1)
tion 179. The taxable income from Diana’s busi- from the section 179 expense deduction
ness (determined without regard to both a sec- You elect to take the section 179 expense de- you actually claimed. The result is the
tion 179 expense deduction for the cost of the duction by completing Part I of Form 4562. amount you must recapture.
machine and the self-employment tax deduc- If you elect the deduction for listed Example. In January 2021, you are a calen-
tion) was $80,000. Diana’s section 179 expense ! property, complete Part V of Form 4562 dar year taxpayer. You bought and placed in
deduction was limited to $80,000. The $20,000 CAUTION before completing Part I. service section 179 property costing $10,000.
cost that was not allowed as a section 179 ex- The property is 3-year property and is depreci-
pense deduction (because of the business in- File Form 4562 with either of the following. ated under MACRS and a half-year convention.
come limit) is carried to this year. • Your original tax return (whether or not you The property is not listed property. You elected
This year, Diana placed another machine in filed it timely). a $5,000 section 179 expense deduction for the
service that cost $110,000. Diana’s taxable in- • An amended return filed within the time property and also elected not to claim a special
come from business (determined without regard prescribed by law. An election made on an depreciation allowance. You used the property
to both a section 179 expense deduction for the amended return must specify the item of only for business in 2021 and 2022. During
cost of the machine and the self-employment section 179 property to which the election 2023, you used the property 40% for business
tax deduction) is $120,000. Diana can deduct applies and the part of the cost of each and 60% for personal use. You figure the recap-
the full cost of the machine ($110,000) but only such item to be taken into account. The ture amount as follows.
$10,000 of the carryover from last year because amended return must also include any re-
of the business income limit. Diana can carry sulting adjustments to taxable income. Section 179 expense deduction claimed
over the balance of $10,000 to next year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000
(2021)
Revoking an election. An election (or any
Partnerships and S Corporations specification made in the election) to take a Minus: Allowable depreciation
section 179 expense deduction for 2023 can be (instead of section 179 expense deduction):
2021 . . . . . . . . . . . . . . . . . . . . . . $1,250
The section 179 expense deduction limits apply revoked without IRS approval by filing an amen- 2022 . . . . . . . . . . . . . . . . . . . . . . 1,875
both to the partnership or S corporation and to ded return. The amended return must be filed 2023 ($1,250 × 40% (business)) . . . 500 3,625
each partner or shareholder. The partnership or within the time prescribed by law. The amended 2023 — Recapture amount. . . . . . . . . $1,375
S corporation determines its section 179 ex- return must also include any resulting adjust-
pense deduction subject to the limits. It then al- ments to taxable income (for example, allowa-
locates the deduction among its partners or ble depreciation in that tax year for the item of You must include $1,375 in income for 2023.
shareholders. section 179 property for which the election per-
tains). Once made, the revocation is irrevoca- Where to report recapture. Report any re-
If you are a partner in a partnership or share- ble. capture of the section 179 expense deduction
holder of an S corporation, you add the amount as ordinary income in Part IV of Form 4797 and
allocated from the partnership or S corporation include it in income on Schedule F (Form 1040).
to any section 179 costs not related to the part-
nership or S corporation and then apply the dol- Recapture for qualified section 179 GO
lar limit to this total. To determine any reduction Zone property. If any qualified section 179 GO
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Zone property ceases to be used in the GO for the adjusted basis of certain specified plants the amount of the special depreciation allow-
Zone in a later year, you must recapture the (defined later) bearing fruits and nuts planted or ance previously allowed or allowable. For more
benefit of the increased section 179 expense grafted after December 31, 2022, and before information, see chapter 3 of Pub. 946.
deduction as “other income.” January 1, 2024.. For certain specified plants
bearing fruits and nuts planted or grafted after
December 31, 2023, and before January 1, Figuring Depreciation
Claiming the Special 2025, you can elect to claim a 60% special al-
lowance. Under MACRS
Depreciation Allowance A specified plant is:
• Any tree or vine that bears fruits or nuts, MACRS is used to recover the basis of most
For qualified property (defined below) placed in and business and investment property placed in
service in 2023, you can take a special depreci- • Any other plant that will have more than service after 1986. MACRS consists of two de-
ation allowance depending on the date you ac- one yield of fruits or nuts and generally has preciation systems, the General Depreciation
quired the qualified property. The allowance is a pre-productive period of more than 2 System (GDS) and the Alternative Depreciation
an additional deduction you can take before you years from planting and grafting to the time System (ADS). Generally, these systems pro-
figure regular depreciation under MACRS. Fig- it begins bearing fruits or nuts. vide different methods and recovery periods to
ure the special depreciation allowance by multi- use in figuring depreciation deductions.
plying the depreciable basis of the qualified Any property planted or grafted outside the
property by the applicable percentage. United States does not qualify as a specified To be sure you can use MACRS to fig-
plant. ! ure depreciation for your property, see
If you elect to claim the special depreciation CAUTION Can You Use MACRS To Depreciate
What Is Qualified Property? allowance for any specified plant, the plant will Your Property, earlier.
not be treated as qualified property eligible for
For farmers, qualified property is certain prop- the special depreciation allowance in the subse- This part explains how to determine which
erty acquired after September 27, 2017, and quent tax year in which it is placed in service. MACRS depreciation system applies to your
certain specified plants. To make the election, attach a statement to property. It also discusses the following informa-
your timely filed return (including extensions) for tion that you need to know before you can figure
Certain qualified property acquired after the tax year in which you plant or graft the depreciation under MACRS.
September 27, 2017. You can elect to take an specified plant(s) indicating you are electing to • Property's recovery class.
80% special depreciation allowance for certain apply section 168(k)(5) and identifying the • Placed-in-service date.
qualified property acquired after September 27, specified plant(s) for which you are making the • Basis for depreciation.
2017, and placed in service after December 31, election. Once made, the election cannot be re- • Recovery period.
2022, and before January 1, 2024 (other than voked without IRS consent. • Convention.
certain property with a long production period See section 168(k)(5) of the Internal Reve- • Depreciation method.
and certain aircraft). For certain qualified prop- nue Code. Finally, this part explains how to use this infor-
erty acquired after September 27, 2017, and mation to figure your depreciation deduction.
placed in service after December 31, 2023, and
before January 1, 2025 (other than certain prop- How Can You Elect Not To
erty with a long production period and certain Claim the Allowance? Which Depreciation System
aircraft), you can elect to take a 60% special de- (GDS or ADS) Applies?
preciation allowance. You can elect, for any class of property, not to
You can elect to take a 100% special depre- deduct the special depreciation allowance for all Your use of either GDS or ADS to depreciate
ciation allowance for certain property with a property in such class placed in service during property under MACRS determines what depre-
long production period and certain aircraft ac- the tax year. To make the election, attach a ciation method and recovery period you use.
quired and placed in service after September statement to your return indicating the class of You must generally use GDS unless you are
27, 2017, and before January 1, 2024. For cer- property for which you are making the election. specifically required by law to use ADS or you
tain property with a long production period and elect to use ADS.
certain aircraft acquired after September 27, Generally, you must make the election on a
2017, and placed in service after December 31, timely filed tax return (including extensions) for Required use of ADS. You must use ADS for
2023, and before January 1, 2025, you can the year in which you place the property in serv- the following property.
elect to take an 80% special depreciation allow- ice. However, if you timely filed your return for • All property used predominantly in a farm-
ance. the year without making the election, you can ing business and placed in service in any
Your property is qualified property if it meets still make the election by filing an amended re- tax year during which an election not to ap-
the following requirements. turn within 6 months of the due date of the origi- ply the uniform capitalization rules to cer-
nal return (not including extensions). Attach the tain farming costs is in effect.
1. It is one of the following types of property. election statement to the amended return. On • Listed property used 50% or less in a
a. Tangible property depreciated under the amended return, write “Filed pursuant to qualified business use. See Additional
MACRS with a recovery period of 20 section 301.9100-2.” Rules for Listed Property, later.
years or less. • Any tax-exempt use property.
Once made, the election may not be re- • Any tax-exempt bond-financed property.
b. Water utility property depreciated un- voked without IRS consent. • Any property imported from a foreign coun-
der MACRS. try for which an Executive order is in effect
If you elect not to have the special de-
because the country maintains trade re-
c. Computer software defined in and de- ! preciation allowance apply, the prop- strictions or engages in other discrimina-
preciated under section 167(f)(1) of CAUTION erty may be subject to an alternative
the Internal Revenue Code. minimum tax adjustment for depreciation. tory acts.
• Any tangible property used predominantly
2. Qualified property can be either new prop- outside the United States during the year.
erty or certain used property.
When Must You Recapture Note. You must use ADS if you are required
3. It is not excepted property. an Allowance? to file Form 8990 and you elect to expense
For more information, see chapter 3 of Pub. farming interest expense.
946. When you dispose of property for which you
claimed a special depreciation allowance, any
Certain specified plants. You can elect to gain on the disposition is generally recaptured
claim an 80% special depreciation allowance (included in income) as ordinary income up to
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Table 7-1. Farm Property Recovery Periods                                                                                                     Also,  see    Certain  specified  plants,  earlier, 
                                                                                                                  Recovery Period in Years    for information on the placed-in-service date for 
                                                                                                                                              specified  plants  bearing  fruits  and  nuts  for 
Assets                                                                                                            GDS  ADS                    which  you  elect  to  claim  the  special  deprecia-
Agricultural structures (single purpose) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            10   15                     tion allowance.
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5    5
Calculators and copiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       5    6                      What Is the Basis for 
Cattle (dairy or breeding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      5    7
Communication equipment1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            7    10                     Depreciation?
Computer and peripheral equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               5    5
Drainage facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15   20                     The basis for depreciation of MACRS property 
Farm buildings2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20   25                     is  the  property's  cost  or  other  basis  multiplied 
New farm machinery and equipment3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               5    10                     by the percentage of business/investment use. 
Used farm machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               7    10                     Reduce that amount by any credits and deduc-
Fences (agricultural) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7    10                     tions allocable to the property. The following are 
Goats and sheep (breeding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          5    5                      examples of some of the credits and deductions 
Grain bin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7    10                     that reduce basis.
                                                                                                                                              • Any deduction for section 179 property.
Hogs (breeding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3    3                      • Any deduction for removal of barriers to the 
Horses (age when placed in service)                                                                                                             disabled and the elderly.
 Breeding and working (12 years or less) . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  7    10
 Breeding and working (more than 12 years) . . . . . . . . . . . . . . . . . . . . . . . . . .                    3    10                     • Any disabled access credit, enhanced oil 
 Racing horses (more than 2 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                3    12                       recovery credit, and credit for em-
Horticultural structures (single purpose) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           10   15                       ployer-provided childcare facilities and 
                                            4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5    6                        services.
Logging machinery and equipment                                                                                                               • Any special depreciation allowance.
Nonresidential real property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        395  40                     • Basis adjustment for investment credit 
Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) . . .                        7    10                       property under section 50(c) of the Internal 
Paved lots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15   20                       Revenue Code.
Residential rental property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       27.5 40                     For information about how to determine the cost 
Tractor units (over-the-road) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3    4                      or other basis of property, see What Is the Basis 
Trees or vines bearing fruits or nuts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         10   20                     of Your Depreciable Property, earlier. Also, see 
Truck (heavy duty, unloaded weight 13,000 lbs. or more) . . . . . . . . . . . . . . . . . . .                     5    6                      chapter 6.
Truck (actual weight less than 13,000 lbs.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             5    5
                                                                                                                                              For  additional  credits  and  deductions  that 
Water wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15   20                     affect  basis,  see  section  1016  of  the  Internal 
                                                                                                                                              Revenue Code.
1 Not including communication equipment listed in other classes.
2 Not including single-purpose agricultural or horticultural structures.
3 Not including grain bin, cotton ginning, asset fence, or other land improvement and the original use                                        Which Recovery Period 
starts with you and placed in service after December 31, 2017.                                                                                Applies?
4 Used by logging and sawmill operators for cutting of timber.
5 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,                                      The recovery period of property is the number 
 the recovery period is 31.5 years.                                                                                                           of years over which you recover its cost or other 
                                                                                                                                              basis. It is determined based on the deprecia-
        If  you  are  required  to  use  ADS  to  de-                                 5. 15-year property.                                    tion system (GDS or ADS) used. See   Table 7-1 
                                                                                                                                              for recovery periods under both GDS and ADS 
CAUTION claim  the  special  depreciation  allow-
 !      preciate  your  property,  you  cannot                                        6. 20-year property.                                    for  some  commonly  used  assets.  For  a  com-
ance.                                                                                 7. 25-year property.                                    plete  list  of  recovery  periods,  see  the  Table  of 
                                                                                                                                              Class Lives and Recovery Periods in Appendix 
                                                                                      8. Residential rental property.
Electing  ADS.        Although  your  property  may                                                                                           B of Pub. 946.
qualify for GDS, you can elect to use ADS. The                                        9. Nonresidential real property.                        House  trailers  for  farm  laborers.   To  de-
election must generally cover all property in the                                 See Which Property Class Applies Under GDS?                 preciate a house trailer you supply as housing 
same property class you placed in service dur-                                    in  chapter  4  of  Pub.  946  for  examples  of  the       for those who work on your farm, use one of the 
ing the year. However, the election for residen-                                  types of property included in each class.                   following recovery periods if the house trailer is 
tial rental property and nonresidential real prop-                                                                                            mobile  (it  has  wheels  and  a  history  of  move-
erty  can  be  made  on  a  property-by-property                                                                                              ment).
basis.  Once  you  make  this  election,  you  can                                What Is the                                                 • A 7-year recovery period under GDS.
never revoke it.                                                                  Placed-in-Service Date?                                     • A 10-year recovery period under ADS.
 You make the election by completing line 20                                                                                                  However, if the house trailer is not mobile (its 
in Part III of Form 4562.                                                         You  begin  to  claim  depreciation  when  your             wheels have been removed and permanent util-
                                                                                  property is placed in service for use either in a           ities and pipes attached to it), use one of the fol-
Which Property Class                                                              trade  or  business  or  for  the  production  of  in-      lowing recovery periods.
                                                                                  come. The placed-in-service date for your prop-             • A 20-year recovery period under GDS.
Applies Under GDS?                                                                erty is the date the property is ready and availa-          • A 25-year recovery period under ADS.
The  following  is  a  list  of  the  nine  property                              ble  for  a  specific  use.  It  is  therefore  not 
classes under GDS.                                                                necessarily the date it is first used. If you con-          Water  wells.     Water  wells  used  to  provide 
                                                                                  verted property held for personal use to use in a           water for raising poultry and livestock are land 
 1. 3-year property.                                                              trade  or  business  or  for  the  production  of  in-      improvements. If they are depreciable, use one 
 2. 5-year property.                                                              come,  treat  the  property  as  being  placed  in          of the following recovery periods.
                                                                                  service on the conversion date. See  Placed in              • A 15-year recovery period under GDS.
 3. 7-year property.                                                              Service  under              When  Does  Depreciation  Begin • A 20-year recovery period under ADS.
                                                                                  and End, earlier, for examples illustrating when            The types of water wells that can be depre-
 4. 10-year property.                                                             property is placed in service.                              ciated  were  discussed  earlier  in Irrigation 
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systems and water wells under Property Having 1Elective method. If you elect to use a different method for
a Determinable Useful Life. 2See section 168(g)(6) of the Internal Revenue ! one item in a property class, you must
Code. CAUTION apply the same method to all property
in that class placed in service during the year of
Which Convention Applies? the election. However, you can make the elec-
Property used in farming business. For 3-, tion on a property-by-property basis for residen-
Under MACRS, averaging conventions estab- 5-, 7-, or 10-year property used in a farming tial rental and nonresidential real property.
lish when the recovery period begins and ends. business and placed in service after 2017, the
The convention you use determines the number 150% declining balance method is no longer re- Straight line election. Instead of using the
of months for which you can claim depreciation quired. However, for 15- or 20-year property declining balance method, you can elect to use
in the year you place property in service and in placed in service in a farming business, you the straight line method over the GDS recovery
the year you dispose of the property. Use one of must use the 150% declining balance method period. Make the election by entering “S/L” un-
the following conventions. over a GDS recovery period or you can elect der column (f) in Part III of Form 4562.
• The half-year convention. one of the following methods.
• The mid-month convention. • The straight line method over a GDS re- ADS election. As explained earlier under
• The mid-quarter convention. covery period. Which Depreciation System (GDS or ADS) Ap-
• The straight line method over an ADS re- plies, you can elect to use ADS even though
For a detailed explanation of each conven- covery period. your property may come under GDS. ADS uses
tion, see Which Convention Applies? in chap- the straight line method of depreciation over the
ter 4 of Pub. 946. Also, see the Instructions for Real property. You can depreciate real prop- ADS recovery periods, which are generally lon-
Form 4562. erty using the straight line method under either ger than the GDS recovery periods. The ADS
GDS or ADS. recovery periods for many assets used in the
business of farming are listed in Table 7-1. Addi-
Which Depreciation Method Switching to straight line. If you use a declin- tional ADS recovery periods for other classes of
Applies? ing balance method, you switch to the straight property may be found in the Table of Class
line method in the year it provides an equal or Lives and Recovery Periods in Appendix B of
MACRS provides three depreciation methods greater deduction. If you use the MACRS per- Pub. 946.
under GDS and one depreciation method under centage tables, discussed later under How Is
ADS. the Depreciation Deduction Figured, you do not
• The 200% declining balance method over need to determine in which year your deduction How Is the Depreciation
a GDS recovery period. is greater using the straight line method. The ta- Deduction Figured?
• The 150% declining balance method over bles have the switch to the straight line method
a GDS recovery period. built into their rates. To figure your depreciation deduction under
• The straight line method over a GDS re- MACRS, you first determine the depreciation
covery period. Fruit or nut trees and vines. Depreciate trees system, property class, placed-in-service date,
• The straight line method over an ADS re- and vines bearing fruits or nuts under GDS us- basis amount, recovery period, convention, and
covery period. ing the straight line method over a 10-year re- depreciation method that applies to your prop-
covery period. erty. Then you are ready to figure your deprecia-
Depreciation Table. The following table lists tion deduction. You can figure it in one of two
the types of property you can depreciate under ADS required for some farmers. If you elect ways.
each method. The declining balance method is not to limit interest expense, you must use ADS • You can use the percentage tables provi-
abbreviated as DB and the straight line method to depreciate any property with a recovery pe- ded by the IRS.
is abbreviated as SL. riod of 10 years or more. See chapter 4 for a • You can figure your own deduction without
discussion of interest rules. If you elect not to using the tables.
Depreciation Table apply the uniform capitalization rules to any Figuring your own MACRS deduction
plant shown in Table 6-1 of chapter 6 and pro- will generally result in a slightly different
System/Method Type of Property duced in your farming business, you must use CAUTION! amount than using the tables.
GDS using • All 15- and 20-year property ADS for all property you place in service in any
150% DB year the election is in effect. See chapter 6 for a See Using the MACRS Percentage Tables
• Farm or Nonfarm 3-, 5-, 7-, and discussion of the application of the uniform cap- and Figuring the Deduction Without Using the
10-year property1 italization rules to farm property. Tables under How is the Depreciation Deduc-
GDS using SL • Nonresidential real property tion Figured in chapter 4 of Pub. 946, for details
• Residential rental property Electing a different method. As shown in the
• Trees or vines bearing fruits or Depreciation Table, you can elect a different on how to figure your depreciation deduction
nuts method for depreciation for certain types of under MACRS.
• All 3-, 5-, 7-, 10-, 15-, and property. You must make the election by the due
20-year property1 date of the return (including extensions) for the Figuring the Deduction for
ADS using SL • Property used predomi- year you placed the property in service. How- Property Acquired in a Nontaxable
nantly outside the United ever, if you timely filed your return for the year Exchange
States without making the election, you can still make
• Farm property used when an the election by filing an amended return within 6 If your property has a carryover basis because
election not to apply the months of the due date of your return (excluding you acquired it in an exchange or involuntary
uniform capitalization rules is in extensions). Attach the election to the amended conversion of other property or in a nontaxable
effect return and write “Filed pursuant to section transfer, you generally figure depreciation for
• Tax-exempt property 301.9100-2” on the election statement. File the the property as if the exchange, conversion, or
• Tax-exempt bond-financed amended return at the same address you filed transfer had not occurred.
property the original return. Once you make the election,
• Imported property2
• Any property for which you you cannot change it. Property acquired in a like-kind exchange
elect to use this method1 or involuntary conversion. You must gener-
ally depreciate the carryover basis of MACRS
GDS using • Nonfarm 3-, 5-, 7-, and property acquired in a like-kind exchange or in-
200% DB 10-year property
• Farm 3-, 5-, 7-, and 10-year voluntary conversion over the remaining recov-
property placed in service after ery period of the property exchanged or involun-
2017 tarily converted. You also generally continue to
use the same depreciation method and
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convention used for the exchanged or involun- the basis and figuring the depreciation deduc- motorcycles, and other vehicles used for trans-
tarily converted property. This applies only to tion for MACRS property in a GAA acquired in a porting persons or goods.
acquired property with the same or a shorter re- like-kind exchange or involuntary conversion.
covery period and the same or more acceler- For more details, see Regulations section Excepted vehicles. Other property used
ated depreciation method than the property ex- 1.168(i)-1 (as in effect for tax years beginning for transportation does not include the following
changed or involuntarily converted. The excess after December 31, 2013). Also, see chapter 4 vehicles.
basis, if any, of the acquired MACRS property is of Pub. 946. • Tractors and other special-purpose farm
treated as newly placed-in-service MACRS vehicles.
property. • Bucket trucks (cherry pickers), dump
When Do You Recapture trucks, flatbed trucks, and refrigerated
Election out. You can elect not to use the MACRS Depreciation? trucks.
above rules. The election, if made, applies to • Combines, cranes and derricks, and fork-
both the acquired property and the exchanged When you dispose of property you depreciated lifts.
or involuntarily converted property. If you make using MACRS, any gain on the disposition is • Any vehicle designed to carry cargo with a
the election, figure depreciation by treating the generally recaptured (included in income) as or- loaded gross vehicle weight of over 14,000
carryover basis and excess basis, if any, for the dinary income up to the amount of the deprecia- pounds.
acquired property as if placed in service the tion previously allowed or allowable for the For more information, see chapter 5 of Pub.
later of the date you acquired it, or the time of property. For more information on depreciation 946.
the disposition of the exchanged or involuntarily recapture, see chapter 9. Also, see chapter 4 of
converted property. For depreciation purposes, Pub. 946.
the adjusted basis of the exchanged or involun- What Is the Business-Use
tarily converted property is treated as if it were Requirement?
disposed of at the time of the exchange or con- Additional Rules for You can claim the section 179 expense deduc-
version.
Listed Property tion for listed property and depreciate listed
When to make the election. You must property using GDS and a declining balance
make the election on a timely filed return (in- Listed property includes cars and other property method, if the property meets the business-use
cluding extensions) for the year of replacement. used for transportation, property used for enter- requirement. To meet this requirement, listed
Once made, the election may not be revoked tainment, and certain computers. property must be used predominantly (more
without IRS consent. than 50% of its total use) for qualified business
For more information and special rules, see Deductions for listed property (other than use. To determine whether the business-use re-
chapter 4 of Pub. 946. certain leased property) are subject to the fol- quirement is met, you must allocate the use of
lowing special rules and limits. any item of listed property used for more than
Property acquired in a nontaxable transfer. • Deduction for employees. one purpose during the year among its various
You must depreciate MACRS property acquired • Business-use requirement. uses.
by a corporation or partnership in certain non- • Passenger automobile limits and rules.
taxable transfers over the property's remaining
recovery period in the transferor's hands, as if Do the Passenger
the transfer had not occurred. You must con- What Is Listed Property? Automobile Limits Apply?
tinue to use the same depreciation method and
convention as the transferor. You can depreci- Listed property is any of the following. The depreciation deduction (including the sec-
ate the part of the property's basis in excess of • Passenger automobiles weighing 6,000 tion 179 expense deduction) you can claim for a
its carried-over basis (the transferor's adjusted pounds or less. passenger automobile each year is limited. The
basis in the property) as newly purchased • Any other property used for transportation, passenger automobile limits are the maximum
MACRS property. For information on the kinds unless it is an excepted vehicle. depreciation amounts you can deduct for a pas-
of nontaxable transfers covered by this rule, see • Property generally used for entertainment, senger automobile. They are based on the date
chapter 4 of Pub. 946. recreation, or amusement. you placed the vehicle in service. See chapter 5
• Certain aircraft. of Pub. 946 for tables that show the maximum
depreciation deduction for passenger automo-
How Do You Use General Passenger automobiles. A passenger auto- biles. Also, see the Instructions for Form 4562.
Asset Accounts? mobile is any 4-wheeled vehicle made primarily For information about deducting expenses
for use on public streets, roads, and highways for the business use of your passenger automo-
To make it easier to figure MACRS depreciation, and rated at 6,000 pounds or less of unloaded bile, see chapter 4 of Pub. 463.
you can group separate assets into one or more gross vehicle weight (6,000 pounds or less of
general asset accounts (GAAs). You can then gross vehicle weight for trucks and vans). It in- Deductions for passenger automobiles ac-
depreciate all the assets in each account as a cludes any part, component, or other item phys- quired in a trade-in. Special rules apply in fig-
single asset. Each account must include only ically attached to the automobile or usually in- uring the depreciation for a passenger automo-
assets of the same recovery period, deprecia- cluded in the purchase price of an automobile. bile received in a like-kind exchange or
tion method, and convention. You cannot in- Electric passenger automobiles are vehicles involuntary conversion. See chapter 5 of Pub.
clude an asset if you use it in both a personal produced by an original equipment manufac- 946 and Regulations section 1.168(i)-6(d)(3).
activity and a trade or business (or for the pro- turer and designed to run primarily on electricity.
duction of income) in the year in which you first
placed it in service. Note. A truck or van that is a qualified nonper- Depletion
sonal use vehicle is not considered a passen-
After you have set up a GAA, you generally ger automobile. See Qualified nonpersonal use Depletion is the using up of natural resources
figure the depreciation for it by using the appli- vehicles under Passenger Automobiles in chap- by mining, quarrying, drilling, or cutting. The de-
cable depreciation method, recovery period, ter 5 of Pub. 946 for the definition of qualified pletion deduction allows an owner or operator to
and convention for the assets in the GAA. For nonpersonal use vehicles. account for the reduction of a product's re-
each GAA, record the depreciation allowance in serves.
a separate depreciation reserve account. For most vehicles, the gross vehicle
TIP weight rating can generally be found on
There are additional rules for grouping as- the driver door post of the vehicle. Who Can Claim Depletion?
sets in a GAA, figuring depreciation for a GAA,
disposing of GAA assets, and terminating GAA Other property used for transportation. If you have an economic interest in mineral
treatment. Special rules apply in determining This includes trucks, buses, boats, airplanes, property or standing timber (defined below), you
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can take a deduction for depletion. More than Adjusted basis. The adjusted basis of your Timber Depletion
one person can have an economic interest in property is your original cost or other basis, plus
the same mineral deposit or timber. certain additions and improvements, and minus Depletion takes place when you cut standing
certain deductions such as depletion allowed or timber (including Christmas trees). You can fig-
You have an economic interest if both the allowable and casualty losses. Your adjusted ure your depletion deduction when the quantity
following apply. basis can never be less than zero. See Pub. 551 of cut timber is first accurately measured in the
• You have acquired by investment any inter- for more information on adjusted basis. process of exploitation.
est in mineral deposits or standing timber.
• You have a legal right to income from the Total recoverable units. The total recoverable Figuring the timber depletion deduction. To
extraction of the mineral or the cutting of units is the sum of the following. figure your cost depletion allowance, multiply
the timber, to which you must look for a re- • The number of units of mineral remaining the number of units of standing timber cut by
turn of your capital investment. at the end of the year (including units re- your depletion unit.
A contractual relationship that allows you an covered but not sold).
economic or monetary advantage from prod- • The number of units of mineral sold during Timber units. When you acquire timber
ucts of the mineral deposit or standing timber is the tax year (determined under your property, you must make an estimate of the
not, in itself, an economic interest. A production method of accounting, as explained next). quantity of marketable timber that exists on the
payment carved out of, or retained on the sale You must estimate or determine recoverable property. You measure the timber using board
of, mineral property is not an economic interest. units (tons, pounds, ounces, barrels, thousands feet, log scale, cords, or other units. If you later
of cubic feet, or other measure) of mineral prod- determine that you have more or less units of
Mineral property is each separate interest ucts using the current industry method and the timber, you must adjust the original estimate.
you own in each mineral deposit in each sepa- most accurate and reliable information you can Depletion units. You figure your depletion
rate tract or parcel of land. You can treat two or obtain. You must include ores and minerals that unit each year by taking the following steps.
more separate interests as one property or as are developed, in sight, blocked out, or assured.
separate properties. See section 614 of the In- You must also include probable or prospective 1. Determine your cost or the adjusted basis
ternal Revenue Code and the related regula- ores or minerals that are believed to exist based of the timber on hand at the beginning of
tions for rules on how to treat separate mineral on good evidence. the year.
interests. 2. Add to the amount determined in (1) the
Timber property is your economic interest in Number of units sold. You determine the cost of any timber units acquired during
standing timber in each tract or block represent- number of units sold during the tax year based the year and any additions to capital.
ing a separate timber account. on your method of accounting. Use the follow-
ing table to make this determination. 3. Figure the number of timber units to take
into account by adding the number of tim-
Figuring Depletion IF you use... THEN the units sold ber units acquired during the year to the
during the year are... number of timber units on hand in the ac-
count at the beginning of the year and then
There are two ways of figuring depletion. the cash method of the units sold for which you adding (or subtracting) any correction to
• Cost depletion. accounting receive payment during the the estimate of the number of timber units
• Percentage depletion. tax year (regardless of the remaining in the account.
For mineral property, you must generally use the year of sale).
method that gives you the larger deduction. For an accrual method of the units sold based on 4. Divide the result of (2) by the result of (3).
standing timber, you must use cost depletion. accounting your inventories. This is your depletion unit.
The number of units sold during the tax year When to claim timber depletion. Claim your
Cost Depletion does not include any units for which depletion depletion allowance as a deduction in the year
deductions were allowed or allowable in earlier of sale or other disposition of the products cut
To figure cost depletion, you must first deter- years. from the timber, unless you elect to treat the cut-
mine the following. ting of timber as a sale or exchange, as ex-
• The property's basis for depletion. Figuring the cost depletion deduction. plained in chapter 8. Include allowable deple-
• The total recoverable units of mineral in the Once you have figured your property's basis for tion for timber products not sold during the tax
property's natural deposit. depletion, the total recoverable units, and the year the timber is cut as a cost item in the clos-
• The number of units of mineral sold during number of units sold during the tax year, you ing inventory of timber products for the year.
the tax year. can figure your cost depletion deduction by tak- The inventory is your basis for determining gain
ing the following steps. or loss in the tax year you sell the timber prod-
You must estimate or determine recoverable ucts.
units (tons, barrels, board feet, thousands of cu- Step Action Result
bic feet, or other measure) using the current in- Form T (Timber). Complete and attach Form
dustry method and the most accurate and relia- 1 Divide your property's basis Rate per unit. T (Timber) to your income tax return if you are
ble information you can obtain. for depletion by total claiming a deduction for timber depletion, elect-
recoverable units. ing to treat the cutting of timber as a sale or ex-
Basis for depletion. To figure the property's 2 Multiply the rate per unit by Cost depletion change, or making an outright sale of timber.
basis for depletion, subtract all of the following units sold during the tax deduction. See the Instructions for Form T (Timber).
from the property's adjusted basis. year.
Example. You bought a farm that included
1. Amounts recoverable through: Cost depletion for ground water in Ogal- standing timber. This year you determined that
a. Depreciation deductions, lala Formation. Farmers who extract ground the standing timber could produce 300,000
water from the Ogallala Formation for irrigation units when cut. At that time, the adjusted basis
b. Deferred expenses (including defer- are allowed cost depletion. Cost depletion is al- of the standing timber was $24,000. You then
red exploration and development lowed when it can be demonstrated the ground cut and sold 27,000 units. (You did not elect to
costs), and water is being depleted and the rate of recharge treat the cutting of the timber as a sale or ex-
c. Deductions other than depletion. is so low that, once extracted, the water would change.) your depletion for each unit for the
be lost to the taxpayer and immediately suc- year is $0.08 ($24,000 ÷ 300,000). Your deduc-
2. The residual value of land and improve- ceeding generations. To figure your cost deple- tion for depletion is $2,160 (27,000 × $0.08). If
ments at the end of operations. tion deduction, use the guidance provided in you had cut 27,000 units but sold only 20,000
3. The cost or value of land acquired for pur- Revenue Procedure 66-11 in Cumulative Bulle- units during the year, your depletion for each
poses other than mineral production. tin 1966-1. unit would have remained at $0.08. However,
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your depletion deduction would have been incurred in connection with any activity engaged Amortization period. The 84-month amortiza-
$1,600 (20,000 × $0.08) for this year and you in for profit and for the production of income be- tion period starts on the first day of the first
would have included the balance of $560 (7,000 fore the trade or business begins, in anticipation month of the second half of the tax year you in-
× $0.08) in the closing inventory for the year. of the activity becoming an active trade or busi- cur the costs (July 1 for a calendar year tax-
ness. payer), regardless of the month you actually in-
Percentage Depletion cur the costs. You can claim amortization
You can elect to currently deduct a limited deductions for no more than 6 months of the
You can use percentage depletion on certain amount of business startup costs paid or incur- first and last (eighth) tax years of the period.
mines, wells, and other natural deposits. You red after October 22, 2004. See Capital Expen-
cannot use the percentage method to figure de- ses in chapter 4. If this election is made, any How to make the election. To elect to amor-
pletion for standing timber, soil, sod, dirt, or turf. costs that are not currently deducted can be tize qualifying reforestation costs, enter your de-
amortized. duction in Part VI of Form 4562. Attach a state-
ment containing any required information. See
To figure percentage depletion, you multiply Amortization period. The amortization period the Instructions for Form 4562.
a certain percentage, specified for each min- for business startup costs paid or incurred be- Generally, you must make the election on a
eral, by your gross income from the property fore October 23, 2004, is 60 months or more. timely filed return (including extensions) for the
during the year. You can find a complete list of For startup costs paid or incurred after October year in which you incurred the costs. However, if
the percentages in section 613(b) of the Internal 22, 2004, the amortization period is 180 you timely filed your return for the year without
Revenue Code. months. The period starts with the month your making the election, you can still make the elec-
active trade or business begins.
Taxable income limit. The percentage deple- tion by filing an amended return within 6 months
of the due date of your return (excluding exten-
tion deduction cannot be more than 50% (100% Reporting requirements. To amortize your sions). Attach Form 4562 and the statement to
for oil and gas property) of your taxable income startup costs that are not currently deductible the amended return and write “Filed pursuant to
from the property figured without the depletion under the election to deduct, complete Part VI section 301.9100-2” on Form 4562. File the
deduction and the domestic production activi- of Form 4562 and attach a statement containing amended return at the same address you filed
ties deduction. any required information. See the Instructions the original return.
The following rules apply when figuring your for Form 4562.
taxable income from the property for purposes
of the taxable income limit. Section 197 Intangibles
• Do not deduct any net operating loss de- Reforestation Costs
duction from the gross income from the You must generally amortize over 15 years the
property. You can elect to currently deduct a limited capitalized costs of section 197 intangibles you
• Corporations do not deduct charitable con- amount of qualifying reforestation costs for each acquired after August 10, 1993. You must amor-
tributions from the gross income from the qualified timber property. See Capital Expenses tize these costs if you hold the section 197 in-
property. in chapter 4. You can elect to amortize over 84 tangible in connection with your farming busi-
• If, during the year, you disposed of an item months any amount not deducted. There is no ness or in an activity engaged in for the
of section 1245 property used in connec- annual limit on the amount you can elect to am- production of income. Your amortization deduc-
tion with the mineral property, reduce any ortize. Reforestation costs are the direct costs tion each year is the applicable part of the intan-
allowable deduction for mining expenses of planting or seeding for forestation or refores- gible's adjusted basis (for purposes of deter-
by the part of any gain you must report as tation. mining gain), figured by amortizing it ratably
ordinary income that is allocable to the over 15 years (180 months). You are not al-
mineral property. See Regulations section Qualifying costs. Qualifying costs include lowed any other depreciation or amortization
1.613-5(b)(1) for information on how to fig- only those costs you must otherwise capitalize deduction for an amortizable section 197 intan-
ure the ordinary gain allocable to the prop- and include in the adjusted basis of the prop- gible.
erty. erty. They include costs for the following items.
• Site preparation. Section 197 intangibles include the following
• Seeds or seedlings. assets.
Amortization • Labor. • Goodwill.
• Tools. • Patents.
Amortization is a method of recovering (deduct- • Depreciation on equipment used in plant- • Copyrights.
ing) certain capital costs over a fixed period of ing and seeding. • Designs.
• Formulas.
time. It is similar to the straight line method of If the government reimburses you for refor- • Licenses.
depreciation. The amortizable costs discussed estation costs under a cost-sharing program, • Permits.
in this section include the startup costs of going you can amortize these costs only if you include • Covenants not to compete.
into business, reforestation costs, the costs of the reimbursement in your income. • Franchises.
pollution control facilities, and the costs of sec- • Trademarks.
tion 197 intangibles. See the Instructions for Qualified timber property. Qualified timber
Form 4562 for more information on these topics. property is property that contains trees in signif- See section 197 of the Internal Revenue Code
icant commercial quantities. It can be a woodlot for more information, including a complete list of
or other site that you own or lease. The property assets that are section 197 intangibles and spe-
Business Startup Costs qualifies only if it meets all the following require- cial rules.
ments.
When you go into business, treat all costs you • It is located in the United States.
incur to get your business started as capital ex- • It is held for the growing and cutting of tim-
penses. Capital expenses are a part of your ba- ber you will either use in or sell for use in
sis in the business. Generally, you recover costs the commercial production of timber prod-
for particular assets through depreciation de- ucts.
ductions. However, you generally cannot re- • It consists of at least 1 acre planted with
cover other costs until you sell the business or tree seedlings in the manner normally used
otherwise go out of business. in forestation or reforestation.
Startup costs are costs for creating an active Qualified timber property does not include
trade or business or investigating the creation or property on which you have planted shelter
acquisition of an active trade or business. belts or ornamental trees, such as Christmas
Startup costs include any amounts paid or trees.
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                                                                                       8995-A    8995-A Qualified Business Income           non-like-kind  property  or  money  as  part  of  the 
                                                                                              Deduction                                     exchange,  you  recognize  gain  to  the  extent  of 
                                                                                                                                            the value of the other property or money you re-
8.                                                                                   See chapter  16  for  information  about  getting      ceived  in  the  exchange.  You  do  not  recognize 
                                                                                     publications and forms.                                any losses. In general, your gain or loss will not 
                                                                                                                                            be  recognized  until  you  sell  or  otherwise  dis-
                                                                                                                                            pose  of  the  property  you  receive  in  the  ex-
Gains and                                                                            Sales and Exchanges                                    change.  See Qualifying  property,  later,  for  de-
                                                                                                                                            tails and exceptions.
Losses                                                                               If  you  sell,  exchange,  or  otherwise  dispose  of 
                                                                                     your property, you usually have a gain or a loss.      The exchange of property for the same kind 
                                                                                     This section explains certain rules for determin-      of property is the most common type of nontax-
                                                                                     ing  whether  any  gain  you  have  is  taxable  and   able  exchange.  To  qualify  for  treatment  as  a 
Introduction                                                                         whether any loss you have is deductible.               like-kind exchange, the property traded and the 
                                                                                                                                            property received must be both of the following 
This chapter explains how to figure, and report                                      A sale is a transfer of property for money or          (discussed later).
on your tax return, your gain or loss on the dis-                                    a  mortgage,  a  note,  or  other  promise  to  pay    •   Qualifying property.
position  of  your  property  or  debt  and  whether                                 money. An exchange is a transfer of property for       •   Like-kind property.
such gain or loss is ordinary or capital. Ordinary                                   other property or services.                            For  more  information  on  like-kind  exchanges, 
gain is taxed at the same rates as wages and in-
terest income, while net capital gain is generally                                   Property sold or exchanged may include the             see Pub. 544.
taxed  at  a  lower  rate.  This  chapter  discusses                                 sale of a portion of a MACRS asset. For details, 
dispositions  such  as  sales  and  exchanges  (in-                                  see Partial Dispositions of MACRS Property in          Multiple-party transactions.  The like-kind ex-
cluding like-kind exchanges and sales of capital                                     chapter 1 of Pub. 544.                                 change rules also apply to property exchanges 
and  noncapital  assets);  hedging  transactions;                                                                                           that  involve  three-  and  four-party  transactions. 
sale of livestock; cutting timber; sale of a farm;                                                                                          Any  part  of  these  multiple-party  transactions 
and  cancellation  of  debt  from  foreclosures,  re-                                Determining Gain or Loss                               can qualify as a like-kind exchange if it meets all 
                                                                                                                                            the requirements described in this section.
possessions, and abandonments.                                                       You usually realize a gain or loss when you sell 
                                                                                     or exchange property. If the amount you realize        Receipt of title from third party.   If you re-
Topics                                                                               from  a  sale  or  exchange  of  property  is  more    ceive property in a like-kind exchange and the 
This chapter discusses:                                                              than its adjusted basis, you have a gain. If the       other  party  who  transfers  the  property  to  you 
                                                                                     adjusted basis of the property is more than the        does  not  give  you  the  title,  but  a  third  party 
• Sales and exchanges                                                                amount you realize, you have a loss.                   does,  you  can  still  treat  this  transaction  as  a 
• Ordinary or capital gain or loss                                                                                                          like-kind  exchange  if  it  meets  all  the  require-
                                                                                     Basis and adjusted basis.    The basis of prop-        ments.
Useful Items                                                                         erty you buy is usually its cost. The adjusted ba-
You may want to see:                                                                 sis of the property is the basis plus certain addi-    Basis  of  property  received. If  you  receive 
                                                                                     tions  and  minus  certain  deductions.  See           property  in  a  like-kind  exchange,  generally  the 
                                                                                     chapter 6 for more information about basis and         basis of the property will be the same as the ba-
Publication                                                                          adjusted basis.                                        sis of the property you gave up. See chapter 6 
                                                                                                                                            for more information on basis.
    334 334 Tax Guide for Small Business
                                                                                     Amount  realized.  The  amount  you  realize 
    523 523 Selling Your Home                                                        from a sale or exchange is the total of all money      Money  paid. If,  in  addition  to  giving  up 
                                                                                     you  receive  plus  the  fair  market  value  (FMV)    like-kind property, you pay money in a like-kind 
    544 544 Sales and Other Dispositions of                                          (defined in chapter 6) of all property or services     exchange, the basis of the property received is 
        Assets                                                                       you  receive.  The  amount  you  realize  also  in-    the basis of the property given up, increased by 
    550 550 Investment Income and Expenses                                           cludes  any  of  your  liabilities  assumed  by  the   the money paid.
                                                                                     buyer  and  any  liabilities  to  which  the  property 
    908 908 Bankruptcy Tax Guide                                                     you  transferred  is  subject,  such  as  real  estate Example.     You  own  farmland  with  a  barn. 
                                                                                     taxes or a mortgage.                                   The combined adjusted basis of the properties 
Form (and Instructions)                                                              If the liabilities relate to an exchange of mul-       is  $70,000  and  the  FMV  is  $150,000.  You  are 
    982 982 Reduction of Tax Attributes Due to                                       tiple  properties,  see Multiple  Property  Ex-        interested  in  another  tract  of  farmland,  with  a 
        Discharge of Indebtedness (and                                               changes in chapter 1 of Pub. 544.                      larger barn, worth $200,000. You exchange your 
                                                                                                                                            existing  property  and  $50,000  in  cash  for  the 
        Section 1082 Basis Adjustment)                                                                                                      new property. Your basis in the new property is 
                                                                                     Amount  recognized.     Your  gain  or  loss  real-
    Sch D (Form 1040)                            Sch D (Form 1040) Capital Gains and ized from a sale or exchange of certain property       $120,000  ($70,000  adjusted  basis  in  your  old 
        Losses                                                                       is usually a recognized gain or loss for tax pur-      property plus $50,000 in cash paid).
    Sch F (Form 1040)          Sch F (Form 1040) Profit or Loss From                 poses. A recognized gain is a gain you must in-        Reporting  the  exchange.     Report  the  ex-
        Farming                                                                      clude  in  gross  income  and  report  on  your  in-   change  of  like-kind  property,  even  though  no 
                                                                                     come tax return. A recognized loss is a loss you 
    1099-A       1099-A Acquisition or Abandonment of                                deduct from gross income. However, your gain           gain or loss is recognized, on Form 8824. The 
        Secured Property                                                             or  loss  realized  from  the  exchange  of  certain   Instructions for Form 8824 explain how to report 
                                                                                     property may not be recognized for tax purpo-          the details of the exchange.
    1099-C              1099-C Cancellation of Debt                                  ses. See Like-Kind Exchanges next. Also, a loss        If  you  have  any  recognized  gain  because 
    4797    4797 Sales of Business Property                                          from  the  disposition  of  property  held  for  per-  you received money or unlike property, report it 
                                                                                     sonal use is not deductible.                           on  Schedule  D  (Form  1040)  or  Form  4797, 
    8824    8824 Like-Kind Exchanges                                                                                                        whichever applies. You may also have to report 
                                                                                                                                            the  recognized  gain  as  ordinary  income  be-
    8949    8949 Sales and Other Dispositions of                                     Like-Kind Exchanges                                    cause of depreciation recapture on Form 4797. 
        Capital Assets                                                                                                                      See chapter 9 for more information.
    8960    8960 Net Investment Income                                               Generally, if you exchange real property you use 
        Tax—Individuals, Estates, and Trusts                                         in your business or hold for investment solely for     Qualifying  property. In  a  like-kind  exchange, 
                                                                                     other business or investment real property of a        both the real property you give up and the real 
    8995    8995 Qualified Business Income                                           like kind, you do not recognize the gain or loss       property  you  receive  must  be  held  by  you  for 
        Deduction Simplified Computation                                             from the exchange. However, if you also receive        investment or for productive use in your trade or 
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business. The nonrecognition rules for like-kind of the unlike property you receive. If you realize Example. You own real property used in
exchanges apply only to exchanges of real a loss on the exchange, no loss is deductible. your business. Your sibling owns real property
property (as defined in Treasury Regulations However, see Unlike property given up below. used in their business. In December 2022, you
section 1.1031(a)-3). The following are exam- exchanged your property plus $15,000 for your
ples of property that may qualify. Example 1. You trade farmland that cost sibling’s property. At that time, the FMV of your
• Land and improvements to land. $130,000 for $10,000 cash and other land to be real property was $200,000 and its adjusted ba-
• Unsevered natural products of land. used in farming with an FMV of $150,000. You sis was $65,000. The FMV of your sibling’s real
have a realized gain of $30,000 ($150,000 FMV property was $215,000 and its adjusted basis
• Water and air space super adjacent to of new land + $10,000 cash − $130,000 basis of was $70,000. You realized a gain of $135,000
land. old farmland = $30,000 realized gain). However, (the $215,000 FMV of the real property re-
• An intangible interest in real property in- only $10,000, the cash received, is recognized ceived, minus the $15,000 you paid, minus your
cluding fee ownership; co-ownership; a gain (included in income). $65,000 adjusted basis in the property). Your
leasehold; an option to acquire real prop- sibling realized a gain of $145,000 (the
erty; an easement; and stock in a coopera- Example 2. Assume the same facts as in $200,000 FMV of your real property, plus the
tive housing corporation. Example 1, except that, instead of money, you $15,000 you paid, minus their $70,000 adjusted
received a tractor with an FMV of $10,000. Your basis in the property).
• Real property that, on the date it is trans- recognized gain is still limited to $10,000, the However, because this was a like-kind ex-
ferred in an exchange, is real property un- value of the tractor (the unlike property). change and you received no cash or
der the law of the state or local jurisdiction non-like-kind property in the exchange, you rec-
in which that property is located. Example 3. Assume in Example 1 that the ognize no gain on the exchange. Your basis in
Nonqualifying property. The rules for FMV of the land you received was only the real property you received is $80,000 (the
like-kind exchanges do not apply to exchanges $115,000. You have a realized loss of $5,000 $65,000 adjusted basis of the real property
of the following property. ($115,000 FMV + $10,000 cash – $130,000 ba- given up plus the $15,000 you paid). Your sib-
• Real property used for personal purposes, sis of old farmland = $5,000 loss). However, ling recognizes gain only to the extent of the
such as your home. your $5,000 loss is not recognized. money they received, $15,000. The basis in the
• Real property held primarily for sale. Unlike property given up. If, in addition to real property received was $70,000 (the
like-kind property, you give up unlike property, $70,000 adjusted basis of the real property ex-
• Any personal or intangible property. you must recognize gain or loss on the unlike changed minus the $15,000 received, plus the
You may have a nontaxable exchange under property you give up. The gain or loss is the dif- $15,000 gain recognized).
other rules. See Other Nontaxable Exchanges ference between the FMV of the unlike property In 2023, you sold the real property you re-
in chapter 1 of Pub. 544. and the adjusted basis of the unlike property. ceived to a third party for $220,000. Because
you sold property you acquired from a related
Special rule for stock in a mutual ditch, Liabilities. If, in a like-kind exchange, you party (your sibling) within 2 years after the ex-
reservoir, or irrigation company. For purpo- transfer property subject to debt, the debt trans- change with your sibling, that exchange is dis-
ses of real property, stock in a mutual ditch, res- ferred is considered the same as the receipt of qualified from nonrecognition treatment and the
ervoir, or irrigation company is treated as real unlike property. For purposes of figuring your re- deferred gain must be recognized on your 2023
property if both of the following conditions are alized gain, add any liabilities assumed by the return. On your 2023 tax return, you must report
met at the time of the trade. other party to your amount realized. Subtract your $135,000 gain on the 2022 exchange. You
any liabilities of the other party that you assume must also report the gain on the 2023 sale on
1. The mutual ditch, reservoir, or irrigation from your amount realized. For more informa- your 2023 return. Additionally, for 2023, your
company is an organization described in tion, see Partial Nontaxable Exchanges in chap- sibling must report a gain of $130,000, which is
section 501(c)(12)(A) of the Internal Reve- ter 1 of Pub. 544. the $145,000 gain on the 2022 exchange, mi-
nue Code (determined without regard to nus the $15,000 recognized in 2022. Your sib-
the percentage of its income that is collec- Like-kind exchanges between related per- ling’s adjusted basis in the property is increased
ted from its members for the purpose of sons. Special rules apply to like-kind ex- to $200,000 ($70,000 basis plus the $130,000
meeting losses and expenses). changes between related persons. These rules gain recognized).
2. The shares in the company have been rec- affect both direct and indirect exchanges. Under
ognized by the highest court of the state in these rules, if either person disposes of the Exceptions to the rules for related per-
which the company was organized or by property within 2 years after the exchange, the sons. The following property dispositions are
applicable state statute as constituting or exchange is disqualified from nonrecognition excluded from these rules.
representing real property or an interest in treatment. The gain or loss on the original ex- • Dispositions due to the death of either rela-
real property. change must be recognized as of the date of ted person.
the later disposition. The 2-year holding period • Involuntary conversions.
Like-kind property. To qualify as a nontaxable begins on the date of the last transfer of prop- • Dispositions where it is established to the
exchange, the properties exchanged must be of erty that was part of the like-kind exchange. satisfaction of the IRS that neither the ex-
change nor the disposition has, as a main
like kind. Like-kind properties are properties of Related persons. Under these rules, rela- purpose, the avoidance of federal income
the same nature or character, even if they differ ted persons include, for example, you and a tax.
in grade or quality. Generally, real property ex- member of your family (spouse, sibling, parent,
changed for real property qualifies as an ex- child, etc.), you and a corporation in which you Multiple property exchanges. Under the
change of like-kind property. For example, an have more than 50% ownership, you and a part- like-kind exchange rules, you must generally
exchange of city property for farm property or nership in which you directly or indirectly own make a property-by-property comparison to fig-
improved property for unimproved property is a more than a 50% interest of the capital or prof- ure your recognized gain and the basis of the
like-kind exchange. its, and two partnerships in which you directly or property you receive in the exchange. However,
Note. Whether you engaged in a like-kind indirectly own more than 50% of the capital in- for exchanges of multiple properties, you do not
exchange depends on an analysis of each as- terests or profits. make a property-by-property comparison if you
set involved in the exchange. For the complete list of related persons, see do either of the following.
Related persons in chapter 2 of Pub. 544. • Transfer and receive properties in two or
more exchange groups.
Partially nontaxable exchange. If, in addition If you transfer property using a qualified • Transfer or receive more than one property
to like-kind property, you receive money or un- ! intermediary involving related persons, within a single exchange group.
like property in an exchange on which you real- CAUTION see Multiple-party transactions involv-
ize gain, you have a partially nontaxable ex- ing related persons in chapter 1 of Pub. 544. For more information, see Multiple Property
change. You are taxed on the gain you realize, Exchanges in chapter 1 of Pub. 544.
but only to the extent of the money and the FMV

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Deferred exchange. A deferred exchange for Capital Assets Nonbusiness bad debt. A nonbusiness
like-kind property may qualify for nonrecognition bad debt is a short-term capital loss, deductible
of gain or loss. A deferred exchange is an ex- in the year the debt becomes worthless. See
change in which you transfer property you use Almost everything you own and use for personal chapter 4 of Pub. 550.
in business or hold for investment and later re- purposes, pleasure, or investment is a capital
ceive like-kind property you will use in business asset. Nontaxable exchange. If you acquire an
asset in exchange for another asset and your
or hold for investment. The property you receive The following items are examples of capital basis for the new asset is figured, in whole or in
is replacement property. The transaction must assets. part, by using your basis in the old property, the
than a transfer of property for money used to •
be an exchange of property for property rather A home owned and occupied by you and holding period of the new property includes the
your family. holding period of the old property. That is, it be-
placement property will not be treated as •
buy replacement property. In addition, the re- Household furnishings. gins on the same day as your holding period for
like-kind property unless certain identification • A car used for pleasure. If your car is used the old property.
both for pleasure and for farm business, it
and receipt requirements are met. is partly a capital asset and partly a nonca- Gift. If you receive a gift of property and
For more information, see Deferred Ex- pital asset, defined later. your basis in it is figured using the donor's ba-
change in chapter 1 of Pub. 544. • Stocks and bonds. However, there are spe- sis, your holding period includes the donor's
cial rules for gains on qualified small busi- holding period.
Transfer to Spouse ness stock. For more information on this Real property. To figure how long you held
subject, see Gains on Qualified Small real property, start counting on the day after you
Generally, no gain or loss is recognized on a Business Stock and Losses on Section received title to it or, if earlier, on the day after
transfer of property from an individual to (or in 1244 (Small Business) Stock in chapter 4 you took possession of it and assumed the bur-
trust for the benefit of) a spouse, or a former of Pub. 550. dens and privileges of ownership.
spouse if incident to divorce. This rule does not However, taking possession of real property
apply in the following situations. Personal-use property. Gain from a sale or under an option agreement is not enough to
• Your spouse or former spouse is a nonresi- exchange of personal-use property is a capital start the holding period. The holding period
dent alien (unless special elections have gain and is taxable. Loss from the sale or ex- cannot start until there is an actual contract of
been made). change of personal-use property is not deducti- sale. The holding period of the seller cannot
• Certain transfers in trust. ble. You can deduct a loss relating to per- end before that time.
• Certain stock redemptions under a divorce sonal-use property only if it results from a
or separation instrument or a valid written casualty or theft. For information on casualties
agreement. and thefts, see chapter 11. Figuring Net Gain or Loss
The totals for short-term capital gains and los-
For more information and special rules for Long and Short Term ses and the totals for long-term capital gains
transfers of property incident to divorce, see and losses must be figured separately.
Property Settlements in Pub. 504, Divorced or Where you report a capital gain or loss depends
Separated Individuals. on how long you own the asset before you sell Net short-term capital gain or loss. Com-
or exchange it. The time you own an asset be- bine your short-term capital gains and losses.
Any transfer of property to a spouse or for- fore disposing of it is the holding period. Do this by adding all of your short-term capital
mer spouse on which gain or loss is not recog- gains. Then add all of your short-term capital
nized is not considered a sale or exchange. The If you hold a capital asset 1 year or less, the losses. Subtract the lesser total from the
recipient's basis in the property will be the same gain or loss resulting from its disposition is short greater. The difference is your net short-term
as the adjusted basis of the giver immediately term. Report it in Part I of Form 8949, and/or capital gain or loss.
before the transfer. This carryover basis rule ap- Schedule D (Form 1040), as applicable. If you
plies whether the adjusted basis of the transfer- hold a capital asset longer than 1 year, the gain Net long-term capital gain or loss. Follow
red property is less than, equal to, or greater or loss resulting from its disposition is long term. the same steps to combine your long-term capi-
than either its FMV at the time of transfer or any Report it in Part II of Form 8949 and/or Sched- tal gains and losses. The result is your net
consideration paid by the recipient. This rule ule D, as applicable. See the Instructions for long-term capital gain or loss.
applies for determining loss as well as gain. Any Form 8949 and the Instructions for Schedule D
gain recognized on a transfer in trust increases (Form 1040) for more information, including Net gain. If the total of your capital gains is
the basis. when Form 8949 is required. Also see chapter 4 more than the total of your capital losses, the
of Pub. 544. difference is taxable. However, part of your gain
(but not more than your net capital gain) may be
Ordinary or Capital Gain Holding period. To figure if you held property taxed at a lower rate than the rate of tax on your
longer than 1 year, start counting on the day af- ordinary income. See Capital Gains Tax Rates,
or Loss ter the day you acquired the property. The day later.
you disposed of the property is part of your
Generally, you will have a capital gain or loss if holding period. Net loss. If the total of your capital losses is
you sell or exchange a capital asset (defined more than the total of your capital gains, the dif-
below). You may also have a capital gain if your Example. If you bought an asset on June ference is deductible. But there are limits on
section 1231 transactions result in a net gain. 19, 2022, you should start counting on June 20, how much loss you can deduct and when you
See Section 1231 Gains and Losses in 2022. If you sold the asset on June 19, 2023, can deduct it. See Treatment of Capital Losses
chapter 9. your holding period is not longer than 1 year, next.
but if you sold it on June 20, 2023, your holding
To figure your net capital gain or loss, you period is longer than 1 year. Treatment of Capital Losses
must classify your gains and losses as either or-
dinary or capital, and your capital gains or los- Livestock. See Holding period under Live-
ses as either short term or long term. stock, later. If your capital losses are more than your capital
gains, you must claim the difference even if you
Your net capital gains may be taxed at a Inherited property. If you inherit property, do not have ordinary income to offset it. For tax-
lower tax rate than ordinary income. See Capital you are considered to have held the property payers other than corporations, the yearly limit
Gains Tax Rates, later. Your deduction for a net longer than 1 year, regardless of how long you on the capital loss you can deduct is $3,000
capital loss may be limited. See Treatment of actually held it. This rule does not apply to live- ($1,500 if you are married and file a separate
Capital Losses, later. stock used in a farm business. See Holding pe- return). If your other income is low, you may not
riod under Livestock, later. be able to use the full $3,000. The part of the
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$3,000 you cannot use becomes part of your price changes, or currency fluctuations, with re- transaction to identify the hedged item(s) or
capital loss carryover (discussed next). spect to borrowings, ordinary property, or ordi- risk.
nary obligations. Ordinary property or obliga-
Capital loss carryover. Generally, you have a tions are those that cannot produce capital gain For more information on the tax treatment of
capital loss carryover if either of the following or loss if sold or exchanged. futures and options contracts, see Commodity
situations applies to you. Futures and Section 1256 Contracts Marked to
• Your net loss on Schedule D (Form 1040) A commodity futures contract is a standar- Market in Pub. 550.
is more than the yearly limit. dized, exchange-traded contract for the sale or
• Your taxable income is less than zero. purchase of a fixed amount of a commodity at a Accounting methods for hedging transac-
future date for a fixed price. The holder of an tions. The accounting method you use for a
If either of these situations applies to you for option on a futures contract has the right (but hedging transaction must clearly reflect income.
2023, see Capital Losses under Reporting Cap- not the obligation) for a specified period of time This means that your accounting method must
ital Gains and Losses in chapter 4 of Pub. 550 to enter into a futures contract to buy or sell at a reasonably match the timing of income, deduc-
to figure the amount you can carry over to 2024. particular price. A forward contract is much dif- tion, gain, or loss from a hedging transaction
To figure your capital loss carryover ferent from a futures contract because its terms with the timing of income, deduction, gain, or
TIP from 2023 to 2024, you will need a are not standardized and it is not exchange tra- loss from the item or items being hedged. There
copy of your 2023 Form 1040 or Form ded. are requirements and limits on the method you
can use for certain hedging transactions. See
1040-SR and Schedule D (Form 1040). Businesses may enter into commodity fu- Regulations section 1.446-4(e) for those re-
tures contracts or forward contracts and may quirements and limits.
Capital Gains Tax Rates acquire options on commodity futures contracts Hedging transactions must be accounted for
as either of the following. under the rules stated above unless the trans-
The tax rates that apply to a net capital gain are • Hedging transactions. action is subject to mark-to-market accounting
generally lower than the tax rates that apply to • Transactions that are not hedging transac- under section 475 or you use an accounting
other income. These lower rates are called the tions. method other than the following methods.
maximum capital gains rates. Futures transactions with exchange-traded 1. Cash method.
commodity futures contracts that are not hedg-
The term “net capital gain” means the ing transactions generally result in capital gain 2. Farm-price method.
amount by which your net long-term capital gain or loss and are subject to the mark-to-market 3. Unit-livestock-price method.
for the year is more than your net short-term rules discussed in Pub. 550. There is a limit on
capital loss. the amount of capital losses you can deduct Once you adopt a method, you must apply it
each year. Hedging transactions are not subject consistently and must have IRS approval before
See Schedule D (Form 1040) and the In- to the mark-to-market rules and the deduction changing it.
structions for Schedule D (Form 1040). Also for hedging losses is not limited. Your books and records must describe the
see Pub. 550. accounting method used for each type of hedg-
If, as a farmer-producer, to protect yourself ing transaction. They must also contain any ad-
from the risk of unfavorable price fluctuations, ditional identification necessary to verify the ap-
Noncapital Assets you enter into commodity forward contracts, fu- plication of the accounting method you used for
Generally, noncapital assets include property tures contracts, or options on futures contracts the transaction. You must make the additional
such as inventory and depreciable property and the contracts cover an amount of the com- identification no more than 35 days after enter-
used in a trade or business. A list of properties modity within your range of production, the ing into the hedging transaction.
that are not capital assets is provided in the In- transactions are generally considered hedging
structions for Schedule D (Form 1040). Nonca- transactions. They can take place at any time Example of a hedging transaction. You file
pital assets used in farming are discussed be- you have the commodity under production, your income tax returns on the cash method.
low. have it on hand for sale, or reasonably expect to On July 2, you anticipate a yield of 50,000 bush-
have it on hand. els of corn this year. The December futures
Property held for sale in the ordinary The gain or loss on the termination of these price is $5.75 a bushel, but there are indications
course of your farm business. Property you hedges is generally ordinary gain or loss. Farm- that by harvest time the price will drop. To pro-
hold mainly for sale to customers, such as live- ers who file their income tax returns on the cash tect yourself against a drop in the price, you en-
stock, poultry, livestock products, and crops, is method report any profit or loss on the hedging ter into the following hedging transaction. You
a noncapital asset. Gain or loss from sales or transaction on Schedule F, line 8. sell 10 December futures contracts of 5,000
other dispositions of this property is reported on bushels each for a total of 50,000 bushels of
Schedule F (Form 1040) (not on Schedule D Gains or losses from hedging transactions corn at $5.75 a bushel.
(Form 1040) or Form 4797). The treatment of that hedge supplies of a type regularly used or The price did not drop as anticipated but
this property is discussed in chapter 3. consumed in the ordinary course of your trade rose to $6 a bushel. In November, you sell your
or business may be ordinary gains or losses. crop at a local elevator for $6 a bushel. You also
Land and depreciable properties. Land and Examples include fuel and feed. close out your futures position by buying 10 De-
depreciable property you use in farming are not If you have numerous transactions in cember contracts for $6 a bushel. You paid a
capital assets. Noncapital assets also include the commodity futures market during broker's commission of $1,400 ($70 per con-
livestock held for draft, breeding, dairy, or sport- RECORDS the year, you must be able to show tract) for the complete in-and-out position in the
ing purposes. However, your gains and losses which transactions are hedging transactions. futures market.
from sales and exchanges of your farmland and Clearly identify a hedging transaction on your The result is that the price of corn rose 25
depreciable properties must be considered to- books and records before the end of the day cents a bushel and the actual selling price is $6
gether with certain other transactions to deter- you entered into the transaction. It may be help- a bushel. Your loss on the hedge is 25 cents a
mine whether the gains and losses are treated ful to have separate brokerage accounts for bushel. In effect, the net selling price of your
as capital or ordinary gains and losses. The your hedging and speculation transactions. corn is $5.75 a bushel.
sales of these business assets are reported on Report the results of your futures transac-
Form 4797. See chapter 9 for more information. Retain the identification of each hedging tions and your sale of corn separately on
transaction with your books and records. Also, Schedule F. See the Instructions for Schedule F
Hedging identify the item(s) or aggregate risk that is be- (Form 1040).
ing hedged in your records. Although the identi- The loss on your futures transactions is
Hedging transactions are transactions that you fication of the hedging transaction must be $13,900, figured as follows.
enter into in the normal course of business pri- made before the end of the day it was entered
marily to manage the risk of interest rate or into, you have 35 days after entering into the
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July 2—Sold December corn futures keys, pigeons, geese, emus, ostriches, rheas, Figuring gain or loss on the cash method.
(50,000 bu. @ $5.75) . . . . . . . . . . . . . . . $287,500 or other birds, fish, frogs, reptiles, etc. Farmers or ranchers who use the cash method
November 6—Bought December corn of accounting figure their gain or loss on the
futures (50,000 bu. @ $6 plus $1,400 Livestock used in farm business. If live- sale of livestock used in their farming business
broker's commission) . . . . . . . . . . . . . . . 301,400 stock is held primarily for draft, breeding, dairy, as follows.
Futures loss. . . . . . . . . . . . . . . . ($13,900) or sporting purposes, it is considered to be
used in your farm business. The purpose for Raised livestock. Gain on the sale of
This loss is reported as a negative figure on which an animal is held is ordinarily determined raised livestock is generally the gross sales
Schedule F, Part I, line 8, as other income. by a farmer's actual use of the animal. An ani- price reduced by any expenses of the sale. Ex-
The proceeds from your corn sale at the lo- mal is not held for draft, breeding, dairy, or penses of sale include sales commissions,
cal elevator are $300,000 (50,000 bu. × $6). Re- sporting purposes merely because it is suitable freight or hauling from farm to commission com-
port it on Schedule F, Part I, line 2, as income for that purpose, or because it is held for sale to pany, and other similar expenses. The basis of
from sales of products you raised. other persons for use by them for that purpose. the animal sold is zero if the costs of raising it
Assume you were right and the price went However, a draft, breeding, dairy, or sporting were deducted during the years the animal was
down 25 cents a bushel. In effect, you would still purpose may be present if an animal is dis- being raised. However, if you are required to
net $5.75 a bushel, figured as follows. posed of within a reasonable time after it is pre- use the accrual accounting method, see Uni-
vented from its intended use or made undesira- form Capitalization Rules in chapter 6.
ble as a result of an accident, disease, drought,
Sold cash corn, per bushel . . . . . . . . . . . . $5.50 or unfitness of the animal. Purchased livestock. The gross sales
Gain on hedge, per bushel . . . . . . . . . . . . .25 price minus your adjusted basis and any expen-
Net price, per bushel. . . . . . . . . . . $5.75 Example 1. You discover an animal that ses of sale is the gain or loss.
you intend to use for breeding purposes is ster-
The gain on your futures transactions would ile. You dispose of it within a reasonable time. Example. A farmer sold a breeding cow on
have been $11,100, figured as follows. This animal was held for breeding purposes. January 8, 2023, for $1,250. Expenses of the
sale were $125. The cow was bought July 2,
July 2—Sold December corn futures (50,000 Example 2. You retire and sell your entire 2019, for $1,300. Depreciation (not less than
bu. @ $5.75) . . . . . . . . . . . . . . . . . . . . . . $287,500 herd, including young animals that you would the amount allowable) was $1,225.
November 6—Bought December corn have used for breeding or dairy purposes had
futures (50,000 bu. @ $5.50 plus $1,400 you remained in business. These young ani- Gross sales price . . . . . . . . . . . . . . . . . . . . $1,250
broker's commission) . . . . . . . . . . . . . . . . 276,400 Cost (basis) . . . . . . . . . . . . . . . . . $1,300
Futures gain. . . . . . . . . . . . . . . . $11,100 mals were held for breeding or dairy purposes.
Also, if you sell young animals to reduce your Minus: Depreciation deduction . . . . 1,225
The $11,100 is reported on Schedule F, Part I, breeding or dairy herd because of drought, Unrecovered cost
line 8, as other income. these animals are treated as having been held (adjusted basis) . . . . . . . . . . . . . . $ 75
for breeding or dairy purposes. See Sales Expense of sale . . . . . . . . . . . . . . 125 200
The proceeds from the sale of your corn at Caused by Weather-Related Conditions in Gain realized. . . . . . . . . . . . . . . . $1,050
the local elevator, $275,000 (50,000 bu. x chapter 3.
$5.50), are reported on Schedule F, Part I,
line 2, as income from sales of products you Example 3. You are in the business of rais- Converted Wetland and
raised. ing hogs for slaughter. Customarily, before sell- Highly Erodible Cropland
ing your sows, you obtain a single litter of pigs
Livestock that you will raise for sale. You sell the brood Special rules apply to dispositions of land con-
sows after obtaining the litter. Even though you verted to farming use after March 1, 1986. Any
This part discusses the sale or exchange of live- hold these brood sows for ultimate sale to cus- gain realized on the disposition of converted
stock used in your farm business. Gain or loss tomers in the ordinary course of your business, wetland or highly erodible cropland is treated as
from the sale or exchange of this livestock may they are considered to be held for breeding pur- ordinary income. Any loss on the disposition of
qualify as a section 1231 gain or loss. However, poses. such property is treated as a long-term capital
any part of the gain that is ordinary income from loss.
the recapture of depreciation is not included as Example 4. You are in the business of rais-
section 1231 gain. See chapter 9 for more infor- ing registered cattle for sale to others for use as Converted wetland. This is generally land that
mation on section 1231 gains and losses and breeding cattle. The business practice is to was drained or filled to make the production of
the recapture of depreciation under section breed the cattle before sale to establish their fit- agricultural commodities possible. It includes
1245. ness as registered breeding cattle. Your use of converted wetland held by the person who origi-
the young cattle for breeding purposes is ordi- nally converted it or held by any other person
The rules discussed here do not apply nary and necessary for selling them as regis- who used the converted wetland at any time af-
! to the sale of livestock held primarily for tered breeding cattle. Such use does not dem- ter conversion for farming.
CAUTION sale to customers. The sale of this live- onstrate that you are holding the cattle for A wetland (before conversion) is land that
stock is reported on Schedule F. See chapter 3 breeding purposes, but rather you are holding meets all the following conditions.
for more information. them primarily for sale to customers. However, • It is mostly soil that, in its undrained condi-
those cattle you held as additions or replace- tion, is saturated, flooded, or ponded long
Also, special rules apply to sales or exchanges ments to your own breeding herd to produce enough during a growing season to de-
caused by weather-related conditions. See calves are considered to be held for breeding velop an oxygen-deficient state that sup-
Sales Caused by Weather-Related Conditions purposes, even though they may not actually ports the growth and regeneration of plants
in chapter 3 for more information. have produced calves. The same applies to hog growing in water.
and sheep breeders. • It is saturated by surface or groundwater at
Holding period. The sale or exchange of live- a frequency and duration sufficient to sup-
stock used in your farm business (defined be- Example 5. You breed, raise, and train port mostly plants that are adapted for life
low) qualifies as a section 1231 transaction if horses for racing purposes. Every year, you cull in saturated soil.
you held the livestock for 12 months or more (24 horses from your racing stable. In 2023, you de- • It supports, under normal circumstances,
months or more for horses and cattle). cided that to prevent your racing stable from mostly plants that grow in saturated soil.
getting too large to be effectively operated, you
Livestock. For section 1231 transactions, live- must cull six horses that had been raced at pub- Highly erodible cropland. This is cropland
stock includes cattle, hogs, horses, mules, don- lic tracks in 2022. These horses are all consid- subject to erosion that you used at any time for
keys, sheep, goats, fur-bearing animals, and ered held for sporting purposes. farming purposes other than grazing animals.
other mammals. Also, for section 1231 transac- Generally, highly erodible cropland is land
tions, livestock does not include chickens, tur-
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currently classified by the Department of Agri- Making the election. You make the elec- ment date as the date of disposal (see Date of
culture as Class IV, VI, VII, or VIII under its clas- tion on your return for the year the cutting takes disposal, later).
sification system. Highly erodible cropland also place by including in income the gain or loss on
includes land that would have an excessive the cutting and including a computation of your Cutting contract. You must treat the disposal
average annual erosion rate in relation to the gain or loss. You do not have to make the elec- of standing timber under a cutting contract as a
soil loss tolerance level, as determined by the tion in the first year you cut timber. You can section 1231 transaction if all the following ap-
Department of Agriculture. make it in any year to which the election would ply to you.
apply. If the timber is partnership property, the • You are the owner of the timber.
Successor. Converted wetland or highly erodi- election is made on the partnership return. This • You held the timber longer than 1 year be-
ble cropland is also land held by any person election cannot be made on an amended re- fore its disposal.
whose basis in the land is figured by reference turn. • You kept an economic interest in the tim-
to the adjusted basis of a person in whose Once you have made the election, it remains ber.
hands the property was converted wetland or in effect for all later years unless you revoke it. You have kept an economic interest in
highly erodible cropland. standing timber if, under the cutting contract,
Election under section 631(a) may be re-
voked. If you previously elected for any tax the expected return on your investment is condi-
Timber year ending before October 23, 2004, to treat tioned on the cutting of the timber.
the cutting of timber as a sale or exchange un- The difference between the amount realized
Standing timber you held as investment prop- der section 631(a), you may revoke this election from the disposal of the timber and its adjusted
erty is a capital asset. Gain or loss from its sale without the consent of the IRS for any tax year basis for depletion is treated as gain or loss on
is capital gain or loss reported on Form 8949 ending after October 22, 2004. The prior elec- its sale. Include this amount on Form 4797
and Schedule D (Form 1040), as applicable. If tion (and revocation) is disregarded for purpo- along with your other section 1231 gains or los-
you held the timber primarily for sale to custom- ses of making a subsequent election. See Form ses.
ers, it is not a capital asset. Gain or loss on its T (Timber), Forest Activities Schedule, for more Date of disposal. The date of disposal is
sale is ordinary business income or loss. It is re- information. the date the timber is cut. However, for outright
ported on Schedule F, line 1 (if purchased tim- sales by landowners or if you receive payment
ber) or line 2 (if raised timber). Gain or loss. Your gain or loss on the cut-
ting of standing timber is the difference between under the contract before the timber is cut, you
Farmers who cut timber on their land and its adjusted basis for depletion and its FMV on can elect to treat the date of payment as the
sell it as logs, firewood, or pulpwood usually the first day of your tax year in which it is cut. date of disposal.
have no cost or other basis for that timber if no The FMV becomes your basis in the cut timber, This election applies only to figure the hold-
allocation was made at the time of acquisition. and a later sale of the cut timber, including any ing period of the timber. It has no effect on the
Amounts realized from these sales, and the ex- by-product or tree tops, will result in ordinary time for reporting gain or loss (generally when
penses incurred in cutting, hauling, etc., are or- business income or loss. the timber is sold or exchanged).
dinary farm income and expenses reported on Your adjusted basis for depletion of cut tim- To make this election, attach a statement to
Schedule F. ber is based on the number of units (board feet, the tax return filed by the due date (including
log scale, or other units) of timber cut during the extensions) for the year payment is received.
Different rules apply if you owned the timber tax year and considered to be sold or ex- The statement must identify the advance pay-
longer than 1 year and elect to treat timber cut- changed. Your adjusted basis for depletion is ments subject to the election and the contract
ting as a sale or exchange or you enter into a also based on the depletion unit of timber in the under which they were made.
cutting contract, discussed below. account used for the cut timber, and should be If you timely filed your return for the year you
figured in the same manner as shown in section received payment without making the election,
Timber considered cut. Timber is considered 611 and Regulations section 1.611-3. you can still make the election by filing an
cut on the date when, in the ordinary course of Depletion of timber is discussed in chap- amended return within 6 months after the due
business, the quantity of felled timber is first ter 7. date for that year's return (excluding exten-
sions). Attach the statement to the amended re-
definitely determined. This is true whether the Example. In April 2023, you owned 4,000 turn and enter “Filed pursuant to section
timber is cut under contract or whether you cut it MBF (1,000 board feet) of standing timber lon- 301.9100-2” at the top of the statement. File the
yourself. ger than 1 year. It had an adjusted basis for de- amended return at the same address the origi-
Christmas trees. Evergreen trees, such as pletion of $40 per MBF. You are a calendar year nal return was filed.
Christmas trees, that are more than 6 years old taxpayer. On January 1, 2023, the timber had
when severed from their roots and sold for orna- an FMV of $350 per MBF. It was cut in April for Owner. An owner is any person who owns
mental purposes are included in the term “tim- sale. On your 2023 tax return, you elect to treat an interest in the timber, including a sublessor
ber.” They qualify for both rules discussed be- the cutting of the timber as a sale or exchange. and the holder of a contract to cut the timber.
low. You report the difference between the FMV and You own an interest in timber if you have the
your adjusted basis for depletion as a gain. This right to cut it for sale on your own account or for
Election to treat cutting as a sale or ex- amount is reported on Form 4797 along with use in your business.
change. Under the general rule, the cutting of your other section 1231 gains and losses to fig-
timber results in no gain or loss. It is not until a ure whether it is treated as a capital gain or as Tree stumps. Tree stumps are a capital asset if
sale or exchange occurs that gain or loss is re- ordinary gain. You figure your gain as follows. they are on land held by an investor who is not
in the timber or stump business as a buyer,
alized. But if you owned or had a contractual seller, or processor. Gain from the sale of
right to cut timber, you can elect to treat the cut- FMV of timber January 1, 2023 . . . . . . . $1,400,000
ting of timber as a section 1231 transaction in Minus: Adjusted basis for depletion . . . . 160,000 stumps sold in one lot by such a holder is taxed
the year it is cut. Even though the cut timber is Section 1231 gain. . . . . . . . . . . . $1,240,000 as a capital gain. However, tree stumps held by
timber operators after the saleable standing tim-
not actually sold or exchanged, you report your ber was cut and removed from the land are con-
gain or loss on the cutting for the year the tim- Outright sales of timber. Outright sales of sidered by-products. Gain from the sale of
ber is cut. Any later sale results in ordinary busi- timber by landowners qualify for capital gains stumps in lots or tonnage by such operators is
ness income or loss. See the example below. treatment using rules similar to the rules for cer- taxed as ordinary income.
To elect this treatment, you must: tain disposal of timber under a contract with re- See Form T (Timber) and its separate in-
1. Own or hold a contractual right to cut the tained economic interest (defined later). How- structions for more information about disposi-
timber for a period of more than 1 year be- ever, for outright sales, the date of disposal is tions of timber.
fore it is cut, and not deemed to be the date the timber is cut be-
cause the landowner can elect to treat the pay-
2. Cut the timber for sale or use in your trade
or business.
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Sale of a Farm Worksheet 8-1. Worksheet for Foreclosures
and Repossessions Keep for Your Records
The sale of your farm may involve the sale of
both nonbusiness property (your home) and Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt
business property (the land and buildings used upon foreclosure or repossession. Complete this part only if you were personally
in the farm operation and perhaps machinery liable for the debt. Otherwise, go to Part 2.
and livestock). If any gain from the sale includes 1. Enter the amount of outstanding debt immediately before the transfer of property
a gain from the sale of your home, you may be reduced by any amount for which you remain personally liable after the transfer of
allowed to exclude the gain on your home. For property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
more information, see Pub. 523. 2. Enter the fair market value of the transferred property . . . . . . . . . . . . . . . . . .
The gain on the sale of your business prop- 3. Ordinary income from cancellation of debt upon foreclosure or
erty is taxable. A loss on the sale of your busi- repossession.* Subtract line 2 from line 1. If zero or less, enter -0- . . . . . . . . . .
ness property to an unrelated person is deduc- Part 2. Figure your gain or loss from foreclosure or repossession.
ted as an ordinary loss. Your taxable gain or
loss on the sale of property used in your farm 4. If you completed Part 1, enter the smaller of line 1 or line 2. If you did not
business is taxed under the rules for section complete Part 1, enter the outstanding debt immediately before the transfer of
1231 transactions. See chapter 9. Losses from property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
personal-use property, other than casualty or 5. Enter any proceeds you received from the foreclosure sale . . . . . . . . . . . . . .
theft losses, are not deductible. If you receive 6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
payments for your farm in installments, certain
gains may be eligible to be taxed over the pe- 7. Enter the adjusted basis of the transferred property . . . . . . . . . . . . . . . . . . .
riod of years the payments are received. See 8. Gain or loss from foreclosure or repossession. Subtract line 7
chapter 10 for information about installment from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
sales.
* The income may not be taxable. See Cancellation of debt, later.
When you sell your farm, the gain or loss on
each asset is figured separately. The tax treat- Farm Farm Assessed values for local property
ment of gain or loss on the sale of each asset is With Home Without taxes. If you paid a flat sum for the entire farm
determined by the classification of the asset. Home Only Home and no other facts are available for properly al-
Each of the assets sold must be classified as Selling price . . . . $382,000 $158,000 $224,000 locating your original cost or other basis be-
one of the following. Cost (or other tween the land and the buildings, you can use
• Capital asset held 1 year or less. basis) . . . . . . . . 240,000 110,000 130,000 the assessed values for local property taxes for
Gain. . . . . . . $142,000 $48,000 $94,000
• Capital asset held longer than 1 year. the year of purchase to allocate the costs.
• Property (including real estate) used in You must report the $94,000 gain from the Example. Assume that in the preceding ex-
your business and held 1 year or less (in- sale of the property used in your farm business. ample there was no breakdown of the $700,000
cluding draft, breeding, dairy, and sporting All or a part of that gain may have to be reported purchase price between land and buildings.
animals held less than the holding periods as ordinary income from the recapture of depre- However, in the year of purchase, local taxes on
discussed earlier under Livestock). ciation or soil and water conservation expenses. the entire property were based on assessed
• Property (including real estate) used in Treat the balance as section 1231 gain. valuations of $420,000 for land and $140,000
your business and held longer than 1 year The $48,000 gain from the sale of your for improvements, or a total of $560,000. The
(including only draft, breeding, dairy, and home is not taxable if you meet the require- assessed valuation of the land is / (75%) of 3 4
sporting animals held for the holding peri- ments explained later under Sale of your home. the total assessed valuation. Multiply the
ods discussed earlier).
$700,000 total purchase price by 75% to figure
• Property held primarily for sale or which is Partial sale. If you sell only part of your farm, basis of $525,000 for the 200 acres of land. The
of the kind that would be included in inven- you must report any recognized gain or loss on unadjusted basis of the 20 acres you sold would
tory if on hand at the end of your tax year. the sale of that part on your tax return for the then be $52,500 ( / of $525,000).1 10
Allocation of consideration paid for a farm. year of the sale. You cannot wait until you have
The sale of a farm for a lump sum is considered sold enough of the farm to recover its entire cost Sale of your home. Your home is a capital as-
a sale of each individual asset rather than a sin- before reporting gain or loss. For a detailed dis- set and not property used in the trade or busi-
gle asset. If the group of assets sold constitutes cussion on installment sales, see Pub. 544. ness of farming. If you sell a farm that includes a
a trade or business, the residual method must Adjusted basis of the part sold. This is house you and your family occupy, you must de-
be used. This method determines gain or loss the properly allocated part of your original cost termine the part of the selling price and the part
from the transfer of each asset. It also deter- or other basis of the entire farm plus or minus of the cost or other basis allocable to your
mines the buyer's basis in the business assets. necessary adjustments for improvements, de- home. Your home includes the immediate sur-
For more information, see Sale of a Business in preciation, etc., on the part sold. If your home is roundings and outbuildings relating to it that are
chapter 2 of Pub. 544. on the farm, you must properly adjust the basis not used for business purposes.
to exclude those costs from your farm asset If you use part of your home for business,
Property used in farm operation. The rules costs, as discussed later under Sale of your you must make an appropriate adjustment to
for excluding the gain on the sale of your home, home. the basis for depreciation allowed or allowable.
described later under Sale of your home, do not For more information on basis, see chapter 6.
apply to the property used for your farming busi- Example. You bought a 200-acre farm for More information. For more information on
ness. Recognized gains and losses on busi- $700,000. The farm included land and build- selling your home, see Pub. 523.
ness property must be reported on your return ings. The purchase contract designated
for the year of the sale. If the property was held $600,000 of the purchase price to the land. You Gain from condemnation. If you have a
longer than 1 year, it may qualify for section later sold 20 acres of land on which you had in- gain from a condemnation or sale of your home
1231 treatment (see chapter 9). stalled a fence. Your adjusted basis for the part under threat of condemnation, you may use the
of your farm sold is $60,000 ( / of $600,000), 1 10 preceding rules for excluding the gain, rather
Example. You sell your farm, including your plus any unrecovered cost (cost not depreci- than the rules discussed under Postponing Gain
main home, which you have owned since De- ated) of the fence on the 20 acres at the time of in chapter 11. However, any gain that cannot be
cember 2006. You realize gain on the sale as sale. Use this amount to determine your gain or excluded (because it is more than the limit) may
follows. loss on the sale of the 20 acres.

Chapter 8 Gains and Losses Page 55

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be postponed under the rules discussed under You are treated as receiving ordinary income is figured as discussed earlier under Foreclo-
Postponing Gain in chapter 11. from the canceled debt for the part of the debt sure or Repossession.
that is more than the FMV. The amount realized If the abandoned property is secured by
does not include the canceled debt that is your debt, special rules apply. The tax consequen-
Foreclosure or income from cancellation of debt. See Cancel- ces of abandonment of property that secures a
Repossession lation of debt, later. debt depend on whether you are personally lia-
ble for the debt (recourse debt) or were not per-
If you do not make payments you owe on a loan Example 3. Assume the same facts as in sonally liable for the debt (nonrecourse debt).
secured by property, the lender may foreclose Example 1 earlier, except you are personally lia- For more information, see chapter 3 of Pub.
on the loan or repossess the property. The fore- ble for the loan (recourse debt). In this case, the 4681, Canceled Debts, Foreclosures, Repos-
closure or repossession is treated as a sale or amount you realize is $170,000. This is the can- sessions, and Abandonments.
exchange from which you may realize gain or celed debt ($180,000) up to the FMV of the land
loss. This is true even if you voluntarily return ($170,000). You figure your gain or loss on the The abandonment loss is deducted in the
the property to the lender. You may also realize foreclosure by comparing the amount realized tax year in which the loss is sustained. Report
ordinary income from cancellation of debt if the ($170,000) with your adjusted basis ($200,000). the loss on Form 4797, Part II, line 10.
loan balance is more than the FMV of the prop- You have a $30,000 deductible loss, which you
erty. figure on Form 4797, Part I. You are also treated Personal-use property. You cannot deduct
as receiving ordinary income from cancellation any loss from abandonment of your home or
Buyer's (borrower's) gain or loss. You figure of debt. That income is $10,000 ($180,000 − other property held for personal use.
and report gain or loss from a foreclosure or re- $170,000). This is the part of the canceled debt
possession in the same way as gain or loss not included in the amount realized. You report Canceled debt. If the abandoned property se-
from a sale or exchange. The gain or loss is the this as other income on Schedule F, line 8. cures a debt for which you are personally liable
difference between your adjusted basis in the and the debt is canceled, you may realize ordi-
transferred property and the amount realized. Seller's (lender's) gain or loss on reposses- nary income equal to the canceled debt. This
See Determining Gain or Loss, earlier. sion. If you finance a buyer's purchase of your income is separate from any loss realized from
You can use Worksheet 8-1 to figure property in an installment sale and later acquire abandonment of the property. Report income
an interest in it through foreclosure or reposses- from cancellation of a debt related to a business
TIP your gain or loss from a foreclosure or sion, you may have a gain or loss on the acquis- or rental activity as business or rental income.
repossession. ition. For more information, see Repossession Report income from cancellation of a nonbusi-
in Pub. 537, Installment Sales. ness debt on Form 1040 or Form 1040-SR.
Amount realized on a nonrecourse debt. However, income from cancellation of debt
If you are not personally liable for repaying the Cancellation of debt. If property that is repos- is not taxed in certain circumstances. See Can-
debt (nonrecourse debt) secured by the trans- sessed or foreclosed upon secures a debt for cellation of debt, earlier, under Foreclosure or
ferred property, the amount you realize includes which you are personally liable (recourse debt), Repossession.
the full amount of the debt canceled by the you must generally report as ordinary income
transfer. The full canceled debt is included in the amount by which the canceled debt is more Forms 1099-A and 1099-C. A lender who ac-
the amount realized even if the FMV of the than the FMV of the property. This income is quires an interest in your property in a foreclo-
property is less than the canceled debt. separate from any gain or loss realized from the sure, repossession, or abandonment should
foreclosure or repossession. Report the income send you Form 1099-A showing the information
Example 1. You paid $200,000 for land from cancellation of a business debt on Sched- you need to figure your loss from the foreclo-
used in your farming business. You paid ule F, line 8. Report the income from cancella- sure, repossession, or abandonment. However,
$15,000 down and borrowed the remaining tion of a nonbusiness debt as miscellaneous in- if the lender cancels part of your debt and the
$185,000 from a bank. You are not personally li- come on Form 1040 or Form 1040-SR. lender must file Form 1099-C, the lender may
able for the loan (nonrecourse debt), but pledge include the information about the foreclosure,
the land as security. The bank foreclosed on the You can use Worksheet 8-1 to figure repossession, or abandonment on that form in-
loan 2 years after you stopped making pay- TIP your income from cancellation of debt. stead of Form 1099-A. The lender must file
ments. When the bank foreclosed, the balance Form 1099-C and send you a copy if the can-
due on the loan was $180,000 and the FMV of However, income from cancellation of debt celed debt is $600 or more and the lender is a
the land was $170,000. The amount you real- is not taxed in certain situations. See Cancella- financial institution, credit union, or federal gov-
ized on the foreclosure was $180,000, the debt tion of Debt in chapter 3. ernment agency, or any organization that has a
canceled by the foreclosure. You figure your significant trade or business of lending money.
gain or loss on Form 4797, Part I, by comparing For foreclosures, repossessions, abandon-
the amount realized ($180,000) with your adjus- Abandonment
ments of property, and debt cancellations oc-
ted basis ($200,000). You have a $20,000 de- curring in 2023, these forms should be sent to
ductible loss. The abandonment of property is a disposition of
property. You abandon property when you vol- you by January 31, 2024.
Example 2. Assume the same facts as in untarily and permanently give up possession
Example 1, except the FMV of the land was and use of the property with the intention of
$210,000. The result is the same. The amount ending your ownership, but without passing it
you realized on the foreclosure is $180,000, the on to anyone else.
debt canceled by the foreclosure. Because your
adjusted basis is $200,000, you have a deducti- Business or investment property. Loss from
ble loss of $20,000, which you report on Form abandonment of business or investment prop-
4797, Part I. erty is deductible as a loss. Loss from abandon-
ment of business or investment property that is
Amount realized on a recourse debt. If not treated as a sale or exchange is generally
you are personally liable for the debt (recourse an ordinary loss. If your adjusted basis is more
debt), the amount realized on the foreclosure or than the amount you realize (if any), then you
repossession includes the lesser of: have a loss. If the amount you realize (if any) is
• The outstanding debt immediately before more than your adjusted basis, then you have a
the transfer reduced by any amount for gain. This rule also applies to leasehold im-
which you remain personally liable immedi- provements the lessor made for the lessee.
ately after the transfer, or However, if the property is foreclosed on or re-
• The FMV of the transferred property. possessed in lieu of abandonment, gain or loss

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                                                        Table 9-1. Where To First Report Certain Items on Form 4797
                                                                                                                                          Held 1 year             Held more than 
9.                                                                            Type of property                                                    or less          1 year
                                                        1 Depreciable trade or business property:
                                                          a  Sold or exchanged at a gain . . . . . . . . . . . . . . . . . . . .          Part II            Part III (1245, 1250)
                                                          b  Sold or exchanged at a loss . . . . . . . . . . . . . . . . . . . .          Part II            Part I
Dispositions of 
                                                        2 Farmland held less than 10 years for which soil or water 
                                                          expenses were deducted:
Property Used in                                          a  Sold at a gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Part II            Part III (1252)
                                                          b  Sold at a loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Part II            Part I
                                                        3 All other farmland used in a trade or business                                  Part II            Part I
Farming
                                                        4 Disposition of cost-sharing payment property described in                       Part II            Part III (1255)
                                                          section 126
Introduction                                            5 Cattle and horses used in a trade or business for draft,                        Held less                Held 24 mos. 
                                                          breeding, dairy, or sporting purposes:                                          than 24 mos.             or more
When you dispose of property used in your farm            a  Sold at a gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Part II            Part III (1245)
business,  your  taxable  gain  or  loss  is  usually     b  Sold at a loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Part II            Part I
treated as ordinary income or capital gain (un-           c  Raised cattle and horses sold at a gain . . . . . . . . . . . .              Part II            Part I
der the rules for section 1231 transactions). Or-
dinary income is taxed at the same rate as wa-          6 Livestock other than cattle and horses used in a trade or                       Held less                Held 12 mos.
ges and interest. Capital gain is generally taxed         business for draft, breeding, dairy, or sporting purposes:                      than 12 mos.              or more
at lower rates.                                           a  Sold at a gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Part II            Part III (1245)
When  you  dispose  of  depreciable  property             b  Sold at a loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Part II            Part I
(section  1245  property  or  section  1250  prop-        c  Raised livestock sold at a gain . . . . . . . . . . . . . . . . . .          Part II            Part I
erty) at a gain, you may have to recognize all or                                                                                         Held 1 year             Held more than 
part  of  the  gain  as  ordinary  income  under  the   7 Real or tangible trade or business property which was                                   or less          1 year
depreciation  recapture  rules.  Any  gain  remain-       deducted under the de minimis safe harbor . . . . . . . . . . . .               Part II         Part II 
ing  after  applying  the  depreciation  recapture 
rules  is  a  section  1231  gain,  which  may  be      all of your section 1231 transactions in the tax                                • Sale or exchange of real estate. This 
taxed  as  a  capital  gain.  Similar  rules  apply  to year.                                                                             property must be used in your business 
the  sale  of  property  on  which  soil  and  water                                                                                      and held longer than 1 year. Examples in-
conservation expenses have been deducted or               If you have a gain from a section 1231 trans-                                   clude your farm or ranch (including barns 
government  cost-sharing  payments  have  been          action, first determine whether any of the gain is                                and sheds).
received.                                               ordinary  income  under  the  depreciation  (or                                 • Sale or exchange of unharvested 
Gains  and  losses  from  property  used  in            other)  recapture  rules  explained  later.  Do  not                              crops. The crop and land must be sold, 
farming  are  reported  on  Form  4797,  Sales  of      take  that  gain  into  account  as  section  1231                                exchanged, or involuntarily converted at 
Business Property. Table 9-1 contains examples          gain.  Only  gain  in  excess  of  the  recapture                                 the same time and to the same person, 
of  items  reported  on  Form  4797  and  refers  to    amount  is  considered  section  1231  gain.  See                                 and the land must have been held longer 
the part of that form on which they should first        Treatment as ordinary or capital, later.                                          than 1 year. You cannot keep any right or 
be reported.                                                                                                                              option to reacquire the land directly or indi-
                                                        Section  1231  transactions.                  Section  1231                       rectly (other than a right customarily inci-
Topics                                                  transactions are sales and exchanges of real or                                   dent to a mortgage or other security trans-
This chapter discusses:                                 depreciable property used in trade or business                                    action). Growing crops sold with a 
                                                        and held the required holding period (based on                                    leasehold on the land, even if sold to the 
                                                        type of asset, as discussed below). Gain or loss                                  same person in a single transaction, is not 
•   Section 1231 gains and losses                       on the following transactions is subject to sec-                                  considered a section 1231 transaction.
•   Depreciation recapture                              tion 1231 treatment.                                                            • Distributive share of partnership gains 
•   Other gains                                         • Sale or exchange of cattle and horses.                                          and losses. Your distributive share must 
                                                          The cattle and horses must be held for                                          be from the sale or exchange of property 
Useful Items                                              draft, breeding, dairy, or sporting purposes                                    listed above and held by the partnership for 
You may want to see:                                      and held for 24 months or longer.                                               longer than 1 year (or for the required pe-
                                                        • Sale or exchange of other livestock.                                            riod for certain livestock). You will receive 
Publication                                               This livestock must be held for draft,                                          Schedule K-1 (Form 1065) showing the ap-
                                                          breeding, dairy, or sporting purposes and                                       propriate classification of any gains or los-
    544   544 Sales and Other Dispositions                held for 12 months or longer. Other live-                                       ses distributed to you.
          of Assets                                       stock includes hogs, mules, sheep, goats,                                     • Cutting or disposal of timber. Special 
                                                          donkeys, and other fur-bearing animals.                                         rules apply if you owned the timber longer 
Form (and Instructions)                                   Other livestock does not include poultry.                                       than 1 year and elect to treat timber cutting 
    4797      4797 Sales of Business Property           • Sale or exchange of depreciable real                                            as a sale or exchange, or you enter into a 
See chapter  16  for  information  about  getting         property or personal property. This                                             cutting contract, as described in chapter 8 
publications and forms.                                   property must be used in your business                                          under Timber.
                                                          and held longer than 1 year. Generally,                                       • Condemnation. The condemned property 
                                                          property held for the production of rents or                                    (defined in chapter 11) must have been 
                                                          royalties is considered to be used in a                                         held longer than 1 year. It must be busi-
Section 1231 Gains and                                    trade or business. This property must also                                      ness property or a capital asset held in 
Losses                                                    be either real property or is of a kind that is                                 connection with a trade or business or a 
                                                          subject to depreciation under section 167                                       transaction entered into for profit, such as 
Section 1231 gains and losses are the taxable             of the Internal Revenue Code. Examples of                                       investment property. It cannot be property 
gains  and  losses  from  section  1231  transac-         depreciable personal property include farm                                      held for personal use.
tions (explained below). Their treatment as ordi-         machinery and trucks. It also includes am-                                    • Casualty or theft. The casualty or theft 
nary income or loss or capital gains depends on           ortizable section 197 intangibles.                                              must have affected business property, 
whether you have a net gain or a net loss from 
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property held for the production of rents or 1. Net section 1231 gain (2023) . . . . . $20,000 a. An integral part of manufacturing, pro-
royalties, or investment property (such as 2. Net section 1231 loss duction, or extraction, or of furnishing
notes and bonds). You must have held the (2020) . . . . . . . . . . . . . . ($25,000) certain services.
property longer than the required holding 3. Net section 1231 gain b. A research facility in any of the activi-
period. However, if your casualty or theft (2022) . . . . . . . . . . . . . . $18,000 ties in (a).
losses are more than your casualty or theft 4. Remaining net section
gains, the net casualty or theft loss is fully 1231 loss from c. A facility in any of the activities in (a)
deductible and is not combined with other prior 5 years . . . . . . . . . ($7,000) above, for the bulk storage of fungible
section 1231 transactions in the section 5. Gain treated as commodities (discussed later).
1231 computation. Section 1231 does not ordinary income . . . . . . . . . . . . . . . $7,000 3. Where applicable, that part of real prop-
apply to personal casualty gains and los- 6. Gain treated as long-term erty (not included in (2)) with an adjusted
ses. See chapter 11 for information on how capital gain. . . . . . . . . . . . . . $13,000 basis reduced by (but not limited to) the
to treat those gains and losses. following.
If the property is not held for the re- Your remaining net section 1231 loss from
2020 is completely recaptured in 2023. a. Amortization of certified pollution con-
! quired holding period, the transaction trol facilities.
CAUTION is not subject to section 1231 treat-
ment, and any gain or loss is ordinary income Property held for sale to customers. A sale, b. The section 179 expense deduction.
reported in Part II of Form 4797. See Table 9-1. exchange, or involuntary conversion of property
held mainly for sale to customers is not a sec- c. Deduction for clean-fuel vehicles and
tion 1231 transaction. If you will get back all, or certain refueling property.
Treatment as ordinary or capital. To deter- nearly all, of your investment in the property by d. Expenditures to remove architectural
mine the treatment of section 1231 gains and selling it rather than by using it up in your busi- and transportation barriers to the
losses, combine all of your section 1231 gains ness, it is property held mainly for sale to cus- handicapped and elderly.
and losses for the year. tomers.
• If you have a net section 1231 loss, it is an e. Certain reforestation expenditures (as
ordinary loss. Property deducted under the de minimis described under Reforestation Costs
• If you have a net section 1231 gain, it is or- safe harbor for tangible property. If you de- in chapter 7).
dinary income up to your nonrecaptured ducted the cost of a property under the de mini- 4. Single-purpose agricultural (livestock) or
section 1231 losses from previous years, mis safe harbor for tangible property (currently horticultural structures.
explained next. The rest, if any, is $2,500 or less), then upon its sale or disposi-
long-term capital gain. tion, this property is not treated as a capital as- 5. Storage facilities (except buildings and
Nonrecaptured section 1231 losses. set or as property used in the trade or business their structural components) used in dis-
Your nonrecaptured section 1231 losses are under section 1231. Generally, any gain on the tributing petroleum or any primary product
your net section 1231 losses for the previous 5 disposition of this property is treated as ordinary of petroleum.
years that have not been applied against a net income reported on Part II of Form 4797.
Buildings and structural components. Sec-
section 1231 gain. Therefore, if in any of your 5 tion 1245 property does not include buildings
preceding tax years you had section 1231 los- and structural components. The term “building”
ses, a net gain for the current year from the sale Depreciation Recapture
includes a house, barn, warehouse, or garage.
of section 1231 assets is ordinary gain to the The term “structural component” includes walls,
extent of your prior losses. These losses are ap- If you dispose of depreciable property (section
plied against your net section 1231 gain begin- 1245 or section 1250 property) or amortizable floors, windows, doors, central air conditioning
ning with the earliest loss in the 5-year period. property at a gain, you may have to treat all or systems, light fixtures, etc.
part of the gain (even if it is otherwise nontaxa- Do not treat a structure that is essentially
Example. In 2023, you have a $20,000 net ble) as ordinary income. Any remaining gain is machinery or equipment as a building or struc-
section 1231 gain. To figure how much you have section 1231 gain (discussed earlier). tural component. Also, do not treat a structure
that houses property used as an integral part of
to report as ordinary income and long-term cap- To figure any gain that must be repor- an activity as a building or structural component
ital gain, you must first determine your section ted as ordinary income, you must keep if the structure's use is so closely related to the
1231 gains and losses from the previous 5-year RECORDS permanent records of the facts neces- property's use that the structure can be expec-
period. From 2018 through 2022, you had the sary to figure the depreciation or amortization ted to be replaced when the property it initially
following section 1231 gains and losses. allowed or allowable on your property. For more houses is replaced.
information on depreciation recapture, see The fact that the structure is specially de-
Year Amount chapter 3 of Pub. 544. Also see Pub. 946. signed to withstand the stress and other de-
2018 -0-
2019 -0- mands of the property and cannot be used eco-
2020 ($25,000) nomically for other purposes indicates it is
2021 -0- Section 1245 Property closely related to the use of the property it
2022 $18,000 houses. Structures such as oil and gas storage
A gain on the disposition of section 1245 prop- tanks, grain storage bins, and silos are not trea-
You used this information to figure how to re- erty is treated as ordinary income to the extent ted as buildings, but as section 1245 property.
port your net section 1231 gain for 2023 as of depreciation allowed or allowable. Any recog-
shown below. nized gain that is more than the part that is ordi- Facility for bulk storage of fungible com-
nary income is a section 1231 gain. modities. This is a facility used mainly for the
bulk storage of fungible commodities. Bulk stor-
Section 1245 property includes any property age means storage of a commodity in a large
that is or has been subject to an allowance for mass before it is used. For example, if a facility
depreciation or amortization and that is any of is used to store oranges that have been sorted
the following types of property. and boxed, it is not used for bulk storage. To be
1. Personal property (either tangible or intan- fungible, a commodity must be such that each
gible). of its parts is essentially interchangeable, and
each of its parts is indistinguishable from an-
2. Other tangible property (except buildings other part.
and their structural components) used as
any of the following. See Buildings and
structural components, later.

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Gain Treated as Ordinary Income truck were $6,000 in 2021 and $9,600 in 2022. See Uniform Capitalization Rules in
You did not claim the section 179 expense de- chapter 6 for more information regard-
The gain treated as ordinary income on the duction for the truck. You sold it in May 2023 for CAUTION! ing electing out of, or being exempt
sale, exchange, or involuntary conversion of $21,000. The MACRS deduction in 2023, the from, using the uniform capitalization rules.
section 1245 property, including a sale and year of sale, is $2,880 ( / of $5,760). Figure the 1 2
leaseback transaction, is the lesser of the fol- gain treated as ordinary income as follows.
lowing amounts. Section 1250 Property
1. Amount realized . . . . . . . . . . . . . . . . . . $21,000
1. The depreciation (which includes any sec- 2. Cost (February 2021) . . . . . . . $30,000 Section 1250 property includes all real property
tion 179 deduction claimed) and amortiza- 3. Depreciation allowed or subject to an allowance for depreciation that is
tion allowed or allowable on the property. allowable (MACRS deductions: not and never has been section 1245 property.
2. The gain realized on the disposition (the $6,000 + $9,600 + $2,880) . . . 18,480
It includes buildings and structural components
4. Adjusted basis (subtract line 3
amount realized from the disposition mi- from line 2) . . . . . . . . . . . . . . . . . . . . . $11,520 that are not section 1245 property (discussed
nus the adjusted basis of the property). 5. Gain realized (subtract line 4 earlier). It includes a leasehold of land or sec-
from line 1) . . . . . . . . . . . . . . . . . . . . . $9,480 tion 1250 property subject to an allowance for
See chapter 3 of Pub. 544 for more information 6. Gain treated as ordinary income depreciation. A fee simple interest in land is not
on dispositions of section 1245 property. (lesser of line 3 or line 5). . . . . . . . $9,480 section 1250 property because, like land, it is
not depreciable.
Use Part III of Form 4797 to figure the ordi- Depreciation allowed or allowable. You gen- Gain on the disposition of section 1250
nary income part of the gain. erally use the greater of the depreciation al- property is treated as ordinary income to the ex-
lowed or allowable when figuring the part of tent of additional depreciation allowed or allow-
Depreciation claimed on other property or gain to report as ordinary income. If, in prior able. To determine the additional depreciation
claimed by other taxpayers. Depreciation years, you have consistently taken proper de- on section 1250 property, see Depreciation Re-
and amortization include the amounts you ductions under one method, the amount al- capture in chapter 3 of Pub. 544.
claimed on the section 1245 property as well as lowed for your prior years will not be increased
the following depreciation and amortization even though a greater amount would have been Use Part III of Form 4797 to figure the ordi-
amounts. allowed under another proper method. If you did nary income part of the gain.
• Amounts you claimed on property you ex- not take any deductions in prior years for depre-
changed for, or converted to, your section ciation, your adjustments to basis for deprecia- You will not have additional depreciation if
1245 property in an applicable like-kind ex- tion allowable are figured by using the straight any of the following apply to the property dis-
change or involuntary conversion. For de- line method. This treatment applies only when posed of.
tails on exchanges of property that are not figuring what part of the gain is treated as ordi- • You figured depreciation for the property
taxable, see Like-Kind Exchanges in chap- nary income under the rules for section 1245 using the straight line method or any other
ter 8. depreciation recapture. For more information on method that does not result in depreciation
• Amounts a previous owner of the section depreciation allowed or allowable, see chap- that is more than the amount figured by the
1245 property claimed if your basis is de- ter 7. For information on adjustments to basis straight line method and you have held the
termined with reference to that person's for depreciation allowed or allowable, see chap- property longer than 1 year.
adjusted basis (for example, the donor's ter 6. • You chose the alternate ACRS (straight
depreciation deductions on property you line) method for the property, which was a
received as a gift). Disposition of plants. If you elect not to use type of 15-, 18-, or 19-year real property
the uniform capitalization rules (see chapter 6), covered by the section 1250 rules.
Depreciation and amortization. Depreciation you must treat any plant that would have been • The property was nonresidential real prop-
and amortization deductions that must be re- subject to the uniform capitalization rules as erty placed in service after 1986 (or after
captured as ordinary income include (but are section 1245 property. If you have a gain on the July 31, 1986, if the choice to use MACRS
not limited to) the following items. See Depreci- property's disposition, you must recapture the was made) and you held it longer than 1
ation Recapture in chapter 3 of Pub. 544 for pre-productive expenses you would have capi- year. These properties are depreciated us-
more details. talized if you had not made the election by treat- ing the straight line method.
1. Ordinary depreciation deductions. ing the gain, up to the amount of these expen-
ses, as ordinary income. For section 1231
2. The section 179 expense deduction (see transactions, show these expenses as depreci- Installment Sale
chapter 7). ation on Form 4797, Part III, line 22. For plant
3. Any special depreciation allowance. sales that are reported on Schedule F (Form If you report the sale of property under the in-
1040), Profit or Loss From Farming, this recap- stallment method, any depreciation recapture
4. Amortization deductions for any of the fol- ture rule does not change the reporting of in- under section 1245 or 1250 is taxable as ordi-
lowing costs. come because the gain is already ordinary in- nary income in the year of sale. This applies
a. Acquiring a lease. come. You can use the farm-price method even if no payments are received in that year. If
discussed in chapter 2 to figure these expen- the gain is more than the depreciation recapture
b. Lessee improvements. ses. income, report the rest of the gain using the
rules of the installment method. For this pur-
c. Pollution control facilities. pose, include the recapture income in your in-
Example. You sold your apple orchard in
d. Reforestation expenses. 2023 for $80,000. Your adjusted basis at the stallment sale basis to determine your gross
e. Section 197 intangibles. time of sale was $60,000. You bought the or- profit on the installment sale.
chard in 2016, but the trees did not produce a If you dispose of more than one asset in a
f. Qualified disaster expenses. crop until 2019. Your pre-productive expenses single transaction, you must separately figure
g. Franchises, trademarks, and trade were $6,000. You elected not to use the uniform the gain on each asset so that it may be prop-
names acquired before August 11, capitalization rules. You must treat $6,000 of the erly reported. To do this, allocate the selling
1993. gain as ordinary income in addition to recaptur- price and the payments you receive in the year
ing depreciation allowed or allowable on the or- of sale to each asset. Report any depreciation
Example. You file your returns on a calen- chard. This amount would be reported on Form recapture income in the year of sale before us-
dar year basis. In February 2021, you bought 4797, Part III, as ordinary income. ing the installment method for any remaining
and placed in service for 100% use in your gain.
farming business a light-duty truck (5-year prop-
erty) that cost $30,000. You used the half-year For more information on installment sales,
convention and your MACRS deductions for the see chapter 10.
Chapter 9 Dispositions of Property Used in Farming Page 59

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Other Dispositions land within the 8th year after you acquired it. form of a deed of trust, note, land contract,
You treat $6,000 (40% of $15,000) of the mortgage, or other evidence of the buyer’s debt
$30,000 gain as ordinary income and the to you.
See chapter 3 of Pub. 544 for the tax treatment $24,000 balance as a section 1231 gain.
of the following transfers of depreciable prop-
Topics
erty. Section 1255 property. If you receive certain This chapter discusses:
• By gift. cost-sharing payments on property and you ex-
• At death. clude those payments from income (as dis-
• In like-kind exchanges. cussed in chapter 3), you may have to treat part • The general rules that apply to using the
• In involuntary conversions. of any gain as ordinary income and treat the installment method, and
Also, see Pub. 544 for information on how to balance as a section 1231 gain. If you chose • Installment sale of a farm.
handle a single transaction involving multiple not to exclude these payments, you will not
properties. have to recognize ordinary income under this Useful Items
provision. You may want to see:
Amount to report as ordinary income.
Other Gains You report as ordinary income the lesser of the Publication
following amounts. 523 523 Selling Your Home
This section discusses gain on the disposition • The applicable percentage of the total ex-
of farmland for which you were allowed either of cluded cost-sharing payments. 537 537 Installment Sales
the following. • The gain on the disposition of the property.
• Deductions for soil and water conservation 538 538 Accounting Periods and Methods
expenditures (section 1252 property). You do not report ordinary income under this
• Exclusions from income for certain rule to the extent the gain is recognized as ordi- 544 544 Sales and Other Dispositions of
cost-sharing payments (section 1255 prop- nary income under sections 1231 through 1254,
erty). 1256, and 1257. However, if applicable, gain re- Assets
ported under this rule must be reported regard- 551 551 Basis of Assets
Section 1252 property. If you disposed of less of any contrary provisions (including nonre-
farmland you held more than 1 year and less cognition provisions) under any other section. Form (and Instructions)
than 10 years at a gain and you were allowed Applicable percentage. The applicable 4797 4797 Sales of Business Property
deductions for soil and water conservation ex- percentage of the excluded cost-sharing pay-
penses for the land, as discussed in chapter 5, ments to be reported as ordinary income is 6252 6252 Installment Sale Income
you must treat part of the gain as ordinary in- based on the length of time you hold the prop-
come and treat the balance as section 1231 erty after receiving the payments. If the property 8594 8594 Asset Acquisition Statement Under
gain. is held less than 10 years after you receive the Section 1060
Exceptions. Do not treat gain on the follow- payments, the percentage is 100%. After 10
ing transactions as gain on section 1252 prop- years, the percentage is reduced by 10% a 8949 8949 Sales and Other Dispositions of
erty. year, or part of a year, until the rate is 0%. Capital Assets
• Disposition of farmland by gift.
• Transfer of farm property at death (except Form 4797, Part III. Use Form 4797, Part III, to See chapter 16 for information about getting
for income in respect of a decedent). figure the ordinary income part of a gain from publications and forms.
the sale, exchange, or involuntary conversion of
For more information, see Regulations section section 1252 property and section 1255 prop-
1.1252-2. erty. Installment Sale of a
Amount to report as ordinary income.
You report as ordinary income the lesser of the Farm
following amounts.
• Your gain (determined by subtracting the The installment sale of a farm for one overall
adjusted basis from the amount realized price under a single contract isn’t the sale of a
from a sale, exchange, or involuntary con- single asset. It generally includes the sale of
version, or the fair market value for all other 10. real property and personal property reportable
dispositions). on the installment method. It may also include
• The total deductions allowed for soil and the sale of property for which you must maintain
water conservation expenses multiplied by an inventory, which can’t be reported on the in-
the applicable percentage, discussed next. Installment stallment method. See Inventory, later. The sell-
ing price must be allocated to determine the
Applicable percentage. The applicable amount received for each class of asset.
percentage is based on the length of time you Sales
held the land. If you dispose of your farmland Note. You may be required to report the
within 5 years after the date you acquired it, the sale of your farm on Form 8594. For more infor-
percentage is 100%. If you dispose of the land mation, see Form 8594 and its instructions.
within the 6th through 9th years after you ac- Introduction
quired it, the applicable percentage is reduced An installment sale is a sale of property where The tax treatment of the gain or loss on the
by 20% a year for each year or part of a year you receive at least one payment after the tax sale of each class of asset is determined by its
you hold the land after the 5th year. If you dis- year of the sale. If you realize a gain on an in- classification as a capital asset, as property
pose of the land 10 or more years after you ac- stallment sale, you may be able to report part of used in the business, or as property held for
quired it, the percentage is 0%, and the entire your gain when you receive each payment. This sale and by the length of time the asset was
gain is a section 1231 gain. method of reporting gain is called the install- held. (See chapter 8 for a discussion of capital
ment method. You can’t use the installment assets and chapter 9 for a discussion of prop-
Example. You acquired farmland on Janu- method to report a loss. You can choose to re- erty used in the business.) Separate computa-
ary 19, 2015. You incurred $15,000 of soil and port all of your gain in the year of sale. tions must be made to figure the gain or loss for
water conservation expenditures for the land each class of asset sold. See Sale of a Farm in
that were fully deductible. On October 5, 2023, Installment obligation. The buyer’s obligation chapter 8.
you sold the land at a $30,000 gain. The appli- to make future payments to you can be in the
cable percentage is 40% because you sold the
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If you report the sale of property on the The taxpayer can’t revoke the election if ei- agreement is called stated interest. If the agree-
! installment method, any depreciation ther of the following applies. ment doesn’t provide for enough stated interest,
CAUTION recapture under section 1245 or 1250 • One of the purposes is to avoid federal in- there may be unstated interest or original issue
is generally taxable as ordinary income in the come tax. discount (OID). See Unstated interest, later.
year of sale. See Depreciation recapture, later. • The tax year in which any payment was re-
This applies even if no payments are received in ceived has closed. You must continue to report the interest
income on payments you receive in
that year. To revoke the election, you must obtain a pri- CAUTION! subsequent years as interest income
vate letter ruling from the IRS. The procedures whether it’s stated or unstated.
Related parties. If you sell depreciable prop- and user fees for obtaining a private letter ruling
erty to a related person and the sale is an in- are published annually in the first revenue pro- Adjusted basis and installment sale income
stallment sale, you may not be able to report the cedure issued each calendar year. For 2023, go (gain on sale). After you have determined how
sale using the installment method. If you sell to IRS.gov/irb/2023-1_IRB#RP-2023-1. much of each payment to treat as interest, you
property to a related person and the related per- Send your request for a private letter ruling, treat the rest of each payment as if it were made
son disposes of the property before you receive including the applicable user fee, to the IRS fol- up of two parts.
all payments with respect to the sale, you may lowing the instructions in section 7 of Revenue A tax-free return of your adjusted basis in
have to treat the amount realized by the related Procedure 2023-1. A schedule of the current •
the property.
person as received by you when the related user fees is available in Appendix A of Revenue Your gain (referred to as “installment sale
person disposes of the property. The definition Procedure 2023-1, starting on page 85. •
of related parties differs based on which of income” on Form 6252).
these applies. For more information, see Rela- Inventory. If you aren’t required to maintain Figuring adjusted basis and gross profit
ted Person under Sale to a Related Person in (keep a record of beginning and ending) inven- percentage for installment sale purposes.
Pub. 537. tories under your method of accounting, you You can use Worksheet 10-1 to figure your ad-
can report gain from the sale of farm inventory justed basis in the property for installment sale
using the installment method. Complete Form purposes. When you have completed the work-
Installment Method 6252 to figure the amount of installment gain to sheet, you will also have determined the gross
report each year from the sale of farm inventory profit percentage necessary to figure your in-
An installment sale is a sale of property where and carry that amount to line 8 of Schedule F stallment sale income (gain) for this year.
you receive at least one payment after the tax (Form 1040).
year of the sale. A farmer who isn’t required to If you are required to maintain inventories 1. Selling price. The selling price is the total
maintain an inventory can use the installment under your method of accounting, you can’t re- cost of the property to the buyer and in-
method to report gain from the sale of property port gain from the sale of farm inventory using cludes the following.
used or produced in farming. See Inventory, the installment method. All gain or loss on the • Any money you’re to receive.
later, for information on the sale of farm property sale of farm inventory must be reported in the • The fair market value (FMV) of any
where inventory items are included in the as- year of sale, even if you receive payment in later property you’re to receive (FMV is
sets sold. years. If inventory items are included in an in- discussed under Property used as a
stallment sale, you may have an agreement payment, later).
If a sale qualifies as an installment sale, the stating which payments are for inventory and • Any existing mortgage or other debt
gain must be reported under the installment which are for the other assets being sold. If you the buyer pays, assumes, or takes the
method unless you elect out of using the install- don’t, each payment must be allocated between property subject to (a note, a mort-
ment method. the inventory and the other assets sold. gage, or any other liability, such as a
lien, accrued interest, or taxes you
Electing out of the installment method. If More information. See Inventory under owe on the property).
you elect not to use the installment method, you Sale of a Business in Pub. 537 for more infor- • Any of your selling expenses the
generally report the entire gain in the year of mation. buyer pays.
sale, even though you don’t receive all the sale Don’t include stated interest, unstated
proceeds in that year. Sale at a loss. If your sale results in a loss, you interest, any amount recomputed or re-
To make this election, don’t report your sale can’t use the installment method. If the loss is characterized as interest, or OID in the
on Form 6252. Instead, report it on Schedule F on an installment sale of business assets, you selling price.
(Form 1040), Schedule D (Form 1040), Form can deduct it only in the tax year of sale.
4797, or all three. 2. Adjusted basis. Your adjusted basis in
property immediately before the install-
You may also need to file Form 8949 along Figuring Installment Sale ment sale is your original basis increased
with Schedule D (Form 1040), Capital Gains Income or reduced as a result of various events
and Losses. For more information, see Form while you own the property.
8949 and its instructions. • Some events, such as adding rooms
Each payment on an installment sale usually
When to elect out. Make this election by consists of the following three parts. or making permanent improvements,
the due date, including extensions, for filing • Interest income. increase basis. Others, such as de-
your tax return for the year the sale takes place. • Return of your adjusted basis in the prop- ductible casualty losses or deprecia-
However, if you timely file your tax return for erty. tion previously allowed or allowable,
the year the sale takes place without making the • Gain on the sale. decrease basis.
• The way you figure your original basis
election, you can still make the election by filing In each year you receive a payment, you must depends on how you acquire the
an amended return within 6 months of the due include in income both the interest part and the property. The basis of property you
date of the return (excluding extensions). Enter part that is your gain on the sale. Don’t include buy is generally its cost. The basis of
“Filed pursuant to section 301.9100-2” at the in income the part that is the return of your basis property you inherit, receive as a gift,
top of the amended return. File the amended re- in the property. Basis is the amount of your in- build yourself, or receive in a tax-free
turn at the same address you filed the original vestment in the property for installment sale exchange is figured differently. See
return. If you electronically filed your Form 1040 purposes. chapter 6 and Pub. 551 for more in-
or 1040-SR, you may electronically file the Form
formation.
1040-X. Interest income. You must report interest as • Generally, your adjusted basis in
Revoking the election. Once made, the ordinary income. Interest generally isn’t inclu- raised farm products, such as grain or
election can be revoked only with IRS approval. ded in a down payment. However, you may market livestock, is zero.
An approved revocation is retroactive. have to treat part of each later payment as inter-
est, even if it isn’t called interest in your agree- 3. Selling expenses. Selling expenses re-
ment with the buyer. Interest provided in the late to the sale of the property. Review the
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   closing statement for fees, which may             Worksheet 10-1. Figuring Adjusted Basis and Gross Profit Percentage
   qualify as selling expenses. These may in-
   clude appraisal fees, attorney fees, closing 
   fees, document preparation fees, escrow 
   fees, mortgage satisfaction fees, notary                                                                                       Keep for Your Records
   fees, points paid by the seller to obtain fi-
   nancing for the buyer, real estate broker’s       1. Enter the selling price for the property . . . . . . . . . . . . . . . . . . . . . . . . .                       
   commission, recording fees (if paid by the        2. Enter your adjusted basis for the property . . . . . . . . . . . . .                                  
   seller), costs of removing title clouds, set-
   tlement fees, title search fees, and transfer     3. Enter your selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . .                       
   or stamp taxes charged by city, county, or        4. Enter any depreciation recapture . . . . . . . . . . . . . . . . . . . . .                            
   state governments.
4. Depreciation recapture. If the property           5. Add lines 2, 3, and 4. 
   you sold was depreciable property:                This is your adjusted basis 
   • You may need to recapture part of the           for installment sale purposes   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         
     gain on the sale as ordinary income,            6. Subtract line 5 from line 1. If zero or less, enter -0-.
     and                                                                                                                                                                 
   • See Depreciation Recapture in chap-             This is your gross profit    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
     ter 9 and Depreciation Recapture In-            If the amount entered on line 6 is zero, stop here. You can’t use 
     come in Pub. 537.                               the installment method.
5. Adjusted basis for installment sale               7. Enter the contract price for the property . . . . . . . . . . . . . . . . . . . . . . .                          
   purposes. Your adjusted basis for install-
   ment sale purposes is the total of the fol-       8. Divide line 6 by line 7. This is your gross 
   lowing three items.                               profit percentage      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          
   • Adjusted basis.
   • Selling expenses.                               Worksheet 10-2. New Gross Profit Percentage — Selling Price Reduced
   • Depreciation recapture.
6. Gross profit. Gross profit is the total gain 
   you report on the installment method.                                                                                          Keep for Your Records
   • To figure your gross profit, subtract 
     your adjusted basis for installment             1. Enter the reduced selling 
     sale purposes from the selling price.                                                                                                                               
   • If the property you sold was your                      price for the property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
     home, subtract from the gross profit            2. Enter your adjusted 
     any gain you can exclude. See Pub.                     basis for the 
     523 for more information.                              property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         
7. Contract price. Contract price equals:            3. Enter your selling 
   • The selling price, minus                                                                                                                                
   • The amount of any mortgages, debts,                    expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
     and other liabilities assumed or taken          4. Enter any depreciation 
     by the buyer, plus                                     recapture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          
   • The amount, if any, by which the 
     mortgages, debts, and other liabilities         5. Add lines 2, 3, and 4  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         
     assumed or taken by the buyer ex-               6. Subtract line 5 from line 1. 
     ceed your adjusted basis for install-                  This is your adjusted
     ment sale purposes.                                                                                                                                                 
                                                            gross profit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8. Gross profit percentage. A certain per-           7. Enter any installment sale 
   centage of each payment (after subtract-
   ing interest) is reported as installment sale            income reported in 
   income. This percentage is called the                    prior year(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              
   gross profit percentage and is figured by         8. Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            
   dividing your gross profit from the sale by 
   the contract price.                               9. Future installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        
   • The gross profit percentage generally 
     remains the same for each payment               10. Divide line 8 by line 9. 
     you receive. However, see Example                      This is your new
     under Selling price reduced, later, for                gross profit percentage* . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             
     a situation where the gross profit per-
     centage changes.                                * Apply this percentage to all future payments to determine how much of each of those payments is installment sale 
                                                     income.
Example. You  sell  property  at  a  contract        Amount  to  report  as  installment  sale  in-         payment.  For  a  detailed  discussion,  see                Pay-
price  of  $60,000  and  your  gross  profit  is     come.  Multiply the payments you receive each          ments Received or Considered Received, later.
$15,000.  Your  gross  profit  percentage  is  25%   year (less interest) by the gross profit percent-
($15,000  ÷  $60,000).  After  subtracting  interest age. The result is your installment sales income       Selling  price  reduced.                       If  the  selling  price 
from  each  payment,  you  report  25%  of  each     for  the  tax  year.  In  certain  circumstances,  you is reduced at a later date, the gross profit on the 
payment,  including  the  down  payment,  as  in-    may be treated as having received a payment,           sale will also change. You must then refigure the 
stallment sale income from the sale for the tax      even though you received nothing directly. A re-       gross  profit  percentage  for  the  remaining  pay-
year  you  receive  the  payment.  The  remainder    ceipt  of  property  or  the  assumption  of  a  mort- ments.  Refigure  your  gross  profit  using        Work-
(balance) of each payment is the tax-free return     gage on the property sold may be treated as a          sheet 10-2. You will spread any remaining gain 
of your adjusted basis.                                                                                     over future installments.

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Example. In 2021, you sold land with a ba- If you’re using the installment method and Payments Received or
sis of $40,000 for $100,000. Your gross profit you dispose of the installment obligation, you
was $60,000. You received a $20,000 down will generally have a gain or loss to report. It’s Considered Received
payment and the buyer’s note for $80,000. The considered gain or loss on the sale of the prop-
note provides for monthly payments of $1,953 erty for which you received the installment obli- You must figure your gain each year on the pay-
each, figured at 8% interest, amortized over 4 gation. ments you receive, or are treated as receiving,
years, beginning in January 2022. Your gross from an installment sale.
profit percentage was 60%. You received the Cancellation. If an installment obligation is
down payment of $20,000 in 2021 and total canceled or otherwise becomes unenforceable, In certain situations, you’re considered to
payments of $23,436 in 2022, of which $17,675 it’s treated as a disposition other than a sale or have received a payment, even though the
was principal and $5,761 was interest accord- exchange. Your gain or loss is the difference be- buyer doesn’t pay you directly. These situations
ing to the amortization schedule. You reported a tween your basis in the obligation and its FMV occur when the buyer assumes or pays any of
gain of $12,000 on the down payment received at the time you cancel it. If the parties are rela- your debts, such as a loan, or pays any of your
in 2021 and $10,605 ($17,675 x 60% (0.60)) in ted, the FMV of the obligation is considered to expenses, such as a sales commission. How-
2022. be no less than its full face value. ever, as discussed later, the buyer’s assumption
In January 2023, you and the buyer agreed of your debt is treated as a recovery of basis,
to reduce the purchase price to $85,000; and Transfer due to death. The transfer of an in- rather than as a payment, in many cases.
payments during 2023, 2024, and 2025 are re- stallment obligation (other than to a buyer) as a
duced to $1,483 a month amortized over the re- result of the death of the seller isn’t a disposi- Buyer pays seller’s expenses. If the buyer
maining 3 years. tion. Any unreported gain from the installment pays any of your expenses related to the sale of
The new gross profit percentage, 47.32%, is obligation isn’t treated as gross income to the your property, it’s considered a payment to you
figured in Example — Worksheet 10-2. decedent. No income is reported on the dece- in the year of sale. Include these expenses in
dent’s return due to the transfer. Whoever re- the selling and contract prices when figuring the
Example — New Gross Profit ceives the installment obligation as a result of gross profit percentage.
Worksheet 10-2. Percentage — Sell- the seller’s death is taxed on the installment
ing Price Reduced payments the same as the seller would’ve been Buyer assumes mortgage. If the buyer as-
Keep for Your Records had the seller lived to receive the payments. sumes or pays off your mortgage, or otherwise
However, if the installment obligation is can- takes the property subject to the mortgage, the
1. Enter the reduced selling celed, becomes unenforceable, or is transferred following rules apply.
price for the property . . . . . . . . . . 85,000
to the buyer because of the death of the holder Mortgage less than basis. If the buyer as-
2. Enter your adjusted of the obligation, it’s a disposition. The estate sumes a mortgage that isn’t more than your in-
property . . . . . . . . . . . . 40,000
basis for the must figure its gain or loss on the disposition. If stallment sale basis in the property, it isn’t con-
3. Enter your selling the holder and the buyer were related, the FMV sidered a payment to you. It’s considered a
expenses . . . . . . . . . . . -0- of the installment obligation is considered to be recovery of your basis. The contract price is the
4. Enter any depreciation no less than its full face value. selling price minus the mortgage.
recapture . . . . . . . . . . . -0-
5. Add lines 2, 3, and 4 . . . . . . . . . . 40,000 More information. For more information, Example. You sell property with an adjus-
see Disposition of an Installment Obligation in
6. Subtract line 5 from line 1. Pub. 537. ted basis of $19,000. You have selling expenses
This is your adjusted of $1,000. The buyer assumes your existing
gross profit . . . . . . . . . . . . . . . 45,000 mortgage of $15,000 and agrees to pay you
7. Enter any installment sale Sale of depreciable property. You generally
income reported in can’t report gain from the sale of depreciable $10,000 (a cash down payment of $2,000 and
prior year(s) . . . . . . . . . . . . . . . 22,605 property to a related person on the installment $2,000 (plus 8% interest) in each of the next 4
8. Subtract line 7 from line 6 . . . . . . . . 22,395 method. However, see Related parties under In- years).
9. Future installments . . . . . . . . . . . 47,325 stallment Sale of a Farm, earlier. The selling price is $25,000 ($15,000 +
$10,000). Your gross profit is $5,000 ($25,000 −
You generally can’t use the installment $20,000 installment sale basis). The contract
This is your new
10. Divide line 8 by line 9. method to report any depreciation recapture in- price is $10,000 ($25,000 − $15,000 mortgage).
gross profit percentage* . . . . . . . 47.32% come. However, you can report any gain greater Your gross profit percentage is 50% ($5,000 ÷
than the recapture income on the installment $10,000). You report half of each $2,000 pay-
* Apply this percentage to all future payments to determine method. ment received as gain from the sale. You also
how much of each of those payments is installment sale The recapture income reported in the year of report all interest you receive as ordinary in-
income. sale is included in your installment sale basis to come.
determine your gross profit on the installment
You will report installment sale income of sale. Mortgage more than basis. If the buyer
$6,878 (47.32% of $14,535) in 2023, $7,449 Figure your depreciation recapture income assumes a mortgage that is more than your in-
(47.32% of $15,742) in 2024, and $8,067 (including the section 179 deduction and the stallment sale basis in the property, you recover
(47.32% of $17,048) in 2025. section 179A deduction recapture) in Part III of your entire basis. The part of the mortgage
Form 6252. Use Form 6252 to report an install- Form 4797. As instructed on the form, transfer greater than your basis is treated as a payment
ment sale in the year it takes place and to report the depreciation recapture income to Part II of received in the year of sale.
payments received, or considered received be- Form 4797 as ordinary income in the year of To figure the contract price, subtract the
cause of related party resales, in later years. At- sale. mortgage from the selling price. This is the total
amount (other than interest) you will receive di-
tach it to your tax return for each year. If you sell depreciable business prop- rectly from the buyer. Add to this amount the
TIP erty, prepare Form 4797 first in order to payment you’re considered to have received
Disposition of Installment figure the amount to enter on Form (the difference between the mortgage and your
Obligation 6252, Part I, line 12. See the Form 6252 instruc- installment sale basis). The contract price is
tions for details. then the same as your gross profit from the
A disposition generally includes a sale, ex- For more information on the section 179 de- sale.
change, cancellation, bequest, distribution, or duction, see Section 179 Expense Deduction in If the mortgage the buyer assumes is
transmission of an installment obligation. An in- chapter 7. For more information on depreciation TIP equal to or more than your installment
stallment obligation is the buyer’s note, deed of recapture, see Depreciation Recapture in chap- sale basis, the gross profit percentage
trust, or other evidence that the buyer will make ter 9. will always be 100%.
future payments to you.

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Example. The selling price for your prop- Exception. If the property the buyer gives If you receive a government or corporate
erty is $90,000. The buyer will pay you $10,000 you is payable on demand or readily tradable bond for a sale before October 22, 2004, and
annually (plus 8% interest) over the next 3 years (see examples later), the amount you should the bond has interest coupons attached or can
and assume an existing mortgage of $60,000. consider as payment in the year received is: be readily traded in an established securities
Your adjusted basis in the property is $44,000. • The FMV of the property on the date you market, you’re considered to have received pay-
You have selling expenses of $6,000, for a total receive it if you use the cash method of ac- ment equal to the bond’s FMV. However, see
installment sale basis of $50,000. The part of counting; Exception under Property used as a payment,
the mortgage that is more than your installment • The face amount of the obligation on the earlier.
sale basis is $10,000 ($60,000 − $50,000). This date you receive it if you use an accrual
amount is included in the contract price and method of accounting; or Buyer’s note. The buyer’s note (unless
treated as a payment received in the year of • The stated redemption price at maturity payable on demand) isn’t considered payment
sale. The contract price is $40,000: less any OID or, if there is no OID, the sta- on the sale. However, its full face value is inclu-
ted redemption price at maturity appropri- ded when figuring the selling price and the con-
Selling price $90,000 ately discounted to reflect total unstated in- tract price. Payments you receive on the note
Minus: Mortgage (60,000) terest. See Unstated interest, later. are used to figure your gain in the year received.
Amount actually received $30,000 Sale to a related person. If you sell deprecia-
Add difference: Examples. If you receive a note from the
Mortgage $60,000 buyer as payment, and the note stipulates that ble property to a related person and the sale is
Minus: Installment sale basis (50,000) 10,000 you can demand payment from the buyer at any an installment sale, you may not be able to re-
Contract price $40,000 time, the note is payable on demand. If you re- port the sale using the installment method. For
ceive marketable securities from the buyer as information on these rules, see the Instructions
Your gross profit on the sale is also $40,000: payment, and you can sell the securities on an for Form 6252 and Related parties under Install-
established securities market (such as the New ment Sale of a Farm, earlier.
Selling price $90,000 York Stock Exchange) at any time, the securi-
Minus: Installment sale basis (50,000) ties are readily tradable. In these examples, Trading property for like-kind property. If
Gross profit $40,000 use the above rules to determine the amount you trade business or investment real property
you should consider as payment in the year re- solely for other business or investment real
Your gross profit percentage is 100%. Re- ceived. property of a like kind, you can postpone report-
ing the gain from the trade. These trades are
port 100% of each payment (less interest) as Debt not payable on demand. Any evi- known as like-kind exchanges. The property
gain from the sale. Treat the $10,000 excess of dence of debt you receive from the buyer that you receive in a like-kind exchange is treated as
the mortgage over your installment sale basis isn’t payable on demand isn’t considered a pay- if it were a continuation of the property you gave
as a payment and report 100% of it as gain in ment. This is true even if the debt is guaranteed up. A trade isn’t a like-kind exchange if the prop-
the year of sale. by a third party, including a government agency. erty you trade or the property you receive is
property you hold primarily for sale to custom-
Buyer assumes other debts. If the buyer as- Fair market value (FMV). This is the price ers. See Like-Kind Exchanges in chapter 8 for a
sumes any other debts, such as a loan or back at which property would change hands between discussion of like-kind property.
taxes, it may be considered a payment to you in a willing buyer and a willing seller, neither being If, in addition to like-kind property, you re-
the year of sale. under any compulsion to buy or sell and both ceive an installment obligation in the exchange,
If the buyer assumes the debt instead of having a reasonable knowledge of all the nec- the following rules apply to determine install-
paying it off, only part of it may have to be trea- essary facts. ment sale income each year.
ted as a payment. Compare the debt to your in- Third-party note. If the property the buyer • The contract price is reduced by the FMV
stallment sale basis in the property being sold. gives you is a third-party note (or other obliga- of the like-kind property received in the
If the debt is less than your installment sale ba- tion of a third party), you’re considered to have trade.
sis, none of it is treated as a payment. If it’s received a payment equal to the note’s FMV. • The gross profit is reduced by any gain on
more, only the difference is treated as a pay- Because the FMV of the note is itself a payment the trade that can be postponed.
ment. If the buyer assumes more than one debt, on your installment sale, any payments you later • Like-kind property received in the trade
any part of the total that is more than your in- receive from the third party aren’t considered isn’t considered payment on the install-
stallment sale basis is considered a payment. payments on the sale. The excess of the note’s ment obligation.
These rules are the same as the rules dis- face value over its FMV is interest. Exclude this
cussed earlier under Buyer assumes mortgage. interest in determining the selling price of the Unstated interest. An installment sale con-
However, they apply only to the following types property. However, see Exception under Prop- tract may provide that each deferred payment
of debt the buyer assumes. erty used as a payment, earlier. on the sale will include interest or that there will
• Those acquired from ownership of the be an interest payment in addition to the princi-
property you’re selling, such as a mort- Example. You sold real estate in an install- pal payment. Interest provided in the contract is
gage, a lien, overdue interest, or back ment sale. As part of the down payment, the called stated interest.
taxes. buyer assigned to you a $50,000, 8% third-party If an installment sale contract doesn’t pro-
• Those acquired in the ordinary course of note. The FMV of the third-party note at the time vide for adequate stated interest, section 483
your business, such as a balance due for of the sale was $30,000. This amount, not provides that part of the stated principal amount
inventory you purchased. $50,000, is a payment to you in the year of sale. of the contract may be recharacterized as inter-
If the buyer assumes any other type of debt, The third-party note had an FMV equal to 60% est. This interest is called unstated interest.
such as a personal loan or your legal fees relat- of its face value ($30,000 ÷ $50,000), so 60% of If section 1274 applies to the contract, this
ing to the sale, it’s treated as if the buyer had each principal payment you receive on this note interest is called original issue discount (OID).
paid off the debt at the time of the sale. The is a nontaxable return of capital. The remaining Generally, if a buyer gives a debt in consid-
value of the assumed debt is then considered a 40% is interest taxed as ordinary income. eration for personal-use property, the unstated
interest rules don’t apply to the buyer. There-
payment to you in the year of sale. Bond. A bond or other evidence of debt fore, the buyer can’t deduct the unstated inter-
Property used as a payment. If you receive you receive from the buyer that is payable on est. The seller must report the unstated interest
property rather than money from the buyer, it’s demand or readily tradable in an established as income. Personal-use property is any prop-
still considered a payment in the year received. securities market is treated as a payment in the erty in which substantially all of its use by the
However, see Trading property for like-kind year you receive it. For more information on the buyer isn’t in connection with a trade or busi-
property, later. Generally, the amount of the amount you should treat as a payment, see Ex- ness or an investment activity.
payment is the property’s FMV on the date you ception under Property used as a payment, ear-
receive it. lier. If the debt is subject to section 483 rules and
is also subject to the below-market loan rules,

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such as a gift loan, compensation-related loan, Special rules may apply when you sell sec- tach a separate page to each Form 6252 that
or corporation-shareholder loan, then both par- tion 1250 assets depreciated under the shows the computations in the example.
ties are subject to the below-market loan rules straight-line method. See the Unrecaptured
rather than the unstated interest rules. Section 1250 Gain Worksheet in the Instruc- If you sell depreciable business prop-
Unstated interest reduces the stated selling tions for Schedule D (Form 1040). As payments TIP erty, prepare Form 4797 first in order to
price of the property and the buyer’s basis in the are received on the installment sale, unrecog- figure the amount to enter on Form
property. It increases the seller’s interest in- nized 1250 gain must be recognized before any 6252.
come and the buyer’s interest expense. section 1231 gain is recognized. See chapter 3
In general, an installment sale contract pro- of Pub. 544 for more information on section Section 1231 gains. The gains on the
vides for adequate stated interest if the stated 1250 assets. farmland and buildings are section 1231 gains.
They are combined with any other section 1231
interest rate (based on an appropriate com- gains and losses. A net section 1231 gain is
pounding period) is at least equal to the appli- Gross profit. The following table shows each
cable federal rate (AFR). asset reported on the installment method, its capital gain and a net section 1231 loss is an
selling price, adjusted basis for installment sale, ordinary loss.
The AFRs are published monthly in the gain, and gross profit.
Internal Revenue Bulletin (IRB). You Installment income for years after 2023.
can access the IRBs at IRS.gov/ Selling Adjusted Gross You figure installment income for the years after
Guidance. Price Basis Gain Profit 2023 by applying the same gross profit percen-
Home $60,000 $36,743 $23,257 $0 tages to the payments you receive each year. If
More information. For more information, Farmland 165,000 81,860 83,140 83,140 you receive $50,000 during the year, the entire
see Unstated Interest and Original Issue Dis- Buildings 75,000 38,880 36,120 36,120 $50,000 is considered received on the install-
count (OID) in Pub. 537. $300,000 $157,483 $142,517 $119,260 ment sale (100% × $50,000). You realize in-
come as follows:
Home. The gain on the home ($23,257) is
excluded from your income because it qualifies Income
Example for the exclusion of gain from the sale of a prin- Home $0
On January 3, 2023, you sold your farm, includ- cipal residence. Therefore, don’t include that Farmland (33.256% × $50,000) 16,628
ing the home, farmland, and buildings. You re- gain when you figure your gross profit percent- Buildings (14.448% × $50,000) 7,224
ceived $50,000 down and the buyer’s note for age. Total installment income $23,852
$200,000. In addition, the buyer assumed an Section 1231 gains. The gain on the farmland In this example, no gain is ever recognized
outstanding $50,000 mortgage on the farmland. and buildings is reported as section 1231 gains. from the sale of your home. You will combine
The total selling price was $300,000. The note See Section 1231 Gains and Losses in chap- your section 1231 gains from this sale with sec-
payments of $25,000 each, plus adequate inter- ter 9. tion 1231 gains and losses from other sales in
est, are due every July 1 and January 1, begin-
each of the later years to determine whether to
ning in July 2023. Your selling expenses were Contract price and gross profit percentage. report them as ordinary or capital gains. The in-
$15,000. The contract price is $250,000. This is calcula- terest received with each payment will be inclu-
ted by subtracting the $50,000 mortgage as- ded in full as ordinary income.
Adjusted basis and depreciation. The adjus- sumed from the $300,000 selling price.
ted basis and depreciation claimed on each as-
set sold are as follows: Gross profit percentage for the sale is Note. Refer to Pub. 523 to determine
47.704% ($119,260 gross profit ÷ $250,000 whether or not the sale of the personal resi-
Seller’s Depreciation Adjusted contract price). The gross profit percentage for dence will result in a taxable event.
Basis Claimed Basis each asset is figured as follows:
Summary. The installment income (roun-
Home* $33,743 $0 $33,743 ded to the nearest dollar) from the sale of the
Farmland 73,610 0 73,610 Percent farm is reported as follows:
Buildings 66,630 31,500 35,130 Home 0
* Owned and used as main home for at least 2 of the 5 years Farmland ($83,140 ÷ $250,000) 33.256
prior to the sale. Buildings ($36,120 ÷ $250,000) 14.448 Selling price $300,000
Total 47.704 Minus: Adjusted basis for installment (157,483)
reporting
Adjusted basis for installment sale purpo- Minus: Excluded gain from home (23,257)
ses. To determine the adjusted basis for install- Figuring the gain to report on the install- Gross profit $119,260
ment sale purposes, prorate the selling expense ment method. One hundred percent (100%)
based on the relative FMV of each asset and of each payment is reported on the installment
add it to the adjusted basis (see above). method. The total amount received on the sale Gain reported in 2023 (year of sale) $35,778
in 2023 is $75,000 ($50,000 down payment + Gain reported in 2024:
Selling Adjusted Adjusted $25,000 payment on July 1). The installment $50,000 × 47.704% 23,852
Expense Basis Basis for sale part of the total payments received in 2023 Gain reported in 2025:
Installment $50,000 × 47.704% 23,852
Sale is also $75,000. Figure the gain to report for Gain reported in 2026:
each asset by multiplying its gross profit per- $50,000 × 47.704% 23,852
Home* $3,000 $33,743 $36,743 centage times $75,000. Gain reported in 2027:
Farmland 8,250 73,610 81,860 $25,000 × 47.704% 11,926
Buildings 3,750 35,130 38,880
$15,000 $142,483 $157,483 Income Total gain reported $119,260
Home $0
* Owned and used as main home for at least 2 of the 5 years Farmland (33.256% × $75,000) 24,942
prior to the sale. Buildings (14.448% × $75,000) 10,836
Total installment income for 2023 $35,778

Depreciation recapture. The buildings are Reporting the sale. Report the installment
section 1250 property. There may be specific sale on three separate Forms 6252. One form
rules for depreciation recapture of buildings should be filed for each component of the sale.
(1250 property) using the straight-line method. Then, report the amounts from Form 6252 on
See chapter 9 for more information on deprecia- Form 4797 and Schedule D (Form 1040). At-
tion recapture.

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                                                       Useful Items                                                                                           •   Car, truck, or farm equipment accidents not 
                                                       You may want to see:                                                                                       resulting from your willful act or willful negli-
                                                                                                                                                                  gence.
11.                                                    Publication                                                                                            •   Earthquakes.
                                                                                                                                                              •   Fires (but see Nondeductible losses next 
                                                           523 523 Selling Your Home                                                                              for exceptions).
Casualties,                                                525 525 Taxable and Nontaxable Income                                                              •   Floods.
                                                                                                                                                              •   Freezing.
                                                           536 536 Net Operating Losses (NOLs) for                                                            •   Government-ordered demolition or reloca-
Thefts, and                                                    Individuals, Estates, and Trusts                                                                   tion of a home that is unsafe to use be-
                                                                                                                                                                  cause of a disaster, as discussed under 
                                                           542 542 Corporations                                                                                   Disaster Area Losses in Pub. 547.
Condemnations                                              544 544 Sales and Other Dispositions of                                                            •   Lightning.
                                                               Assets                                                                                         •   Storms, including hurricanes and torna-
                                                                                                                                                                  does.
Reminder                                                                                                                                                      •   Terrorist attacks.
                                                           547 547 Casualties, Disasters, and Thefts
                                                                                                                                                              •   Vandalism.
                                                           584 584 Casualty, Disaster, and Theft Loss                                                         •   Volcanic eruptions.
Special  rules  for  qualified  disaster  losses.              Workbook (Personal-Use Property)
Special rules apply to federally declared disas-           584-B        584-B Business Casualty, Disaster, and                                                Note.     For  tax  years  2018  through  2025,  if 
ter area losses. A federally declared disaster is                                                                                                             you  are  an  individual  and  you  have  a  loss  of 
a disaster that occurred in an area declared by                Theft Loss Workbook
                                                                                                                                                              personal-use  property  caused  by  one  the 
the  President  to  be  eligible  for  federal  assis-     976 976 Disaster Relief                                                                            events  listed  above,  or  other  casualties  or 
tance under the Robert T. Stafford Disaster Re-                                                                                                               thefts, this loss is deductible only if it is attributa-
lief and Emergency Assistance Act.                     Form (and Instructions)                                                                                ble  to  a  federally  declared  disaster.  See  Pub. 
See     Disaster  Area  Losses,  later,  and  Pub.         Sch A (Form 1040)                         Sch A (Form 1040) Itemized                               547 for more information.
547, Casualties, Disasters, and Thefts, for more 
information  on  the  special  relief.  Also,  see             Deductions                                                                                     Example.     The event causing you to suffer a 
IRS.gov/DisasterTaxRelief for more information.            Sch D (Form 1040)                                           Sch D (Form 1040) Capital Gains and    personal casualty loss occurred before January 
                                                               Losses                                                                                         1, 2018, but the casualty loss was not sustained 
                                                                                                                                                              until  January  1,  2018,  or  later.  If  this  loss  was 
                                                                                   Sch F (Form 1040) 
Introduction                                               Sch F (Form 1040)                         Profit or Loss From                                      not attributed to a federally declared disaster, it 
                                                               Farming                                                                                        is not deductible.
This chapter explains the tax treatment of casu-           4684    4684 Casualties and Thefts                                                                 Nondeductible  losses.      A  casualty  loss 
alties,  thefts,  and  condemnations.  A  casualty 
occurs  when  property  is  damaged,  destroyed,           4797    4797 Sales of Business Property                                                            isn't deductible if the damage or destruction is 
or lost due to a sudden, unexpected, or unusual                                                                                                               caused by the following.
event. A theft occurs when property is stolen. A       See chapter  16  for  information  about  getting                                                      •   Accidentally breaking articles such as 
condemnation  occurs  when  private  property  is      publications and forms.                                                                                    glassware or china under normal condi-
legally taken for public use without the owner's                                                                                                                  tions.
consent. A casualty, theft, or condemnation may                                                                                                               •   A family pet (explained below).
result  in  a  deductible  loss  or  taxable  gain  on Casualties and Thefts                                                                                  •   A fire if you willfully set it, or pay someone 
your federal income tax return. You may have a                                                                                                                    else to set it.
deductible loss or a taxable gain even if only a               For tax years 2018 through 2025, per-                                                          •   A car, truck, or farm equipment accident if 
portion of your property was affected by a casu-       !       sonal casualty and theft losses of an in-                                                          your willful negligence or willful act caused 
alty, theft, or condemnation.                          CAUTION dividual  are  deductible  only  to  the  ex-                                                      it. The same is true if the willful act or willful 
An involuntary conversion occurs when you              tent  they're  attributable  to  a  federally  declared                                                    negligence of someone acting for you 
receive money or other property as reimburse-          disaster. An exception to the rule limiting the de-                                                        caused the accident.
ment for a casualty, theft, condemnation, dispo-       duction for personal casualty and theft losses to                                                      •   Progressive deterioration (explained be-
sition of property under threat of condemnation,       federal disaster losses applies where you have                                                             low).
or certain other events discussed in this chap-        personal casualty gains to the extent the losses 
ter.                                                   don't exceed your gains.                                                                               Family pet.        Loss of property due to dam-
If an involuntary conversion results in a gain                                                                                                                age by a family pet isn't deductible as a casu-
                                                                                                                                                              alty  loss  unless  the  requirements  discussed 
and  you  buy  qualified  replacement  property        If  your  property  is  destroyed,  damaged,  or                                                       above under Casualty are met.
within  the  specified  replacement  period,  you      stolen, you may have a deductible loss. If the in-
can postpone reporting the gain on your income         surance  or  other  reimbursement  is  more  than                                                      Example.     You keep your horse in your yard. 
tax  return.  For  more  information,  see Postpon-    the adjusted basis of the destroyed, damaged,                                                          The  ornamental  fruit  trees  in  your  yard  were 
ing Gain, later.                                       or stolen property, you may have a taxable gain.                                                       damaged  when  your  horse  stripped  the  bark 
                                                                                                                                                              from them. Some of the trees were completely 
Topics                                                 Casualty.   A  casualty  is  the  damage,  destruc-                                                    girdled  and  died.  Because  the  damage  wasn't 
This chapter discusses:                                tion, or loss of property resulting from an identi-                                                    unexpected  or  unusual,  the  loss  isn't  deducti-
                                                       fiable event that is sudden, unexpected, or un-                                                        ble.
•    Casualties and thefts                             usual.
•    How to figure a loss or gain                      •   A sudden event is one that is swift, not                                                           Progressive  deterioration.  Loss  of  prop-
•    Other involuntary conversions                         gradual or progressive.                                                                            erty  due  to  progressive  deterioration  isn't  de-
•    Postponing gain                                   •   An unexpected event is one that is ordina-                                                         ductible as a casualty loss. This is because the 
•    Disaster area losses                                  rily unanticipated and unintended.                                                                 damage results from a steadily operating cause 
•    Reporting gains and losses                        •   An unusual event is one that isn't a                                                               or a normal process, rather than from a sudden 
•    Drought involving property connected with             day-to-day occurrence and that isn't typical                                                       event. Examples of damage due to progressive 
     a trade or business or a transaction                  of the activity in which you were engaged.                                                         deterioration  include  damage  from  rust,  corro-
                                                                                                                                                              sion, or termites. However, weather-related con-
     entered into for profit                           Deductible  losses.                                                               Deductible  casualty ditions or disease may cause another type of in-
                                                       losses  can  result  from  a  number  of  different                                                    voluntary  conversion.  See Other  Involuntary 
                                                       causes, including the following.                                                                       Conversions, later.
                                                       •   Airplane crashes.
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Theft. A theft is the taking and removing of For plants with a preproductive period of Your adjusted basis in the property
money or property with the intent to deprive the more than 2 years, you may have a deductible
owner of it. The taking of property must be ille- loss if you have a tax basis in the plants. You MINUS
gal under the law of the state where it occurred usually have a tax basis if you capitalized the Any salvage value
and it must have been done with criminal intent. expenses associated with these plants under MINUS
You don't need to show a conviction for theft. the uniform capitalization rules. The uniform
Theft includes the taking of money or prop- capitalization rules are discussed in chapter 6. Any insurance or other reimbursement you
erty by the following means. If you report your income on an accrual receive or expect to receive
• Blackmail. method, casualty or theft losses are deductible You can use the schedules in Pub.
• Burglary. only if you included the items in your inventory TIP 584-B to list your stolen, damaged, or
• Embezzlement. at the beginning of your tax year. You get the destroyed business property and to fig-
• Extortion. deduction by omitting the item from your inven- ure your loss.
• Kidnapping for ransom. tory at the close of your tax year. You can't take
• Larceny. a separate casualty or theft deduction. If your farm property was partially damaged,
• Robbery. use the following steps to figure your casualty
• Threats. Income loss. A loss of future income isn't de- loss.
• Timber trespass. ductible.
1. Determine your adjusted basis in the prop-
The taking of money or property through fraud Example. A severe flood destroyed your erty before the casualty or theft.
or misrepresentation is theft if it is illegal under crops. Because you are a cash method tax- 2. Determine the decrease in fair market
state or local law. payer and already deducted the cost of raising value of the property as a result of the
Decline in market value of stock. You the crops as farm expenses, this loss isn't de- casualty or theft.
can't deduct as a theft loss the decline in market ductible, as explained above under Livestock,
value of stock acquired on the open market for plants, produce, and crops raised for sale. You 3. From the smaller of the amounts you de-
investment if the decline is caused by disclo- estimate that the crop loss will reduce your farm termined in (1) and (2), subtract any insur-
sure of accounting fraud or other illegal miscon- income by $25,000. This loss of future income ance or other reimbursement you receive
duct by the officers or directors of the corpora- is also not deductible. or expect to receive.
tion that issued the stock. However, you may be Personal-use property. For tax years 2018
able to deduct it as a capital loss on Schedule D Loss of timber. If you sell timber downed as a
(Form 1040) if the stock is sold or exchanged or result of a casualty, you may have a reportable through 2025, personal casualty and theft los-
becomes completely worthless. You report a gain. If you use the proceeds to buy qualified re- ses of an individual are deductible only to the
capital loss on Schedule D (Form 1040). For placement property, you can postpone reporting extent they're attributable to a federally declared
more information about stock sales, worthless the gain. See Timber loss in the section Post- disaster. An exception to the rule limiting the de-
stock, and capital losses, see chapter 4 of Pub. poning Gain, later. duction for personal casualty and theft losses to
federal disaster losses applies where you have
550. personal casualty gains to the extent the losses
Property used in farming. Casualty and theft
Mislaid or lost property. The simple dis- losses of property used in your farm business don't exceed your gains.
appearance of money or property isn't a theft. usually result in deductible losses. If a fire or Personal-use property is property used by
However, an accidental loss or disappearance storm destroyed your barn, or you lose by casu- you or your family members for personal purpo-
of property can qualify as a casualty if it results alty or theft farm equipment or an animal you ses and not used in your farm business or for in-
from an identifiable event that is sudden, unex- bought for draft, breeding, dairy, or sport, you come-producing purposes. The following items
pected, or unusual. may have a deductible loss. See How To Figure are examples of personal-use property.
a Loss, later. • Your main home.
Example. A car door is accidentally slam- • Furniture and electronics used in your main
med on your hand, breaking the setting of your Raised draft, breeding, dairy, or sporting home and not used in a home office or for
diamond ring. The diamond falls from the ring animals. Generally, losses of raised draft, business purposes.
and is never found. The loss of the diamond is a breeding, dairy, or sporting animals don't result • Clothing and jewelry.
casualty. in deductible casualty or theft losses because • An automobile used for nonbusiness pur-
you have no basis in the animals. However, you poses.
may have a basis in the animal and therefore
Farm Property Losses may be able to claim a deduction if you use in- You figure the casualty or theft loss on this prop-
ventories to determine your income and you in- erty by taking the following steps.
You can deduct certain casualty or theft losses cluded the animals in your inventory. 1. Determine your adjusted basis in the prop-
that occur in the business of farming. The fol- When you include livestock in inventory, its erty before the casualty or theft.
lowing is a discussion of some losses you can last inventory value is its basis. When you lose
deduct and some you can't deduct. an inventoried animal held for draft, breeding, 2. Determine the decrease in fair market
dairy, or sport by casualty or theft during the value of the property as a result of the
Livestock or produce bought for resale. year, decrease ending inventory by the amount casualty or theft.
Casualty or theft losses of livestock or produce you included in inventory for the animal. You 3. From the smaller of the amounts you de-
bought for resale are deductible if you report can't take a separate deduction. termined in (1) and (2), subtract any insur-
your income on the cash method. If you report ance or other reimbursement you receive
your income on an accrual method, take casu- or expect to receive.
alty and theft losses on property bought for re- How To Figure a Loss
sale by omitting the item from the closing inven- You must apply the deduction limits, discussed
tory for the year of the loss. You can't take a How you figure a deductible casualty or theft later, to determine your deductible loss.
separate deduction. loss depends on whether the loss was to farm
or personal-use property and whether the prop- You can use Pub. 584 to list your stolen
Livestock, plants, produce, and crops erty was stolen or partly or completely de- TIP or damaged personal-use property and
raised for sale. Losses of livestock, plants, stroyed. figure your loss. It includes schedules
produce, and crops raised for sale are generally to help you figure the loss on your home, its
not deductible if you report your income on the Farm property. Farm property is the property contents, and your motor vehicles.
cash method. You have already deducted the you use in your farming business. If your farm
cost of raising these items as farm expenses, so property was completely destroyed or stolen, Adjusted basis. Adjusted basis is your ba-
their basis is equal to zero. your loss is figured as follows: sis (usually cost) increased or decreased by
various events, such as improvements and

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casualty losses. For more information about ad- mandatory. For more information about this safe 1) Adjusted basis . . . . . . . . . . . . . . . . $64,000
justed basis, see chapter 6. harbor method, see Pub. 547. 2) FMV before the tornado . . . . . . . . . . $120,000
Decrease in fair market value (FMV). Related expenses. The incidental expen- 3) FMV after the tornado . . . . . . . . . . . . 112,500
The decrease in FMV is the difference between ses due to a casualty or theft, such as expenses 4) Decrease in FMV (line 2 − line 3) . . . . $7,500
the property's value immediately before the for the treatment of personal injuries, temporary 5) Loss before insurance
casualty or theft and its value immediately after- housing, or a rental car, aren't part of your casu- (lesser of line 1 or line 4) . . . . . . . . . . $7,500
ward. FMV is defined in chapter 10 under Pay- alty or theft loss. However, they may be deducti- 6) Minus: Insurance . . . . . . . . . . . . . . -0-
ments Received or Considered Received. ble as farm business expenses if the damaged 7) Loss before applying limits . . . . $7,500
or stolen property is farm property.
Appraisal. To figure the decrease in FMV As explained later under Deduction Limits on Losses of
because of a casualty or theft, you generally Separate computations for more than one Personal-Use Property, you have to reduce the $7,500
amount by the applicable limit or limits. As this loss is not
need a competent appraisal. But other meas- item of property. Generally, if a single casu- a qualified disaster loss, the applicable limits would
ures, such as the cost of cleaning up or making alty or theft involves more than one item of prop- be $100 and 10% of your AGI. Because this loss is not
repairs and certain safe harbor methods, can be erty, you must figure your loss separately for attributed to a qualified disaster, your deductible loss
used to establish decreases in FMV. each item of property. Then, combine the losses would be figured as follows.
An appraisal to determine the difference be- to determine your total loss.
tween the FMV of the property immediately be- 8) Subtract $100 . . . . . . . . . . . . . . . . . 100
fore a casualty or theft and immediately after- Example. A fire on your farm damaged a 9) Loss after $100 rule . . . . . . . . . . . . . $7,400
ward should be made by a competent tractor and the barn in which it was stored. The 10) Subtract 10% of $55,000 AGI . . . . . . 5,500
appraiser. The appraiser must recognize the ef- tractor had an adjusted basis of $3,300. Its FMV 11) Casualty loss deduction. . . . . . $1,900
fects of any general market decline that may oc- was $28,000 just before the fire and $10,000
cur along with the casualty. This information is immediately afterward. The barn had an adjus- You never replaced the trees. Your adjusted
needed to limit any deduction to the actual loss ted basis of $28,000. Its FMV was $55,000 just basis in the residential part of your property af-
resulting from damage to the property. before the fire and $25,000 immediately after- ter the casualty is $62,100 ($64,000 - $1,900).
ward. You received insurance reimbursements
Note. Several factors are important in eval- of $2,100 on the tractor and $26,000 on the Insurance and other reimbursements. If you
uating the accuracy of an appraisal. See Pub. barn. Figure your deductible casualty loss sepa- receive an insurance or other type of reimburse-
547 for additional details regarding appraisals. rately for the two items of property. ment, you must subtract the reimbursement
Cost of cleaning up or making repairs. when you figure your business or personal loss.
The cost of cleaning up after a casualty isn't Tractor Barn You don't have a casualty or theft loss to the ex-
part of a casualty loss. Neither is the cost of re- 1) Adjusted basis . . . . . . . . . $3,300 $28,000 tent you are reimbursed.
pairing damaged property after a casualty. But 2) FMV before fire . . . . . . . . . $28,000 $55,000 If you expect to be reimbursed for part or all
you can use the cost of cleaning up or making 3) FMV after fire . . . . . . . . . . 10,000 25,000 of your loss, you must subtract the expected re-
repairs after a casualty as a measure of the de- 4) Decrease in FMV imbursement when you figure your loss. You
crease in FMV if you meet all the following con- (line 2 − line 3) . . . . . . . . . $18,000 $30,000 must reduce your loss even if you don't receive
ditions. 5) Loss (lesser of line 1 or payment until a later tax year.
• The repairs are actually made. line 4) . . . . . . . . . . . . . . . $3,300 $28,000
• The repairs are necessary to bring the 6) Minus: Insurance . . . . . . . 2,100 26,000 Don't subtract from your loss any insur-
property back to its condition before the 7) Deductible casualty loss . . . $1,200 $2,000 ! ance payments you receive for living
casualty. 8) Total deductible casualty loss. . . . $3,200 CAUTION expenses if you lose the use of your
main home or are denied access to it because
• The amount spent for repairs isn't exces- of a casualty. You may have to include a portion
sive. You spent $10,800 restoring the tractor to its
• The repairs fix the damage only. pre-casualty condition and $30,000 restoring of these payments in your income. See Insur-
• The value of the property after the repairs the barn to its pre-casualty condition. Your ad- ance payments for living expenses in Pub. 547
is not, due to the repairs, more than the justed basis in the tractor after the casualty is for details.
value of the property before the casualty. $10,800 ($3,300 – $2,100 – $1,200 + $10,800).
Your adjusted basis in the barn after the casu- Reimbursement received after deduct-
Landscaping. The cost of restoring land- alty is $30,000 ($28,000 – $26,000 – $2,000 + ing loss. If you figure your casualty or theft loss
scaping to its original condition after a casualty $30,000). using your expected reimbursement, you may
may indicate the decrease in FMV. You may be have to adjust your tax return for the tax year in
able to measure your loss by what you spend Exception for personal-use real prop- which you get your actual reimbursement.
on the following. erty. In figuring a casualty loss on personal-use
• Removing destroyed or damaged trees real property, the entire property (including any Actual reimbursement less than expec-
and shrubs, minus any salvage you re- improvements, such as buildings, trees, and ted. If you later receive less reimbursement
ceive. shrubs) is treated as one item. Figure the loss than you expected, include that difference as a
• Pruning and other measures taken to pre- using the smaller of the following. loss with your other losses (if any) on your re-
serve damaged trees and shrubs. • The decrease in FMV of the entire prop- turn for the year in which you can reasonably
• Replanting necessary to restore the prop- erty. expect no more reimbursement.
erty to its approximate value before the • The adjusted basis of the entire property. Actual reimbursement more than expec-
casualty. ted. If you later receive more reimbursement
Example. You bought a farm in 2000 for than you expected after you have claimed a de-
Safe harbor methods for individual tax- $300,000. The adjusted basis of the residential duction for the loss, you may have to include the
payers to determine casualty and theft los- part is now $64,000. In 2023, a tornado, which extra reimbursement in your income for the year
ses. Revenue Procedure 2018-08, 2018-2 was a federally declared disaster, blew down you receive it. However, if any part of your origi-
I.R.B. 286, available at IRS.gov/IRB/ shade trees and three ornamental trees planted nal deduction didn't reduce your tax for the ear-
2018-02_IRB#RP-2018-08, provides safe har- at a cost of $3,750 on the residential part. The lier year, don't include that part of the reim-
bor methods that you may use to figure the adjusted basis of the residential part includes bursement in your income. Don't refigure your
amount of your casualty and theft losses of your the $3,750. The FMV of the residential part im- tax for the year you claimed the deduction. See
personal-use residential real property and per- mediately before the tornado was $120,000, Recoveries in Pub. 525 to find out how much
sonal belongings. If you qualify for and use a and $112,500 immediately after the tornado. extra reimbursement to include in income.
safe harbor method described in Revenue Pro- The trees weren’t covered by insurance. Your
cedure 2018-08, the IRS won't challenge your adjusted gross income (AGI) for 2023 is
determination. The use of a safe harbor method $55,000.
described in Revenue Procedure 2018-08 isn't

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If the total of all the reimbursements 4684. This deduction will be entered on Sched- Also, the $100 limit per casualty is increased to
! you receive is more than your adjusted ule A (Form 1040) as an itemized deduction but $500. For more information, see the Instructions
CAUTION basis in the destroyed or stolen prop- you can increase your standard deduction by for Form 4684.
erty, you will have a gain on the casualty or qualified disaster losses if you elect not to item-
theft. See Figuring a Gain in Pub. 547 for infor- ize your deductions. See Increased standard If you have a casualty or theft gain in
mation on how to treat a gain from the reim- deduction reporting, later. ! addition to a loss, you will have to make
bursement you receive because of a casualty or CAUTION a special computation before you figure
theft. For tax years 2018 through 2025, casualty your 10% limit. See 10% Rule in Pub. 547.
and theft losses of personal-use property are
Actual reimbursement same as expec- deductible only to the extent they're attributable
ted. If you later receive exactly the reimburse- to a federally declared disaster. When Loss Is Deductible
ment you expected to receive, you don't have to An exception to the rule above, limiting the Generally, you can deduct casualty losses that
include any of the reimbursement in your in- personal casualty and theft loss deduction to aren't reimbursable only in the tax year in which
come and you can't deduct any additional loss. losses attributable to a federally declared disas- they occur. You can generally deduct theft los-
Lump-sum reimbursement. If you have a ter, applies if you have personal casualty gains ses that aren't reimbursable only in the year you
casualty or theft loss of several assets at the for the tax year. In this case, you may reduce discover your property was stolen.
same time without an allocation of reimburse- your personal casualty gains by any casualty
ment to specific assets, divide the lump-sum re- losses not attributable to a federally declared Example. In November 2022, engine parts
imbursement among the assets according to disaster. Any excess gain is used to reduce los- were stolen from Frank’s stored tractor. Frank
the FMV of each asset at the time of the loss. ses from a federally declared disaster. didn’t know that the theft occurred until March
Figure the gain or loss separately for each asset 2023, when he attempted to start the tractor.
that has a separate basis. There are two limits on the deduction for Any theft loss to which Frank is entitled as a de-
casualty or theft loss of personal-use property. duction will be deductible in the 2023 tax year.
Disaster assistance. Food, medical sup- You figure these limits on Form 4684.
plies, and other forms of assistance you receive Losses in federally declared disaster areas
don't reduce your casualty loss, unless they are $100 rule. You must reduce each casualty or are subject to different rules. See Disaster Area
replacements for lost or destroyed property. Ex- theft loss on personal-use property by $100. Losses, later, for an exception.
cludable cash gifts you receive also do not re- This rule applies after you have subtracted any
duce your casualty loss if there are no restric- reimbursement. If you aren't sure whether part of your casu-
tions on how you can use the money. alty or theft loss will be reimbursed, don't de-
Generally, disaster relief grants received un- 10% rule. You must further reduce the total of duct that part until the tax year when you be-
der the Robert T. Stafford Disaster Relief and all your casualty or theft losses on personal-use come reasonably certain that it won’t be
Emergency Assistance Act aren't included in property by 10% of your AGI. Apply this rule af- reimbursed.
your income. See Federal disaster relief grants, ter you reduce each loss by $100. AGI is repor-
later, under Disaster Area Losses. ted on line 11 of Form 1040 or 1040-SR. Leased property. If you lease property from
Qualified disaster relief payments for expen- someone else, you can deduct a loss on the
ses you incurred as a result of a federally de- Example. In June, you discovered that your property in the year your liability for the loss is
clared disaster aren't taxable income to you. house had been burglarized. Your loss after in- determined. This is true even if the loss occur-
See Qualified disaster relief payments, later, un- surance reimbursement was $2,000. Your AGI red or the liability was paid in a different year.
der Disaster Area Losses. for the year you discovered the burglary is You aren't entitled to a deduction until your lia-
$57,000. Figure your theft loss deduction as fol- bility under the lease can be determined with
Adjustments to basis. If you have a casualty lows: reasonable accuracy. Your liability can be deter-
or theft loss, you must decrease your basis in mined when a claim for recovery is settled, ad-
the property by any insurance or other reim- 1) Loss after insurance . . . . . . . . . . . . . . . $2,000 judicated, or abandoned.
bursement you receive and by any deductible 2) Subtract $100 . . . . . . . . . . . . . . . . . . . . 100
loss. The result is your adjusted basis in the 3) Loss after $100 rule . . . . . . . . . . . . . . . . $1,900 Example. Robert leased a tractor from First
property. If you make either of the basis adjust- 4) Subtract 10% (0.10) × $57,000 AGI . . . . . $5,700 Implement, Inc., for use in his farm business.
ments described above, amounts you spend on 5) Theft loss deduction. . . . . . . . . . -0- The tractor was destroyed by a tornado in June
repairs to restore your property to its pre-casu- 2022. The loss wasn’t insured. First Implement
alty condition increase your adjusted basis. See You don't have a theft loss deduction be- billed Robert for the FMV of the tractor on the
Adjusted Basis in chapter 6 for more informa- cause your loss ($1,900) is less than 10% of date of the loss. Robert disagreed with the bill
tion. your AGI ($5,700). and refused to pay it. First Implement later filed
suit in court against Robert. In 2023, Robert and
Example. You built a new grain storage fa- Please note this theft loss was not at- First Implement agreed to settle the suit for
cility for $50,000. This is the basis in your grain ! tributed to a major disaster declared by $20,000, and the court entered a judgment in
storage facility because that is the total cost you CAUTION the President under section 401 of the favor of First Implement. Robert paid $20,000 in
incurred to build it. During the year, a tornado Stafford Act and therefore would not be a de- June 2023. He can claim the $20,000 as a loss
damaged your grain storage facility and your al- ductible loss. on his 2023 tax return.
lowable casualty loss deduction was $2,000. In
addition, your insurance company reimbursed If you have personal casualty losses Net operating loss (NOL). If your deductions,
you $8,000 for the damage and you spent ! that were attributable to a major disas- including casualty or theft loss deductions, are
$12,000 to restore the grain storage facility to its CAUTION ter declared by the President under more than your income for the year, you may
pre-casualty condition. Your adjusted basis in section 401 of the Stafford Act, your net casu- have an NOL. See Pub. 536 for more informa-
the grain storage facility after the casualty is alty loss from this qualified disaster doesn’t tion.
$52,000 ($50,000 – $2,000 – $8,000 + have to exceed 10% of your AGI to qualify for
$12,000). the deduction. However, this disaster must meet Generally, an NOL arising in a tax year
the following requirements: ! beginning in 2018 or later may not be
CAUTION carried back and instead must be car-
Deduction Limits on Losses • It must have been declared by the Presi- ried forward indefinitely. However, farming los-
dent during the period between January 1, ses arising in tax years beginning in 2018 or
of Personal-Use Property 2020, and February 25, 2021. later may be carried back two years and carried
• It must have an incident period that began forward indefinitely.
Casualty and theft losses of personal-use prop- on or after December 28, 2019, or on or
erty may be deducted using Form 4684. For before December 27, 2020, and ended no
more information see the Instructions for Form later than January 25, 2021.
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Proof of Loss 1) Insurance reimbursement . . . . . . . . . . $40,000 Livestock Losses
2) Legal expenses . . . . . . . . . . . . . . . . . 2,000
To deduct a casualty or theft loss, you must be 3) Amount received Diseased livestock. If your livestock die from
able to prove that there was a casualty or theft. (line 1 − line 2) . . . . . . . . . . . . . . . . . . $38,000 disease, or are destroyed, sold, or exchanged
You must have records to support the amount 4) Adjusted basis . . . . . . . . . . . . . . . . . . 25,000 because of disease, even though the disease
you claim for the loss. 5) Gain on casualty (line 3 − line 4). . . . $13,000 isn't of epidemic proportions, treat these occur-
rences as involuntary conversions. If the live-
Casualty loss proof. For a casualty loss, your The adjusted basis of the barn after the stock were raised or purchased for resale, fol-
records should show all the following informa- casualty is $0 ($25,000 + $13,000 – $38,000) if low the rules for livestock discussed earlier
tion. you recognized gain and did not repair the barn. under Farm Property Losses. Otherwise, figure
• That you were the owner of the property or, the gain or loss from these conversions using
if you leased the property from someone the rules discussed under Determining Gain or
else, that you were contractually liable to Other Involuntary Loss in chapter 8. If you replace the livestock,
the owner for the damage. you may be able to postpone reporting the gain.
• The type of casualty (car accident, fire, Conversions See Postponing Gain below.
storm, etc.) and when it occurred.
• That the loss was a direct result of the In addition to casualties and thefts, other events Reporting dispositions of diseased live-
casualty. cause involuntary conversions of property. stock. If you choose to postpone reporting
• Whether a claim for reimbursement exists Some of these are discussed in the following gain on the disposition of diseased livestock,
for which there is a reasonable expectation paragraphs. you must attach a statement to your return ex-
plaining that the livestock were disposed of be-
of recovery. Gain or loss from an involuntary conversion cause of disease. You must also include other
Theft loss proof. For a theft loss, your records of your property is usually recognized for tax information on this statement. See How To
should show all the following information. purposes. You report the gain or deduct the loss Postpone Gain, later, under Postponing Gain.
• That you were the owner of the property. on your tax return for the year you realize it.
• That your property was stolen. However, depending on the type of property you Weather-related sales of livestock. If you
• When you discovered your property was receive, you may not have to report your gain on sell or exchange livestock (other than poultry)
missing. the involuntary conversion. See Postponing held for draft, breeding, or dairy purposes solely
• Whether a claim for reimbursement exists Gain, later. because of drought, flood, or other weather-re-
for which there is a reasonable expectation lated conditions, treat the sale or exchange as
of recovery. Condemnation an involuntary conversion. Only livestock sold in
excess of the number you normally would sell
Condemnation is the process by which private under usual business practice, in the absence
Figuring a Gain property is legally taken for public use without of weather-related conditions, are considered
A casualty or theft may result in a taxable gain. the owner's consent. The property may be involuntary conversions. Figure the gain or loss
If you receive an insurance payment or other re- taken by the federal government, a state gov- using the rules discussed under Determining
imbursement that is more than your adjusted ernment, a political subdivision, or a private or- Gain or Loss in chapter 8. If you replace the
basis in the destroyed, damaged, or stolen ganization that has the power to legally take livestock, you may be able to postpone report-
property, you have a gain from the casualty or property. The owner receives a condemnation ing the gain. See Postponing Gain below.
theft. You generally report your gain as income award (money or property) in exchange for the
in the year you receive the reimbursement. property taken. A condemnation is a forced Example. It is your usual business practice
However, depending on the type of property you sale, the owner being the seller and the con- to sell five of your dairy animals during the year.
receive, you may not have to report your gain. demning authority being the buyer. This year, you sold 20 dairy animals because of
drought. The sale of 15 animals is treated as an
See Postponing Gain, later. Threat of condemnation. Treat the sale of involuntary conversion.
Your gain is figured as follows: your property under threat of condemnation as If you don't replace the livestock, you
• The amount you receive, minus a condemnation, provided you have reasonable TIP may be able to report the gain in the
• Your adjusted basis in the property at the grounds to believe that your property will be following year's income. This rule also
time of the casualty or theft. condemned. applies to other livestock (including poultry).
See Sales Caused by Weather-Related Condi-
Even if the decrease in FMV of your property Main home condemned. If you have a gain tions in chapter 3.
is smaller than the adjusted basis of your prop- because your main home is condemned, you
erty, use your adjusted basis to figure the gain. generally can exclude the gain from your in-
come as if you had sold or exchanged your Tree Seedlings
Amount you receive. The amount you receive home. For information on this exclusion, see
includes any money plus the value of any prop- Pub. 523. If your gain is more than the amount If, because of an abnormal drought, the failure
erty you receive, minus any expenses you have you can exclude, but you buy replacement prop- of planted tree seedlings is greater than nor-
in obtaining reimbursement. It also includes any erty, you may be able to postpone reporting the mally anticipated, you may have a deductible
reimbursement used to pay off a mortgage or excess gain. See Postponing Gain, later. (You loss. Treat the loss as a loss from an involuntary
other lien on the damaged, destroyed, or stolen can't deduct a loss from the condemnation of conversion. The loss equals the previously capi-
property. your main home.) talized reforestation costs you had to duplicate
on replanting. You deduct the loss on the return
Example. A tornado severely damaged More information. For information on how to for the year the seedlings died.
your barn. The adjusted basis of the barn was figure the gain or loss on condemned property,
$25,000. Your insurance company reimbursed see chapter 1 in Pub. 544. Also, see Postponing
you $40,000 for the damaged barn. However, Gain, later, to find out if you can postpone re- Postponing Gain
you had legal expenses of $2,000 to collect that porting the gain.
insurance. Your insurance minus your expenses
to collect the insurance is more than your adjus- Don't report a gain if you receive reimbursement
ted basis in the barn, so you have a gain. Irrigation Project in the form of property similar or related in serv-
ice or use to the destroyed, stolen, or other in-
The sale or other disposition of property located voluntarily converted property. Your basis in the
within an irrigation project to conform to the new property is generally the same as your ad-
acreage limits of federal reclamation laws is an justed basis in the property it replaces.
involuntary conversion.
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You must generally report the gain on your For involuntary conversions described in (3) Weather-related conditions. If, because of
stolen, destroyed, or other involuntarily conver- above, gains can't be offset by any losses when drought, flood, or other weather-related condi-
ted property if you receive money or unlike determining whether the total gain is more than tions, it isn't feasible for you to reinvest the in-
property as reimbursement. However, you can $100,000. If the property is owned by a partner- surance money or other proceeds in property
choose to postpone reporting the gain if you ship, the $100,000 limit applies to the partner- similar or related in service or use to the live-
purchase replacement property similar or rela- ship and each partner. If the property is owned stock, you can treat other property (excluding
ted in service or use to your destroyed, stolen, by an S corporation, the $100,000 limit applies real property) used for farming purposes as
or other involuntarily converted property within a to the S corporation and each shareholder. property similar or related in service or use to
specific replacement period. the livestock you disposed of.
Exception. This rule doesn’t apply if the re-
If you have a gain on damaged property, you lated person acquired the property from an un- Example. Each year, you normally sell 25
can postpone reporting the gain if you spend an related person within the period of time allowed cows from your beef herd. However, this year
amount at least equal to the reimbursement to for replacing the involuntarily converted prop- you had to sell 50 cows. This is because a se-
restore the property. erty. vere drought significantly reduced the amount
Related persons. Under this rule, related of hay and pasture yield needed to feed your
To postpone reporting all the gain, the cost persons include, for example, a parent and herd for the rest of the year. Because, as a re-
of your replacement property must be at least child, a brother and sister, a corporation and an sult of the severe drought, it isn't feasible for you
as much as the reimbursement you receive. If individual who owns more than 50% of its out- to use the proceeds from selling the extra cows
the cost of the replacement property is less than standing stock, and two partnerships in which to buy new cows, you can treat other property
the reimbursement, you must include the gain in the same C corporations own more than 50% of (excluding real property) used for farming pur-
your income up to the amount of the unspent re- the capital or profits interests. For more informa- poses as property similar or related in service or
imbursement. For more information about post- tion on related persons, see Nondeductible use to the cows you sold.
poning gain on the replacement of damaged Loss under Sales and Exchanges Between Re-
property, see Code section 1033. lated Persons in chapter 2 of Pub. 544. Standing crop destroyed by casualty. If a
storm or other casualty destroyed your standing
Example 1. In 1985, you constructed a Death of a taxpayer. If a taxpayer dies after crop and you use the insurance money to ac-
barn to store farm equipment at a cost of realizing a gain, but before buying replacement quire either another standing crop or a harves-
$35,000. In 1990, you added a grain bin to the property, the gain must be reported for the year ted crop, this purchase qualifies as replacement
barn at a cost of $15,000. In May of this year, in which the decedent realized the gain. The ex- property. The costs of planting and raising a
the property was worth $70,000. In June, the ecutor of the estate or the person succeeding to new crop qualify as replacement costs for the
barn and grain storage facility were destroyed the funds from the involuntary conversion can't destroyed crop only if you use the crop method
by a tornado. At the time of the tornado, you had postpone reporting the gain by buying replace- of accounting (discussed in chapter 2). In that
an adjusted basis of $0 in the property. You re- ment property. case, the costs of bringing the new crop to the
ceived $70,000 from the insurance company. same level of maturity as the destroyed crop
You had a gain of $70,000 ($70,000 – $0). qualify as replacement costs to the extent they
You spent $65,000 to rebuild the barn and Replacement Property are incurred during the replacement period.
grain bin. Since this is less than the insurance
proceeds received, you must include $5,000 You must buy replacement property for the spe- Timber loss. Standing timber (not land) you
($70,000 – $65,000) in your income. You cific purpose of replacing your property. Your re- bought with the proceeds from the sale of tim-
choose to postpone the remaining $65,000 placement property must be similar or related in ber downed as a result of a casualty, such as
gain. service or use to the property it replaces. You high winds, earthquakes, or volcanic eruptions,
don't have to use the same funds you receive as qualifies as replacement property. If you bought
Example 2. In 1993, you bought a cabin in reimbursement for your old property to acquire the standing timber within the replacement pe-
the mountains for your personal use at a cost of the replacement property. If you spend the riod, you can postpone reporting the gain.
$48,000. You made no further improvements or money you receive for other purposes, and bor-
additions to it. When a storm destroyed the row money to buy replacement property, you Business or income-producing property lo-
cabin this January, the cabin was worth can still choose to postpone reporting the gain if cated in a federally declared disaster area.
$250,000. You received $146,000 from the in- you meet the other requirements. Property you If your destroyed business or income-producing
surance company in March. You had a gain of acquire by gift or inheritance doesn’t qualify as property was located in a federally declared dis-
$98,000 ($146,000 − $48,000). replacement property. aster area, any tangible replacement property
You spent $144,000 to rebuild the cabin. you acquire for use in any business is treated as
Since this is less than the insurance proceeds Owner-user. If you are an owner-user, similar similar or related in service or use to the de-
received, you must include $2,000 ($146,000 − or related in service or use means that replace- stroyed property. For more information, see Dis-
$144,000) in your income. You choose to post- ment property must function in the same way as aster Area Losses in Pub. 547.
pone reporting the remaining $96,000 gain. the property it replaces. Examples of property
that functions in the same way as the property it Substituting replacement property. Once
Buying replacement property from a related replaces are a home that replaces another you have acquired qualified replacement prop-
person. You can't postpone reporting a gain home, a dairy cow that replaces another dairy erty and have designated it as replacement
from a casualty, theft, or other involuntary con- cow, and farm land that replaces other farm property in a statement attached to your tax re-
version if you buy the replacement property land. A grinding mill that replaces a tractor turn, you can't substitute other qualified replace-
from a related person (discussed later). This doesn’t qualify. Neither does a draft animal that ment property. This is true even if you acquire
rule applies to the following taxpayers. replaces a breeding or dairy cow. the other property within the replacement pe-
riod. However, if you discover that the original
1. C corporations. Soil or other environmental contamination. replacement property wasn’t qualified replace-
2. Partnerships in which more than 50% of If, because of soil or other environmental con- ment property, you can, within the replacement
the capital or profits interest is owned by C tamination, it isn't feasible for you to reinvest period, substitute the new qualified replacement
corporations. your insurance money or other proceeds from property.
destroyed or damaged livestock in property
3. Individuals, partnerships (other than those similar or related in service or use to the live- Basis of replacement property. You must re-
in (2) above), and S corporations if the to- stock, you can treat other property (including duce the cost basis of your replacement prop-
tal realized gain for the tax year on all in- real property) used for farming purposes as erty by the amount of postponed gain. In this
voluntarily converted properties on which property similar or related in service or use to way, tax on the gain is postponed until you dis-
there are realized gains is more than the destroyed or damaged livestock. pose of the replacement property. Amounts
$100,000. paid for replacement property that exceed the

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amount of the gain postponed can be depreci- • The date on which the threat of condemna- return. Include in the statement detailed infor-
ated. tion began. mation on the replacement property bought in
The replacement period generally ends 2 years that year.
Example. In 2023, you sold 50 cows with a after the close of the first tax year in which any Reporting weather-related sales of live-
$0 basis due to severe drought. This is more part of the gain on the condemnation is real- stock. If you choose to postpone reporting the
than the 25 cows you normally sell each year. ized. But see Main home in disaster area, ear- gain on weather-related sales or exchanges of
The proceeds from the sale of the additional 25 lier, for an exception. livestock, show all the following information on a
cows are $31,250. Because of the severe
drought, it isn’t feasible for you to use these pro- Business or investment real property. If statement attached to your return for the tax
ceeds to buy replacement cows. Instead, you real property held for use in a trade or business year in which you first realize any of the gain.
use the proceeds to buy a hay baler for or for investment (not including property held • Evidence of the weather-related conditions
$40,000. You choose to postpone reporting the primarily for sale) is condemned, the replace- that forced the sale or exchange of the live-
$31,250 gain ($31,250 – $0) from the sale of the ment period ends 3 years after the close of the stock.
cows. Therefore, the basis of the hay baler is first tax year in which any part of the gain on the • The gain realized on the sale or exchange.
$8,750 ($40,000 – $31,250). condemnation is realized. • The number and kind of livestock sold or
exchanged.
Extension. You can apply for an extension of • The number of livestock of each kind you
Replacement Period the replacement period. Send your written ap- would have sold or exchanged under your
plication to the Internal Revenue Service Center usual business practice.
To postpone reporting your gain, you must buy where you file your tax return. See your tax re- Show all the following information and the
replacement property within a specified period turn instructions for the address. Include all the preceding information on the return for the year
of time. This is the replacement period. details about your need for an extension. Make in which you replace the livestock.
your application before the end of the replace- • The dates you bought the replacement
The replacement period begins on the date ment period. However, you can file an applica- property.
your property was damaged, destroyed, stolen, tion within a reasonable time after the replace- • The cost of the replacement property.
sold, or exchanged. The replacement period ment period ends if you can show a good • Description of the replacement property
generally ends 2 years after the close of the first reason for the delay. You will get an extension of (for example, the number and kind of the
tax year in which you realize any part of your the replacement period if you can show reason- replacement livestock).
gain from the involuntary conversion. able cause for not making the replacement
within the regular period. Amended return for changes regarding re-
Example. You are a calendar year taxpayer. placement property. You must file an amen-
Farm equipment that cost $2,200 was stolen ded return (Form 1040-X) for the tax year of the
from your farm. You discovered the theft when How To Postpone Gain gain in either of the following situations.
you returned to your farm on November 11, • You don't acquire replacement property
2022. Your insurance company investigated the You postpone reporting your gain by reporting
theft and didn’t settle your claim until January 3, your choice on your tax return for the year you within the replacement period, plus exten-
2023, when they paid you $3,000. You first real- have the gain. You have the gain in the year you sions. On this amended return, you must
ized a gain from the reimbursement for the theft receive insurance proceeds or other reimburse- report the gain and pay any additional tax
during 2023, so you have until December 31, ments that result in a gain. due.
• You acquire replacement property within
2025, to replace the property. the required replacement period, plus ex-
Required statement. You should attach a
Main home in disaster area. For your main statement to your return for the year you have tensions, but at a cost less than the
home (or its contents) located in a federally de- the gain. This statement should include all the amount you receive from the casualty,
clared disaster area, the replacement period following information. theft, or other involuntary conversion. On
ends 4 years after the close of the first tax year • The date and details of the casualty, theft, this amended return, you must report the
in which you realize any part of your gain from or other involuntary conversion. part of the gain that can't be postponed
the involuntary conversion. See Disaster Area • The insurance or other reimbursement you and pay any additional tax due.
Losses, later. received.
• How you figured the gain.
Weather-related sales of livestock in an Disaster Area Losses
area eligible for federal assistance. For the Replacement property acquired before
sale or exchange of livestock due to drought, return filed. If you acquire replacement prop- Personal casualty and theft losses of an individ-
flood, or other weather-related conditions in an erty before you file your return for the year you ual are subject to special rules for those per-
area eligible for federal assistance, the replace- have the gain, your statement should also in- sonal casualty and theft losses attributable to
ment period ends 4 years after the close of the clude detailed information about all the follow- federally declared disasters that occur during
first tax year in which you realize any part of ing items. tax years beginning after 2017.
your gain from the sale or exchange. The IRS • The replacement property.
may extend the replacement period on a re- • The postponed gain. Personal casualty and theft losses are sub-
gional basis if the weather-related conditions • The basis adjustment that reflects the post- ject to the $100 per casualty and 10% of your
continue for longer than 3 years. poned gain. AGI limitations. In this case you reduce your
For information on extensions of the replace- • Any gain you are reporting as income. personal casualty gains by any casualty losses
not attributable to a federally declared disaster.
ment period because of persistent drought, see Replacement property acquired after re- Net qualified disaster losses (disaster losses
Notice 2006-82, 2006-39 I.R.B. 529, available turn filed. If you intend to buy replacement reduced by any excess personal casualty gains)
at IRS.gov/IRB/2006-39_IRB/ar11.html. For a property after you file your return for the year are subject to the $500 per casualty limitation
list of counties for which exceptional, extreme, you realize gain, your statement should also say but are not subject to the 10% of your AGI limi-
or severe drought was reported during the 12 that you are choosing to replace the property tation.
months ending August 31, 2023, see Notice within the required replacement period.
2023–67, available at IRS.gov. You should then attach another statement to
your return for the year in which you buy the re-
Condemnation. The replacement period for a placement property. This statement should con-
condemnation begins on the earlier of the fol- tain detailed information on the replacement
lowing dates. property. If you acquire part of your replacement
• The date on which you disposed of the property in one year and part in another year,
condemned property. you must attach a statement to each year's

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For tax years 2018 through 2025, per- ceived is sustained until it can be ascertained reimbursed by the grant and you received the
! sonal casualty and theft losses of an in- with reasonable certainty whether you will be grant after the year in which you deducted the
CAUTION dividual are deductible only to the ex- reimbursed. casualty loss, see Reimbursement received af-
tent they're attributable to a federally declared ter deducting loss, earlier. Unemployment as-
disaster. An exception to the rule limiting the de- When to deduct the loss. You must generally sistance payments under the Act are taxable
duction for personal casualty and theft losses to deduct a casualty loss in the disaster year. unemployment compensation.
federal disaster losses applies where you have However, if you have a deductible loss from a
personal casualty gains to the extent the losses disaster that occurred in an area warranting Qualified disaster relief payments. Qualified
don't exceed your gains. public or individual assistance (or both), you disaster relief payments aren't included in the
can choose to deduct that loss on your return or income of individuals to the extent any expen-
A list of the areas warranting public or amended return for the tax year immediately ses compensated by these payments aren't oth-
TIP individual assistance (or both) under preceding the disaster year. If you make this erwise compensated for by insurance or other
the Act is available at the Federal choice, the loss is treated as having occurred in reimbursement. These payments aren't subject
Emergency Management Agency (FEMA) web the preceding year. to income tax, self-employment tax, or employ-
site at FEMA.gov/Disasters. ment taxes (social security, Medicare, and fed-
Claiming a qualifying disaster loss on eral unemployment taxes). No withholding ap-
TIP the previous year's return may result in plies to these payments.
Qualified disaster losses. A qualified dis- a lower tax for that year, often produc-
aster loss is an individual's casualty or theft loss ing or increasing a cash refund. Qualified disaster relief payments include
of personal-use property that is attributable to a payments you receive (regardless of the
major disaster that was declared by the Presi- You must make an election to deduct a 2023 source) for the following expenses.
dent during the period between January 1, disaster loss on your 2022 return on or before • Reasonable and necessary personal, fam-
2020, and February 25, 2021. However, in order the date that is 6 months after the regular due ily, living, or funeral expenses incurred as a
to qualify, this disaster must have an incident date for filing your original return (without exten- result of a federally declared disaster.
period that began on or after December 28, sions) for the disaster year. For calendar year • Reasonable and necessary expenses in-
2019, or on or before December 27, 2020, and individual taxpayers, the deadline for electing to curred for the repair or rehabilitation of a
must have ended no later than January 26, take a 2023 disaster loss on your 2022 tax re- personal residence due to a federally de-
2021. The definition of a qualified disaster loss turn is October 15, 2024. clared disaster. (A personal residence can
does not extend to any major disaster which If you claimed a deduction for a disaster loss be a rented residence or one you own.)
has been declared only by reason of COVID-19. in the disaster year and you wish to deduct the • Reasonable and necessary expenses in-
A qualified disaster loss also includes an in- loss in the preceding year, you must file an curred for the repair or replacement of the
dividual’s casualty or theft loss of personal-use amended return to remove the previously de- contents of a personal residence due to a
property that is attributable to: ducted loss on or before you file the return or federally declared disaster.
• A major disaster declared by the President amended return for the preceding year that in- Qualified disaster relief payments include
under section 401 of the Stafford Act in cludes the disaster loss deduction. For more in- amounts paid by a federal, state, or local gov-
2016; formation, see Pub. 547. ernment in connection with a federally declared
• Hurricane Harvey; disaster to individuals affected by the disaster.
• Tropical Storm Harvey; Increased standard deduction reporting. If These payments must be made from a govern-
• Hurricane Irma; you have a net qualified disaster loss on Form mental fund, be based on individual or family
• Hurricane Maria; 4684, line 15, and you aren’t itemizing your de- needs, and not be compensation for services.
• The California wildfires in 2017 and Janu- ductions, you can claim an increased standard Payments to businesses generally don't qualify.
ary 2018; and deduction using Schedule A (Form 1040) by do-
• A major disaster that was declared by the ing the following. Qualified disaster relief payments don't
President under section 401 of the Stafford 1. Enter the amount from Form 4684, line 15, ! include:
CAUTION
Act and that occurred in 2018 and before on the dotted line next to line 16 on Sched-
December 21, 2019, and continued until ule A and the description “Net Qualified • Payments for expenses otherwise paid for
no later than January 19, 2020 (except Disaster Loss.” by insurance or other reimbursements; or
those attributable to the California wildfires • Income replacement payments, such as
in January 2018 that received prior relief). 2. Enter on the dotted line next to line 16 your payments of lost wages, lost business in-
See IRS.gov/DisasterTaxRelief for date-spe- standard deduction amount and the de- come, or unemployment compensation.
cific declarations associated with these disas- scription “Standard Deduction Claimed
ters and for more information. With Qualified Disaster Loss.”
Casualty and theft losses of personal-use 3. Combine these two amounts and enter on Qualified disaster mitigation payments.
property may be claimed as a qualified disaster line 16 of Schedule A and Form 1040 or Qualified disaster mitigation payments made
loss on your Form 4684 for the year in which the 1040-SR, line 12. under the Robert T. Stafford Disaster Relief and
loss was sustained. This deduction will be en- Emergency Assistance Act or the National
tered on Schedule A (Form 1040) as an item- The AMT adjustment for the standard Flood Insurance Act (as in effect on April 15,
ized deduction but you can increase your stand- ! deduction is made retroactively inappli- 2005) aren’t included in income. These are pay-
ard deduction by qualified disaster losses if you CAUTION cable to net qualified disaster losses. ments you, as a property owner, received to re-
elect not to itemize your deductions. See In- See Taxpayers who also file the 2023 Form duce the risk of future damage to your property.
creased standard deduction reporting, later. 6251, Alternative Minimum Tax for Individuals, You can't increase your basis in property, or
Moreover, your net casualty loss from these in the Instructions for Form 4684 for more infor- take a deduction or credit, for expenditures
disasters does not need to exceed 10% of your mation. made with respect to those payments.
AGI to qualify for the deduction, but the $100 Sale of property under hazard mitigation
limit per casualty is increased to $500. Federal disaster relief grants. Don't include program. Generally, if you sell or otherwise
post-disaster relief grants received under the
Disaster year. The disaster year is the tax year Robert T. Stafford Disaster Relief and Emer- transfer property, you must recognize any gain
in which you sustained the loss attributable to a gency Assistance Act in your income if the grant or loss for tax purposes unless the property is
federally declared disaster. Generally, a disaster payments are made to help you meet neces- your main home. You report the gain or deduct
loss is sustained in the year the disaster occur- sary expenses or serious needs for medical, the loss on your tax return for the year you real-
red. A disaster loss may also be sustained in a dental, housing, personal property, transporta- ize it. (You can't deduct a loss on personal-use
year after the disaster occurred. For example, if tion, or funeral expenses. Don't deduct casualty property unless the loss resulted from a casu-
a claim for reimbursement exists for which there losses or medical expenses to the extent they alty, as discussed earlier.) However, if you sell
is a reasonable prospect of recovery, no part of are specifically reimbursed by these disaster re- or otherwise transfer property to the federal
the loss for which reimbursement may be re- lief grants. If the casualty loss was specifically government, a state or local government, or an

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Indian tribal government under a hazard mitiga- underpaid income tax for the length of any post- is $160,200 for 2023, up from $147,000 for
tion program, you can choose to postpone re- ponement of tax deadlines. 2022. There is no maximum limit on earnings
porting the gain if you buy qualifying replace- subject to the Medicare part (2.9%) or, if appli-
ment property within a certain period of time. cable, the Additional Medicare Tax (0.9%).
See Postponing Gain, earlier, for the rules that Reporting Gains The maximum net self-employment earnings
apply. subject to the social security part of the self-em-
and Losses ployment tax for 2024 will be discussed in the
Other federal assistance programs. For 2023 Pub. 334.
more information about other federal assistance You will have to file one or more of the following
programs, see Crop Insurance and Crop Disas- forms to report your gains or losses from invol-
ter Payments and Feed Assistance and Pay- untary conversions.
ments in chapter 3. Introduction
Form 4684. Use this form to report your gains Self-employment tax (SE tax) is a social secur-
Postponed tax deadlines. The IRS may post- and losses from casualties and thefts. ity and Medicare tax primarily for individuals
pone for up to 1 year certain tax deadlines of who work for themselves. It is similar to the so-
taxpayers who are affected by a federally de- Form 4797. Use this form to report involuntary cial security and Medicare taxes withheld from
clared disaster. The tax deadlines the IRS may conversions (other than from casualty or theft) the pay of most wage earners.
postpone include those for filing income, excise, of property used in your trade or business and You usually have to pay SE tax if you are
and employment tax returns, paying income, ex- capital assets held in connection with a trade or self-employed. You are usually self-employed if
cise, and employment taxes, and making contri- business or a transaction entered into for profit. you operate your own farm on land you either
butions to a traditional IRA or Roth IRA. Also use this form if you have a gain from a own or rent. You have to figure SE tax on
If any tax deadline is postponed, the IRS will casualty or theft on trade, business, or in- Schedule SE (Form 1040).
publicize the postponement in your area and come-producing property held for more than 1 Farmers who have employees may have to
publish a news release and, where necessary, a year and you have to recapture some or all of pay the employer's share of social security and
revenue ruling, revenue procedure, notice, an- your gain as ordinary income. Medicare taxes, as well. See chapter 13 for in-
nouncement, or other guidance in the Internal formation on employment taxes.
Revenue Bulletin (IRB). Go to IRS.gov/ Form 8949. Use this form to report gain from If your self-employment income exceeds a
DisasterTaxRelief to find out if a tax deadline an involuntary conversion (other than from certain threshold amount, you may also be sub-
has been postponed for your area. casualty or theft) of personal-use property. ject to a 0.9% Additional Medicare Tax on the
income that is more than that amount. You fig-
Who is eligible. If the IRS postpones a tax Schedule A (Form 1040). Use this form to de- ure this tax using Form 8959. For more informa-
deadline, the following taxpayers are eligible for duct your losses from casualties and thefts of tion about the Additional Medicare Tax, includ-
the postponement. personal-use property and income-producing ing the threshold amounts, see the Instructions
• Any individual whose main home is located property that you reported on Form 4684. for Form 8959.
in a covered disaster area (defined next).
• Any business entity or sole proprietor Schedule D (Form 1040). Use this form to SE tax rate. The SE tax rate is 15.3%. The rate
whose principal place of business is loca- carry over the following gains. consists of two parts: 12.4% for social security
ted in a covered disaster area. • Net gain shown on Form 4797 from an in- (old-age, survivors, and disability insurance)
• Any individual who is a relief worker affili- voluntary conversion of business property and 2.9% for Medicare (hospital insurance).
ated with a recognized government or phil- held for more than 1 year.
anthropic organization and who is assisting • Net gain shown on Form 4684 from the
in a covered disaster area. casualty or theft of personal-use property. Topics
This chapter discusses:
• Any individual, business entity, or sole pro- Also use this form to figure the overall gain
prietorship whose records are needed to or loss from transactions reported on Form Why pay SE tax
meet a postponed tax deadline, provided 8949. •
those records are maintained in a covered • How to pay SE tax
disaster area. The main home or principal Schedule F (Form 1040). Use this form to de- • Who must pay SE tax
place of business doesn’t have to be loca- duct your losses from casualty or theft of live- • Figuring SE earnings
ted in the covered disaster area. stock or produce bought for sale on line 32 • Landlord participation in farming
• Any estate or trust that has tax records (Other expenses) if you use the cash method of • Methods for figuring net earnings
necessary to meet a postponed tax dead- accounting and haven’t otherwise deducted • Reporting SE tax
line, provided those records are main- these losses.
tained in a covered disaster area. Useful Items
• The spouse on a joint return with a tax- You may want to see:
payer who is eligible for postponements.
• Any individual, business entity, or sole pro-
prietorship not located in a covered disas- Publication
ter area, but whose necessary records to 541 541 Partnerships
meet a postponed tax deadline are located
in the covered disaster area. 12. Form (and Instructions)
• Any individual visiting the covered disaster
area who was killed or injured as a result of 1040 1040 U.S. Individual Income Tax Return
the disaster. 1040-SR 1040-SR U.S. Tax Return for Seniors
• Any other person determined by the IRS to Self-Employment
be affected by a federally declared disas- Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From
ter. Tax Farming
Covered disaster area. This is an area of Sch SE (Form 1040) Sch SE (Form 1040) Self-Employment
a federally declared disaster area in which the Tax
IRS has decided to postpone tax deadlines for What's New for 2023 1065 1065 U.S. Return of Partnership Income
up to 1 year.
Maximum net earnings. The maximum net Sch K-1 (Form 1065) Sch K-1 (Form 1065) Partner's Share of
Abatement of interest and penalties. The self-employment earnings subject to the social Income, Deductions, Credits, etc.
IRS may abate the interest and penalties on the security part (12.4%) of the self-employment tax 8959 8959 Additional Medicare Tax
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See chapter 16 for information about getting Obtaining a SSN. If you have never had an
publications and forms. SSN, apply for one using Form SS-5, Applica-
tion for a Social Security Card. The application Who Must Pay SE Tax?
is also available in Spanish. You can get this
Why Pay SE Tax? form at any SSA office or by calling You must pay SE tax and file Schedule SE
800-772-1213, or by going to SSA.gov/forms. (Form 1040) if your net earnings from self-em-
Social security benefits are available to self-em- If you have an SSN from the time you were ployment were $400 or more.
ployed persons just as they are to wage earn- an employee, you must use that number. Don’t The SE tax rules apply no matter how
ers. Your payments of SE tax contribute to your apply for a new one. ! old you are and even if you are already
coverage under the social security system. So- Replacing a lost social security card. If CAUTION receiving social security or Medicare
cial security coverage provides you with retire- you have a number but lost your card, file Form benefits.
ment benefits, disability benefits, survivor bene- SS-5. You will get a new card showing your orig-
fits, and hospital insurance (Medicare) benefits. inal number, not a new number. In some areas, Aliens. Generally, resident aliens must pay SE
How to become insured under social secur- you may be able to request a replacement card tax under the same rules that apply to U.S. citi-
ity. You must be insured under the social secur- online. zens. Nonresident aliens aren’t subject to SE
tax unless an international social security
ity system before you begin receiving social se- Name change. If your name has changed agreement determines that they are covered
curity benefits. You are insured if you have the since you received your social security card, under the U.S. social security system. Resi-
required number of credits (also called “quar- complete Form SS-5 to report a name change. dents of the U.S. Virgin Islands, Puerto Rico,
ters of coverage”).
You can find more information about Guam, the Commonwealth of the Northern Ma-
Earning credits in 2023. You can earn a max- obtaining a SSN, replacing a lost card, riana Islands, or American Samoa are subject to
imum of four credits per year. For 2023, you or requesting a name change at SE tax, as they are considered U.S. residents
earn one credit for each $1,640 of combined SSA.gov. for SE tax purposes. For more information on
wages and self-employment earnings subject to aliens, see Pub. 519, U.S. Tax Guide for Aliens,
and the Instructions for Schedule SE (Form
social security tax. You need $6,560 ($1,640 × Obtaining an ITIN. The IRS will issue you an 1040).
4) of combined wages and self-employment ITIN, for tax use only, if you are a nonresident or
earnings subject to social security tax to earn resident alien and you don’t have, and aren’t eli- Are you self-employed? You are self-em-
four credits in 2023. It doesn’t matter whether gible to get, an SSN. To apply for an ITIN, file ployed if you carry on a trade or business (such
the income is earned in 1 quarter or is spread Form W-7, Application for IRS Individual Tax- as running a farm) as a sole proprietor, an inde-
over 2 or more quarters. payer Identification Number. You can download pendent contractor, or a member of a partner-
Form W-7 from the IRS website at IRS.gov. For ship, or are otherwise in business for yourself. A
For an explanation of the number of credits more information on ITINs, see Pub. 1915. Form trade or business is generally an activity carried
you must have to be insured and the benefits W-7 and Pub. 1915 are also available in Span- on for a livelihood or in good faith to make a
available to you and your family under the social ish. profit.
security program, consult your nearest Social
Security Administration (SSA) office or go to the If you were assigned an ITIN before
Share farmer. You are a self-employed farmer
CAUTION haven't included on a tax return in the
SSA website at SSA.gov. ! 2013, or if you have an ITIN that you under an income-sharing arrangement if both
Making false statements to get or to in- last 3 consecutive years, you may need to re- the following apply.
CAUTION subject you to penalties.
! crease social security benefits may new it. For more information, see the Instruc- 1. You produce a crop or raise livestock on
tions for Form W-7 or go to IRS.gov/ITIN. land belonging to another person.
The SSA time limit for posting self-employ- Paying estimated tax. Estimated tax is the 2. Your share of the crop or livestock, or the
ment earnings. Generally, the SSA will give method used to pay tax (including SE tax) on in- proceeds from their sale, depends on the
you credit only for self-employment earnings re- come not subject to withholding. You generally amount produced.
ported on a tax return filed within 3 years, 3 have to make estimated tax payments if you ex- Your net farm profit or loss from the in-
months, and 15 days after the tax year you pect to owe tax, including SE tax, of $1,000 or come-sharing arrangement is reported on
earned the income. more when you file your return. Use Form Schedule F (Form 1040) and included in your
If you file your tax return or report a 1040-ES, Estimated Tax for Individuals, to figure self-employment earnings.
! change in your self-employment earn- and pay the tax. If you produce a crop or livestock on land
CAUTION ings after the SSA time limit for posting However, if at least two-thirds of your gross belonging to another person and are to receive
self-employment earnings, the SSA may income for the current tax year or the prior tax a specified rate of pay, a fixed sum of money, or
change its records, but only to remove or re- year is from farming and you file your tax return a fixed quantity of the crop or livestock, and not
duce the amount. The SSA won't change its re- and pay all the tax due by March 1, you don’t a share of the crop or livestock or their pro-
cords to increase your self-employment earn- have to pay any estimated tax. For example, if ceeds, you may be either self-employed or an
ings after the SSA time limit listed above. at least two-thirds of your gross income for 2022 employee of the landowner. This will depend on
or 2023 is from farming and you file your 2023 whether the landowner has the right to direct or
Form 1040 and pay all the tax due by March 1, control your performance of services.
2024, you don’t have to make any estimated tax
How To Pay SE Tax payments for 2023. For more information about Example. A share farmer produces a crop
estimated tax for farmers, the definition of “farm- on land owned by another person on a 50-50
To pay SE tax, you must have a social security ing income,” and exceptions to what constitutes crop-share basis. Under the terms of their
number (SSN) or an individual taxpayer identifi- farming income, see chapter 15. agreement, the share farmer furnishes the labor
cation number (ITIN). This section explains how and half the cost of seed and fertilizer. The land-
to: Penalty for underpayment of estimated owner furnishes the machinery and equipment
• Obtain an SSN or ITIN, and tax. You may have to pay a penalty if you don’t used to produce and harvest the crop, and half
• Pay your SE tax using estimated tax. pay enough estimated tax by its due date. the cost of seed and fertilizer. The share farmer
An ITIN doesn’t entitle you to social se- is provided a house in which to live. The land-
owner and the share farmer decide on a crop-
CAUTION doesn’t change your immigration or
! curity benefits. Obtaining an ITIN ping plan.
employment status under U.S. law. The share farmer is a self-employed farmer
for purposes of the agreement to produce the
crops, and the share farmer's part of the profit
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or loss from the crops is reported on Sched- If your spouse is your employee, not Partnership income or loss. If you are a
ule F (Form 1040) and included in self-employ- ! your partner, you must withhold and member of a partnership that carries on a trade
ment earnings. CAUTION pay social security and Medicare taxes or business, the partnership should report your
The tax treatment of the landowner is dis- for him or her. For more information about em- self-employment earnings in box 14, code A, of
cussed later under Landlord Participation in ployment taxes, see chapter 13. your Schedule K-1 (Form 1065). Box 14 of
Farming. Schedule K-1 may also provide amounts for
Qualified joint venture (QJV). If you and gross farming or fishing income (code B) and
Contract farming. Under typical contract farm- your spouse each materially participate as the gross nonfarm income (code C). Use these
ing arrangements, the grower receives a fixed only members of a jointly owned and operated amounts if you use the farm or nonfarm optional
payment per unit of crops or finished livestock farm, and you file a joint tax return for the tax method to figure net earnings from self-employ-
delivered to the processor or packing company. year, you can make a joint election to be treated ment (see Methods for Figuring Net Earnings,
Because the grower typically furnishes labor as a QJV instead of a partnership for the tax later).
and assumes some production risk, the pay- year. Making this election will allow you to avoid If you are a general partner, you may need to
ments are reported on Schedule F (Form 1040) the complexity of Form 1065 but still give each reduce these reported earnings by amounts you
and are therefore subject to SE tax. spouse credit for social security earnings on claim as a section 179 deduction, unreimbursed
which retirement benefits are based. For an ex- partnership expenses, or depletion on oil and
4-H Club or FFA project. If an individual par- planation of “material participation,” see the in- gas properties.
ticipates in a 4-H Club or National FFA Organi- structions for Schedule C, line G, and the in- If the amount reported is a loss, include only
zation (FFA) project, any net income received structions for Schedule F, line E. the deductible amount when you figure your to-
from sales or prizes related to the project may tal self-employment earnings.
be subject to income tax. Report the net income Only businesses that are owned and
For more information, see the Partner's In-
as “Other income” on Schedule 1 (Form 1040), ! operated by spouses as co-owners structions for Schedule K-1 (Form 1065).
line 8z. If necessary, attach a statement show- CAUTION (and not in the name of a state law en-
ing the gross income and expenses. The net in- tity) qualify for the election. Thus, a business For general information on partnerships, see
come may not be subject to SE tax if the project owned and operated by spouses through a limi- Pub. 541.
is primarily for educational purposes and not for ted liability company does not qualify for the
profit, and is completed by the individual under election of a QJV. More than one business. If you have self-em-
ployment earnings from more than one trade,
the rules and economic restrictions of the spon- To make this election, you must divide all business, or profession, you must generally
soring 4-H or FFA organization. Such a project items of income, gain, loss, deduction, and combine the net profit or loss from each to de-
is generally not considered a trade or business. credit attributable to the business between you termine your total self-employment earnings. A
For information on the filing requirements and and your spouse in accordance with your re- loss from one business reduces your profit from
other tax information for dependents, see Pub. spective interests in the venture. Each of you another business. However, don’t combine
929. must file a separate Schedule F and a separate earnings from farm and nonfarm businesses if
Schedule SE. For more information, see Quali- you are using one of the optional methods (dis-
Partners in a partnership. Generally, you are fied Joint Ventures in the Instructions for Sched- cussed later) to figure net earnings.
self-employed if you are a member of a partner- ule SE (Form 1040).
ship that carries on a trade or business. Community property. If any of the income
Community income. If you and your
Limited partner. If you are a limited part- spouse wholly own an unincorporated business from a farm or business, other than a partner-
ner, your partnership income is generally not as community property under the community ship, is community property under state law, it is
subject to SE tax. However, guaranteed pay- property laws of a state, foreign country, or U.S. included in the self-employment earnings of the
ments you receive for services you perform for territory, you can treat your wholly owned, unin- spouse carrying on the trade or business.
the partnership are subject to SE tax and corporated business as a sole proprietorship,
should be reported to you in box 14 of your instead of a partnership. Any change in your re- Payments for lost income. Include in self-em-
Schedule K-1 (Form 1065). porting position will be treated as a conversion ployment earnings any payments you receive
Community property. If you are a partner of the entity. from insurance or other sources to replace in-
and your distributive share of any income or Report your income and deductions as fol- come lost because you reduced or stopped
loss from a trade or business carried on by the lows. farming activities. These include USDA pay-
partnership is community property, treat your • If only one spouse participates in the busi- ments under the Dairy Margin Coverage (DMC)
share as your self-employment earnings. Don’t ness, all of the income from that business Program, which provides dairy producers with
treat any of your share as self-employment is the self-employment earnings of the payments when dairy margins are below the
earnings of your spouse. spouse who carried on the business. margin coverage levels. Go to USDA.gov for ad-
• If both spouses participate, the income and ditional information about other USDA pro-
Business owned and operated by spouses. deductions are allocated to the spouses grams. Even if you aren’t farming when you re-
If you and your spouse jointly own and operate based on their distributive shares. ceive the payment, it is included in
a farm as an unincorporated business and • If you and your spouse elected to treat the self-employment earnings if it relates to your
share in the profits and losses, you are partners business as a QJV, see Qualified joint ven- farm business (even though it is temporarily in-
in a partnership whether or not you have a for- ture (QJV), earlier. active). A connection exists if it is clear the pay-
ment would not have been made but for your
mal partnership agreement. You must file Form States with community property laws include conduct of your farm business.
1065 instead of Schedule F (Form 1040). How- Arizona, California, Idaho, Louisiana, Nevada,
ever, you and your spouse may still report in- New Mexico, Texas, Washington, and Wiscon- Gain or loss. A gain or loss from the disposi-
come using Schedule F (Form 1040) instead of sin. See Pub. 555 for more information about tion of property that is neither stock in trade nor
Form 1065 if either of the following applies. community property laws. held primarily for sale to customers isn’t inclu-
• You and your spouse elect to be treated as ded in self-employment earnings. It doesn’t
a qualified joint venture. See Qualified joint matter whether the disposition is a sale, ex-
venture (QJV), later. Figuring change, or involuntary conversion. For example,
• You and your spouse wholly own the unin- gains or losses from the disposition of the fol-
corporated farming business as community Self-Employment lowing types of property aren’t included in
property and you treat the business as a self-employment earnings.
sole proprietorship. See Community in- Earnings Investment property.
•
come, later. • Depreciable property or other fixed assets
Farmer. If you are self-employed as a farmer,
use Schedule F (Form 1040) to figure your used in your trade or business.
self-employment earnings. • Livestock held for draft, breeding, sport, or
dairy purposes, and not held primarily for

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sale, regardless of how long the livestock and deductions from farm rentals, including and furnishes the equipment; Nancy furnishes
was held, or whether it was raised or pur- government commodity program payments re- all labor needed to grow and harvest the crop.
chased. Livestock does not include poultry. ceived by a landowner who rents land, are in- The management decisions made by Cohen
• Unharvested standing crops sold with land cluded if the rental arrangement provides that in connection with the care of the cotton crop
held more than 1 year. the landowner will, and does, materially partici- and his regular inspection of the crop establish
• Timber, coal, or iron ore held for more than pate in the production or management of pro- that Cohen participates materially in the cotton
1 year if an economic interest was re- duction of the farm products on the land. production operations. The income Cohen re-
tained, such as a right to receive coal roy- ceives from the cotton farm is included in Co-
alties. Material participation for landlords. You ma- hen’s self-employment earnings.
A gain or loss from the cutting of timber isn’t terially participate if you have an arrangement
included in self-employment earnings if the cut- with your tenant for your participation and you
ting is treated as a sale or exchange. For more meet one or more of the following tests. Methods for Figuring Net
information on electing to treat the cutting of 1. You do at least three of the following. Earnings
timber as a sale or exchange, see Timber in
chapter 8. a. Pay, using cash or credit, at least half
the direct costs of producing the crop There are three ways to figure net earnings from
Wages and salaries. Wages and salaries re- or livestock. self-employment.
ceived for services performed as an employee b. Furnish at least half the tools, equip- 1. The regular method.
and covered by social security or railroad retire- ment, and livestock used in the pro- 2. The farm optional method.
ment aren’t included in self-employment earn- duction activities.
ings. 3. The nonfarm optional method.
Wages paid in kind to you for agricultural la- c. Advise or consult with your tenant on
bor performed as an employee, such as com- something like deciding what crops to You must use the regular method to the extent
modity wages, aren’t included in self-employ- plant, the type of seed or fertilizer to you don’t use one or both of the optional meth-
ment earnings. use, or when and at what price the ods. See Figure 12-1 to see if you are eligible to
crops should be sold. use an optional method.
Retired partner. Retirement income received d. Inspect the production activities peri-
by a partner from his or her partnership under a odically. Why use an optional method? You may want
written plan isn’t included in self-employment to use the optional methods (discussed later)
earnings if all the following apply. 2. You regularly and frequently make, or take
• The retired partner performs no services an important part in making, management when you have a loss or a small net profit and
for the partnership during the year. decisions substantially contributing to or any one of the following applies.
• The retired partner is owed only the retire- affecting the success of the enterprise, for • You want to receive credit for social secur-
ment payments. example, decisions about when and where ity benefit coverage.
• The retired partner's share (if any) of the to plant or spray, when to harvest, what • You incurred child or dependent care ex-
partnership capital was fully paid to the re- standards to follow, and what records to penses for which you could claim a credit.
tired partner. keep. (An optional method may increase your
earned income, which could increase your
• The payments to the retired partner are 3. You work 100 hours or more spread over a credit.)
lifelong periodic payments. period of 5 weeks or more in activities con- • You are entitled to the earned income
nected with agricultural production. credit. (An optional method may increase
Conservation Reserve Program (CRP) pay- your earned income, which could increase
ments. Under the CRP, if you own or operate 4. You do things that, considered in their to-
highly erodible or other specified cropland, you tality, show you are materially and signifi- your credit.)
may enter into a long-term contract with the cantly involved in the production of the • You are entitled to the additional child tax
USDA, agreeing to convert to a less intensive farm commodities. credit. (An optional method may increase
your earned income, which could increase
use of that cropland. You must include the an- These tests may be used as general guides for your credit.)
nual rental payments and any one-time incen- determining whether you are a material partici-
tive payment you receive under the program on pant. Effects of using an optional method. Using
Schedule F, lines 4a and 4b. Cost-share pay- an optional method could increase your SE tax.
ments you receive may qualify for the cost-shar- Crop shares. Rent paid in the form of crop Paying more SE tax may result in you getting
ing exclusion. See Cost-Sharing Exclusion (Im- shares is included in self-employment earnings higher social security disability or retirement
provements), earlier, in chapter 3. CRP for the year you sell, exchange, give away, or benefits.
payments are reported to you on Form 1099-G. use the crop shares if you meet one of the four Using the optional methods may also de-
Individuals who are receiving social se- material participation tests (discussed above) at crease your adjusted gross income (AGI) due to
TIP curity retirement or disability benefits the time the crop shares are produced. Feeding the deduction for one-half of SE tax on Form
may exclude CRP payments when cal- such crop shares to livestock is considered us- 1040, which may affect your eligibility for cred-
culating SE tax. See the Instructions for Sched- ing them. Your gross income for figuring your its, deductions, or other items that are subject to
ule SE (Form 1040). self-employment earnings includes the fair mar- an AGI limit. Figure your AGI with and without
ket value of the crop shares when they are used using the optional methods to see if the optional
as feed. methods will benefit you.
Self-employed health insurance deduction.
If you use either or both optional methods,
You can’t deduct the self-employed health insur- Example. Nancy agrees to produce a crop you must figure and pay the SE tax due under
ance deduction you report on Schedule 1 (Form on G. Cohen's cotton farm, with each receiving these methods even if you would have had a
1040), line 17, from self-employment earnings half the proceeds. Cohen agrees to furnish all smaller SE tax or no SE tax using the regular
on Schedule SE (Form 1040). the necessary equipment, and it is understood method.
that Cohen will advise Nancy on when to plant, The optional methods may be used only to
Landlord Participation in spray, and pick the cotton. It is also understood figure your SE tax. To figure your income tax, in-
that he will inspect the crop every few days to clude your actual self-employment earnings in
Farming determine whether Nancy is properly taking gross income, regardless of which method you
care of the crop. Under their arrangement, it is use to determine SE tax.
As a general rule, income and deductions from further understood that Nancy will furnish all la-
rentals and from personal property leased with bor needed to grow and harvest the crop. Co-
real estate aren’t included in determining hen provides the advice, makes inspections,
self-employment earnings. However, income
Chapter 12 Self-Employment Tax Page 77

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Figure 12-1. Can I Use the Optional Methods?

START here to determine if START here to determine if
you can use the nonfarm you can use the farm
optional method. optional method.

Are your net nonfarm prots No Is your gross farm income
less than $7,103? $9,840 or less?
Yes
Yes No
Are your net nonfarm prots No
less than 72.189% of your
gross nonfarm income? You can Yes Are your net farm prots
use the less than $7,103?
Yes farm
optional No
Were your actual net earnings method.*
from self-employment $400 or No See Table You can’t use the
more in at least 2 of the 3 tax 12-1. farm optional method.
years before this year?
Yes
Have you previously used this
method less than 5 years? No
(Note: There is a 5-year
lifetime limit.)
Yes You can’t
use the
nonfarm
You can use the nonfarm optional
optional method.* See method.
Pub. 334.

*If you use both optional methods, see Using Both Optional Methods, later, for limits on the amount to report.

Regular Method If you received social security retirement or dis- tax. Your actual farm net earnings are your farm
ability benefits, you must subtract the amount of net earnings figured using the regular method,
any CRP payments included on your Sched- explained earlier.
To figure net earnings using the regular method, ule F, line 4b, or listed in box 20, Code AQ, of
multiply your self-employment earnings by Schedule K-1. You may also need to adjust the Example. Your gross farm income is $540
92.35% (0.9235). For your net earnings figured amount reported on Schedule K-1 if you are a and your net farm profit is $460. Consequently,
using the regular method, see line 4a of your general partner or if it is a loss. For more infor- your net earnings figured under the farm op-
Schedule SE (Form 1040). mation, see Partnership income or loss, earlier. tional method are $360 (2/3 of $540) and your
actual net earnings are $425 (92.35% of $460).
Net earnings figured using the regular Figuring farm net earnings. If you meet ei- You owe no SE tax if you use the optional
method are also called actual net earnings. ther of the two tests explained above, use Ta- method because your net earnings under the
ble 12-1 to figure your net earnings from farm optional method are less than $400.
Farm Optional Method self-employment under the farm optional
method.
Nonfarm Optional Method
Use the farm optional method only for self-em-
ployment earnings from a farming business. You Table 12-1. Figuring Farm Net
can use this method if you meet either of the fol- Earnings This is an optional method available for deter-
mining net earnings from nonfarm self-employ-
lowing tests. ment, much like the farm optional method.
IF your gross farm THEN your net
1. Your gross farm income is $9,840 or less. income is... earnings are If you are also engaged in a nonfarm busi-
2. Your net farm profits are less than $7,103. equal to... ness, you may be able to use this method to fig-
$9,840 or less two-thirds of your ure your nonfarm net earnings. You can use this
Gross farm income. Your gross farm income gross farm income. method even if you don’t use the farm optional
is the total of the amounts from: method for determining your farm net earnings
• Schedule F (Form 1040), line 9; and more than $9,840 $6,560. and even if you have a net loss from your non-
• Box 14, code B, of Schedule K-1 (Form farm business. For more information about the
1065) (from farm partnerships). nonfarm optional method, see Pub. 334.
Optional method can reduce or eliminate
Net farm profits. Net farm profits are generally SE tax. If your gross farm income is $9,840 or You can’t combine farm and nonfarm
the total of the amounts from: less and your farm net earnings figured under ! self-employment earnings to figure
• Schedule F (Form 1040), line 34; and the farm optional method are less than your ac- CAUTION your net earnings under either of the
• Box 14, code A of Schedule K-1 (Form tual farm net earnings, you can use the farm op- optional methods.
1065) (from farm partnerships). tional method to reduce or eliminate your SE

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Using Both Optional 2023 for leave taken after March 31, 2020, and notice and election period requirements (gener-
before April 1, 2021, aren't subject to the em- ally, employers had 60 days to provide notice
Methods ployer share of social security tax; therefore, the and assistance eligible individuals had 60 days
tax rate on these wages is 6.2%. The social se- to elect coverage), the first quarter of 2022 was
If you use both optional methods, you must add curity wage base limit is $160,200. the last quarter in which most employers may
the net earnings figured under each method to have been eligible to claim the COBRA pre-
arrive at your total net earnings from self-em- The Medicare tax rate is 1.45% (0.0145)
ployment. You can report less than your total each for the employee and employer, un- mium assistance credit.
actual farm and nonfarm net earnings but not changed from 2022. There is no wage base limit Pub. 51 discontinued after 2023. Pub. 51,
less than actual nonfarm net earnings. If you for Medicare tax. Agricultural Employer's Tax Guide, will no lon-
use both optional methods, you can report no 2023 withholding tables. The federal income ger be available after 2023. Instead, information
more than $6,560 as your combined net earn- tax withholding tables are now included in Pub. specific to agricultural employers will be inclu-
ings from self-employment. 15-T, Federal Income Tax Withholding Methods. ded in Pub. 15, Employer's Tax Guide, begin-
ning with the Pub. 15 for use in 2024. Beginning
Qualified small business payroll tax credit in 2024, there will be a new Pub. 15 (sp) that is
for increasing research activities. For tax a Spanish-language version of Pub. 15. Refer-
Reporting SE Tax years beginning before January 1, 2023, a ences to Pub. 51 were retained throughout this
qualified small business may elect to claim up chapter because this chapter is for tax year
Use Schedule SE (Form 1040) to figure and re- to $250,000 of its credit for increasing research 2023. If you need information specific to tax
port your SE tax. Then, enter the SE tax on activities as a payroll tax credit. The Inflation year 2024, you will use Pub. 15 or Pub. 15 (sp)
Schedule 2 (Form 1040), line 4, and attach Reduction Act of 2022 (the IRA) increases the in 2024.
Schedule SE to Form 1040 or 1040-SR. election amount to $500,000 for tax years be-
If you have to pay SE tax, you must file ginning after December 31, 2022. The payroll
tax credit election must be made on or before
! Form 1040 or 1040-SR (with Sched- the due date of the originally filed income tax re- What’s New for 2024
CAUTION ule SE attached) even if you don’t oth-
erwise have to file a federal income tax return. turn (including extensions). The portion of the
credit used against payroll taxes is allowed in Social security and Medicare tax for 2024.
the first calendar quarter beginning after the The employee and employer tax rates for social
SE tax deduction. You can deduct half of your date that the qualified small business filed its in- security and the maximum amount of wages
SE tax in figuring your AGI. This deduction only come tax return. The election and determination subject to social security tax for 2024 will be
affects your income tax. It doesn’t affect either of the credit amount that will be used against discussed in Pub. 15 (for use in 2024).
your net earnings from self-employment or your the employer's payroll taxes are made on Form The Medicare tax rate for 2024 will also be
SE tax. 6765, Credit for Increasing Research Activities. discussed in Pub. 15 (for use in 2024). There is
To deduct the tax, enter on Schedule 1 The amount from Form 6765, line 44, must then no limit on the amount of wages subject to Med-
(Form 1040), line 15, the amount from line 13 of be reported on Form 8974, Qualified Small icare tax.
Schedule SE (Form 1040). Business Payroll Tax Credit for Increasing Re-
search Activities.
Joint return. Even if you file a joint return, you Starting in the first quarter of 2023, the pay- Reminders
can’t file a joint Schedule SE. This is true roll tax credit is first used to reduce the em-
whether one spouse or both spouses have ployer share of social security tax up to The COVID-19 related credit for qualified
self-employment earnings. Your spouse isn’t $250,000 per quarter and any remaining credit sick and family leave wages is limited to
considered self-employed just because you are. reduces the employer share of Medicare tax for leave taken after March 31, 2020, and be-
If both of you have self-employment earnings, the quarter. Any remaining credit, after reducing fore October 1, 2021. Generally, the credit for
each of you must complete a separate Sched- the employer share of social security tax and qualified sick and family leave wages, as enac-
ule SE. Attach both schedules to the joint re- the employer share of Medicare tax, is then car- ted under the Families First Coronavirus Re-
turn. If you and your spouse operate a business ried forward to the next quarter. Form 8974 is sponse Act (FFCRA) and amended and exten-
as a partnership, see Business owned and op- used to determine the amount of the credit that ded by the COVID-related Tax Relief Act of
erated by spouses and Qualified joint venture can be used in the current quarter. The amount 2020, for leave taken after March 31, 2020, and
(QJV), earlier, under Who Must Pay SE Tax. from Form 8974, line 12 or, if applicable, line 17, before April 1, 2021, and the credit for qualified
is reported on Form 943, line 12a. For more in- sick and family leave wages under sections
formation about the payroll tax credit, see the 3131, 3132, and 3133 of the Internal Revenue
Instructions for Form 8974 and go to IRS.gov/ Code, as enacted under the ARP, for leave
ResearchPayrollTC. taken after March 31, 2021, and before October
1, 2021, have expired. However, employers that
Credit for COBRA premium assistance pay- pay qualified sick and family leave wages in
ments. The COBRA premium assistance 2023 for leave taken after March 31, 2020, and
13. credit lines have been “Reserved for future use” before October 1, 2021, are eligible to claim a
on Form 943 because the first quarter of 2022 credit for qualified sick and family leave wages
was the last quarter in which most employers in 2023.
may have been eligible to claim the COBRA
Employment premium assistance credit. Section 9501 of the For more information about the credit for
American Rescue Plan Act of 2021 (the ARP) qualified sick and family leave wages, see the
Taxes provided for COBRA premium assistance in the Instructions for Form 943, and go to IRS.gov/
form of a full reduction in the premium otherwise PLC.
payable by certain individuals and their families An employer who receives a refund of
who elected COBRA continuation coverage due TIP payroll taxes resulting from qualified
What's New for 2023 to a loss of coverage as the result of a reduction sick and family leave credit reported on
in hours or an involuntary termination of em- a 2022 Form 943 generally won't receive that
Social security and Medicare tax for 2023. ployment (assistance eligible individuals). This refund until the 2023 calendar year. Even
The rate of social security tax on taxable wages, COBRA premium assistance was available for though that credit isn't received until 2023, in-
including qualified sick leave wages and quali- periods of coverage beginning on or after April come reported in 2022 must be increased by
fied family leave wages paid in 2023 for leave 1, 2021, through periods of coverage beginning the refundable and nonrefundable portions of
taken after March 31, 2021, and before October on or before September 30, 2021. A premium the qualified sick and family leave credit repor-
1, 2021, is 6.2% each for the employer and em- payee was entitled to the COBRA premium as- ted on their 2022 Form 943. For more informa-
ployee or 12.4% for both. Qualified sick leave sistance credit at the time an eligible individual tion, see the instructions for the income tax
wages and qualified family leave wages paid in elected coverage. Therefore, due to the COBRA
Chapter 13 Employment Taxes Page 79

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return or the Form 1040 schedule you file for able to claim the work opportunity tax credit the General Instructions for Forms W-2
your business. against their payroll tax liability using Form and W-3.
5884-C. For more information, go to IRS.gov/ Note. For employers in Puerto Rico, references
Advance payment of COVID-19 credits WOTC. to Form W-2 also apply to Form 499R-2/W-2PR
ended. Although you may pay qualified sick
and family leave wages in 2023 for leave taken Correcting a previously filed Form 943. If and references to Form W-3 also apply to Form
after March 31, 2020, and before October 1, you discover an error on a previously filed Form W-3 (PR), unless otherwise specified.
2021, you may no longer request an advance 943, or if you otherwise need to amend a previ-
payment of any credit on Form 7200, Advance ously filed Form 943, make the correction using
Payment of Employer Credits Due to COVID-19. Form 943-X, Adjusted Employer's Annual Fed- Important Dates for 2024
Additional employment tax information for eral Tax Return for Agricultural Employees or
farmers. See Pub. 51 for more detailed guid- Claim for Refund. Form 943-X is filed separately You should take the actions indicated by the
ance on employment taxes for tax year 2023 for from Form 943. For more information, see the dates listed. The dates listed here aren't
employers of agricultural workers. See Pub. 15 Instructions for Form 943-X, section 9 of Pub. adjusted for Saturdays, Sundays, and legal
for more detailed guidance on employment 51, or go to IRS.gov/ holidays (see the TIP next). Pub. 509, Tax
taxes for tax year 2024 for employers of agricul- CorrectingEmploymentTaxes. Calendars (for use in 2024), adjusts the dates
tural workers. For the latest information about Federal tax deposits must be made by elec- for Saturdays, Sundays, and legal holidays. Due
developments related to Pub. 15, such as legis- tronic funds transfer (EFT). You must use dates for deposits of withheld federal income
lation enacted after it was published, go to EFT to make all federal tax deposits. Generally, taxes, social security taxes, and Medicare taxes
IRS.gov/Pub15. For general tax information rel- an EFT is made using the Electronic Federal aren't listed here. Also, the due dates for forms
evant to agricultural employers, go to IRS.gov/ Tax Payment System (EFTPS). If you don't want required for health coverage reporting aren't
AgricultureTaxCenter. For general information to use EFTPS, you can arrange for your tax pro- listed here. For these dates, see Pub. 509.
about employment taxes, go to IRS.gov/ fessional, financial institution, payroll service, or If any date shown next for filing a re-
EmploymentTaxes. For information about em- other trusted third party to make electronic de- TIP turn, furnishing a form, or depositing
ployer responsibilities under the Affordable posits on your behalf. Also, you may arrange for taxes falls on a Saturday, Sunday, or le-
Care Act, go to IRS.gov/ACA. For information your financial institution to initiate a same-day gal holiday, the due date is the next business
about COVID-19 tax relief, go to IRS.gov/ wire payment on your behalf. EFTPS is a free day. The term “legal holiday” means any legal
Coronavirus. service provided by the Department of the holiday in the District of Columbia. Legal holi-
Treasury. Services provided by your tax profes- days in the District of Columbia are provided in
You may have nonfarm employees as sional, financial institution, payroll service, or section 11 of Pub. 15. A statewide legal holiday
! well as farm employees, for example, other third party may have a fee. delays a filing or furnishing due date only if the
CAUTION workers at a retail farm market. See
IRS office where you’re required to file a return
Pub.15 for employment tax rules for wages and Note. An exception applies to the EFT re- or furnish a form is located in that state. How-
noncash wages paid to these employees as quirement for making your federal tax deposits. ever, a statewide legal holiday doesn't delay the
they may differ from those discussed in this If your liability is less than $2,500 (Form 943, due date of federal tax deposits. For any due
chapter. line 13), you may pay in full with a check or date, you will meet the “file” or “furnish” date re-
Certification program for professional em- money order with a timely filed return. See the quirement if the envelope containing the tax re-
ployer organizations (PEOs). The Stephen Instructions of Form 943 for more information. turn or form is properly addressed, contains suf-
Beck, Jr., Achieving a Better Life Experience For more information on making federal tax ficient postage, and is postmarked by the U.S.
Act of 2014 required the IRS to establish a vol- deposits, see section 7 of Pub. 51. To get more Postal Service on or before the due date, or
untary certification program for PEOs. PEOs information about EFTPS or to enroll in EFTPS, sent by an IRS-designated private delivery serv-
handle various payroll administration and tax re- go to EFTPS.gov or call one of the following ice (PDS) on or before the due date. Go to
porting responsibilities for their business clients numbers. IRS.gov/PDS for the current list of PDSs. For
and are typically paid a fee based on payroll • 800-555-4477 the IRS mailing address to use if you're using a
costs. To become and remain certified under • 800-244-4829 (Spanish) PDS, go to IRS.gov/PDSstreetAddresses.
the certification program, certified professional • 303-967-5916 if you're outside the United
employer organizations (CPEOs) must meet States (toll call) Fiscal year taxpayers. The due dates listed
various requirements described in sections next apply whether you use a calendar or a fis-
3511 and 7705 and related published guidance. To contact EFTPS using Telecommunica- cal year.
Certification as a CPEO may affect the employ- tions Relay Services (TRS) for people who are
ment tax liabilities of both the CPEO and its deaf, hard of hearing, or have a speech disabil- By January 31.
customers. A CPEO is generally treated for em- ity, dial 711 and then provide the TRS assistant • File Form 943 with the IRS. If you depos-
ployment tax purposes as the employer of any the 800-555-4477 number above or ited all Form 943 taxes when due, you may
individual who performs services for a customer 800-733-4829. Additional information about file Form 943 by February 10.
of the CPEO and is covered by a contract de- EFTPS is also available in Pub. 966. • File Form 940, Employer's Annual Federal
Unemployment (FUTA) Tax Return, with
scribed in section 7705(e)(2) between the Electronic filing and payment. Businesses the IRS. If you deposited all the FUTA tax
CPEO and the customer (CPEO contract), but can enjoy the benefits of filing tax returns and when due, you may file Form 940 by Febru-
only for wages and other compensation paid to paying their federal taxes electronically. ary 10.
the individual by the CPEO. To become a Whether you rely on a tax professional or han- • File Copy A of all paper and electronic
CPEO, the organization must apply through the dle your own taxes, the IRS offers you conven- Forms W-2 with Form W-3, Transmittal of
IRS Online Registration System. For more infor- ient and secure programs to make filing and Wage and Tax Statements, with the Social
mation or to apply to become a CPEO, go to paying easier. Spend less time worrying about Security Administration (SSA). If filing elec-
IRS.gov/CPEO. taxes and more time running your business. tronically, the SSA generates Form W-3
CPEOs must generally file Form 943 and Use e-file and EFTPS to your benefit. automatically based on your Forms W-2.
Schedule R (Form 943), Allocation Schedule for • For e-file, go to IRS.gov/EmploymentEfile For more information on reporting Form
Aggregate Form 943 Filers, electronically. For for additional information. A fee may be W-2 information to the SSA electronically,
more information about a CPEO's requirement charged to file electronically. go to the SSA’s Employer W-2 Filing In-
to file electronically, see Revenue Procedure • For EFTPS, go to EFTPS.gov or call structions & Information webpage at
2023-18, 2023-13 I.R.B. 605, available at EFTPS at one of the numbers provided un- SSA.gov/employer.
IRS.gov/irb/2023-13_IRB#REV-PROC-2023-18. der the Note, earlier. • Furnish each employee with a completed
Work opportunity tax credit for qualified • For electronic filing of Form W-2, Wage Form W-2.
tax-exempt organizations hiring qualified and Tax Statement, go to SSA.gov/ • File Copy A of all paper and electronic
veterans. Qualified tax-exempt organizations employer. You may be required to file Forms 1099-NEC, Nonemployee Compen-
that hire eligible unemployed veterans may be Forms W-2 electronically. For details, see sation, that report nonemployee
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compensation with Form 1096, Annual Topics more than half of the commodity (for a
Summary and Transmittal of U.S. Informa- This chapter discusses: group of up to 20 unincorporated opera-
tion Returns, with the IRS. For information tors, all of the commodity).
on filing information returns electronically • Farm employment; • Work related to cotton ginning, turpentine,
with the IRS, see Pub. 1220. Other Forms • Family employees; gum resin products, or the operation and
1099, including Forms 1099-MISC, Miscel- • Crew leaders; maintenance of irrigation facilities.
laneous Information, have different due • Social security and Medicare taxes; For more information, see sections 2 of Pub. 15.
dates. For details about filing Forms 1099 • Federal income tax withholding;
and for information about required elec- • Required notice to employees about the Generally, a worker who performs services
tronic filing, see the General Instructions earned income credit (EIC); for you is your employee if you have the right to
for Certain Information Returns for general • Reporting and paying social security, control what will be done and how it will be
information, and the separate, specific in- Medicare, and withheld federal income done. This is so even when you give the em-
structions for each information return you taxes; and ployee freedom of action. What matters is that
file (for example, the Instructions for Forms • FUTA tax. you have the right to control the details of how
1099-MISC and 1099-NEC). the services are performed. You’re responsible
• Furnish each recipient to whom you paid for withholding and paying employment taxes
$600 or more in nonemployee compensa- Useful Items for your employees. You’re also required to file
tion with a completed Form 1099-NEC. You may want to see: employment tax returns. These requirements
• File Form 945, Annual Return of Withheld don't apply to amounts that you pay to inde-
Federal Income Tax, with the IRS to report Publication pendent contractors, as discussed later under
any nonpayroll income tax withheld. If you 15 15 Employer's Tax Guide Nonemployee compensation. See sections 1
deposited all Form 945 taxes when due, and 2 of Pub. 15-A for more information on how
you may file Form 945 by February 10. 15-A 15-A Employer's Supplemental Tax Guide to determine whether an individual providing
By February 15. Ask for a new Form W-4, Em- 15-B 15-B Employer's Tax Guide to Fringe services is an independent contractor or an em-
ployee’s Withholding Certificate, or Formulario Benefits ployee.
W-4(SP) from each employee who claimed ex- 15-T 15-T Federal Income Tax Withholding If you employ a family of workers, each
emption from federal income tax withholding worker subject to your control (not just the head
last year. Methods
of the family) is an employee.
On February 16. Any Form W-4 claiming ex- 51 51 Agricultural Employer's Tax Guide
Special rules apply to crew leaders. See
emption from withholding for the previous year 926 926 Household Employer's Tax Guide Crew Leaders, later.
has now expired. Begin withholding for any em-
ployee who previously claimed exemption from Form (and Instructions) Employer identification number (EIN). If
withholding but hasn't given you a new Form
W-4 for the current year. If the employee doesn't W-2 W-2 Wage and Tax Statement you’re required to report employment taxes or
give tax statements to employees, you must
give you a new Form W-4, withhold taxes as if W-4 W-4 Employee's Withholding Certificate have an EIN. If you don't have an EIN, you may
they had checked the box for Single or Married
filing separately in Step 1(c) and made no en- W-9 W-9 Request for Taxpayer Identification apply for one online by going to IRS.gov/EIN.
tries in Step 2, Step 3, or Step 4 of the 2024 Number and Certification You may also apply for an EIN by faxing or mail-
ing Form SS-4 to the IRS. Be aware that you
Form W-4. If the employee furnishes a new 940 940 Employer's Annual Federal may already have an EIN if you have previously
Form W-4 claiming exemption from withholding
after February 15, you may apply the exemption Unemployment (FUTA) Tax Return had farm employees; previously had nonfarm
employees in a different business; you file Form
to future wages, but don't refund taxes withheld 943 943 Employer's Annual Federal Tax 2290, Heavy Highway Vehicle Use Tax Return;
while the exempt status wasn't in place. Return for Agricultural Employees or your farm business is structured as a partner-
By April 30, July 31, October 31, and Janu- 943-X 943-X Adjusted Employer's Annual ship, limited liability company, S corporation, or
ary 31. Deposit FUTA taxes. Deposit FUTA Federal Tax Return for Agricultural C corporation.
tax due if the undeposited amount is over $500. Employees or Claim for Refund
Before December 1. Provide employees an Employee's social security number (SSN).
opportunity to submit a new Form W-4 if their fil- See chapter 16 for information about getting An employee who doesn't have an SSN and is
ing status, other income, deductions, or credits publications and forms. legally eligible to work in the United States
have changed or will change for the next year. should submit Form SS-5, Application for a So-
cial Security Card, to the SSA. Form SS-5 is
Farm Employment available from any SSA office or by calling
Introduction 800-772-1213. It is also available from the
In general, you’re an employer of farmworkers if SSA's website at SSA.gov/online/ss-5.pdf.
You’re generally required to withhold federal in- your employees do any of the following types of The employee must furnish evidence of age,
come tax from the wages of your employees. work. identity, and U.S. citizenship or lawful immigra-
You may be required to withhold social security • Raising or harvesting agricultural or horti- tion status permitting employment with the Form
and Medicare taxes from your employees' wa- cultural products on a farm, including rais- SS-5.
ges and pay the employer's share of these ing and feeding of livestock and raising
taxes under the Federal Insurance Contribu- bees for pollination and the production of Form I-9. You must verify that each new em-
tions Act (FICA). You may also have to pay fed- honey. ployee is legally eligible to work in the United
eral unemployment tax under the Federal Un- • Operating, managing, conserving, improv- States. This includes completing the U.S. Citi-
employment Tax Act (FUTA). You must also ing, or maintaining your farm and its tools zenship and Immigration Services (USCIS)
withhold Additional Medicare Tax from wages and equipment, if the major part of such Form I-9, Employment Eligibility Verification.
you pay to an employee in excess of $200,000 service is performed on a farm. You can get Form I-9 at USCIS.gov/Forms. For
in a calendar year. This chapter includes infor- • Services performed in salvaging timber, or more information, go to the USCIS website at
mation about these taxes. clearing land of brush and other debris, left USCIS.gov/I-9-Central or call 800-375-5283 or
You must also pay self-employment tax on by a hurricane (also known as hurricane la- 800-767-1833 (TTY). Employers and employ-
your net earnings from farming. See chapter 12 bor), if the major part of such service is ees in Puerto Rico ONLY may use the Spanish
for information on self-employment tax. performed on a farm. version of Form I-9.
• Handling, processing, or packaging any You may use the Social Security Number
agricultural or horticultural commodity in its Verification Service (SSNVS) at SSA.gov/
unmanufactured state if you produced employer/ssnv.htm to verify that an employee
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name matches an SSN. A person may have a holding as well as social security, Medicare, and Federal income tax withholding. If the crew
valid SSN but not be authorized to work in the FUTA taxes if they work for any of the following leader is the employer for social security and
United States. You may use E-Verify at E- entities. Medicare tax purposes, the crew leader is the
Verify.gov to confirm the employment eligibility • A corporation, even if it is controlled by employer for federal income tax withholding
of newly hired employees. Some states may re- you. purposes.
quire employers to also use E-Verify; check with • A partnership, even if you’re a partner. This
the appropriate agency in your state. doesn't apply to wages paid to your child if Federal unemployment (FUTA) tax. For
each partner is a parent of the child. FUTA tax purposes, the crew leader is the em-
Form W-4. You should give each new em- • An estate or trust, even if it is the estate of ployer of the workers if, in addition to the earlier
ployee a Form W-4 (IRS.gov/W4) as soon as a deceased parent. requirements, either of the following require-
you hire the employee. For Spanish-speaking In these situations, the child or spouse is con- ments is met.
employees, you may use Formulario W-4(SP), sidered to work for the corporation, partnership, • The crew leader is registered under the Mi-
which is the Spanish translation of Form W-4. or estate, not you. grant and Seasonal Agricultural Worker
Have the employee complete and return Form Protection Act.
W-4 to you before the first payday. If the em- Exemptions for your parent. Payments for • Substantially all crew members operate or
ployee doesn't return the completed form, you the services of your parent employed by you in maintain mechanized equipment provided
must withhold federal income tax as if the em- your trade or business are subject to federal in- by the crew leader as part of the service to
ployee had checked the box for Single or Mar- come tax withholding and social security and the farmer.
ried filing separately in Step 1(c) and made no Medicare taxes. Social security and Medicare The farmer is the employer of workers fur-
entries in Step 2, Step 3, or Step 4 of Form W-4. taxes don't apply to wages paid to your parent nished by a crew leader in all other situations. In
for services not in your trade or business, but addition, the farmer is the employer of workers
New hire reporting. You’re required to report they do apply to payments for household serv- furnished by a registered crew leader if the
any new employee to a designated state new ices in your home if both of the following condi- workers are the employees of the farmer under
hire registry. A new employee is an employee tions are satisfied. the common-law test. For example, some farm-
who hasn’t previously been employed by you or You have a child (including an adopted ers employ individuals to recruit farmworkers
was previously employed by you but has been •
child or stepchild) living in your home who exclusively for them. Although these individuals
separated from such prior employment for at is under age 18 or has a physical or mental may be required to register under the Migrant
least 60 consecutive days. Many states accept condition that requires care by an adult for and Seasonal Agricultural Worker Protection
a copy of Form W-4 with employer information at least 4 continuous weeks in the calendar Act, the workers are employed directly by the
added. Go to the Office of Child Support En- quarter services were performed. farmer. The farmer is the employer in these ca-
forcement website at acf.hhs.gov/css/ You’re a widow or widower; or divorced ses. For information about common-law em-
employers for more information. •
and not remarried; or have a spouse in the ployees, see section 1 of Pub. 15-A. For infor-
home who, because of a physical or men- mation about the Migrant and Seasonal
tal condition, can't care for your child for at Agricultural Worker Protection Act, which pro-
Family Employees least 4 continuous weeks in the calendar tects migrant and seasonal agricultural workers
quarter services were performed. by establishing employment standards related
Generally, the wages you pay to family mem- to wages, housing, transportation, and disclo-
bers who are your employees are subject to Wages you pay to your parent aren't subject
employment taxes. However, certain exemp- to FUTA tax, regardless of the type of services sures and recordkeeping, and which requires
tions may apply to wages paid to your child, provided. farm labor contractors to register with the U.S.
Department of Labor (DOL), see the DOL web-
spouse, or parent. site at dol.gov/whd/regs/compliance/
Qualified joint venture (QJV). If spouses
Exemptions for your child. Payments for the elect to be treated as a QJV instead of a part- whdfs49.htm.
services of your child under age 18 who works nership, either spouse may report and pay the
for you in your trade or business (including a employment taxes due on the wages paid to
farm) aren't subject to social security and Medi- employees using the EIN of that spouse's sole Social Security and
care taxes. However, see Nonexempt services proprietorship. For more information about
of a child or spouse, later. Payments for the QJVs, see chapter 12. Medicare Taxes
services of your child under age 21 employed All cash wages that you pay to farmworkers are
by you in other than a trade or business, such subject to social security and Medicare taxes
as payments for household services in your Crew Leaders for any calendar year for which you meet either
home, also aren't subject to social security or of the following tests.
Medicare taxes. Payments for the services of If farmworkers are provided by a crew leader, • You pay an employee cash wages of $150
your child under age 21 employed by you, the crew leader may be the employer of the or more in a year for farmwork (count all
whether or not in your trade or business, aren't workers. wages paid on a time, piecework, or other
subject to FUTA tax. Although not subject to so- basis). The $150 test applies separately to
cial security, Medicare, or FUTA tax, the child's Social security and Medicare taxes. For so- each farmworker that you employ. If you
wages may still be subject to federal income tax cial security and Medicare tax purposes, the employ a family of workers, each member
withholding. crew leader is the employer of the workers if is treated separately. Don't count wages
both of the following requirements are met. paid by other employers.
Exemptions for your spouse. Payments for • The crew leader pays (either on their own • The total (cash and noncash) wages that
the services of your spouse who works for you behalf or on behalf of the farmer) the work- you pay to all farmworkers is $2,500 or
in your trade or business are subject to federal ers for their farm labor. more.
income tax withholding and social security and • The crew leader hasn't entered into a writ-
Medicare taxes, but not FUTA tax. ten agreement with the farmer under which If the $2,500-or-more test for the group isn't
Payments for the services of your spouse the crew leader is designated as an em- met, the $150-or-more test for an individual still
employed by you in other than a trade or busi- ployee of the farmer. applies. Similarly, if the $150-or-more test is not
ness, such as payments for household services If both requirements are met, the crew met for any individual, the $2,500-or-more test
in your home, aren't subject to social security, leader isn't considered the employee of the for the group still applies.
Medicare, or FUTA taxes. farmer for services performed by the crew
leader in furnishing farmworkers and as a mem- Exceptions. Annual cash wages of less than
Nonexempt services of a child or spouse. ber of the crew. $150 you pay to a seasonal farmworker aren't
Payments for the services of your child or subject to social security and Medicare taxes,
spouse are subject to federal income tax with- even if you pay $2,500 or more to all your

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farmworkers. However, these wages count to- ject to the employer share of social security
ward the $2,500 test for determining whether tax; therefore, the tax rate on these wages
other farmworkers' wages are subject to social is 6.2%. Federal Income Tax
security and Medicare taxes. • The employer and employee each pay
A seasonal farmworker is a worker who: 1.45% of cash wages for Medicare tax Withholding
• Works as a hand-harvest laborer, (hospital insurance).
• Is paid piece rates in an operation usually • The employee pays 0.9% of cash wages in If the cash wages you pay to farmworkers are
paid on this basis in the region of employ- excess of $200,000 for Additional Medi- subject to social security and Medicare taxes,
ment, care Tax. they are also subject to federal income tax with-
holding. Although noncash wages are subject to
• Commutes daily from their permanent federal income tax, withhold income tax on
home to the farm, and Wage limit. The limit on wages subject to
• Worked in agriculture less than 13 weeks the social security tax for 2023 is $160,200. these noncash wages only if you and the em-
in the preceding calendar year. There is no limit on wages subject to the Medi- ployee agree to do so. The amount to withhold
care tax. All covered wages are subject to the is figured on gross wages without taking out so-
See Family Employees, earlier, for certain Medicare tax. Additionally, all wages in excess cial security and Medicare taxes, union dues,
exemptions from social security and Medicare of $200,000 are subject to Additional Medicare etc.
taxes that apply to your child, spouse, and pa- Tax withholding.
rent. Form W-4. Generally, the amount of federal in-
Paying employee's share. If you would rather come tax you withhold is based on the employ-
Religious exemption. An exemption from pay the employee's share of social security and ee's filing status and other information reported
social security and Medicare taxes is available Medicare taxes without deducting it from their on the employee's Form W-4. Don't withhold
to members of a recognized religious group or wages, you may do so. It is additional income to federal income tax from the wages of an em-
division opposed to public insurance. This ex- the employee, thus it is subject to income tax ployee who, by writing “Exempt” on Form W-4,
emption is available only if both the employee withholding. You must include it in box 1 of the certifies that they had no federal income tax lia-
and the employer are members of the group or employee's Form W-2, but don't count it as so- bility last year and anticipates no liability for the
division. These employees are still subject to cial security and Medicare wages (boxes 3 and current year.
federal income tax. For more information, see 5 of Form W-2) or as wages for FUTA tax purpo- You should give each new employee a Form
Pub. 517. ses. W-4 as soon as you hire the employee. For
Spanish-speaking employees, you may use
Cash wages. Only cash wages paid to farm- Example. Gabrielle operates a small family Formulario W-4(SP) which is the Spanish trans-
workers are subject to social security and Medi- fruit farm. She employs day laborers in the pick- lation of Form W-4. Have the employee com-
care taxes. Cash wages include checks, money ing season to enable her to timely get her crop plete and return Form W-4 to you before the first
orders, and any kind of money or cash. to market. She doesn't deduct the employees' payday. If the employee doesn't return the com-
Only cash wages subject to social security share of social security and Medicare taxes pleted form, you must withhold federal income
and Medicare taxes are credited to your em- from their pay; instead, she pays it on their be- tax as if the employee had checked the box for
ployees for social security benefit purposes. half. When she prepares her employees' Forms Single or Married filing separately in Step 1(c)
Payments not subject to these taxes, such as W-2, she adds each employee's share of social and made no entries in Step 2, Step 3, or Step
certain commodity wages (discussed next), security and Medicare taxes that she paid to the 4 of Form W-4.
don't contribute to your employees' social se- employee's wage income (box 1 of Form W-2), You should make the 2024 Form W-4 availa-
curity coverage. For information about social se- but doesn't include it in box 3 (social security ble to your employees and encourage them to
curity benefits, go to SSA.gov or call the SSA at wages) or box 5 (Medicare wages and tips). check their income tax withholding for 2024.
800-772-1213. For 2023, Gabrielle paid Dan $1,000 during Those employees who owed a large amount of
the year. She enters $1,076.50 in box 1 of Dan’s tax or received a large refund for 2023 may
Noncash wages (including commodity wa- Form W-2 ($1,000 wages plus $76.50 social se- want to submit a new Form W-4. You can't ac-
ges). Noncash wages include food, lodging, curity and Medicare taxes paid for Dan). She cept substitute Forms W-4 developed by em-
clothing, transportation passes, farm products, enters $1,000.00 in boxes 3 and 5 of Dan's ployees. Advise your employees to use the IRS
or other goods or commodities. Noncash wages Form W-2. Tax Withholding Estimator available at IRS.gov/
paid to farmworkers, including commodity wa-
W4App to determine accurate withholding.
ges, aren't subject to social security and Medi- Additional Medicare Tax. In addition to with-
care taxes. However, they are subject to these holding Medicare tax at 1.45%, you must also Form W-2. By January 31, you must furnish
taxes if the substance of the transaction is a withhold a 0.9% Additional Medicare Tax from each employee a Form W-2 showing total wa-
cash payment. For information on lodging provi- wages you pay to an employee in excess of ges for the previous year and total federal in-
ded as a condition of employment, see Pub. $200,000 in a calendar year. You’re required to come tax, social security tax, and Medicare tax
15-B. begin withholding Additional Medicare Tax in withheld. However, if an employee stops work-
Report the value of noncash wages in box 1 the pay period in which you pay wages in ex- ing for you and asks for the form earlier, you
of Form W-2 together with cash wages. Don't cess of $200,000 to an employee and continue must give it to the employee within 30 days of
show noncash wages in box 3 or in box 5 (un- to withhold it each pay period until the end of the later of the following dates.
less the substance of the transaction is a cash the calendar year. Additional Medicare Tax is • The date the employee asks for the form.
payment). only imposed on the employee. There is no em- • The date you make your final payment of
ployer share of Additional Medicare Tax. All wa- wages to the employee.
Tax rates and social security wage limit. For ges that are subject to Medicare tax are subject
2023, the employer and the employee will pay to Additional Medicare Tax withholding if paid in Compensation paid to H-2A visa holders.
the following taxes. excess of the $200,000 withholding threshold. Report compensation of $600 or more paid to
• The employer and employee each pay For more information on what wages are foreign agricultural workers who entered the
6.2% of cash wages for social security tax subject to Medicare tax, see the chart, Special country on H-2A visas in box 1 of Form W-2.
(old-age, survivors, and disability insur- Rules for Various Types of Services and Pay- Compensation paid to H-2A workers for agricul-
ance). The tax rate for qualified sick leave ments, in section 15 of Pub. 15. For more infor- tural labor performed in connection with this
wages and qualified family leave wages mation on Additional Medicare Tax, go to visa isn't subject to social security and Medi-
paid in 2023 for leave taken after March IRS.gov/ADMTfaqs. care taxes, and therefore shouldn't be reported
31, 2021, and before October 1, 2021, is as wages subject to social security tax (line 2),
6.2% each for the employer and employee Medicare tax (line 4), or Additional Medicare
or 12.4% for both. Qualified sick leave wa- Tax (line 6) on Form 943, and shouldn't be re-
ges and qualified family leave wages paid ported as social security wages (box 3) or Medi-
in 2023 for leave taken after March 31, care wages (box 5) on Form W-2. On Form
2020, and before April 1, 2021, aren't sub-

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W-2, don't check box 13 (Statutory employee), Example. You contract Sean Black to com- employee of any form of business. A trustee or
as H-2A workers aren't statutory employees. plete custom corn chopping on your farm. Be- agent with authority over the funds of the busi-
An employer isn’t required to withhold fed- cause Sean Black is a contracted individual and ness can also be held responsible for the pen-
eral income tax from compensation paid to an not an employee, you will issue him a Form alty. Willfully means voluntarily, consciously, and
H-2A worker for agricultural labor performed in 1099-NEC to report the compensation paid for intentionally. Paying other expenses of the busi-
connection with this visa unless the worker asks the custom corn chopping services. ness instead of the taxes due is acting willfully.
for withholding and the employer agrees. In this
case, the worker must give the employer a com- Example. You rent a barn from Valerie Consequences of treating an employee as
pleted Form W-4. Federal income tax withheld Brown for the operation of your business. Be- an independent contractor. If you classify an
should be reported on Form 943, line 8, and in cause you pay more than $600 annually for the employee as an independent contractor and
box 2 of Form W-2. rental, you will need to issue a Form 1099-MISC you have no reasonable basis for doing so, you
These reporting rules apply when the H-2A to Valerie Brown to report the rent you paid to may be held liable for employment taxes for that
worker provides their taxpayer identification her. worker. See Pub. 15-A for more information.
number (TIN) to the employer. However, if an
H-2A visa worker didn't provide the employer
with a TIN, the employee is subject to backup Reporting and Paying Federal Unemployment
withholding. The employer must report the wa-
ges and backup withholding on Form Social Security, (FUTA) Tax
1099-MISC. The employer must also report the Medicare, and Withheld You must pay FUTA tax if you meet either of the
backup withholding on Form 945, line 2.
For more information, see the Instructions Federal Income Taxes following tests.
for Forms 1099-MISC and 1099-NEC and the • You paid cash wages of $20,000 or more
Instructions for Form 945. For more information You must withhold federal income, social secur- to farmworkers in any calendar quarter dur-
on foreign agricultural workers on H-2A visas, ity, and Medicare taxes required to be withheld ing the current or preceding calendar year.
go to IRS.gov/H2A. from the salaries and wages of your employees. • You employed 10 or more farmworkers for
You’re liable for the payment of these taxes to some part of at least 1 day (whether or not
Required notice to employees about the the federal government whether or not you col- all at the same time) during any 20 or more
earned income credit (EIC). You must pro- lect them from your employees. If, for example, different calendar weeks during the current
vide notification about the EIC to each em- you withhold less than the correct tax from an or preceding calendar year.
ployee who worked for you at any time during employee's wages, you’re still liable for the full These rules don't apply to exempt services of
the year and from whom you didn't withhold any amount. You must also pay the employer's your spouse, your parents, or your children un-
federal income tax. However, you don't have to share of social security and Medicare taxes. der age 21. See Family Employees, earlier.
notify employees who claim exemption from There is no employer share of Additional Medi-
federal income tax withholding on Form W-4. care Tax. Alien farmworkers. Wages paid to aliens ad-
You meet the notification requirement by giving mitted on a temporary basis to the United
each employee any of the following. Form 943. Report withheld federal income tax, States to perform farmwork (also known as
• Form W-2, which contains the EIC notifica- social security tax, and Medicare tax on Form H-2A visa workers) are exempt from FUTA tax.
tion on the back of Copy B. 943. Your 2023 Form 943 is due by January 31, However, include your employment of these
• A substitute Form W-2 with the exact EIC 2024 (or February 12, 2024, if you made depos- workers and the wages you paid them to deter-
wording shown on the back of Copy B of its on time in full payment of the taxes due for mine whether you meet either of the above
Form W-2. the year). tests.
• Notice 797, Possible Federal Tax Refund Deposits. Generally, you must deposit both the Commodity wages. Payments in kind for farm
Due to the Earned Income Credit (EIC). employer and employee share of social security labor aren't cash wages. Don't count them to
• Your own written statement with the exact and Medicare taxes and federal income tax figure whether you’re subject to FUTA tax or to
wording of Notice 797. For more informa- withheld during the year. However, you may figure how much tax you owe.
tion, see Pub. 15 and Notice 1015, Have make payments with Form 943 instead of de-
You Told Your Employees About the positing them if you accumulate less than a Tax rate and credit. The gross FUTA tax rate
Earned Income Credit (EIC). $2,500 tax liability (“Total taxes after adjust- is 6.0% of the first $7,000 cash wages you pay
ments and nonrefundable credits” line on Form to each employee during the year. However,
How to figure withholding. You can use one 943) during the year and you pay in full with a you’re given a credit of up to 5.4% of the first
of several methods to determine the amount to timely filed return. See the Instructions for Form $7,000 cash wages you pay to each employee
withhold. The methods are described in Pub. 943 for more information on making a payment for the state unemployment tax you pay. If your
15-T, which contains tables showing the correct with your return. state tax rate (experience rate) is less than
amount of federal income tax you should with- For more information on deposit rules, see 5.4%, you may still be allowed the full 5.4%
hold. Section 9 of Pub. 15 also contains addi- section 7 of Pub. 51. credit.
If all of the taxable FUTA wages you paid
tional information about federal income tax with- Electronic deposit requirement. You were excluded from state unemployment tax,
holding. must use EFT to make all federal tax deposits. the full 6.0% rate applies. See the Instructions
See Federal tax deposits must be made by for Form 940 for additional information.
Nonemployee compensation. Generally, you electronic funds transfer (EFT), earlier.
don't have to withhold federal income tax on
More information. For more information on
payments for services to individuals who aren't Trust fund recovery penalty. If you’re respon- FUTA tax, see section 10 of Pub. 51.
your employees. However, you may be required sible for withholding, accounting for, depositing,
to report these payments on Form 1099-NEC or paying federal income, social security, and
and to withhold under the backup withholding Medicare taxes (that is, trust fund taxes) and Reporting and Paying FUTA
rules. For example, persons who haven’t fur- willfully fail to do so, you can be held liable for Tax
nished their TINs to you are subject to withhold- a penalty equal to the withheld tax not paid. The
ing on payments required to be reported on trust fund recovery penalty won't apply to any The FUTA tax is imposed on you as the em-
Form 1099-NEC. For more information, see the amount of trust fund taxes an employer holds ployer. It must not be collected or deducted
Instructions for Forms 1099-MISC and back in anticipation of any credits they are enti- from the wages of your employees.
1099-NEC. For backup withholding on H-2A tled to.
visa holders, see Compensation paid to H-2A A responsible person can be an officer of a Form 940. Report FUTA tax on Form 940. The
visa holders, earlier.
corporation, a partner, a sole proprietor, or an 2023 Form 940 is due by January 31, 2024 (or

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February 12, 2024, if you timely deposited the Table 14-1. Fuel Excise Tax Credits and Refunds at a Glance
full amount of your 2023 FUTA tax).
Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed.
Deposits. If at the end of any calendar quarter
you owe, but haven't yet deposited, more than Household Use or
$500 in FUTA tax for the year, you must make a On a Farm for Farming Off-Highway Use Other Than as
deposit by the end of the following month. If the Fuel Used Purposes Business Use a Fuel1

undeposited tax is $500 or less at the end of a Gasoline Credit only Credit or refund None
quarter, you don't have to deposit it. You can
add it to the tax for the next quarter. If the total Aviation gasoline Credit only None None
undeposited tax is more than $500 at the end of Undyed diesel fuel Credit or refund Credit or refund2 Credit or refund2
the next quarter, a deposit will be required. If the and undyed
total undeposited tax at the end of the 4th quar- kerosene
ter is $500 or less, you can either make a de-
posit or pay it with your return by the January Kerosene for use in Credit or refund None None
31, 2024, due date. aviation
Electronic deposit requirement. You Dyed diesel fuel None None None
must use EFT to make all federal tax deposits. and dyed kerosene
See Federal tax deposits must be made by Other Fuels Credit or refund Credit or refund None
electronic funds transfer (EFT), earlier. (including
alternative fuels)3
1 For a use other than as fuel in a propulsion engine.
2 Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending
with undyed diesel fuel to be used for heating purposes. See Regulations section 48.6427-10(b)(1) for the
definition of a blocked pump.
14. 3 Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. It includes
the alternative fuels: liquefied petroleum gas (LPG), “P” Series fuels, compressed natural gas (CNG),
liquefied hydrogen, Fischer-Tropsch process liquid fuel from coal (including peat), liquid fuel derived from
Fuel Excise Tax biomass, liquefied natural gas (LNG), liquefied gas derived from biomass, and compressed gas derived
from biomass.
Credits and Useful Items excise tax is collected at the time of sale. The
You may want to see: diesel is dyed when the intended use is for non-
Refunds taxable purposes, such as farming, and no ex-
Publication cise tax is collected at the time of sale. When
undyed diesel is used in farming or any other
510 510 Excise Taxes qualifying purpose, the taxpayer may recover
Introduction Form (and Instructions) the excise tax paid by claiming a credit or filing
for a refund (see Table 14-1).
You may be eligible to claim a credit on your in- 720 720 Quarterly Federal Excise Tax Return
come tax return for the federal excise tax on 4136 4136 Credit for Federal Tax Paid on Fuels Dyed diesel fuel and dyed kerosene. If
you purchase dyed diesel fuel or dyed kerosene
quarterly refund of the fuel taxes during the
certain fuels. You may also be eligible to claim a 8849 8849 Claim for Refund of Excise Taxes for a nontaxable use, you must use it only on a
year, instead of waiting to claim a credit on your See chapter 16 for information about getting farm for farming purposes or for other nontaxa-
income tax return. publications and forms. ble purposes. For example, you shouldn't use
Whether you can claim a credit or refund de- dyed diesel fuel in a truck that is used both on
pends on whether the fuel was taxed and the the farm for farming purposes and on the high-
purpose (nontaxable use) for which you used Fuels Used in Farming way, even though the highway use is in connec-
the fuel. The nontaxable uses of fuel for which a tion with farm business. Excise tax applies to
farmer may claim a credit or refund are gener- Owners, operators, and tenants of farms and the fuel used by the truck on the highways. In
ally the following. certain other persons may be eligible to claim a this situation, undyed (taxed) fuel should be
• Use on a farm for farming purposes. credit or refund of excise taxes on fuel used in purchased for the truck. You should keep fuel
• Off-highway business use. the trade or business of farming, when used on records of the use of the truck on the farm for
• Uses other than as a fuel in a propulsion a farm in the United States for farming purpo- farming purposes, and for other uses. You may
engine, such as home use. ses. See Table 14-1 for a list of available fuel ex- be eligible for a credit or refund for the excise
Table 14-1 presents an overview of credits cise tax credits and refunds. Fuel is used on a tax on fuel used on the farm for farming purpo-
and refunds that may be claimed for fuels used farm for farming purposes only if used in carry- ses.
for the nontaxable uses listed above. See Pub. ing on a trade or business of farming, on a farm
510, Excise Taxes, for more information. in the United States, and for farming purposes. Penalty. A penalty is imposed on any person
who knowingly uses, sells, or alters dyed diesel
Farm. A farm includes livestock, dairy, fish, fuel or dyed kerosene for any purpose other
Topics poultry, fruit, fur-bearing animals, truck farms, than a nontaxable use. The penalty is the
This chapter discusses: greater of $1,000 or $10 per gallon of the dyed
orchards, plantations, ranches, nurseries,
ranges, and feed yards for finishing cattle. It diesel fuel or dyed kerosene involved. After the
• Fuels used in farming also includes structures such as greenhouses first violation, the $1,000 portion of the penalty
• Dyed diesel fuel and dyed kerosene used primarily for raising agricultural or horticul- increases depending on the number of viola-
• Fuels used in off-highway business use tural commodities. A fish farm is an area where tions. For more information on this penalty, see
• Fuels used for household purposes fish are grown or raised and not merely caught Pub. 510.
• How to claim a credit or refund or harvested.
• Including the credit or refund in income Farming purposes. As the owner, tenant, or
Dyed versus undyed diesel. Diesel is operator and the ultimate purchaser of fuel that
undyed when sold for highway use vehicles and you purchased, you use the fuel on a farm for

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farming purposes if you use it in any of the fol- Table 14-2. Claiming a Credit or Refund of Excise Taxes
lowing ways.
This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a
1. To cultivate the soil or to raise or harvest nontaxable use.
any agricultural or horticultural commodity.
2. To raise, shear, feed, care for, train, or Credit Refund
manage livestock, bees, poultry, fur-bear- Which form to use Form 4136, Credit for Federal Form 8849, Claim for Refund of
ing animals, or wildlife. Tax Paid on Fuels Excise Taxes; and Schedule 1
3. To operate, manage, conserve, improve, (Form 8849), Nontaxable Use
or maintain your farm and its tools and of Fuels
equipment. Type of form Annual Quarterly
4. To handle, dry, pack, grade, or store any When to file With your income tax return By the last day of the quarter
raw agricultural or horticultural commodity. following the last quarter
For this use to qualify, you must have pro- included in the claim
duced more than half the commodity so
treated during the tax year. The Amount of tax Any amount $750 or more1
more-than-one-half test applies separately 1 You may carry over an amount less than $750 to the next quarter.
to each commodity. Commodity means a
single raw product. For example, apples undyed diesel fuel, undyed kerosene, or other for undyed diesel fuel and undyed kerosene
and peaches are two separate commodi- fuels (including alternative fuel) used for farming sold for use on a farm for farming purposes.
ties. purposes. However, see Custom application of
5. To plant, cultivate, care for, or cut trees or fertilizer and pesticide next. Also see Dyed die- All-terrain vehicles (ATVs). Fuel used in
to prepare (other than sawing logs into sel fuel and dyed kerosene, earlier. ATVs on a farm for farming purposes, discussed
lumber, chipping, or other milling) trees for earlier, is eligible for a credit or refund of excise
market, but only if these activities are inci- Example. Farm owner Haleigh Blue hired taxes on the fuel. Fuel used in ATVs for non-
dental to your farming operations. Your custom operator Tyler Steele to cultivate the soil farming purposes isn’t eligible for a credit or re-
tree operations are incidental only if they on Haleigh’s farm. Tyler purchased 200 gallons fund of the taxes. If ATVs are used both for
are minor in nature when compared to the of undyed diesel fuel to perform the work on Ha- farming and nonfarming purposes, only that
total farming operations. leigh's farm. In addition, Haleigh hired contrac- portion of the fuel used for farming purposes is
tor Lee Brown to pack and store the farm’s ap- eligible for the credit or refund.
If any other person, such as a neighbor or ple crop. Lee bought 25 gallons of undyed
custom operator (independent contractor), per- diesel fuel to use in packing the apples. Haleigh
forms a service for you on your farm for any of can claim the credit for the 200 gallons of Fuels Used in
the purposes included in list item (1) or (2) undyed diesel fuel used by Tyler on the farm be-
above, you are considered to be the ultimate cause it qualifies as fuel used on the farm for Off-Highway Business
purchaser who used the fuel on a farm for farm- farming purposes. No one can claim a credit for
ing purposes. Therefore, you can still claim the the 25 gallons used by Lee because that fuel Use
credit or refund for the fuel so used. However, wasn’t used for a farming purpose included in
see Custom application of fertilizer and pesti- list item (1) or (2) above. You may be eligible to claim a credit or refund
cide, later. If the other person performs any In the above example, both Tyler Steele and for the excise tax on fuel used in an off-highway
other services for you on your farm for purposes Lee Brown could have purchased dyed (un- business use.
not included in list item (1) or (2) above, no one taxed) diesel fuel for their tasks.
can claim the credit or refund for fuel used on Off-highway business use. This is any use of
your farm for those other services. Custom application of fertilizer and pes- fuel in a trade or business or in an income-pro-
ticide. Fuel used on a farm for farming purpo- ducing activity. The use must not be in a high-
Fuel not used for farming. You don’t use ses includes fuel used in the application (includ- way vehicle registered or required to be regis-
fuel on a farm for farming purposes when you ing aerial application) of fertilizer, pesticides, or tered for use on public highways. Off-highway
use it in any of the following ways. other substances. Generally, the applicator is business use generally doesn’t include any use
• Off the farm, such as on the highway or in treated as having used the fuel on a farm for in a recreational motorboat.
noncommercial aviation, even if the fuel is farming purposes and therefore claims the
used in transporting livestock, feed, crops, credit or refund. For applicators using highway Examples. Off-highway business use in-
or equipment. vehicles, only the fuel used on the farm is ex- cludes the use of fuels in a trade or business in
• For personal use, such as lawn mowing. empt. Fuel used traveling on the highway to and any of the following ways.
• In processing, packaging, freezing, or can- from the farm is taxable. Fuel used by an aerial • In stationary machines such as generators,
ning operations. applicator for the direct flight between the air- compressors, power saws, and similar
• In processing crude gum into gum spirits of field and one or more farms is treated as used equipment.
turpentine or gum resin or in processing for a farming purpose. For aviation gasoline, the • For cleaning.
maple sap into maple syrup or maple aerial applicator makes the claim as the ulti- • In forklift trucks, bulldozers, and earthmov-
sugar. mate purchaser. For kerosene used in aviation, ers.
Buyer of fuel, including undyed diesel the ultimate purchaser may make the claim or
fuel or undyed kerosene. If doubt exists waive the right to make the claim to the regis- Off-highway nonbusiness (taxable) use of
whether the owner, tenant, or operator of the tered ultimate vendor. A sample waiver is inclu- fuel includes use in minibikes, snowmobiles,
farm bought the fuel, determine who actually ded as Model Waiver L in the appendix of Pub. power lawn mowers, chain saws, and other yard
bore the cost of the fuel. For example, if the 510. equipment. For more information, see Pub. 510.
owner of a farm and his or her tenant equally
share the cost of gasoline used on the farm, A registered ultimate vendor is the person
each can claim a credit for the tax on half the who sells undyed diesel fuel, undyed kerosene,
fuel used. or kerosene for use in aviation to the user (ulti-
mate purchaser) of the fuel for use on a farm for
Undyed diesel fuel, undyed kerosene, farming purposes. To claim a credit or refund of
and other fuels (including alternative fuel). tax, the ultimate vendor must be registered with
Usually, the farmer is the only person who can the IRS at the time the claim is made. However,
make a claim for credit or refund for the tax on registered ultimate vendors can’t make claims

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Claiming a Credit You can’t claim a refund for excise tax
on gasoline and aviation gasoline used
Fuels Used for You make a claim for a fuel tax credit on Form CAUTION! on a farm for farming purposes. You
Household Purposes or 4136 and attach it to your income tax return. must claim a credit on your income tax return for
Don’t claim a credit for any excise tax for which the tax.
Other Than as a Fuel for you have filed a refund claim.
How to file a quarterly claim. File the claim
Propulsion Engines How to claim a credit. How you claim a credit for refund by completing Schedule 1 (Form
depends on whether you are an individual, part- 8849) and attaching it to Form 8849. Send it to
You may be eligible to claim a credit or refund nership, corporation, S corporation, trust, or the address shown in the instructions. If you file
for the excise tax on undyed diesel fuel or kero- farmers' cooperative association. Form 720, you can use its Schedule C for your
sene used for home heating, lighting, and cook- refund claims. See the Instructions for Form
ing. This also applies to diesel fuel and kero- Individuals. You claim the credit on the
sene used in a home generator to produce “Credit for federal tax on fuels” line of your Form 720.
electricity for home use. Home use of a fuel 1040 or 1040-SR. If you wouldn’t otherwise
doesn’t include use in a propulsion engine and have to file an income tax return, you must do When to file a quarterly claim. You must file
it's also not considered an off-highway business so to get a fuel tax credit. a quarterly claim by the last day of the first quar-
ter following the last quarter included in the
use. claim. If you don’t file a timely refund claim for
Partnerships. Partnerships claim the credit
by including a statement on Schedule K-1 the fourth quarter of your tax year, you will have
(Form 1065), Partner's Share of Income, De- to claim a credit for that amount on your income
How To Claim a Credit or ductions, Credits, etc., showing each partner's tax return, as discussed earlier.
Refund share of the number of gallons of each fuel sold In most situations, the amount claimed
or used for a nontaxable use, the type of use, as a credit or refund will be less than
You may be able to claim a credit or refund of and the applicable credit per gallon. Each part- CAUTION! the amount of fuel tax paid, because
the excise tax on fuels you use for nontaxable ner claims the credit on his or her income tax re- the Leaking Underground Storage Tank (LUST)
uses. The basic rules for claiming credits and turn for the partner's share of the fuel used by tax of $0.001 per gallon is generally not subject
refunds are listed in Table 14-2. the partnership. to credit or refund.
Keep at your principal place of busi- Other entities. Corporations, S corpora-
ness all records needed to enable the tions, farmers' cooperative associations, and
RECORDS IRS to verify that you are the person trusts make the claim on the appropriate line of Including the Credit or
entitled to claim a credit or refund and the their income tax return.
amount you claimed. You don’t have to use any Refund in Income
special form, but the records should establish When to claim a credit. You can claim a fuel
the following information. tax credit on your income tax return for the year Include any credit or refund of excise taxes on
you used the fuel. fuels in your gross income if you claimed the to-
• The total number of gallons bought and tal cost of the fuel (including the excise taxes)
used during the period covered by your You may be able to make a fuel tax
claim. TIP claim on an amended income tax re- as an expense deduction that reduced your in-
• The date of each purchase. turn for the year you used the fuel. A come tax liability.
• The names and addresses of suppliers claim for credit or refund of an overpayment Which year you include a credit or refund in
and amounts bought from each during the must generally be filed within the later of: gross income depends on whether you use the
period covered by your claim. • 3 years from the date the original return cash or an accrual method of accounting.
• The nontaxable use for which you used the was filed, or
fuel. • 2 years from the date the tax was paid. Cash method. If you use the cash method
• The number of gallons used for each non- and file a claim for refund, include the refund
taxable use. amount in gross income for the tax year in
which you receive the refund. If you claim a
Claiming a Refund credit on your income tax return, include the
It's important that your records separately show credit amount in gross income for the tax year in
the number of gallons used for each nontaxable If eligible, you can claim a refund of excise taxes which you file Form 4136. If you file an amen-
use that qualifies as a claim. For more informa- using Schedule 1 (Form 8849); if you file Form ded return and claim a credit, include the credit
tion about recordkeeping, see Pub. 583, Start- 720, you can use its Schedule C to claim a re- amount in gross income for the tax year in
ing a Business and Keeping Records. fund for the quarter; if you file Form 4136, you which you receive the credit.
can use it to claim a refund for your tax year by
Credit or refund. A credit is an amount that attaching it to your tax return. Don't claim a re- Example. Morgan Brown, a farmer who
reduces the tax on your income tax return when fund on any of these forms for any amount that uses the cash method, filed a 2023 Form 1040
you file it at the end of the year. If you meet cer- you have filed, or will file, a claim for refund on on March 3, 2024. On the Schedule F, Morgan
tain requirements, you may claim a refund dur- another form. deducted the total cost of gasoline (including
ing the year instead of waiting until you file your $110 of excise taxes) used on the farm for farm-
income tax return. You can use Schedule 1 (Form 8849) to file
a claim for a refund for any quarter of your tax ing purposes. Then, on Form 4136, Morgan
Credit only. You can claim the following year for which you can claim $750 or more. This claimed the $110 as a credit, then reports the
taxes only as a credit on your income tax return. amount is the excise tax on all fuels used for a $110 as other income on line 8 of the 2023
• Tax on gasoline and aviation gasoline you nontaxable use during that quarter or any prior Schedule F.
used on a farm for farming purposes. quarter (for which no other claim has been filed)
• Tax on fuels (including undyed diesel fuel during the tax year. Accrual method. If you use an accrual
method, include the amount of credit or refund
or undyed kerosene) you used for nontaxa- If you can’t claim at least $750 at the end of in gross income for the tax year in which you
ble uses if the total for the tax year is less a quarter, you carry the amount over to the next used the fuels. It doesn’t matter whether you
than $750. quarter of your tax year to determine if you can filed for a quarterly refund or claimed the entire
• Tax on fuel you didn’t iinclude in any claim claim at least $750 for that quarter. If you can’t amount as a credit.
for refund previously filed for any quarter of claim at least $750 at the end of the fourth quar-
the tax year. ter of your tax year, you must claim a credit on Example. Amy Johnson, a farmer who
your income tax return using Form 4136. Only uses the accrual method, files a 2023 Form
one claim can be filed for a quarter. 1040 on April 15, 2024. On Schedule F, Amy
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deducts the total cost of gasoline (including Gross Income next for information on how to fig- • Gains from sales of draft, breeding, dairy,
$155 of excise taxes) used on the farm for farm- ure your gross income from all sources, and see or sporting livestock.
ing purposes during 2023. On Form 4136, Amy Gross Income From Farming, later, for informa-
claims the $155 as a credit, then reports the tion on how to figure your gross income from Gross income from farming is the total of the
$155 as other income on line 8 of 2023 Sched- farming. See also Percentage From Farming, following amounts from your tax return.
ule F. later, for information on how to determine the • Gross farm income from Schedule F (Form
percentage of your gross income from farming. 1040).
• Gross farm rental income from Form 4835.
Gross Income • Gross farm income from Schedule E (Form
1040), Parts II and III.
• Gains from the sale of livestock used for
Gross income is all income you receive in the draft, breeding, sport, or dairy purposes re-
form of money, goods, property, and services ported on Form 4797.
15. that is not exempt from income tax. On a joint • Gains from the sale of depreciable farm
return, you must add your spouse's gross in- equipment reported on Form 4797.
come to your gross income. To decide whether
two-thirds of your gross income was from farm- For more information about income from
Estimated Tax ing, use as your gross income the total of the farming, see chapter 3.
following income (not loss) amounts from your
tax return. Farm income does not include:
Introduction • Wages, salaries, tips, etc. !
• Taxable interest. CAUTION
Estimated tax is the method used to pay tax on • Ordinary dividends. • Wages you receive as a farm employee,
income that is not subject to withholding. See • Taxable refunds, credits, or offsets of state • Income you receive from contract grain
Pub. 505 for the general rules and requirements and local income taxes. harvesting and hauling with workers and
for paying estimated tax. If you are a qualified • Gross business income from Schedule C machines you furnish, and
farmer, defined below, you are subject to the (Form 1040). • Gains you receive from the sale of farm-
special rules covered in this chapter for paying • Capital gains from Schedule D (Form land.
estimated tax. 1040). Losses are not netted against
gains.
Topics • Gains on sales of business property from Percentage From Farming
This chapter discusses: Form 4797.
• Taxable IRA distributions, pensions, annui- Figure your gross income from all sources, dis-
• Special estimated tax rules for qualified ties, and social security benefits. cussed earlier. Then, figure your gross income
farmers • Gross rental income from Schedule E from farming, discussed earlier. Divide your
• Estimated tax penalty (Form 1040). farm gross income by your total gross income to
• Gross royalty income from Schedule E determine the percentage of gross income from
(Form 1040). farming.
Useful Items • Taxable net income from an estate or trust
You may want to see: reported on Schedule E (Form 1040). Example 1. You had the following total
• Income from a Real Estate Mortgage In- gross income and farm gross income amounts
Publication vestment Conduit reported on Schedule E in 2023.
(Form 1040).
•
505 505 Tax Withholding and Estimated Tax Gross farm rental income from Form 4835. Gross Income
Form (and Instructions) • Gross farm income from Schedule F (Form
1040). Total Farm
1040 1040 U.S. Individual Income Tax Return • Your distributive share of gross income Taxable interest . . . . . . . . . $3,000
from a partnership, or limited liability com- Dividends . . . . . . . . . . . . . 500
1040-SR 1040-SR U.S. Tax Return for Seniors pany treated as a partnership, from Sched- Rental income (Sch E) . . . . 41,500
1040-ES 1040-ES Estimated Tax for Individuals ule K-1 (Form 1065). Farm income (Sch F) . . . . . 75,000 $75,000
• Your pro rata share of gross income from Gain (Form 4797) . . . . . . . 5,000 5,000
2210-F 2210-F Underpayment of Estimated Tax an S corporation, from Schedule K-1 (Form Total. . . . . . . . . . . . $125,000 $80,000
by Farmers and Fishermen 1120-S).
• Unemployment compensation. Schedule D showed gain from the sale of
See chapter 16 for information about getting • Other income not included with any of the dairy cows carried over from Form 4797
publications and forms. items listed above. ($5,000) in addition to a loss from the sale of
The calculation of farm income for soil corporate stock ($2,000). However, that loss is
Special Estimated Tax TIP and water conservation expenses dif- not netted against the gain to figure your total
fers from the calculations for income gross income or gross farm income. Your gross
Rules for Qualified averaging and estimated tax payments. See In- farm income is 64% of your total gross income
come Averaging for Farmers and Estimated ($80,000 ÷ $125,000 = 0.64). Because your
Farmers Tax, earlier. gross farm income is less than two-thirds of
your total gross income, you are not a qualified
Special rules apply to the payment of estimated farmer and the general estimated tax rules ap-
tax by individuals who are qualified farmers. If Gross Income From Farming ply.
you are not a qualified farmer, as defined next,
see Pub. 505 for the estimated tax rules that ap- Gross income from farming is income from culti-
ply. vating the soil or raising agricultural commodi-
ties. It includes the following amounts.
Qualified Farmer • Income from operating a stock, dairy, poul-
try, bee, fruit, or truck farm.
An individual is a qualified farmer for 2023 if at • Income from a plantation, ranch, nursery,
least two-thirds of their gross income from all range, orchard, or oyster bed.
sources for 2022 or 2023 was from farming. See • Crop shares for the use of your land.

Page 88 Chapter 15 Estimated Tax

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Figure 15-1. Estimated Tax for Farmers                                                                     determine if you owe a penalty. See the Instruc-
                                                                                                           tions for Form 2210-F. Also, see the Instructions 
                                        Start Here:                                                        for  Form  2210-F  for  information  on  how  to  re-
                                Will you owe $1,000 or                                                     quest a waiver of the penalty.
                         No     more after subtracting 
                                income tax withholding                                                             If you receive a penalty notice, do not 
                                and refundable credits                                                        !    ignore  it,  even  if  you  think  it  is  wrong. 
                                from your total tax? (Do                                                   CAUTION You  may  get  a  penalty  notice  even  if 
                                not subtract any                                                           you  filed  your  return  on  time,  attached  Form 
                                estimated tax payments.)                                                   2210-F, and met the gross income from farming 
                                        Yes                                                                requirement. If you receive a penalty notice for 
                                                                                                           underpaying  estimated  tax  and  you  think  it  is 
             Yes  Was at least 662⁄3%        No                                                            wrong,  write  to  the  address  on  the  notice.  Ex-
                  of all your gross                     Follow the general                                 plain why you think the notice is wrong. Include 
                  income in 2022 or                     estimated tax rules.                               a  computation  like  the  one  in Example  1  (ear-
                  2023 from farming?                                                                       lier),  showing  that  you  met  the  gross  income 
                                                                                                           from farming requirement.
  Will your 2023        Will your 2023
  income tax            income tax                      Will you le your     You must pay 
  withholding and No    withholding and      No         income tax         No your estimated 
  credits be at         credits be at                   return and pay        tax (your 
  least 662⁄3% of       least 100% of                   the tax in full by    required annual 
  the tax shown         the tax shown                   March 1, 2024?        payment) by 
  on your 2023          on your 2022                                          January 15,                  16.
  return?               return?                                               2024.
         Yes                                 Yes                Yes

             You do not have to                                                                            How To Get Tax 
             pay estimated tax.
                                                                                                           Help
Note. See Special Rules for Qualiﬁed Farmers, later, for a detailed description of the special             If  you  have  questions  about  a  tax  issue;  need 
estimated tax rules that apply to qualied farmers.
                                                                                                           help preparing your tax return; or want to down-
                                                                                                           load free publications, forms, or instructions, go 
Special Rules for Qualified                             and your farm gross income $95,000 ($90,000        to IRS.gov to find resources that can help you 
                                                        + $5,000). You qualify to use the special estima-  right away.
Farmers                                                 ted  tax  rules  for  qualified  farmers,  because 
The following special estimated tax rules apply         67.9% (at least two-thirds) of your gross income   Preparing  and  filing  your  tax  return.   After 
if you are a qualified farmer for 2023.                 is from farming ($95,000 ÷ $140,000 = 0.679).      receiving  all  your  wage  and  earnings  state-
                                                                                                           ments (Forms W-2, W-2G, 1099-R, 1099-MISC, 
• You do not have to pay estimated tax if you                   If  your  farm  income  falls  below       1099-NEC, etc.); unemployment compensation 
  file your 2023 tax return and pay all the tax         !       two-thirds  for  the  previous  year  and  statements  (by  mail  or  in  a  digital  format)  or 
  due by March 1, 2024.                                 CAUTION current  year,  you  may  no  longer  meet 
                                                                                                           other  government  payment  statements  (Form 
• You do not have to pay estimated tax if               the Qualified Farmer Designation.                  1099-G); and interest, dividend, and retirement 
  your 2023 income tax withholding (includ-                                                                statements  from  banks  and  investment  firms 
  ing any amount applied to your 2023 esti-                                                                (Forms  1099),  you  have  several  options  to 
  mated tax from your 2022 return) will be at           Required Annual Payment
  least 66 / % (0.6667) of the total tax 2 3                                                               choose from to prepare and file your tax return. 
  shown on your 2023 tax return or 100% of              If you are a qualified farmer and must pay esti-   You  can  prepare  the  tax  return  yourself,  see  if 
  the total tax shown on your 2022 return.              mated tax for 2023, use the worksheet on Form      you qualify for free tax preparation, or hire a tax 
• If you must pay estimated tax, you are re-            1040-ES to figure the amount of your required      professional to prepare your return.
  quired to make only one estimated tax pay-            annual  payment.  Apply  the  following  special 
  ment (your required annual payment) by                rules for qualified farmers to the worksheet.      Free  options  for  tax  preparation.   Go  to 
  January 15, 2024, using special rules to              •   On line 12a, multiply line 11c by 66 / % 2 3   IRS.gov  to  see  your  options  for  preparing  and 
  figure the amount of the payment. See Re-                 (0.6667).                                      filing your return online or in your local commun-
  quired Annual Payment next for details.               •   On line 12b, enter 100% of the tax shown       ity, if you qualify, which include the following.
                                                            on your 2022 tax return regardless of the      •  Free File. This program lets you prepare 
Figure 15-1 presents an overview of the spe-                amount of your adjusted gross income. For         and file your federal individual income tax 
cial  estimated  tax  rules  that  apply  to  qualified     this purpose, the “tax shown on your 2022         return for free using brand-name tax-prep-
farmers.                                                    tax return” is the amount on line 16 of your      aration-and-filing software or Free File filla-
                                                            2022 return modified by certain adjust-           ble forms. However, state tax preparation 
Example  2.  Assume  the  same  facts  as  in               ments. For more information, see chapter 2        may not be available through Free File. Go 
Example  1.  Your  gross  farm  income  is  64%  of         of Pub. 505.                                      to IRS.gov/FreeFile to see if you qualify for 
your  total  income.  Therefore,  based  on  your                                                             free online federal tax preparation, e-filing, 
2023 income, you don’t qualify to use the spe-                                                                and direct deposit or payment options.
cial  estimated  tax  rules  for  qualified  farmers.   Estimated Tax Penalty                              •  VITA. The Volunteer Income Tax Assis-
However, you do qualify if at least two-thirds of                                                             tance (VITA) program offers free tax help to 
your 2022 gross income was from farming.                for 2023                                              people with low-to-moderate incomes, per-
                                                                                                              sons with disabilities, and limited-Eng-
Example  3.  Assume  the  same  facts  as  in           If you do not pay all your required estimated tax     lish-speaking taxpayers who need help 
Example 1, except that your farm income from            for 2023 by January 15, 2024, or file your 2023       preparing their own tax returns. Go to 
Schedule  F  was  $90,000  instead  of  $75,000.        return and pay any tax due by March 1, 2024,          IRS.gov/VITA, download the free IRS2Go 
This  made  your  total  gross  income  $140,000        you  may  owe  a  penalty.  Use  Form  2210-F  to     app, or call 800-906-9887 for information 
($3,000 + $500 + $41,500 + $90,000 + $5,000)                                                                  on free tax return preparation.
                                                                                                           Chapter 16 How To Get Tax Help    Page 89

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• TCE. The Tax Counseling for the Elderly return, choose that preparer wisely. A paid tax accessibility products and services available in
(TCE) program offers free tax help for all preparer is: alternative media formats (for example, braille,
taxpayers, particularly those who are 60 • Primarily responsible for the overall sub- large print, audio, etc.). The Accessibility Help-
years of age and older. TCE volunteers stantive accuracy of your return, line does not have access to your IRS account.
specialize in answering questions about • Required to sign the return, and For help with tax law, refunds, or account-rela-
pensions and retirement-related issues • Required to include their preparer tax iden- ted issues, go to IRS.gov/LetUsHelp.
unique to seniors. Go to IRS.gov/TCE, tification number (PTIN).
download the free IRS2Go app, or call Note. Form 9000, Alternative Media Prefer-
888-227-7669 for information on free tax Although the tax preparer always signs the re- ence, or Form 9000(SP) allows you to elect to
return preparation. turn, you're ultimately responsible for providing receive certain types of written correspondence
• MilTax. Members of the U.S. Armed all the information required for the preparer to in the following formats.
Forces and qualified veterans may use Mil- accurately prepare your return. Anyone paid to • Standard Print.
Tax, a free tax service offered by the De- prepare tax returns for others should have a
partment of Defense through Military One- thorough understanding of tax matters. For • Large Print.
Source. For more information, go to more information on how to choose a tax pre- • Braille.
MilitaryOneSource MilitaryOneSource.mil/ ( parer, go to Tips for Choosing a Tax Preparer on
MilTax). IRS.gov. • Audio (MP3).
Also, the IRS offers Free Fillable Forms, • Plain Text File (TXT).
which can be completed online and then Coronavirus. Go to IRS.gov/Coronavirus for • Braille Ready File (BRF).
filed electronically regardless of income. links to information on the impact of the corona-
virus, as well as tax relief available for individu- Disasters. Go to Disaster Assistance and
Using online tools to help prepare your re- als and families, small and large businesses, Emergency Relief for Individuals and
turn. Go to IRS.gov/Tools for the following. and tax-exempt organizations. Businesses to review the available disaster tax
• The Earned Income Tax Credit Assistant relief.
(IRS.gov/EITCAssistant) determines if Employers can register to use Business
you’re eligible for the earned income credit Services Online. The Social Security Adminis- Getting tax forms and publications. Go to
(EIC). tration (SSA) offers online service at SSA.gov/ IRS.gov/Forms to view, download, or print all
• The Online EIN Application IRS.gov/EIN ( ) employer for fast, free, and secure online W-2 the forms, instructions, and publications you
helps you get an employer identification filing options to CPAs, accountants, enrolled may need. Or, you can go to IRS.gov/
number (EIN) at no cost. agents, and individuals who process Form W-2, OrderForms to place an order.
• The Tax Withholding Estimator IRS.gov/ ( Wage and Tax Statement, and Form W-2c, Cor-
W4app) makes it easier for you to estimate rected Wage and Tax Statement. Getting tax publications and instructions in
the federal income tax you want your em- eBook format. You can also download and
ployer to withhold from your paycheck. IRS social media. Go to IRS.gov/SocialMedia view popular tax publications and instructions
This is tax withholding. See how your with- to see the various social media tools the IRS (including the Instructions for Form 1040) on
holding affects your refund, take-home pay, uses to share the latest information on tax mobile devices as eBooks at IRS.gov/eBooks.
or tax due. changes, scam alerts, initiatives, products, and
services. At the IRS, privacy and security are Note. IRS eBooks have been tested using
• The First-Time Homebuyer Credit Account our highest priority. We use these tools to share Apple's iBooks for iPad. Our eBooks haven’t
Look-up IRS.gov/HomeBuyer ( ) tool pro- public information with you. Don’t post your so- been tested on other dedicated eBook readers,
vides information on your repayments and cial security number (SSN) or other confidential and eBook functionality may not operate as in-
account balance. information on social media sites. Always pro- tended.
• The Sales Tax Deduction Calculator tect your identity when using any social net-
(IRS.gov/SalesTax) figures the amount you working site. Access your online account (individual tax-
can claim if you itemize deductions on The following IRS YouTube channels provide payers only). Go to IRS.gov/Account to se-
Schedule A (Form 1040). short, informative videos on various tax-related curely access information about your federal tax
Getting answers to your tax ques- topics in English, Spanish, and ASL. account.
tions. On IRS.gov, you can get • Youtube.com/irsvideos. • View the amount you owe and a break-
up-to-date information on current • Youtube.com/irsvideosmultilingua. down by tax year.
events and changes in tax law. • Youtube.com/irsvideosASL. • See payment plan details or apply for a
new payment plan.
• IRS.gov/Help: A variety of tools to help you Watching IRS videos. The IRS Video portal • Make a payment or view 5 years of pay-
get answers to some of the most common (IRSVideos.gov) contains video and audio pre- ment history and any pending or sched-
tax questions. sentations for individuals, small businesses, uled payments.
• IRS.gov/ITA: The Interactive Tax Assistant, and tax professionals. • Access your tax records, including key
a tool that will ask you questions and, data from your most recent tax return, and
based on your input, provide answers on a Online tax information in other languages. transcripts.
number of tax law topics. You can find information on IRS.gov/ • View digital copies of select notices from
• IRS.gov/Forms: Find forms, instructions, MyLanguage if English isn’t your native lan- the IRS.
and publications. You will find details on guage. • Approve or reject authorization requests
the most recent tax changes and interac- from tax professionals.
tive links to help you find answers to your Free Over-the-Phone Interpreter (OPI) Serv- • View your address on file or manage your
questions. ice. The IRS is committed to serving our multi- communication preferences.
• You may also be able to access tax law in- lingual customers by offering OPI services. The
formation in your electronic filing software. OPI Service is a federally funded program and Tax Pro Account. This tool lets your tax pro-
is available at Taxpayer Assistance Centers fessional submit an authorization request to ac-
(TACs), other IRS offices, and every VITA/TCE cess your individual taxpayer IRS online
Need someone to prepare your tax return? return site. The OPI Service is accessible in account. For more information, go to IRS.gov/
There are various types of tax return preparers, more than 350 languages. TaxProAccount.
including enrolled agents, certified public ac-
countants (CPAs), accountants, and many oth- Accessibility Helpline available for taxpay- Using direct deposit. The fastest way to re-
ers who don’t have professional credentials. If ers with disabilities. Taxpayers who need in- ceive a tax refund is to file electronically and
you choose to have someone prepare your tax formation about accessibility services can call choose direct deposit, which securely and elec-
833-690-0598. The Accessibility Helpline can tronically transfers your refund directly into your
answer questions related to current and future
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financial account. Direct deposit also avoids the • Electronic Funds Withdrawal: Schedule a IRS.gov without visiting an IRS TAC. Go to
possibility that your check could be lost, stolen, payment when filing your federal taxes us- IRS.gov/LetUsHelp for the topics people ask
destroyed, or returned undeliverable to the IRS. ing tax return preparation software or about most. If you still need help, IRS TACs pro-
Eight in 10 taxpayers use direct deposit to re- through a tax professional. vide tax help when a tax issue can’t be handled
ceive their refunds. If you don’t have a bank ac- • Electronic Federal Tax Payment System: online or by phone. All TACs now provide serv-
count, go to IRS.gov/DirectDeposit for more in- Best option for businesses. Enrollment is ice by appointment, so you’ll know in advance
formation on where to find a bank or credit required. that you can get the service you need without
union that can open an account online. • Check or Money Order: Mail your payment long wait times. Before you visit, go to IRS.gov/
to the address listed on the notice or in- TACLocator to find the nearest TAC and to
Getting a transcript of your return. The structions. check hours, available services, and appoint-
quickest way to get a copy of your tax transcript • Cash: You may be able to pay your taxes ment options. Or, on the IRS2Go app, under the
is to go to IRS.gov/Transcripts. Click on either with cash at a participating retail store. Stay Connected tab, choose the Contact Us op-
“Get Transcript Online” or “Get Transcript by • Same-Day Wire: You may be able to do tion and click on “Local Offices.”
Mail” to order a free copy of your transcript. If same-day wire from your financial institu-
you prefer, you can order your transcript by call- tion. Contact your financial institution for
ing 800-908-9946. availability, cost, and time frames. The Taxpayer Advocate
Reporting and resolving your tax-related Note. The IRS uses the latest encryption Service (TAS) Is Here To
identity theft issues. technology to ensure that the electronic pay-
• Tax-related identity theft happens when ments you make online, by phone, or from a Help You
someone steals your personal information mobile device using the IRS2Go app are safe
to commit tax fraud. Your taxes can be af- and secure. Paying electronically is quick, easy, What Is TAS?
fected if your SSN is used to file a fraudu- and faster than mailing in a check or money or-
lent return or to claim a refund or credit. der. TAS is an independent organization within the
• The IRS doesn’t initiate contact with tax- IRS that helps taxpayers and protects taxpayer
payers by email, text messages (including What if I can’t pay now? Go to IRS.gov/ rights. Their job is to ensure that every taxpayer
shortened links), telephone calls, or social Payments for more information about your op- is treated fairly and that you know and under-
media channels to request or verify per- tions. stand your rights under the Taxpayer Bill of
sonal or financial information. This includes • Apply for an online payment agreement Rights.
requests for personal identification num- (IRS.gov/OPA) to meet your tax obligation
bers (PINs), passwords, or similar informa- in monthly installments if you can’t pay
tion for credit cards, banks, or other finan- your taxes in full today. Once you complete How Can You Learn About Your
cial accounts. the online process, you will receive imme- Taxpayer Rights?
• Go to IRS.gov/IdentityTheft, the IRS Iden- diate notification of whether your agree-
tity Theft Central webpage, for information ment has been approved. The Taxpayer Bill of Rights describes 10 basic
on identity theft and data security protec- • Use the Offer in Compromise Pre-Qualifier rights that all taxpayers have when dealing with
tion for taxpayers, tax professionals, and to see if you can settle your tax debt for the IRS. Go to TaxpayerAdvocate.IRS.gov to
businesses. If your SSN has been lost or less than the full amount you owe. For help you understand what these rights mean to
stolen or you suspect you’re a victim of more information on the Offer in Compro- you and how they apply. These are your rights.
tax-related identity theft, you can learn mise program, go to IRS.gov/OIC. Know them. Use them.
what steps you should take.
• Get an Identity Protection PIN (IP PIN). IP Filing an amended return. Go to IRS.gov/ What Can TAS Do for You?
PINs are six-digit numbers assigned to tax- Form1040X for information and updates.
payers to help prevent the misuse of their Checking the status of your amended re- TAS can help you resolve problems that you
SSNs on fraudulent federal income tax re- turn. Go to IRS.gov/WMAR to track the status can’t resolve with the IRS. And their service is
turns. When you have an IP PIN, it pre- of Form 1040-X amended returns. free. If you qualify for their assistance, you will
vents someone else from filing a tax return be assigned to one advocate who will work with
with your SSN. To learn more, go to Note. It can take up to 3 weeks from the you throughout the process and will do every-
IRS.gov/IPPIN. date you filed your amended return for it to thing possible to resolve your issue. TAS can
show up in our system, and processing it can help you if:
Ways to check on the status of your refund. take up to 16 weeks. • Your problem is causing financial difficulty
• Go to IRS.gov/Refunds. for you, your family, or your business;
• Download the official IRS2Go app to your Understanding an IRS notice or letter • You face (or your business is facing) an im-
mobile device to check your refund status. you’ve received. Go to IRS.gov/Notices to find mediate threat of adverse action; or
• Call the automated refund hotline at additional information about responding to an • You’ve tried repeatedly to contact the IRS
800-829-1954. IRS notice or letter. but no one has responded, or the IRS
hasn’t responded by the date promised.
Note. The IRS can’t issue refunds before Note. You can use Schedule LEP (Form
mid-February for returns that claimed the EIC or 1040), Request for Change in Language Prefer- How Can You Reach TAS?
the additional child tax credit (ACTC). This ap- ence, to state a preference to receive notices,
plies to the entire refund, not just the portion as- letters, or other written communications from TAS has offices in every state, the District of
sociated with these credits. the IRS in an alternative language. You may not Columbia, and Puerto Rico. Your local advo-
immediately receive written communications in cate’s number is in your local directory and at
Making a tax payment. Go to IRS.gov/ the requested language. The IRS’s commitment TaxpayerAdvocate.IRS.gov/Contact-Us. You
Payments for information on how to make a pay- to LEP taxpayers is part of a multi-year timeline can also call them at 877-777-4778.
ment using any of the following options. that is scheduled to begin providing translations
• IRS Direct Pay: Pay your individual tax bill in 2023. You will continue to receive communi-
or estimated tax payment directly from your cations, including notices and letters, in English How Else Does TAS Help
checking or savings account at no cost to until they are translated to your preferred lan- Taxpayers?
you. guage.
• Debit or Credit Card: Choose an approved TAS works to resolve large-scale problems that
payment processor to pay online or by Contacting your local IRS office. Keep in affect many taxpayers. If you know of one of
phone. mind, many questions can be answered on these broad issues, report it to them at IRS.gov/
SAMS.
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TAS for Tax Professionals Low Income Taxpayer Clinics speak English as a second language. Services
are offered for free or a small fee for eligible tax-
TAS can provide a variety of information for tax (LITCs) payers. To find an LITC near you, go to
professionals, including tax law updates and LITCs are independent from the IRS. LITCs rep- TaxpayerAdvocate.IRS.gov/about-us/Low-
guidance, TAS programs, and ways to let TAS resent individuals whose income is below a cer- Income-Taxpayer-Clinics-LITC or see IRS Pub.
know about systemic problems you’ve seen in tain level and need to resolve tax problems with 4134, Low Income Taxpayer Clinic List.
your practice. the IRS, such as audits, appeals, and tax collec-
tion disputes. In addition, LITCs can provide in-
formation about taxpayer rights and responsibil-
ities in different languages for individuals who

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                      To help us develop a more useful index, please let us know if you have ideas for index entries.
Index                 See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
                                  Capital assets 51                     Recourse   56                     Off-highway uses   86
A                                 Capital expenses  25                Depletion 46                        Refund    87
Abandonment    56                 Car expenses   24                   Depreciation  43
Accounting method:                Cash method of accounting    6        ADS election  45                 F
  Accrual 7                       Casualties and thefts:                Conservation assets     29       Fair market value (FMV) 64
  Cash  6                           Adjustments to basis  69            Deduction   37                   Family member:
  Change in 9                       Casualty, defined 66                Incorrect amount deducted  39     Business expenses    7
  Crop  9                           Disaster area losses  72            Limit for automobiles   41        Like-kind exchange   50
  Farm inventory  8                 Leased property 69                  Listed property 46                Loss on sale or exchange of 
Accounting periods   6              Livestock 67                        Raised livestock  38                  property 26
Accrual method of accounting    7   Reimbursement   68                  Recapture   46 58 59, ,           Personal-use property  67
Additional Medicare Tax             Reporting gains and losses 74       When to file 39                   Social security coverage   82
  withholding  83                   Theft, defined 67                 Depreciation allowable    39       Farm:
Adjusted basis of assets   33     Certification program for           Depreciation allowed   39           Business expenses    19
Agricultural activity codes,        professional employer             Disaster area losses   72           Business, defined   28
  Schedule F   3                    organizations (PEOs).    3 80,    Disaster payments   12              Defined   28 85, 
Agricultural program              Change in accounting method      9  Disaster relief grants 73           Income averaging   19
  payments   11                   Chickens, purchased     25          Disaster relief payments  73        Rental    28
Agricultural structure,           Christmas trees  26 54,             Disposition of installment          Sale of   55
  defined  40                     Club dues  27                         obligation  63                   Farmer 76
Alternative Depreciation System  Commodity:                           Dispositions  30 31 57, ,          Federal unemployment tax 
  (ADS) 43 45,                      Wages  83                         Drainage tile 29                    (FUTA)    84
Amortization:                     Commodity Credit Corporation        Dyed diesel fuel 85                Fertilizer 14 22, 
  Going into business 48            (CCC):                            Dyed kerosene   85                 Figuring installment sale income:
  Reforestation expenses   48       Loans  11
                                                                                                          Adjusted basis   61
  Section 197 intangibles  48       Market gain  12                   E                                   Adjusted basis and installment 
Assessments:                      Community property    76                                                    sale income (gain on 
  By conservation district 29     Computer, software   38             Easement  18 34, 
  Depreciable property  29        Condemnation   66 70,               Election:                               sale) 61
Assistance (See Tax help)         Conservation:                         ADS depreciation  44 45,          Adjusted basis for installment 
                                                                                                              sale purposes  61
Automobiles, depreciation    41     Cost-sharing exclusion 29           Amortization:                     Amount to report as installment 
                                    District assessments  29            Business start-up costs    48         sale income   61
B                                   Expenses  29                        Reforestation costs     48        Cancellation   61
                                    Plans  29                           Crop method   25                  Contract price   61
Bankruptcy  16                    Conservation Reserve                  Cutting of timber 54              Depreciation recapture 61
Barter income  18                   Program   77                        Deducting conservation            Disposition of installment 
Basis:                            Conservation Reserve Program          expenses      31                      obligation   61
  Involuntary conversion  34        (CRP)  12                           Not excluding cost-sharing        Figuring adjusted basis and 
  Like-kind exchange  35          Constructing assets  32               payments      14                      gross profit percentage for 
  Partner's basis 36              Constructive receipt of income   6    Out of installment method  61         installment sale purposes   61
  Replacement property    71      Contamination  71                     Postponing casualty gain   70     Form 6252   61
  Shareholder's basis 36          Converted wetland   53                Postponing reporting crop         Gross profit 61
Basis of assets:                  Cooperatives, income from   14        insurance proceeds      12        Gross profit percentage  61
  Adjusted basis  33              Cost-sharing exclusion  13            Section 179 expense               Interest income   61
                                                                        deduction     42                  Sale of depreciable property  61
  Allocating to several assets 32 Credits:                            Embryo transplants    32            Selling expenses   61
  Changed to business use    34     Employment   21                   Employer identification             Selling price 61
  Constructing assets 32            Fuel tax 18 87,                     number  3
  Cost  31                          Social security and Medicare   75 Employer identification number      Selling price reduced 61
  Decreases   33                    Social security coverage 75         (EIN)  81                         Transfer due to death 61
  Depreciation 44                   State unemployment tax   84       Endangered species recovery        Foreclosure  56
  Exchanges:                      Crew leaders 82                       expenses    29                   Forestation costs   26
     Like-kind 34                 Crop:                               Environmental contamination     71 Form:
     Nontaxable   34                Destroyed 71                      Estimated tax:                      1099-A    12 56, 
     Partially nontaxable  35       Insurance proceeds    12            Farm gross income    88           1099-C    15 56, 
     Taxable  34                    Method of accounting  9             Gross income   88                 1099-G    12 14, 
  Gifts 35                          Shares 11                           Penalties 89                      1099-NEC    84
  Increases 33                      Unharvested  26 57 77, ,          Exchanges:                          1099-PATR    14
  Real property  31               Cropland, highly erodible  53         Basis:                            1128  6
  Received for services 34                                              Like-kind    34                   2210-F    89
  Uniform capitalization rules 32 D                                     Nontaxable      34                3115  9
Below-market loans   18                                                 Partially nontaxable    35        4136  87
Books and records   4             Damage:                                                                 4562  39
Breeding fees  22                   Casualties and thefts 66            Taxable     34
Business income limit, section      Crop insurance  12                  Like-kind 49                      4797  10 14 49, , 
  179 expense deduction      41     Tree seedlings  70                  Nontaxable   49                   4835  11
Business use of home    23        Debt:                               Excise taxes:                       5213  28
                                    Canceled  15 34 56, ,               Credit  87                        8822  3
C                                   Nonbusiness bad   51                Diesel fuel 85                    8824  49
                                    Nonrecourse  56                     Farming purposes    85            8849  87
Canceled debt  15                   Qualified farm 17                   Home use of fuels   87            940 84
                                                                                                          943 84
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  982  17                              Unstated interest  64                                                Livestock feed  20
  I-9 81                             Insurance   22 23,                M                                   Prizes 18
  SS-4  3 81,                        Intangible property   48          MACRS property:                     Produce  10
  SS-5  75                           Interest:                           Involuntary conversion  45        Property:
  T (Timber)   47                      Expense    21                     Like-kind exchange   45            Changed to business use     34
  W-4   82 83,                       Inventory:                          Nontaxable transfer  46            Received for services    34
  W-4V  11 12,                         Items included   8              Market gain, reporting  12           Repairs and improvements    39
  W-7   75                             Methods of valuation   8        Marketing quota penalties    24      Section 1231   57
Fuel tax credit or refund   18 87,   Involuntary conversions    45 66, Material participation 77            Section 1245   58
                                     Irrigation:                       Meals 24                             Section 1250   59
G                                      Illegal subsidy  18             Membership fees    27                Section 1252   60
Gains:                                 Project   70                    Methods of accounting     6          Section 1255   60
  Section 1231 gains   65                                              Modified ACRS (MACRS):               Tangible personal  40
Gains and losses:                    L                                   ADS election 45                   Property used as a payment:
  Basis of assets  31                Labor hired  21                     Conventions  45                    Examples   64
  Capital assets, defined   51       Landlord participation   77         Depreciation methods    45         Exception  64
  Casualty 67 70,                    Lease or purchase    23             Exchange  45                      Publications (See Tax help)
  Installment sales    60            Life tenant (See Term interests)    Figuring the deduction  45
  Livestock  53                      Like-kind exchanges    34 49,       Involuntary conversion  45        Q
  Long- or short-term   51           Lime  22                            Nontaxable transfer  46           Qualified disaster relief 
  Ordinary or capital  51            Limits:                             Property classes  44               payments     73
  Sale of farm 55                      At-risk 27                        Recovery periods  44              Qualified farm debt 17
  Section 1231   57                    Business use of home   23                                           Qualified joint venture  76
  Theft 67 70,                         Capital losses   51             N                                   Qualified small business payroll 
                                                                                                            tax credit for increasing 
  Timber  54                           Conservation expenses    30     National Center for Missing &        research activities   2 79, 
General asset accounts      46         Depreciation:                     Exploited Children   4
Gifts 11 26 35 51, , ,                    Business-use    46           Net operating losses:               R
Going into business    48              Excluded farm debt   17           Net operating loss (NOL)   69
Grants, disaster relief   73           Farm losses    27               New hire reporting  82              Recapture:
                                       Loss of personal-use            Noncapital asset  52                 Amortization 59
H                                         property    69               Nontaxable exchanges    49           Basis reductions 17
                                       Not-for-profit farming 27       Nontaxable transfer of MACRS         Certain depreciation  18
Health insurance deduction     23      Passive activity  27              property  46                       Cost-sharing payments    14
Highway use tax   22                   Percentage depletion   48       Not-for-profit farming 27            Depreciation   46 58, 
Holding period   51 53,                Prepaid farm supplies  20                                            Section 1245 property    58
Home  65                               Reforestation costs  48         O                                    Section 1250 property    59
Horticultural structure   40           Section 179 expense deduction:                                       Section 179 expense 
                                          Automobile    41             Organizational costs  25             deduction      42
I                                         Business income     41                                            Section 179 GO Zone 
Illegal irrigation subsidy  18            Dollar  41                   P                                    property     42
Important dates   80                   Time to keep records   5        Partners, limited 76                 Special depreciation 
                                                                                                            allowance      43
Improvements    13                   Listed property:                  Partners, retired 77                Recordkeeping   4 24, 
Income:                                Defined   46                    Partners, spouses  76               Records on depreciable 
  Accounting for  6                    Passenger automobile   46       Partnership 76                       property   58
  Accrual method of accounting     7   Rules   46                      Passenger automobile    46          Reforestation costs 26 48, 
  Canceled debt excluded     15      Livestock   57                    Pasture income  11                  Refund:
  From farming   9 30 88, ,            Casualty and theft losses 67    Patronage dividends   14             Deduction taken  18
  Gross  88                            Crop shares    11               Payments considered received:        Fuel tax 18 87, 
  Not-for-profit farming  27           Depreciation   38                 Bond   63                         Reimbursements:
  Pasture  11                          Diseased   70                     Buyer assumes mortgage     63      Casualties and thefts   33 66 68, , 
  Schedule F   9                       Feed assistance   13              Buyer assumes other debts   63     Deduction taken  18
  Withholding of tax   83              Immature   38                     Buyer pays seller’s expenses   63  Expenses   20
Income averaging (See Farm:            Losses    26 53,                  Buyer’s note 63                    Feed assistance  13
  Income averaging)                    Purchased    53                   Debt not payable on demand     63  Real estate taxes  31
Incorrect amount of depreciation       Raised    53                      Mortgage less than basis   63      Reforestation expenses    48
  deducted    39                       Sale of   10 53,                  Mortgage more than basis   63      To employees   24
Individual taxpayer identification     Unit-livestock-price, inventory   Property used as a payment     63 Related parties 61
  number (ITIN)    75                     valuation   8                  Sale to a related person 63       Related persons  7 26 35 50 71, , , , 
Inherited property     36              Used in a farm business   53      Third-party note 63               Rental income 11
Insolvency 16                          Weather-related sales  10 70,     Trading property for like-kind    Rented property, 
Installment method:                  Loans 11 25,                        property    63                     improvements     39
  Electing out of the installment    Losses:                           Payments received   63              Repairs 21
      method   61                      At-risk limits 27               Penalties:                          Repairs and improvements     39
  Inventory (See More information)     Casualty   66                     Estimated tax 89                  Repayment of income     7
  Revoking the election (See More      Disaster areas   72               Returns  89                       Replacement:
      information)                     Farming   67                      Trust fund recovery 84             Period  72
  Sale at a loss 61                    Growing crops    26             Per-unit retain certificates 15      Property  71
  When to elect out    61              Hobby farming    27             Personal expenses   26              Repossessions   56
Installment sales:                     Livestock  53 70,               Placed in service  38 44,           Right-of-way income    18
  Electing out 61                      Nondeductible    26             Postponing casualty gain    70
  Example  64                          Theft 66                        Prepaid expense:                    S
  Farm, sale of  60                  Lost income payments     76         Advance premiums    22
  Installment obligation  60         Lost property  67                   Extends useful life 7             Sale of home  55
  Related parties  60
                                                                         Farm supplies   20
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Section 179 expense            Reporting 79                                                        Timber 26 47 54, , 
deduction  39                  Self-employment tax rate  74     T                                  Trade-in 35
How to elect 42                Share farming 75                 Tangible personal property    40   Travel expenses 24
Listed property 46             Who must pay  75                 Tax help 89                        Truck expenses  24
Qualifying property 40         Selling price reduced 62         Tax preparation fees    25         Trust fund recovery penalty  84
Recapture 42                   Settlement costs (fees) 32       Tax shelter:
Self-employed health           Social security and Medicare:      At-risk limits 27                U
insurance  23                  Credits of coverage   75           Defined   7                      Uniform capitalization rules:
Self-employed health insurance Withholding of tax 82            Tax-free exchanges  49              Basis of assets   32
deduction  77                  Social security number (SSN)  75 Taxes:                              Inventory  8
Self-employment (SE) tax:      Software, computer 38              Credits and Refunds   85
Community property     76      Soil:                              Federal use    22                W
Deduction 79                   Conservation 29                    General   22                     Wages and salaries   77
How to pay 75                  Contamination 71                   Self-employment   74             Water conservation   29
Landlord participation 77      Special depreciation allowance:    State and federal 22             Water well 29 44, 
Material participation 77      How to elect not to claim 43       State and local general sales 22 Weather-related sales, 
Maximum net earnings     2 74, Recapture 43                       Withholding    82 83,             livestock  10 70, 
earnings     77
Methods for figuring net       Standard mileage rate 24         Telephone expense   24             Withholding:
Optional method 78             Start-up costs for businesses 25 Tenant house expenses      24       Income tax  83
Regular method  78                                              Term interests   38                 Social security and Medicare 
Rental income 77                                                Theft losses  66                    tax     82
                                                                Third-party note 64

Publication 225 (2023)                                                                                                       Page 95

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