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            Publication 225
            Cat. No. 11049L                                                    Contents
                                                                               Introduction . . . . . . . . . . . . . . . . . . 1
Department 
of the      Farmer's                                                           What's New for 2022 . . . . . . . . . . . . . 2
Treasury
Internal                                                                       What's New for 2023 . . . . . . . . . . . . . 3
Revenue     Tax Guide
Service                                                                        Reminders . . . . . . . . . . . . . . . . . . . 3
                                                                               Chapter  1.  Importance of Records . . . . 5
            For use in preparing                                               Chapter  2.  Accounting Methods             . . . . . 6

                                                                               Chapter  3.  Farm Income . . . . . . . . .            10
            2022 Returns
                                                                               Chapter  4.  Farm 
                                                                                   Business Expenses             . . . . . . . . .   20
            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 . . . . . . .               29
            gratefully acknowledged. 
                                                                               Chapter  6.  Basis of Assets          . . . . . . .   32
                                                                               Chapter  7.  Depreciation, Depletion, 
                                                                                   and Amortization . . . . . . . . . . .            37
                                                                               Chapter  8.  Gains and Losses . . . . . .             50
                                                                               Chapter  9.  Dispositions of 
                                                                                   Property Used in Farming              . . . . .   58
                                                                               Chapter  10.  Installment Sales           . . . . .   61
                                                                               Chapter  11.  Casualties, Thefts, and 
                                                                                   Condemnations . . . . . . . . . . . .             67
                                                                               Chapter  12.  Self-Employment Tax . . .               75
                                                                               Chapter  13.  Employment Taxes              . . . .   80
                                                                               Chapter  14.  Fuel Excise Tax 
                                                                                   Credits and Refunds . . . . . . . . .             86
                                                                               Chapter  15.  Estimated Tax           . . . . . . .   89
                                                                               Chapter  16.  How To Get Tax Help             . . .   91
                                                                               Index       . . . . . . . . . . . . . . . . . . . . . 94

                                                                               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, 
              • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)          and  court  decisions.  However,  the  information 
              • IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt)    given does not cover every situation and is not 
                                                                               intended  to  replace  the  law  or  change  its 

Oct 14, 2022

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meaning. This publication covers subjects on Treasury Inspector General for Tax Admin- 2022, and before January 1, 2024. See chap-
which a court may have rendered a decision istration (TIGTA). If you want to confidentially ter 7 for more information.
more favorable to taxpayers than the interpreta- report misconduct, waste, fraud, or abuse by an Maximum net earnings. The maximum net
tion by the IRS. Until these differing interpreta- IRS employee, you can visit TIGTA. You can re- self-employment earnings subject to the social
tions are resolved by higher court decisions, or main anonymous. security part (12.4%) of the self-employment tax
in some other way, this publication will continue is $147,000 for 2022, up from $142,800 for
to present the interpretation by the IRS. Farm tax classes. Many state Cooperative 2021. There is no maximum limit on earnings
Extension Services conduct farm tax work- subject to the Medicare part (2.9%) or, if appli-
The IRS Mission. Provide America's taxpay- shops in conjunction with the IRS. Contact your cable, the Additional Medicare Tax (0.9%). See
ers top-quality service by helping them under- county or regional extension office for more in- chapter 12.
stand and meet their tax responsibilities and en- formation.
force the tax law with integrity and fairness to Special rules for qualified disaster losses.
all. Rural Tax Education website. The Rural Tax Personal casualty losses that are qualified dis-
Education website is a source for information aster losses attributable to a major disaster de-
Comments and suggestions. We welcome concerning agriculturally related income and clared by the President under section 401 of the
your comments about this publication and sug- deductions and self-employment tax. The web- Stafford Act may be claimed as a qualified dis-
gestions for future editions. site is available for farmers and ranchers, other aster loss on Form 4684, Casualties and Thefts,
You can send us comments through agricultural producers, Extension educators, for the year in which the loss was sustained. A
IRS.gov/FormComments. Or, you can write to and anyone interested in learning about the tax qualified disaster loss is an individual's casualty
the Internal Revenue Service, Tax Forms and side of the agricultural community. Members of or theft loss of personal-use property that is at-
Publications, 1111 Constitution Ave. NW, the National Farm Income Tax Extension Com- tributable to a major disaster that was declared
IR-6526, Washington, DC 20224. mittee are contributors to the website, and the by the President during the period between
Although we can’t respond individually to website is hosted by Utah State University Co- January 1, 2020, and February 25, 2021. Also,
each comment received, we do appreciate your operative Extension. You can visit the website this disaster must have an incident period that
feedback and will consider your comments and at ruraltax.org. began on or after December 28, 2019, or on or
suggestions as we revise our tax forms, instruc- before December 27, 2020, and must have
tions, and publications. Don’t send tax ques- ended no later than January 26, 2021. The defi-
tions, tax returns, or payments to the above ad- nition of a qualified disaster loss does not ex-
dress. Future Developments tend to any major disaster which has been de-
clared only by reason of COVID-19.
Getting answers to your tax questions. The IRS has created a page on IRS.gov for See Disaster Area Losses, later, and Pub.
If you have a tax question not answered by this information about Pub. 225 at 547, Casualties, Disasters and Thefts, for more
publication or the How To Get Tax Help section IRS.gov/Pub225. Information about recent information on the special relief. Also, see
at the end of this publication, go to the IRS In- developments affecting Pub. 225 will be posted IRS.gov/DisasterTaxRelief for more informa-
teractive Tax Assistant page at IRS.gov/ on that page. tion.
Help/ITA where you can find topics by using the Disaster losses. Section D of Form 4684 may
search feature or viewing the categories listed. be used to make an election (or revoke a prior
Getting tax forms, instructions, and pub- What's New for 2022 election) to deduct a loss attributable to a feder-
lications. Go to IRS.gov/Forms to download ally declared disaster and that occurred in a
current and prior-year forms, instructions, and The following items highlight a number of federally declared disaster area in the tax year
publications. administrative and tax law changes for 2022. immediately preceding the tax year the loss
They are discussed in more detail throughout was sustained. See Pub. 547 for more informa-
Ordering tax forms, instructions, and this publication. tion about disaster losses.
publications. Go to IRS.gov/OrderForms to Standard mileage rate. The business stand- Limitation on personal casualty and theft
order current forms, instructions, and publica- ard mileage rate from January 1, 2022, to June losses. Personal casualty and theft losses of
tions; call 800-829-3676 to order prior-year 30, 2022, is 58.5 cents per business mile. The an individual are subject to special rules for
forms and instructions. The IRS will process business standard mileage rate from July 1, those personal casualty and theft losses attrib-
your order for forms and publications as soon 2022, to December 31, 2022, is 62.5 cents per utable to federally declared disasters that occur
as possible. Don’t resubmit requests you’ve al- business mile. See chapter 4. during tax years beginning after 2017.
ready sent us. You can get forms and publica-
tions faster online. Increased section 179 expense deduction Personal casualty and theft losses are sub-
dollar limits. The maximum amount you can ject to the $100 per casualty and 10% of your
Comments on IRS enforcement actions. elect to deduct for most section 179 property adjusted gross income (AGI) limitations. In this
The Small Business and Agricultural Regulatory you placed in service in 2022 is $1,080,000. case, you reduce your personal casualty gains
Enforcement Ombudsman and 10 Regional This limit is reduced by the amount by which the by any casualty losses not attributable to a fed-
Fairness Boards were established to receive cost of the property placed in service during the erally declared disaster. Net disaster losses
comments from small business about federal tax year exceeds $2,700,000. Also, the maxi- (disaster losses reduced by any excess per-
agency enforcement actions. The Ombudsman mum section 179 expense deduction for sport sonal casualty gains) are subject to the $500
will annually evaluate the enforcement activities utility vehicles placed in service in tax years be- per casualty limitation but not subject to the
of each agency and rate its responsiveness to ginning in 2022 is $27,000. See chapter 7. 10% of your AGI limitation.
small business. If you wish to comment on the Phase down of special depreciation allow- Farming losses for 2018, 2019, and 2020. If
enforcement actions of the IRS, you can: ance. The special depreciation allowance is you previously carried back farming losses for 2
• Call 888-734-3247; phased down to 80% for certain qualified prop- years and limited those losses to 80% of taxa-
• Fax your comments to 202-481-5719; erty acquired after September 27, 2017, and ble income (before any net operating loss
• Write to: placed in service after December 31, 2022, and (NOL) deduction) of the carryback year, you
Office of the National Ombudsman before January 1, 2024 (other than certain long may be able to carry back the losses 5 years
U.S. Small Business Administration production period and certain aircraft). For cer- without the 80% limitation. These special rules
409 3rd Street SW tain specified plants bearing fruits and nuts apply to farm NOLs for tax years 2018, 2019,
Washington, DC 20416; planted or grafted after December 31, 2022, and 2020. To make this election, you may need
• Send an email to ombudsman@sba.gov; and before January 1, 2024, the special depre- to amend your returns for which you had al-
or ciation allowance is also phased down to 80%. ready filed a claim for refund.
• Complete and submit a Federal Agency The special depreciation allowance is also 80% Maximum net earnings. The maximum net
Comment Form online at for certain specified plants bearing fruits and self-employment earnings subject to the social
sba.gov/ombudsman/comment. nuts planted or grafted after December 31, security part (12.4%) of the self-employment tax
Page 2 Publication 225 (2022)

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is $147,000 for 2022, up from $142,800 for on COBRA premium assistance payments and business address, you should use Form
2021. There is no maximum limit on earnings the credit, see the Instructions for Form 943; 8822-B, Change of Address or Responsible
subject to the Medicare part (2.9%) or, if appli- Notice 2021-31, 2021-23 I.R.B. 1173, available Party—Business, to notify the IRS. Be sure to
cable, the Additional Medicare Tax (0.9%). at IRS.gov/irb/2021-23_IRB#NOT-2021-31; and include your suite, room, or other unit number.
The maximum net self-employment earn- Notice 2021-46, 2021-33 I.R.B. 303, available Coronavirus Food Assistance Program
ings subject to the social security part of the at IRS.gov/irb/2021-33_IRB#NOT-2021-46. (CFAP). The CFAP provides direct payments
self-employment tax for 2023 will be discussed Advance payment of COVID-19 credits to producers of eligible agricultural commodities
in the 2022 Pub. 334. ended. Although you may pay qualified sick adversely affected by the coronavirus
The COVID-19 related credit for qualified and family leave wages in 2022 for leave taken (COVID-19) pandemic to help offset sales los-
sick and family leave wages is limited to after March 31, 2020, and before October 1, ses and increased marketing costs associated
leave taken after March 31, 2020, and be- 2021, or provide COBRA premium assistance with the COVID-19 pandemic. CFAP payments
fore October 1, 2021. Generally, the credit payments in 2022, you may no longer request are agricultural program payments that you
for qualified sick and family leave wages, as an advance payment of any credit on Form must include in gross income. Report the full
enacted under the Families First Coronavirus 7200, Advance Payment of Employer Credits amount of your CFAP payments on Schedule F
Response Act (FFCRA) and amended and ex- Due to COVID-19. (Form 1040), lines 4a and 4b. Go to usda.gov.
tended by the COVID-related Tax Relief Act of Social security and Medicare tax for 2022. See chapter 3.
2020, for leave taken after March 31, 2020, and The rate of social security tax on taxable wa- Temporary meal expense deduction in-
before April 1, 2021, and the credit for qualified ges, including qualified sick leave wages and crease for 2022. Section 210 of the Taxpayer
sick and family leave wages under sections qualified family leave wages paid in 2022 for Certainty and Disaster Tax Relief Act of 2020
3131, 3132, and 3133 of the Internal Revenue leave taken after March 31, 2021, and before provides for the temporary allowance of a 100%
Code, as enacted under the American Rescue October 1, 2021, is 6.2% each for the employer business meal deduction for food or beverages,
Plan Act of 2021 (the ARP), for leave taken after and employee or 12.4% for both. Qualified sick if provided by a restaurant (including carry-out
March 31, 2021, and before October 1, 2021, leave wages and qualified family leave wages or delivery), and the expense is paid or incurred
have expired. However, employers that pay paid in 2022 for leave taken after March 31, after December 31, 2020, and before January
qualified sick and family leave wages in 2022 2020, and before April 1, 2021, aren't subject to 1, 2023. See chapter 4.
for leave taken after March 31, 2020, and be- the employer share of social security tax; there-
fore October 1, 2021, are eligible to claim a fore, the tax rate on these wages is 6.2%. The Special rules for qualified disaster losses.
credit for qualified sick and family leave wages social security wage base limit is $147,000. Personal casualty losses that are qualified dis-
aster losses attributable to a major disaster de-
in 2022. See chapter 13. clared by the President under section 401 of the
The COVID-19 related employee retention 2022 withholding tables. The federal income Stafford Act may be claimed as a qualified dis-
credit has expired. The employee retention tax withholding tables are now included in Pub. aster loss on Form 4684 for the year in which
credit enacted under the Coronavirus Aid, Re- 15-T, Federal Income Tax Withholding Meth- the loss was sustained. A qualified disaster loss
lief, and Economic Security (CARES) Act and ods. is an individual's casualty or theft loss of per-
amended and extended by the Taxpayer Cer- sonal-use property that is attributable to a major
tainty and Disaster Tax Relief Act of 2020 was disaster that was declared by the President dur-
limited to qualified wages paid after March 12, ing the period between January 1, 2020 and
2020, and before July 1, 2021. The employee What's New for 2023 February 25, 2021. Also, this disaster must
retention credit under section 3134 of the Inter- have an incident period that began on or after
nal Revenue Code, as enacted by the ARP and Social security and Medicare tax for 2023. December 28, 2019, or on or before December
amended by the Infrastructure Investment and The employee and employer tax rates for social 27, 2020, and must have ended no later than
Jobs Act, was limited to wages paid after June security and the maximum amount of wages January 26, 2021. The definition of a qualified
30, 2021, and before October 1, 2021, unless subject to social security tax for 2023 will be disaster loss does not extend to any major dis-
the employer was a recovery startup business. discussed in Pub. 51 (for use in 2023). aster which has been declared only by reason
An employer that was a recovery startup busi- The Medicare tax rate for 2023 will also be of COVID-19.
ness could also claim the employee retention discussed in Pub. 51 (for use in 2023). There is See Disaster Area Losses, later, and Pub.
credit for wages paid after September 30, 2021, no limit on the amount of wages subject to Med- 547, Casualties, Disasters, and Thefts, for more
and before January 1, 2022. icare tax. See chapter 13. information on the special relief. Also, see
Credit for COBRA premium assistance pay- IRS.gov/DisasterTaxRelief for more informa-
ments is limited to periods of coverage be- tion.
ginning on or after April 1, 2021, through Disaster losses. Section D of Form 4684,
periods of coverage beginning on or before Reminders
Casualties and Thefts, may be used to make an
September 30, 2021. Section 9501 of the The following reminders and other items may election (or revoke a prior election) to deduct a
ARP provides for COBRA premium assistance help you file your tax return. loss attributable to a federally declared disaster
in the form of a full reduction in the premium Principal agricultural activity codes. You and that occurred in a federally declared disas-
otherwise payable by certain individuals and must enter on line B of Schedule F (Form 1040) ter area in the tax year immediately preceding
their families who elect COBRA continuation a code that identifies your principal agricultural the tax year the loss was sustained. See Pub.
coverage due to a loss of coverage as the result activity. It is important to use the correct code 547 for more information about disaster losses.
of a reduction in hours or an involuntary termi- because this information will identify market Limitation on personal casualty and theft
nation of employment (assistance eligible indi- segments of the public for IRS Taxpayer Educa- losses. Personal casualty and theft losses of
viduals). This COBRA premium assistance is tion programs. The U.S. Census Bureau also an individual are subject to special rules for
available for periods of coverage beginning on uses this information for its economic census. those personal casualty and theft losses attrib-
or after April 1, 2021, through periods of cover- See the list of Principal Agricultural Activity Co- utable to federally declared disasters that occur
age beginning on or before September 30, des on page 2 of Schedule F (Form 1040). during tax years beginning after 2017.
2021. A premium payee is entitled to the CO-
BRA premium assistance credit at the time an Publication on employer identification num- Personal casualty and theft losses are sub-
eligible individual elects coverage. Therefore, bers (EINs). Pub. 1635, Understanding Your ject to the $100 per casualty and 10% of your
due to the COBRA notice and election period Employer Identification Number, provides gen- adjusted gross income (AGI) limitations. In this
requirements (generally, employers have 60 eral information on EINs. Topics include how to case you reduce your personal casualty gains
days to provide notice and assistance eligible apply for an EIN and how to complete Form by any casualty losses not attributable to a fed-
individuals have 60 days to elect coverage), SS-4. erally declared disaster. Net disaster losses
some employers may be eligible to claim the Change of address. If you change your home (disaster losses reduced by any excess per-
COBRA premium assistance credit on employ- address, you should use Form 8822, Change of sonal casualty gains) are subject to the $500
ment tax returns for 2022. For more information Address, to notify the IRS. If you change your per casualty limitation but not subject to the
Publication 225 (2022) Page 3

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10% of your adjusted gross income (AGI) limita- Notice 2021-11, 2021-06 I.R.B. 827, available may arrange for your financial institution to ini-
tion. at IRS.gov/irb/2021-06_IRB#NOT-2021-11. tiate a same-day wire payment on your behalf.
EFTPS is a free service provided by the Depart-
Farming losses for 2018, 2019, and 2020. If Qualified small business payroll tax credit ment of the Treasury. Services provided by your
you previously carried back farming losses for 2 for increasing research activities. For tax tax professional, financial institution, payroll
years and limited those losses to 80% of taxa- years beginning after 2015, a qualified small service, or other third party may have a fee.
ble income (before any NOL deduction) of the business may elect to claim up to $250,000 of
carryback year, you may be able to carry back its credit for increasing research activities as a Note. An exception applies to the EFT re-
the losses 5 years without the 80% limitation. payroll tax credit against the employer's share quirement for making your federal tax deposits.
These special rules apply to farm NOLs for tax of social security tax. The payroll tax credit elec- If your liability is less than $2,500 (Form 943,
years 2018, 2019, and 2020. To make this elec- tion must be made on or before the due date of line 13), you may pay in full with a check or
tion you may need to amend your returns for the originally filed income tax return (including money order with a timely filed return. See the
which you had already filed a claim for refund. extensions). The portion of the credit used Instructions of Form 943 for more information.
Self-employed tax payments deferred in against the employer's share of social security
2020. If you elected to defer payments of cer- tax is allowed in the first calendar quarter begin- For more information on making federal tax
tain social security taxes from 2020, see How ning after the date that the qualified small busi- deposits, see section 7 of Pub. 51. To get more
self-employed individuals and household ness filed its income tax return. For more infor- information about EFTPS or to enroll in EFTPS,
employers repay deferred Social Security tax. mation, see the Instructions for Form 943 and go to EFTPS.gov or call 800-555-4477 or
Additional employment tax information for go to IRS.gov/ResearchPayrollTC. 800-733-4829 (TDD). Additional information
about EFTPS is also available in Pub. 966.
farmers. See Pub. 51 for more detailed guid- Certification program for professional em-
ance on employment taxes for employers of ag- ployer organizations (PEOs). The Stephen Electronic filing and payment. Businesses
ricultural workers. For the latest information Beck, Jr., Achieving a Better Life Experience can enjoy the benefits of filing tax returns and
about developments related to Pub. 51, such as Act of 2014 required the IRS to establish a vol- paying their federal taxes electronically.
legislation enacted after it was published, go to untary certification program for PEOs. PEOs Whether you rely on a tax professional or han-
IRS.gov/Pub51. For general tax information rel- handle various payroll administration and tax dle your own taxes, the IRS offers you conven-
evant to agricultural employers, go to IRS.gov/ reporting responsibilities for their business cli- ient programs to make filing and paying easier.
AgricultureTaxCenter. For general information ents and are typically paid a fee based on pay- Spend less time worrying about taxes and more
about employment taxes, go to IRS.gov/ roll costs. To become and remain certified un- time running your business. Use e-file and
EmploymentTaxes. For information about em- der the certification program, certified EFTPS to your benefit.
ployer responsibilities under the Affordable professional employer organizations (CPEOs) • For e-file, go to IRS.gov/EmploymentEfile
Care Act, go to IRS.gov/ACA. For information must meet various requirements described in for additional information. A fee may be
about COVID-19 tax relief, go to IRS.gov/ sections 3511 and 7705 and related published charged to file electronically.
Coronavirus. guidance. Certification as a CPEO may affect • For EFTPS, go to EFTPS.gov or call
Deferral of the employer share of social se- the employment tax liabilities of both the CPEO EFTPS Customer Service at 800-555-4477
curity tax expired. The CARES Act allowed and its customers. A CPEO is generally treated or 800-733-4829 (TDD) for additional infor-
employers to defer the deposit and payment of for employment tax purposes as the employer mation.
the employer share of social security tax. The of any individual who performs services for a • For electronic filing of Form W-2, Wage
deferred amount of the employer share of social customer of the CPEO and is covered by a con- and Tax Statement, go to SSA.gov/
security tax was only available for deposits due tract described in section 7705(e)(2) between employer. You may be required to file
on or after March 27, 2020, and before January the CPEO and the customer (CPEO contract), Forms W-2 electronically. For details, see
1, 2021, as well as deposits and payments due but only for wages and other compensation the General Instructions for Forms W-2
after January 1, 2021, that are required for wa- paid to the individual by the CPEO. To become and W-3.
ges paid on or after March 27, 2020, and before a CPEO, the organization must apply through Work opportunity tax credit for qualified
January 1, 2021. One half of the employer ‐ the IRS Online Registration System. For more tax-exempt organizations hiring qualified
share of social security tax is due by December information or to apply to become a CPEO, go veterans. Qualified tax-exempt organizations
31, 2021, and the remainder is due by Decem- to IRS.gov/CPEO. Also see Revenue Proce- that hire eligible unemployed veterans may be
ber 31, 2022. For more information about the dure 2017-14, 2017-3 I.R.B. 426, available at able to claim the work opportunity tax credit
deferral of the employer share of the social se- IRS.gov/irb/2017-03_IRB#RP-2017-14. against their payroll tax liability using Form
curity tax, see the Instructions for Form 943 and CPEOs must generally file Form 943 and 5884-C. For more information, go to IRS.gov/
IRS.gov/ETD. Schedule R (Form 943), Allocation Schedule for WOTC.
Deferral of the employee share of social se- Aggregate Form 943 Filers, electronically. For
curity tax expired. The Presidential Memo- more information about a CPEO's requirement Reportable transactions. You must file Form
randum on Deferring Payroll Tax Obligations in to file electronically, see Regulations section 8886, Reportable Transaction Disclosure State-
Light of the Ongoing COVID 19 Disaster, issued ‐ 31.3511-1(g)(2). ment, to report certain transactions. You may
have to pay a penalty if you are required to file
on August 8, 2020, directed the Secretary of the Correcting a previously filed Form 943. If Form 8886 but do not do so. Reportable trans-
Treasury to defer the withholding, deposit, and you discover an error on a previously filed Form actions include (1) transactions the same as, or
payment of the employee share of social secur- 943, make the correction using Form 943-X, substantially similar to, tax avoidance transac-
ity tax on wages paid during the period from Adjusted Employer's Annual Federal Tax Re- tions identified by the IRS; (2) transactions of-
September 1, 2020, through December 31, turn for Agricultural Employees or Claim for Re- fered to you under conditions of confidentiality
2020. The deferral of the withholding and pay- fund. Form 943-X is filed separately from Form and for which you paid an advisor a minimum
ment of the employee share of social security 943. For more information on correcting Form fee; (3) transactions for which you have, or a re-
tax was available for employees whose social 943, see the Instructions for Form 943-X or sec- lated party has, a right to a full or partial refund
security wages paid for a biweekly pay period tion 9 of Pub. 51, or go to IRS.gov/ of fees if all or part of the intended tax conse-
were less than $4,000, or the equivalent thresh- CorrectingEmploymentTaxes. quences from the transaction is not sustained;
old amount for other pay periods. The
COVID-related Tax Relief Act of 2020 deferred Federal tax deposits must be made by elec- (4) transactions that result in losses of at least
the due date for the withholding and payment of tronic funds transfer (EFT). You must use $2 million in any single year or $4 million in any
the employee share of social security tax until EFT to make all federal tax deposits. Generally, combination of years; and (5) transactions with
the period beginning on January 1, 2021, and an EFT is made using the Electronic Federal asset holding periods of 45 days or less and
ending on December 31, 2021. For more infor- Tax Payment System (EFTPS). If you don't that result in a tax credit of more than $250,000.
mation about the deferral of employee social want to use EFTPS, you can arrange for your For more information, see the Instructions for
security tax, see the Instructions for Form 943; tax professional, financial institution, payroll Form 8886.
Notice 2020 65, 2020 38 I.R.B. 567, available ‐ ‐ service, or other trusted third party to make Form W-4 for 2022. You should make Forms
at IRS.gov/irb/2020-38_IRB#NOT-2020-65; and electronic deposits on your behalf. Also, you W-4 available to your employees and encourge
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them to check their income tax withholding for recommendations for financial reporting and Keep track of deductible expenses. You
2022. Those employees who owed a large analysis. You can download the Implementation may forget expenses when you prepare your
amount of tax or received a large refund for Guidelines at https://ffsc.org. For more informa- tax return unless you record them when they
2021 may need to submit a new Form W-4. tion, contact the Farm Financial Standards occur. Your records can identify the purpose
Form 1099-MISC. Generally, file Form Council in the following manner. and timing of expenses. You need this informa-
1099-MISC if you pay at least $600 in rents, • Call 262-253-6902. tion to separate farm business expenses from
services, and other miscellaneous payments in • Send a fax to 262-253-6903. nonfarm payments and other expenses. You
your farming business to an individual (for ex- • Write to: also need to keep these records to separate ex-
ample, an accountant, an attorney, or a veteri- Farm Financial Standards Council penses deductible for tax purposes from those
narian) who is not your employee. Payments N78 W14573 Appleton Ave., #287 that are non-tax related. See chapter 4 for more
made to corporations for medical and health Menomonee Falls, WI 53051. information.
care payments, including payments made to Prepare your tax returns. You need records
veterinarians, must generally be reported on Topics
Form 1099. This chapter discusses: to prepare your tax return. These records must
accurately support the income, expenses, and
Limited liability company (LLC). For purpo- credits you report. Generally, these are the
ses of this publication, an LLC is a business en- • Benefits of recordkeeping same records you use to monitor your farming
tity organized in the United States under state • Kinds of records to keep business and prepare your financial statements.
law. Unlike a partnership, all of the members of • How long to keep records You will also need records to prepare informa-
an LLC have limited personal liability for its tion returns such as a Form 1099-MISC or Form
debts. An LLC may be classified for federal in- Useful Items 1099-NEC provided to a vendor or a Form W-2
come tax purposes as a partnership, a corpora- You may want to see: provided to an employee.
tion, or an entity disregarded as separate from
its owner by applying the rules in Regulations Publication Support items reported on tax returns. You
section 301.7701-3. See Pub. 3402 for more must keep your business records available at all
details. 51 51 (Circular A), Agricultural Employer's times for inspection by the IRS. If the IRS exam-
Tax Guide ines any of your tax returns, you may be asked
Photographs of missing children. The IRS is to explain the items reported. A complete set of
a proud partner with the National Center for 463 463 Travel, Gift, and Car Expenses records will assist in the examination.
Missing & Exploited Children® (NCMEC). Pho-
tographs of missing children selected by the 535 535 Business Expenses
Center may appear in this publication on pages 544 544 Sales and Other Dispositions of Kinds of Records
that would otherwise be blank. You can help
bring these children home by looking at the Assets
To Keep
photographs and calling 1-800-THE-LOST 946 946 How To Depreciate Property
(1-800-843-5678) (24 hours a day, 7 days a Except in a few cases, the law does not require
week) if you recognize a child. See chapter 16 for information about getting any specific kind of records. You can choose
publications. any recordkeeping system suited to your farm-
ing business that clearly shows, for example,
your income and expenses.
Benefits of You should set up your recordkeeping sys-
Recordkeeping tem using an accounting method that clearly
1. shows your income for your tax year. If you are
Everyone in business, including farmers, must in more than one business, you should keep a
keep appropriate records. Recordkeeping will complete and separate set of records for each
help you do the following. business. A corporation’s recordkeeping sys-
Importance of tem should include board of directors meeting
Monitor the progress of your farming busi- minutes. See chapter 2 for more information.
ness. You need records to monitor the pro- Your recordkeeping system should include a
Records gress of your business. In addition to measuring summary of your business transactions, which
overall profitability, detailed records can help shows your gross income, as well as any ex-
you identify which crop or livestock enterprises penses, deductions, and credits you are report-
Introduction are most profitable or indicate where manage- ing. In addition, you must keep supporting
ment changes may be needed to improve profit- documents, such as invoices and receipts, for
A farmer, like other taxpayers, must keep re- ability. Records that help you make better deci- purchases, sales, payroll, and other business
cords to prepare an accurate income tax return sions should also increase the likelihood of transactions.
and determine the correct amount of tax. This business success.
chapter explains the benefits of keeping re- It is important to keep these documents be-
cords, what kinds of records you must keep, Prepare your financial statements. You will cause they support the entries in your journals
and how long you must keep them for federal need records to prepare accurate financial and ledgers and on your tax return. Keep them
tax purposes. statements. These include income (profit and in an orderly fashion and in a safe place. For in-
While this publication only discusses tax re- loss) statements, cash flow statements, bal- stance, organize them by year and type of in-
cords, the records you keep as a farm business ance sheets, and statements of owner’s equity. come or expense.
owner should allow you to accurately measure These statements will be required and helpful
your farm’s financial performance, create finan- when working with your bank or creditors and Electronic records. All requirements that ap-
cial statements, and help you make manage- may also help you manage your farm business. ply to hard copy books and records also apply
ment decisions in addition to calculating taxable to electronic storage systems that maintain tax
farm income. Identify source of receipts. You will receive books and records. When you replace hard
Records that provide information beyond money, property, and/or services from many copy books and records, you must maintain the
your tax return require additional information sources. Your records can identify the source of electronic storage systems for as long as they
and effort on the part of the record keeper. To your receipts. You need this information to sep- are material to the administration of tax law.
assist you in developing or improving your re- arate farm from nonfarm receipts and taxable An electronic storage system is any system
cordkeeping system, the Farm Financial Stand- from nontaxable income. See chapter 3 for for preparing or keeping your records either by
ards Council produces publications that provide more information. electronic imaging or by transfer to electronic
Chapter 1 Importance of Records Page 5

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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 The following are examples of records that due or is paid, whichever is later.
systems must provide a complete and accurate may show this information.
record of your data that is accessible to the IRS. • Purchase and sales invoices. Assets. Keep records relating to property until
Electronic storage systems are also subject • Real estate closing statements. the period of limitations expires for the year in
to the same controls and retention guidelines as • Canceled checks. which you dispose of the property in a taxable
those imposed on your original hard copy • Bank statements. disposition. You must keep these records to fig-
books and records. The original hard copy ure any depreciation, amortization, or depletion
books and records may be destroyed, provided Financial account statements as proof of deduction and to figure your basis for comput-
that the electronic storage system has been payment. If you do not have a canceled check, ing gain or (loss) when you sell or otherwise dis-
tested to establish that the hard copy books and you may be able to prove payment with certain pose of the property.
records are being reproduced in compliance financial account statements prepared by finan- You may need to keep records relating to
with IRS requirements for an electronic storage cial institutions. These include account state- the basis of property longer than the period of
system and procedures are established to en- ments prepared for the financial institution by a limitation. Keep those records as long as they
sure continued compliance with all applicable third party. These account statements must be are important in figuring the basis of the original
rules and regulations. You still have the respon- legible. The following table lists acceptable ac- or replacement property. Generally, this means
sibility of retaining any other books and records count statements. as long as you own the property and, after you
that are required to be retained. dispose of it, for the period of limitations that ap-
The IRS may test your electronic storage THEN the statement must plies to you. For example, if you received prop-
system, including the equipment used, indexing IF payment is by... show the... erty in a nontaxable exchange, you must keep
methodology, software, and retrieval capabili- the records for the old property, as well as for
ties. This test is not considered an examination Check • Check number. the new property, until the period of limitations
and the results must be shared with you. If your • Amount. expires for the year in which you dispose of the
electronic storage system meets the require- • Payee's name. new property in a taxable disposition. For more
ments mentioned earlier, you will be in compli- • Date the check amount information on basis, see chapter 6.
ance. If not, you may be subject to penalties for was posted to the
account by the financial
noncompliance, unless you continue to main- institution. Records for nontax purposes. When your
tain your original hard copy books and records records are no longer needed for tax purposes,
in a manner that allows you and the IRS to de- Electronic funds • Amount transferred. do not discard them until you check to see if
termine your correct tax. For details on elec- transfer • Payee's name. you have to keep them longer for other purpo-
tronic storage system requirements, see Reve- • Date the transfer was ses. For example, your insurance company or
nue Procedure 97-22. You can find Revenue posted to the account by creditors may require you to keep them longer
Procedure 97-22 on page 9 of Internal Revenue the financial institution. than the IRS does.
Bulletin 1997-13 at Credit card • Amount charged.
IRS.gov/pub/irs-irbs/irb97-13.pdf. • Payee's name.
• Transaction date.
Travel, transportation, entertainment, and
gift expenses. Specific recordkeeping rules Proof of payment of an amount, by it-
apply to these expenses. For more information, ! self, does not establish you are entitled
see Pub. 463. CAUTION to a tax deduction. You should also 2.
keep other documents, such as credit card
Employment taxes. There are specific em- sales slips and invoices, to show that you also
ployment tax records you must keep. Payroll re- incurred the cost.
cords are important when claiming various tax Accounting
deductions and credits based on payroll items Tax returns. Keep copies of your filed tax re-
such as number of employees and wages paid. turns. They help in preparing future tax returns Methods
For a list of employment tax records you must and making computations if you file an amen-
keep, see Pub. 51 (Circular A). ded return. Keep copies of your information re-
Excise taxes. See How To Claim a Credit or turns such as Form 1099, Schedule K-1, and
Refund in chapter 14 for the specific records Form W-2. Introduction
you must keep to verify your claim for credit or
refund of excise taxes on certain fuels. You must use an accounting method that
How Long To Keep clearly shows the income and expenses used to
Assets. Assets are the property, such as ma- figure your taxable income. You must also file
chinery and equipment, you own and use in Records an income tax return for an annual accounting
your business. You must keep records to verify period called a “tax year.”
certain information about your business assets. You must keep your records as long as they This chapter discusses accounting meth-
You need records to figure your annual depreci- may be needed for the administration of any ods. For information on accounting periods, see
ation deduction and the gain or (loss) when you provision of the Internal Revenue Code. Keep Pub. 538, Accounting Periods and Methods,
sell the assets. Your records should show all records that support an item of income or a de- and the Instructions for Form 1128, Application
the following. duction appearing on a return until the period of To Adopt, Change, or Retain a Tax Year.
• When and how you acquired the asset limitations for the return runs out. A period of
(whether the asset was new or used). limitations is the period of time after which no le-
• Full purchase cost of the asset. gal action can be brought. Generally, that Topics
• Cost of any improvements. means you must keep your records for at least This chapter discusses:
• Section 179 deduction taken. 3 years from when your tax return was due or
• Deductions taken for depreciation. filed or within 2 years of the date the tax was • Cash method
• Deductions taken for casualty losses, such paid, whichever is later. However, certain re- • Accrual method
as losses resulting from fires or storms. cords must be kept for a longer period of time, • Farm inventory
• How you used the asset. as discussed below. • Special methods of accounting
• When and how you disposed of the asset. • Changes in methods of accounting

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Useful Items Cash Method buyer at any time after delivery of the item, then
You may want to see: you must include the sales price in income in
Most farmers use the cash method because the year of the sale, regardless of when you ac-
Publication they find it easier to keep records using the tually receive payment.
cash method. Certain farm corporations and
538 538 Accounting Periods and Methods partnerships and all tax shelters are generally Example. You are a farmer who uses the
535 535 Business Expenses required to use an accrual method of account- cash method and a calendar tax year. You sell
ing. However, for tax years beginning in 2022, grain in December 2022 under a bona fide
Form (and Instructions) farm corporations or partnerships that have arm's-length contract that calls for payment in
average annual gross receipts of $27 million or 2023. You include the proceeds from the sale in
1128 1128 Application To Adopt, Change, or less for the 3 preceding tax years and are not your 2023 gross income since that is the year
Retain a Tax Year tax shelters can use the cash method instead of payment is received. However, if the contract
3115 3115 Application for Change in the accrual method. See Accrual Method Re- states that you have the right to the proceeds
Accounting Method quired, later. Also, see Inventory, later. from the buyer at any time after the grain is de-
livered, you must include the sales price in your
See chapter 16 for information about getting 2022 income, even if payment is received in the
publications and forms. Income following year.
Under the cash method, include in your gross Repayment of income. If you include an
income all items of income you actually or con- amount in income and in a later year you have
Accounting Methods structively received during the tax year. Items of to repay all or part of it, then you can usually de-
income include money received as well as duct the repayment in the year repaid. The type
An accounting method is a set of rules used to property or services received. If you receive of deduction you are allowed in the year of re-
determine when and how your income and ex- property or services, you must include the fair payment depends on the type of income you in-
penses are reported on your tax return. Your market value (FMV) of the property or services cluded in the earlier year. See Repayments in
accounting method includes not only your over- received in income. See chapter 3 for informa- chapter 11 of Pub. 535, Business Expenses.
all method of accounting, but also the account- tion on how to report farm income on your in-
ing treatment you use for any material item. come tax return.
Expenses
Facts and circumstances affect whether an
item is material. Factors to consider in deter- Constructive receipt. Income is construc-
mining the materiality of an item include the size tively received when an amount is credited to Under the cash method, you generally deduct
of the item (both in absolute terms and in rela- your account or made available to you without expenses in the tax year you pay them. This in-
tion to income and other expenses) and the restriction. You do not need to have possession cludes business expenses for which you con-
treatment of the item on your financial state- of the income for it to be treated as income for test liability. However, you may not be able to
ments. Generally, an item considered material the tax year. You need to have the ability to re- deduct an expense paid in advance or you may
for financial statement purposes is also consid- ceive the income. If you authorize someone to be required to capitalize certain costs, as ex-
ered material for income tax purposes. See be your agent and receive income for you, you plained under Uniform Capitalization Rules in
Pub. 538 for more information. are considered to have received the income chapter 6. See chapter 4 for information on how
when your agent receives it. Income is not con- to deduct farm business expenses on your in-
You generally choose an accounting structively received if your receipt of the income come tax return.
method for your farm business when you file is subject to substantial restrictions or limita-
your first income tax return that includes a tions. Prepayment. Generally, you cannot deduct
Schedule F (Form 1040), Profit or Loss From expenses paid in advance. This rule applies to
Farming. If you later want to change your ac- Delaying receipt of income. You cannot any expense paid far enough in advance to, in
counting method, you must generally get IRS hold checks or postpone taking possession of effect, create an asset with a useful life extend-
approval. How to obtain IRS approval is dis- similar property from one tax year to another to ing substantially beyond the end of the current
cussed later under Changes in Methods of Ac- avoid paying tax on the income. You must re- tax year.
counting. port the income in the year the money or prop-
erty is received or made available to you with- Example. On November 1, 2022, you
Types of accounting methods. Generally, out restriction. signed and paid $3,600 for a 3-year (36-month)
you can use any of the following accounting insurance contract for equipment. In 2022, you
methods. Each method is discussed in detail Example. Frances Jones, a farmer who are allowed to deduct only $200 (2/36 x $3,600)
below. uses the cash method of accounting was enti- of the cost of the policy that is attributable to
• Cash method. tled to receive a $10,000 payment on a grain 2022. In 2023, you'll be able to deduct $1,200
• Accrual method. contract in December 2022. Frances was told in (12/36 x $3,600); in 2024, you'll be able to de-
• Special methods of accounting for certain December that the payment was available, and duct $1,200 (12/36 x $3,600); and in 2025,
items of income and expenses. requested not to be paid until January 2023. you'll be able to deduct the remaining balance
• Combination (hybrid) method using ele- Frances must include this payment in her 2022 of $1,000.
ments of two or more of the above meth- income because it was made available to her in An exception applies if the expense qualifies
ods. 2022. for the 12-month rule. Under the 12-month rule,
a taxpayer is not required to capitalize amounts
Debts paid by another person or can- paid to create certain rights or benefits for the
Business and other items. You can account celed. If your debts are paid by another person earlier of the following:
for business and personal items using different or are canceled by your creditors, you may • 12 months after the right or benefit begins,
accounting methods. For example, you can fig- have to report part or all of this debt relief as in- or
ure your business income under an accrual come. If you receive income in this way, you • The end of the tax year after the tax year in
method, even if you use the cash method to fig- constructively receive the income when the which payment is made.
ure personal items. debt is canceled or paid. See Cancellation of
Debt in chapter 3 for more information. See Pub. 538 for more information and exam-
Two or more businesses. If you operate two ples.
or more separate and distinct businesses, you Deferred payment contract. If you sell an See chapter 4 for special rules for prepaid
can use a different accounting method for each item under a deferred payment contract that farm supplies and prepaid livestock feed.
business. Generally, no business is separate calls for payment in a future year, there is no
and distinct unless a complete and separate set constructive receipt in the year of sale. How-
of books and records is maintained for each ever, if the sales contract states that you have
business. the right to the proceeds of the sale from the
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Accrual Method a. All events have occurred that fix the agency with the authority to regulate
fact that you have a liability, and the offering of securities for sale.
Under an accrual method of accounting, you b. The amount of the liability can be de- b. More than 35% of the losses during
generally report income in the year earned and termined with reasonable accuracy. the tax year are allocable to limited
deduct or capitalize expenses in the year incur- 2. Economic performance has occurred. partners or limited entrepreneurs.
red. The purpose of an accrual method of ac-
A “limited partner” is one whose personal li-
counting is to correctly match income and ex- Economic performance. Generally, you can- ability for partnership debts is limited to the
penses in the correct tax year. Certain large not deduct or capitalize a business expense un- money or other property the partner contributed
farm businesses must use an accrual method of til economic performance occurs. If your ex- or is required to contribute to the partnership.
accounting for its farm activities and for sales pense is for property or services provided to A “limited entrepreneur” is one who has an
and purchases of inventory items. See Accrual you, or for your use of property, economic per- interest in an enterprise other than as a limited
Method Required and Farm Inventory, later. formance occurs as the property or services are partner and does not actively participate in the
provided or as the property is used. If your ex- management of the enterprise.
Income pense is for property or services you provide to
others, economic performance occurs as you Note. If a farming business has average an-
Generally, you include an amount in income for provide the property or services. nual gross receipts of $27 million or less for the
the tax year in which all events that fix your right 3 preceding tax years and is not a tax shelter,
to receive the income have occurred, and you Example. Jane, who is a farmer, uses a the farm is not subject to the uniform capitaliza-
can determine the amount with reasonable ac- calendar tax year and an accrual method of ac- tion rules. See Uniform capitalization rules,
curacy. Under this rule, include an amount in in- counting. To take advantage of early payment later. Also, see Uniform Capitalization Rules in
come on the earliest of the following dates. discounts, she paid for seed in October 2021. chapter 6.
• When you receive payment. The seed was delivered to her in March 2022.
• When the income amount is due to you. Economic performance did not occur until the
• When you earn the income. seed was delivered and planted. Jane incurs Farm Inventory
• When title passes. the expense in 2022.
• When included as revenue in an applicable An exception to the economic performance If you are required to keep an inventory, you
financial statement, if you have an applica- rule allows certain recurring items to be treated should keep a complete record of your inven-
ble financial statement. as incurred during a tax year even though eco- tory as part of your farm records. This record
nomic performance has not occurred. For more should show the actual count or measurement
For more information, see Pub. 538. If you information, see Economic Performance in Pub. of the inventory. It should also show all factors
use an accrual method of accounting, complete 538. that enter into its valuation, including quality and
weight, if applicable. Below are some items that
Part III of Schedule F (Form 1040) to report your Special rule for related persons. Business could be included in inventory.
income. expenses and interest owed to a related person
who uses the cash method of accounting are Hatchery business. If you are in the hatchery
Inventory not deductible until you make the payment and business, and use an accrual method of ac-
the corresponding amount is includible in the counting, you must include in inventory eggs in
Generally, if you keep an inventory, you must related person's gross income. Determine the the process of incubation.
use an accrual method of accounting to deter- relationship for this rule as of the end of the tax
mine your gross income. However, see Excep- year for which the expense or interest would Products held for sale. All harvested and pur-
tion below. An inventory is necessary to clearly otherwise be deductible. chased farm products held for sale or for feed
show income when the production, purchase, or seed, such as grain, hay, silage, concen-
trates, cotton, tobacco, etc., must be included in
or sale of merchandise is an income-producing Accrual Method Required inventory.
factor. See Pub. 538 for more information. Also,
see Farm Inventory, later, for more information Generally, the following businesses, if engaged Supplies. Supplies acquired for sale or that
on items that must be included in inventory by in farming, are required to use an accrual become a physical part of items held for sale
farmers, and inventory valuation methods for method of accounting. must be included in inventory. Deduct the cost
farmers.
1. A corporation that has gross receipts of of supplies in the year used or consumed in op-
Exception. For tax years beginning in 2022, more than $27 million. erations. Do not include incidental supplies in
you are not required to maintain an inventory if inventory as these are deductible in the year of
the average annual gross receipts for the 3 pre- 2. A partnership with a corporation as a part- purchase.
ceding tax years for the farm is $27 million or ner, if that corporation meets the require-
less and the farm is not a tax shelter. In this ments of (1) above. Livestock. Livestock held primarily for sale
case, the farm can use a method of accounting 3. A tax shelter (discussed below). must be included in inventory. Livestock held
that (1) treats inventory as nonincidental materi- for draft, breeding, or dairy purposes can either
als and supplies, or (2) accounts for the inven- Note. Items (1) and (2) above do not apply be depreciated or included in inventory. Also,
tory in the same manner as the applicable finan- to an S corporation or a business operating a see Unit-livestock-price method, later. If you are
cial statements, conform to its treatment of nursery or sod farm, or the raising or harvesting in the business of breeding and raising chinchil-
inventory in an applicable financial statement. If of trees (other than fruit and nut trees). las, mink, foxes, or other fur-bearing animals,
it does not have an applicable financial state- these animals are livestock for inventory purpo-
ment, it can use the method of accounting used Tax shelter. A tax shelter is a partnership, ses.
in its books and records prepared according to noncorporate enterprise, or S corporation that
its accounting procedures. meets either of the following tests. Growing crops. Generally, growing crops are
not required to be included in inventory. How-
1. Its principal purpose is the avoidance or ever, if the crop has a preproductive period of
Expenses evasion of federal income tax. more than 2 years, you may have to capitalize
2. It is a farming syndicate. A farming syndi- (or include in inventory) costs associated with
Under an accrual method of accounting, you cate is an entity that meets either of the the crop.
generally deduct or capitalize a business ex- following tests.
pense when both of the following apply.
a. Interests in the activity have been of-
1. The all-events test has been met. This test fered for sale in an offering required to
is met when: be registered with a federal or state
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Uniform capitalization rules. The follow- adjustments. Any other changes in unit prices Special Methods
ing applies if you are required to use an accrual or classifications do require IRS approval.
method of accounting. If you use this method, include all raised of Accounting
• The uniform capitalization rules apply to all livestock in inventory, regardless of whether
costs of raising a plant, even if the prepro- they are held for sale or for draft, breeding, There are special methods of accounting for
ductive period of raising a plant is 2 years sport, or dairy purposes. This method accounts certain items of income and expense.
or less. only for the increase in cost of raising an animal
• The costs of animals are subject to the uni- to maturity. It does not provide for any decrease Crop method. If you do not harvest and dis-
form capitalization rules. in the animal's market value after it reaches ma- pose of your crop in the same tax year that you
turity. Also, if you raise cattle, you are not re- plant it, you can, with IRS approval, use the
Note. If a farming business has average an- quired to inventory hay you grow to feed your crop method of accounting. You cannot use the
nual gross receipts of $27 million or less for the herd. crop method for any tax return, including your
3 preceding tax years and is not a tax shelter, Do not include animals that were sold or lost first tax return, unless you receive approval
the farm is not subject to the uniform capitaliza- in the year-end inventory. If your records do not from the IRS. Under this method, you deduct
tion rules. See Uniform Capitalization Rules in show which animals were sold or lost, treat the the entire cost of producing the crop, including
chapter 6. first animals acquired as sold or lost. The ani- the expense of seed or young plants, in the year
mals on hand at the end of the year are consid- you realize income from the crop.
Items to include in inventory. Your inventory ered those most recently acquired. See chapter 4 for details on deducting the
should include all items held for sale, or for use You must include in inventory all livestock costs of operating a farm. Also, see Regulations
as feed, seed, etc., whether raised or pur- purchased primarily for sale. You can choose section 1.162-12.
chased, that are unsold at the end of the year. either to include in inventory or depreciate live-
stock purchased for draft, breeding, sport, or Other special methods. Other special meth-
dairy purposes. However, you must be consis- ods of accounting apply to the following items.
Inventory valuation methods. The following tent from year to year, regardless of the method • Amortization, see chapter 7.
methods, described below, are those generally you have chosen. You cannot change your • Casualties, see chapter 11.
available for valuing inventory. The method you method without obtaining approval from the • Condemnations, see chapter 11.
use must conform to generally accepted ac- IRS. • Depletion, see chapter 7.
counting principles for similar businesses and You must include in inventory animals pur- • Depreciation, see chapter 7.
must clearly reflect income. chased after maturity or capitalize them at their • Farm business expenses, see chapter 4.
• Cost. purchase price. If the animals are not mature at • Farm income, see chapter 3.
• Lower of cost or market. purchase, increase the cost at the end of each • Installment sales, see chapter 10.
• Farm-price method. tax year according to the established unit price. • Soil and water conservation expenses, see
• Unit-livestock-price method. However, in the year of purchase, do not in- chapter 5.
crease the cost of any animal purchased during • Thefts, see chapter 11.
Cost and lower of cost or market meth- the last 6 months of the year. This “no increase”
ods. See Pub. 538 for information on these val- rule does not apply to tax shelters, which must Combination Method
uation methods. make an adjustment for any animal purchased
during the year. It also does not apply to taxpay- Generally, you can use any combination of
If you value your livestock inventory at ers that must make an adjustment to reasona- cash, accrual, and special methods of account-
TIP cost or the lower of cost or market, you bly reflect the particular period in the year in ing if the combination clearly shows your in-
do not need IRS approval to change to which animals are purchased, if necessary to come and expenses and you use it consistently.
the unit-livestock-price method. However, if you avoid significant distortions in income. However, the following restrictions apply.
value your livestock inventory using the
farm-price method, then you must obtain per- Note. A farmer can determine costs re- • If you use the cash method for figuring
mission from the IRS to change to the unit-live- quired to be allocated under the uniform capital- your income, you must use the cash
stock-price method. ization rules by using the farm-price or unit-live- method for reporting your expenses.
stock-price inventory method. This applies to • If you use an accrual method for reporting
Farm-price method. Under this method, any plant or animal, even if the farmer does not your expenses, you must use an accrual
each item, whether raised or purchased, is val- hold or treat the plant or animal as inventory method for figuring your income.
ued at its market price less the direct cost of property.
disposition. Market price is the current price at Changes in Methods of
the nearest market in the quantities you usually Accounting
sell. Cost of disposition includes broker's com- Cash Versus Accrual Method
missions, freight, hauling to market, and other A change in your method of accounting in-
marketing costs. If you use this method, you The following examples compare the cash and
must use it for your entire inventory, except that accrual methods of accounting. cludes a change in:
• Your overall method, such as from the
livestock can be inventoried under the unit-live- cash method to an accrual method, and
stock-price method. Example 1, Accrual Method. You are a
farmer who uses an accrual method of account- • Your treatment of any material item, such
Unit-livestock-price method. This method ing. You keep your books on the calendar year as a change in your method of valuing in-
recognizes the difficulty of establishing the ex- basis. You sell grain in December 2022 but you ventory (for example, a change from the
act costs of producing and raising each animal. are not paid until January 2023. Because you farm-price method to the unit-live-
You group or classify livestock according to use the accrual method, you report the grain stock-price method, discussed earlier).
type and age and use a standard unit price for sale in 2022 because that is when the income Generally, once you have set up your account-
each animal within a class or group. The unit was earned, even though you did not receive ing method, you must receive approval from the
price you assign should reasonably approxi- the income until 2023. IRS before you can change either an overall
mate the normal costs incurred in producing the method of accounting or the accounting treat-
animals in such classes. Unit prices and classi- Example 2, Cash Method. Assume the ment of any material item. A user fee may be re-
fications are subject to approval by the IRS on same facts as in Example 1 except that you use quired for any non-automatic change requests.
examination of your return. You must annually the cash method and there was no constructive
reevaluate your unit livestock prices and adjust receipt of the sales proceeds in 2022. Under Form 3115. To obtain approval, you must gen-
the prices upward or downward to reflect in- the cash method, you include the sales pro- erally file Form 3115. There are instances when
creases or decreases in the costs of raising ceeds in income in 2023, the year you receive you can obtain automatic consent to change
livestock. IRS approval is not required for these payment. Deduct the costs of producing the certain accounting methods. In other instances,
grain in the year you pay for them. you can file Form 3115 using the non-automatic
Chapter 2 Accounting Methods Page 9

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change  request  procedures  to  request  an  ac-  Table 3-1. Where To Report Sales of Farm Products
counting method change. For more information, 
see  Form  3115  and  the  Instructions  for  Form                                                     Item Sold                                                               Schedule F*             Form 4797**
3115. Also, see Pub. 538.
                                                   Farm products raised for sale                                                                                                    X 
                                                   Farm products bought for resale                                                                                                  X 
                                                   Farm assets not held primarily for sale, such as 
                                                   livestock held for draft, breeding, sport, or dairy 
                                                   purposes (bought or raised), and equipment                                                                                                                  X
3.                                                 * See the Instructions for Schedule F for more information.
                                                   ** See the Instructions for Form 4797 for more information.
                                                     908  908 Bankruptcy Tax Guide                                                                                        Income reported on Schedule F doesn't in-
                                                                                                                                                                          clude gains or losses from sales or other dispo-
Farm Income                                          925  925 Passive Activity and At-Risk Rules                                                                          sitions of the following farm assets.
                                                     4681     4681 Canceled Debts, Foreclosures,                                                                          •    Land.
Reminders                                                 Repossessions, and Abandonments                                                                                 •    Depreciable farm equipment.
                                                                                                                                                                          •    Buildings and structures.
                                                   Form (and Instructions)                                                                                                •    Livestock held for draft, breeding, sport, or 
Coronavirus  Food  Assistance  Program                                                                                                                                         dairy purposes.
(CFAP)  payments.    You  must  report  the  full    982  982 Reduction of Tax Attributes Due to 
amount of the CFAP payments you received in               Discharge of Indebtedness                                                                                       Gains and losses from most dispositions of 
                                                                                                                                                                          farm assets are discussed in  chapters 8 and  . 9
1040). See CFAP, later.
2022  as  gross  income  on  Schedule  F  (Form      Sch E (Form 1040)                                                                     Sch E (Form 1040) Supplemental Gains  and  losses  from  casualties,  thefts,  and 
                                                          Income and Loss                                                                                                 condemnations are discussed in chapter 11.
                                                     Sch F (Form 1040)                                                   Sch F (Form 1040) Profit or Loss From 
Introduction                                              Farming
You  may  receive  income  from  many  sources.      Sch J (Form 1040)                                 Sch J (Form 1040) Income Averaging for                             Sales of Farm Products
You must report the income from all the differ-           Farmers and Fishermen
                                                                                                                                                                          Where  to  report. Table  3-1  shows  where  to 
ent sources on your tax return, unless it is ex-     1099-G        1099-G Certain Government Payments                                                                     report the sale of farm products on your tax re-
cluded by law. Where you report the income on                                                                                                                             turn.
your tax return depends on its source.               1099-MISC                     1099-MISC Miscellaneous Information
This chapter discusses farm income you re-           1099 NEC             1099 NEC Nonemployee Compensation                                                               Schedule  F.     Amounts  received  from  the 
port on Schedule F (Form 1040), Profit or Loss 
From Farming. For information on where to re-        1099-PATR                               1099-PATR Taxable Distributions                                              sales  of  products  you  raised  on  your  farm  for 
port  other  income,  see  the  Instructions  for         Received From Cooperatives                                                                                      sale  (or  bought  for  resale),  such  as  livestock, 
                                                                                                                                                                          produce, or grains, are reported on Schedule F. 
Forms  1040  and  1040-SR,  U.S.  Individual  In-    4797     4797 Sales of Business Property                                                                             This includes money and the fair market value 
come Tax Return.
                                                     4835     4835 Farm Rental Income and                                                                                 of any property or services you receive. When 
Accounting  method.  The  rules  discussed  in            Expenses                                                                                                        you  sell  farm  products  bought  for  resale,  your 
this chapter assume you use the cash method                                                                                                                               profit or loss is the difference between your sell-
of  accounting.  Under  the  cash  method,  you    See chapter  16  for  information  about  getting                                                                      ing  price  (money  plus  the  fair  market  value  of 
generally include an item of income in gross in-   publications and forms.                                                                                                any property) and your basis in the item (usually 
come  in  the  year  you  receive  it.  See Cash                                                                                                                          the cost). See chapter 6 for information on the 
Method in chapter 2.                                                                                                                                                      basis  of  assets.  You  generally  report  these 
If you use an accrual method of accounting,        Schedule F (Form 1040)                                                                                                 amounts on Schedule F for the year you receive 
different rules may apply to your situation. See                                                                                                                          payment.
Accrual Method in chapter 2.                       Individuals, trusts, partnerships, S corporations, 
                                                   LLCs taxed as partnerships, and sole members                                                                           Example.     In  2021,  you  bought  20  feeder 
Topics                                             of a domestic LLC engaged in the business of                                                                           calves for $20,000 for resale. You sold them in 
This chapter discusses:                            farming  report  farm  income  on  Schedule  F                                                                         2022 for $25,000. You report the $25,000 sales 
                                                   (Form 1040). Use this schedule to figure the net                                                                       price  on  Schedule  F,  line  1a,  subtract  your 
• Schedule F (Form 1040)                           profit or loss from regular farming operations.                                                                        $20,000 basis on line 1b, and report the result-
                                                                                                                                                                          ing $5,000 profit on line 1c.
• Sales of farm products                                  Corporations use Form 1120 to report 
• Rents (including crop shares)                    TIP    the income or loss from regular farming                                                                         Form  4797.      Sales  of  livestock  held  for 
• Agricultural program payments                           operations.                                                                                                     draft, breeding, sport, or dairy purposes may re-
• Income from cooperatives                                                                                                                                                sult  in  ordinary  or  capital  gains  or  losses,  de-
• Cancellation of debt                             Income  from  farming  reported  on  Sched-                                                                            pending  on  the  circumstances.  In  either  case, 
• Income from other sources                        ule F includes amounts you receive from culti-                                                                         you  should  not  report  these  sales  on  Sched-
• Income averaging for farmers                     vating,  operating,  or  managing  a  farm  for  gain                                                                  ule F. Instead, report these sales on Form 4797. 
                                                   or  profit,  either  as  owner  or  tenant.  This  in-                                                                 See Livestock under Ordinary or Capital Gain or 
Useful Items                                       cludes  income  from  operating  a  stock,  dairy,                                                                     Loss in chapter 8. Animals that you don't hold 
You may want to see:                               poultry, fish, fruit, or truck farm and income from                                                                    primarily  for  sale  are  considered  business  as-
                                                   operating a plantation, ranch, range, orchard, or                                                                      sets  of  your  farm.  Some  sales  of  timber/forest 
Publication                                        grove. It also includes income from the sale of                                                                        products are also reported on Form 4797. See 
                                                   crop shares if you materially participate in pro-                                                                      Timber in chapter 8 for more information.
    525 525 Taxable and Nontaxable Income          ducing  the  crop.  See                             Rents  (Including  Crop 
                                                   Shares), later.                                                                                                        Sale  by  agent. If  your  agent  sells  your  farm 
    544 544 Sales and Other Dispositions of                                                                                                                               products,  you  have  constructive  receipt  of  the 
        Assets                                     Income  received  from  operating  a  nursery,                                                                         income when your agent receives payment and 
                                                   which specializes in growing ornamental plants,                                                                        you must include the net proceeds from the sale 
    550 550 Investment Income and Expenses         is considered to be income from farming.                                                                               in gross income for the year the agent receives 
Page 10    Chapter 3     Farm Income

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payment. This applies even if your agent pays postponement to apply. However, the sale must • A computation, as described above, of the
you in a later year. For a discussion on con- occur solely because of a weather-related con- income to be postponed for each class of
structive receipt of income, see Cash Method dition that affected the water, grazing, or other livestock.
under Accounting Methods in chapter 2. requirements of the livestock. This requirement Generally, you must file the statement and
generally won't be met if the costs of feed, wa- the return by the due date of the return, includ-
ter, or other requirements of the livestock affec- ing extensions. However, for sales or ex-
Sales Caused by ted by the weather-related condition aren't sub- changes treated as an involuntary conversion
Weather-Related Conditions stantial in relation to the total costs of holding from weather-related sales of livestock in an
the livestock.
If you sell or exchange more livestock, including area eligible for federal assistance (discussed
in chapter 11), you can file this statement at any
poultry, than you normally would in a year be- Classes of livestock. You must figure the time during the replacement period. For other
cause of a drought, flood, or other weather-rela- amount to be postponed separately for each sales or exchanges, if you timely filed your re-
ted condition, you may be able to postpone re- generic class of animals—for example, hogs, turn for the year without postponing gain, you
porting the gain from the additional animals until sheep, and cattle. Don’t separate animals into can still postpone gain by filing an amended re-
the next year. This applies to livestock that are classes based on age, sex, or breed. turn within 6 months of the due date of the re-
held for sale (either raised or purchased) as
well as livestock held for draft, breeding, sport, Amount to be postponed. Follow these steps turn (excluding extensions). Attach the state-
or dairy purposes. You must meet all the follow- to figure the amount of gain to be postponed for ment to the amended return and write “Filed
ing conditions to qualify. each class of animals. pursuant to section 301.9100-2” at the top of
• Your principal trade or business is farming. the amended return. File the amended return at
• You use the cash method of accounting. 1. Divide the total income realized from the the same address you filed the original return.
• You can show that, under your usual busi- sale of all livestock in the class during the Once you have filed the statement, you can
ness practices, you wouldn't have sold or tax year by the total number of such live- cancel your postponement of gain only with the
exchanged the additional animals this year stock sold. For this purpose, don't treat approval of the IRS.
except for the weather-related condition. any postponed gain from the previous
• The weather-related condition caused an year as income received from the sale of
area to be designated as eligible for assis- livestock. Rents (Including Crop
tance by the federal government. 2. Multiply the result in (1) by the excess Shares)
Disaster assistance and emergency number of such livestock sold solely be-
cause of weather-related conditions.
TIP relief for individuals and busi- The rent you receive for the use of your farm-
nesses. Special tax law provisions Example. You're a calendar year taxpayer land by another person or entity is generally
may help taxpayers and businesses recover fi- and you normally wean 100 beef calves in the rental income, not farm income. However, the
nancially from the impact of a disaster, espe- fall and feed them through the winter, selling in rent is farm income if:
cially when the federal government declares January or February. As a result of drought, you 1. Your arrangement with your tenant pro-
their location to be a major disaster area. Get decide you don't have enough feed for all of vides that you will materially participate in
the latest tax relief guidance in disaster situa- your calves, so you sell 35 head in the fall at the production or management of produc-
tions at IRS.gov/uac/Tax-Relief-in-Disaster- weaning and plan to sell the remaining 65 tion of the farm products on the land, and
Situations and in disaster area losses-agricul- calves in January. As a result, you sold 135
ture tax tips at IRS.gov/businesses/Small- head during 2021. You realized $121,500 from 2. You materially participate.
Businesses-Self-Employed/Disaster- the sale ($121,500 ÷ 135 = $900 per head). On See Landlord Participation in Farming in chap-
Assistance-and-Emergency-Relief-for- August 10, 2021, as a result of drought, the af- ter 12.
Individuals-and-Businesses. fected area was declared a disaster area eligi-
ble for federal assistance. The income you can Pasture income and rental. If you pasture
Sales or exchanges made before an area postpone until 2022 is $31,500 [($121,500 ÷ someone else's livestock and take care of them
became eligible for federal assistance qualify if 135) × 35]. for a fee, the income is from your farming busi-
the weather-related condition that caused the ness. You must enter it as “Other Income” on
sale or exchange also caused the area to be How to postpone gain. To postpone gain, at- Schedule F. If you simply rent your pasture or
designated as eligible for federal assistance. tach a statement to your tax return for the year other farm real estate for a flat cash amount
The designation can be made by the President, of the sale. The statement must include your without providing services, report the income as
the Department of Agriculture (or any of its name and address and give the following infor- rent on Schedule E (Form 1040), Part I.
agencies), or by other federal departments or mation for each class of livestock for which
agencies. you're postponing gain.
A weather-related sale or exchange of • A statement that you're postponing gain Crop Shares
TIP livestock (other than poultry) held for under section 451(e).
draft, breeding, or dairy purposes may • Evidence of the weather-related conditions You must include rent you receive in the form of
be an involuntary conversion. See Other Invol- that forced the early sale or exchange of crop shares in income in the year you convert
untary Conversions in chapter 11. the livestock and the date, if known, on the shares to money or the equivalent of
which an area was designated as eligible money. It doesn't matter whether you use the
for assistance by the federal government cash method of accounting or an accrual
Usual business practice. You must deter- because of weather-related conditions. method of accounting.
mine the number of animals you would have • A statement explaining the relationship of If you receive rent in the form of crop shares
sold had you followed your usual business the area affected by the weather-related or livestock, the rental income is included in
practice in the absence of the weather-related condition to your early sale or exchange of self-employment income if:
condition. Do this by considering all the facts the livestock.
and circumstances, but don't take into account • The number of animals sold in each of the 1. Your arrangement with your tenant pro-
your sales in any earlier year for which you 3 preceding years. vides that you will materially participate in
postponed the gain. If you haven't yet estab- • The number of animals you would have the production or management of produc-
lished a usual business practice, rely on the sold in the tax year had you followed your tion of the farm products on the land, and
usual business practices of similarly situated normal business practice in the absence of 2. You materially participate.
farmers in your general region. weather-related conditions.
• The total number of animals sold and the See Landlord Participation in Farming in chap-
Connection with affected area. The livestock number sold because of weather-related ter 12. Report the rental income on Schedule F.
doesn't have to be raised or sold in an area af- conditions during the tax year.
fected by a weather-related condition for the
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The crop share income isn’t included in exclude from income some payments you re- proceeds minus your basis in the commodity. If
self-employment income if: ceive under certain cost-sharing conservation the sale proceeds are less than your basis in
1. Your arrangement with your tenant doesn’t programs if there is a corresponding reduction the commodity, you can report the difference as
provide that you will materially participate in basis of a related improvement. See a loss on Schedule F.
in the production or management of pro- Cost-Sharing Exclusion (Improvements), later.
If you forfeit the pledged crops to the CCC in
duction of the farm products on the land, Report the agricultural program payment on full payment of the loan, the forfeiture is treated
or the appropriate line of Schedule F, Part I. Re- for tax purposes as a sale of the crops. If you
2. You don't materially participate in operat- port the full amount even if you return a govern- didn't report the loan proceeds as income for
ing the farm. ment check for cancellation, refund any of the the year you received them, you must include
payment you receive, or the government col- them in your income for the year of the forfei-
Report this income on Form 4835, and carry the lects all or part of the payment from you by re- ture.
net income or loss to Schedule E (Form 1040), ducing the amount of some other payment or
page 2. Commodity Credit Corporation (CCC) loan. Form 1099-A. If you forfeit pledged crops to
However, you can deduct the amount you re- the CCC in full payment of a loan, you may re-
Crop shares you use to feed livestock. fund or return or that reduces some other pay- ceive a Form 1099-A. “CCC” should be shown
Crop shares you receive as a landlord and feed ment or loan to you. Claim the deduction on in box 6. The amount of any CCC loan out-
to your livestock are considered converted to Schedule F, Part II, for the year of repayment or standing when you forfeited your commodity
money when fed to the livestock. You must in- reduction. should also be indicated on the form.
clude the fair market value of the crop shares in
income at that time. You're entitled to a busi- Market Gain
ness expense deduction for the livestock feed Commodity Credit
in the same amount and at the same time you Corporation (CCC) Loans Under the CCC nonrecourse marketing assis-
include the fair market value of the crop share tance loan program, your repayment amount for
as rental income. Although these two transac- Generally, you don't report loans you receive as
tions cancel each other for figuring adjusted income. However, if you pledge part or all of a loan secured by your pledge of an eligible
gross income on Form 1040 or 1040-SR, they your production to secure a CCC loan, you can commodity is generally based on the lower of
may be necessary to figure your self-employ- treat the loan as if it were a sale of the crop and the loan rate or the prevailing world market
ment tax. See Landlord Participation in Farming report the loan proceeds as income in the year price for the commodity on the date of repay-
and Farm Optional Method in chapter 12. you receive them. You don't need approval from ment. If you repay the loan when the world price
the IRS to adopt this method of reporting CCC is lower, the difference between that repayment
Crop shares you give to others (gift). Crop loans. amount and the original loan amount is market
gain. Whether you use cash or CCC certificates
shares you receive as a landlord and give to Once you report a CCC loan as income for to repay the loan, you will receive a Form
others are considered converted to money the year received, you must generally report all 1099-G showing the market gain you realized.
when you make the gift. You must report the fair CCC loans in that year and later years in the Market gain should be reported as follows.
market value of the crop share as income, even same way. However, you can obtain for your • If you elected to include the CCC loan in
though someone else receives payment for the tax year an automatic consent to change your income in the year you received it, don’t in-
crop share. This applies even if the gift is made method of accounting for loans received from clude the market gain in income. However,
to a qualified charitable organization. the CCC, from including the loan amount in reduce (adjust) the basis of the commodity
gross income for the tax year in which the loan for the amount of the market gain.
Example. A tenant farmed part of your land is received to treating the loan amount as a • If you didn’t include the CCC loan in in-
under a crop-share arrangement. The tenant loan. For more information, see Part I of the In- come in the year received, include the
harvested and delivered the crop in your name structions for Form 3115 and Revenue Proce- market gain in your income.
to an elevator company. Before selling any of dure 2008-52. Revenue Procedure 2008-52,
the crop, you instructed the elevator company 2008-36 I.R.B. 587, is available at The following examples show how to report
to cancel your warehouse receipt and make out IRS.gov/irb/2008-36_IRB#NOT-2008-52. market gain.
new warehouse receipts in equal amounts of
the crop in the names of your children. They sell You can request income tax withhold- Example 1. Mike Green is a cotton farmer.
their crop shares in the following year and the TIP ing from CCC loan payments you re- He uses the cash method of accounting and
elevator company makes payments directly to ceive. Use Form W-4V. See chapter 16 files his tax return on a calendar year basis. He
your children. for information about ordering the form. has deducted all expenses incurred in produc-
In this situation, you're considered to have ing the cotton and has a zero basis in the com-
received rental income and then made a gift of To elect to report a CCC loan as income, in- modity. In 2021, Mike pledged 1,000 pounds of
that income. You must include the fair market clude the loan proceeds as income on Sched- cotton as collateral for a CCC loan of $2,000 (a
value of the crop shares in your income for the ule F for the year you receive it. Attach a state- loan rate of $2.00 per pound). In 2022, he re-
tax year you gave the crop shares to your chil- ment to your return showing the details of the paid the loan and redeemed the cotton for
dren. loan. $1,500 when the world price was $1.50 per
You must file the statement and the return pound (lower than the loan amount). Later in
Crop share loss. If you're involved in a rental by the due date of the return, including exten- 2022, he sold the cotton for $2,500.
or crop-share lease arrangement, any loss from sions. If you timely filed your return for the year The market gain on the redemption was
these activities may be subject to the limits un- without making the election, you can still make $0.50 ($2.00 – $1.50) per pound. Mike realized
der the passive loss rules. See Pub. 925 for in- the election by filing an amended return within 6 total market gain of $500 ($0.50 x 1,000
formation on these rules. months of the due date of the return (excluding pounds). How he reports this market gain and
extensions). Attach the statement to the amen- figures his gain or loss from the sale of the cot-
ded return and write “Filed pursuant to section ton depends on whether he included CCC
Agricultural Program 301.9100-2” at the top of the return. File the loans in income in 2021.
amended return at the same address you filed
Payments the original return. Included CCC loan. Mike reported the
$2,000 CCC loan as income for 2021 on
You must include in income most government When you make this election, the amount Schedule F, line 5a, so he is treated as if he
payments, such as those for approved conser- you report as income becomes your basis in the sold the cotton for $2,000 when he pledged it
vation practices, livestock indemnity payments, commodity. See chapter 6 for information on and repurchased the cotton for $1,500 when he
or livestock forage disaster payments whether the basis of assets. If you later repay the loan, redeemed it. The $500 market gain isn’t recog-
you receive them in cash, materials, services, redeem the pledged commodity, and sell it, you nized on the redemption. He reports it for 2022
or commodity certificates. However, you can report as income at the time of sale the sale as an agricultural program payment on
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Schedule F, line 4a, but doesn't include it as a Crop Insurance and Crop One election covers all crops representing a
taxable amount on line 4b. single trade or business. If you have more than
Mike's basis in the cotton after he redeemed Disaster Payments one farming business, make a separate election
it was $1,500, which is the redemption (re- for each one. For example, if you operate two
purchase) price paid for the cotton. His gain You must include in income any crop insurance separate farms on which you grow different
from the sale is $1,000 ($2,500 – $1,500). He proceeds you receive as the result of physical crops and you keep separate books for each
reports the $2,500 sale on line 1a and the crop damage or reduction of crop revenue, or farm, you should make two separate elections
$1,500 basis on line 1b. After subtracting his both. You generally include them in the year to postpone reporting insurance proceeds you
basis from the sale, Mike will have a $1,000 you receive them. Treat as crop insurance pro- receive for crops grown on each of your farms.
gain for 2022 on Schedule F, line 1c. ceeds the crop disaster payments you receive An election is binding for the year unless the
from the federal government as the result of de- IRS approves your request to change it. To re-
Excluded CCC loan. Mike didn’t elect to struction or damage to crops, or the inability to quest IRS approval to change your election,
report the $2,000 CCC loan as income and plant crops, because of drought, flood, or any write to the IRS at the following address, giving
therefore didn’t include it on his 2021 Sched- other natural disaster. your name, address, identification number, the
ule F. When he paid $1,500 to pay off the loan year you made the election, and your reasons
in 2022, he had to recognize $500 of income You can request income tax withhold-
from market gain. TIP ing from crop disaster payments you for wanting to change it.
receive from the federal government.
Example 2. The facts are the same as in Use Form W-4V. See chapter 16 for information Ogden Submission Processing Center
Example 1, except that, instead of selling the about ordering the form. P. O. Box 9941
Ogden, UT 84409
cotton for $2,500 after redeeming it, Mike en-
tered into an option-to-purchase contract with a Election to postpone reporting until the fol-
cotton buyer before redeeming the cotton. Un- lowing year. You can postpone reporting Feed Assistance and
der that contract, Mike authorized the cotton some or all crop insurance proceeds as income Payments
buyer to pay the CCC loan on Mike's behalf. In until the year following the year the physical
2022, the cotton buyer repaid the loan for damage occurred if you meet all the following The Disaster Assistance Act of 1988 authorizes
$1,500 and immediately exercised his option, conditions. programs to provide feed assistance, reim-
buying the cotton for $1,500. How Mike reports • You use the cash method of accounting. bursement payments, and other benefits to
the $500 market gain on the redemption of the • You receive the crop insurance proceeds qualifying livestock producers if the Secretary of
cotton and figures his gain or loss from its sale in the same tax year the crops are dam- Agriculture determines that, because of a natu-
depends on whether he included CCC loans in aged. ral disaster, a livestock emergency exists.
income in 2021. • You can show that under your normal busi- These programs include partial reimbursement
ness practice you would have included for the cost of purchased feed and for certain
Included CCC loan. As in Example 1, Mike more than 50% of the income from the transportation expenses. They also include the
is treated as though he sold the cotton for damaged crops in any tax year following donation or sale at a below-market price of feed
$2,000 when he pledged it and repurchased the the year the damage occurred. owned by the CCC.
cotton for $1,500 when the cotton buyer re-
deemed it for him. The $500 market gain isn’t Proceeds received from revenue insurance
recognized on the redemption. Mike reports it policies may be the result of either yield loss Include in income:
for 2022 as an agricultural program payment on due to physical damage or to decline in price • The market value of donated feed re-
Schedule F, line 4a, but doesn't include it as a from planting to harvest. For these policies, only ceived,
taxable amount on line 4b. the amount of the proceeds received as a result • The difference between the market value
Also, as in Example 1, Mike's basis in the of yield loss can be deferred. Proceeds re- and the price you paid for feed you buy at
cotton when the cotton buyer redeemed it for ceived from weather insurance policies cannot below-market prices, and
him was $1,500. Mike has no gain or loss on its be deferred if the payment is based on rainfall • Any cost reimbursement you receive.
sale to the cotton buyer for that amount. amounts and is not a result of physical damage
to a crop. You must include these benefits in income
Excluded CCC loan. As in Example 1, To postpone reporting some or all crop in- in the year you receive them. You can't post-
Mike didn't report the $2,000 loan as income in surance proceeds received in 2022, report the pone reporting them under the rules explained
2021 and must recognize $500 of income from amount you received on Schedule F, line 6a, earlier for weather-related sales of livestock or
market gain in 2022. but don't include it as a taxable amount on crop insurance proceeds. Report the benefits
line 6b. Check the box on line 6c and attach a on Schedule F, Part I, as agricultural program
Conservation Reserve statement to your tax return. The statement payments. You can usually take a current de-
Program (CRP) must include your name and address and con- duction for the same amount as a feed ex-
tain the following information. pense.
Under the CRP, if you own or operate highly • A statement that you're making an election
erodible or other specified cropland, you may under section 451(f) and Regulations sec- Cost-Sharing Exclusion
enter into a long-term contract with the USDA, tion 1.451-6.
agreeing to convert to a less intensive use of • The specific crop or crops physically de- (Improvements)
that cropland. You must include the annual stroyed or damaged.
rental payments and any one-time incentive • A statement that under your normal busi- You can exclude from your income part or all of
payment you receive under the program on the ness practice you would have included a payment you receive under certain federal or
appropriate lines of Schedule F. Cost-share more than 50% of the income from some state cost-sharing conservation, reclamation,
payments you receive may qualify for the or all of the destroyed or damaged crops in and restoration programs. However, see Effects
cost-sharing exclusion. See Cost-Sharing Ex- gross income for a tax year following the of the exclusion, later. A payment is any eco-
clusion (Improvements), later. CRP payments year the crops were destroyed or dam- nomic benefit you get as a result of an improve-
are reported to you on Form 1099-G. aged. ment. However, this exclusion applies only to
• The cause of the physical destruction or that part of a payment that meets all three of the
Individuals who are receiving social se- damage and the date or dates it occurred. following tests.
TIP curity retirement or disability benefits • The total payments you received from in- 1. It was for a capital expense. You can't ex-
may exclude CRP payments when cal- surance carriers, itemized for each specific clude any part of a payment for an ex-
culating self-employment tax. See the Instruc- crop, and the date you received each pay- pense you can deduct in the year you pay
tions for Schedule SE (Form 1040). ment. or incur it. You must include the payment
• The name of each insurance carrier from for a deductible expense in income, and
whom you received payments. you can take any offsetting deduction. See
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chapter 5 for information on deducting soil • The Wetlands Reserve Program author- The calculation of present fair market
and water conservation expenses. ized by the Food Security Act of 1985, the ! value of the right to receive annual in-
2. It doesn't substantially increase your an- Federal Agriculture Improvement and Re- CAUTION come is too complex to discuss in this
nual income from the property for which form Act of 1996, and the Farm Security publication. You may need to consult your tax
it's made. An increase in annual income is and Rural Investment Act of 2002. advisor for assistance.
substantial if it's more than the greater of • The Environmental Quality Incentives Pro-
the following amounts. gram (EQIP) authorized by the Federal Ag- Example. One hundred acres of your land
riculture Improvement and Reform Act of was reclaimed under a rural abandoned mine
a. 10% of the average annual income 1996. program contract with the NRCS of the USDA.
derived from the affected property be- • The Wildlife Habitat Incentives Program The total cost of the improvement was
fore receiving the improvement. (WHIP) authorized by the Federal Agricul- $500,000. The USDA paid $490,000. You paid
b. $2.50 times the number of affected ture Improvement and Reform Act of 1996. $10,000. The value of the cost-sharing improve-
acres. • The Soil and Water Conservation Assis- ment is $15,000.
tance Program authorized by the Agricul- The present fair market value of the right to
3. The Secretary of Agriculture certified that tural Risk Protection Act of 2000. receive the annual income described in (1)
the payment was primarily made for con- • The Agricultural Management Assistance above was calculated to be $1,380, and the
serving soil and water resources, protect- Program authorized by the Agricultural present fair market value of the right to receive
ing or restoring the environment, improv- Risk Protection Act of 2000. the annual income described in (2) is $1,550.
ing forests, or providing a habitat for • The Conservation Reserve Program au- The excludable portion is the greater amount,
wildlife. thorized by the Food Security Act of 1985 $1,550.
and the Federal Agriculture Improvement You figure the amount to include in gross in-
Qualifying programs. If the three tests listed and Reform Act of 1996. come as follows:
above are met, you can exclude part or all of • The Forest Land Enhancement Program
the payments from the following programs. authorized under the Farm Security and
• The rural clean water program authorized Rural Investment Act of 2002. Value of cost-sharing
by the Federal Water Pollution Control Act. • The Conservation Security Program au- improvement . . . . . . . . . . . . . . . . . . $15,000
• The rural abandoned mine program au- thorized by the Food Security Act of 1985. Minus: Your share . . . . . $10,000
thorized by the Surface Mining Control and • The Forest Health Protection Program Excludable
Reclamation Act of 1977. (FHPP) authorized by the Cooperative For- portion . . . . . . . . 1,550 11,550
• The water bank program authorized by the estry Assistance Act of 1978.
Water Bank Act. Amount included in income . . . . $ 3,450
• The emergency conservation measures Income realized. The gross income you real-
program authorized by title IV of the Agri- ize upon getting an improvement under these Effects of the exclusion. When you figure the
cultural Credit Act of 1978. cost-sharing programs is the value of the im- basis of property you acquire or improve using
• The agricultural conservation program au- provement reduced by the sum of the excluda- cost-sharing payments excluded from income,
thorized by the Soil Conservation and Do- ble portion and your share of the cost of the im- subtract the excluded payments from your capi-
mestic Allotment Act. provement (if any). tal costs. Any payment excluded from income
• The great plains conservation program au- isn't part of your basis. In the example above,
thorized by the Soil Conservation and Do- Value of the improvement. You deter-
mestic Policy Act. mine the value of the improvement by multiply- the increase in basis is $500,000 – $490,000 +
• The resource conservation and develop- ing its fair market value (defined in chapter 6) by $3,450 = $13,450.
ment program authorized by the Bank- a fraction. The numerator of the fraction is the In addition, you can't take depreciation, am-
head-Jones Farm Tenant Act and by the total cost of the improvement (all amounts paid ortization, or depletion deductions for the part of
Soil Conservation and Domestic Allotment either by you or by the government for the im- the cost of the property for which you receive
Act. provement) reduced by the sum of the following cost-sharing payments you exclude from in-
• Certain small watershed programs, listed items. come.
later. • Any government payments under a pro-
• Any program of a state, possession of the gram not listed earlier. How to report the exclusion. Attach a state-
United States, a political subdivision of any • Any part of a government payment under a ment to your tax return (or amended return) for
of these, or of the District of Columbia, un- program listed earlier that the Secretary of the tax year you receive the last government
der which payments are made to individu- Agriculture hasn't certified as primarily for payment for the improvement. The statement
als primarily for conserving soil, protecting conservation. must include the following information.
or restoring the environment, improving • Any government payment to you for rent or • The dollar amount of the cost funded by
forests, or providing a habitat for wildlife. for your services. the government payment.
• The value of the improvement.
Several state programs have been ap- The denominator of the fraction is the total cost • The amount you're excluding.
proved. For information about the status of of the improvement.
those programs, contact the state offices Report the total cost-sharing payments you
of the Farm Service Agency (FSA) and the Excludable portion. The excludable por- receive on Schedule F, line 4a, and the taxable
Natural Resources and Conservation Serv- tion is the present fair market value of the right amount on line 4b.
ice (NRCS). to receive annual income from the affected
acreage of the greater of the following amounts. Recapture. If you dispose of the property
Small watershed programs. If the three within 20 years after you received the excluded
tests listed earlier are met, you can exclude part 1. 10% of the prior average annual income payments, you must treat as ordinary income
or all of the payments you receive under the fol- from the affected acreage. The prior aver- part or all of the cost-sharing payments you ex-
lowing programs for improvements made in age annual income is the average of the cluded. In the above example, if the 100 acres
connection with a watershed. gross receipts from the affected acreage were sold within 20 years of the exclusion for a
• The programs under the Watershed Pro- for the last 3 tax years before the tax year gain of $2,000, $1,550 of that amount would be
tection and Flood Prevention Act. in which you started to install the improve- included in ordinary income. You must report
• The flood prevention projects under the ment. the recapture on Form 4797. See Section 1255
Flood Control Act of 1944. 2. $2.50 times the number of affected acres. property under Other Gains in chapter 9.
• The Emergency Watershed Protection
Program under the Flood Control Act of Electing not to exclude payments. You can
1950. elect not to exclude all or part of any payments
• Certain programs under the Colorado you receive under these programs. If you make
River Basin Salinity Control Act.
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this election for all of these payments, none of Report the total amount reported to you as a. Signing and giving a written agree-
the above restrictions and rules apply. You the payee of record on Schedule F. However, ment to the cooperative.
must make this election by the due date, includ- don't report as a taxable amount any amount b. Getting or keeping membership in the
ing extensions, for filing your return. In the ex- belonging to someone else. cooperative after it adopted a bylaw
ample above, an election not to exclude pay- providing that membership constitutes
ments results in $5,000 included in income and See chapter 16 for information about order-
a $15,000 increase in basis. If you timely filed ing Form 1099-G. agreement. The cooperative must no-
your return for the year without making the elec- tify you in writing of this bylaw and
tion, you can still make the election by filing an give you a copy.
amended return within 6 months of the due date Income From c. Endorsing and cashing a qualified
of the return (excluding extensions). Write check paid as part of the same pa-
“Filed pursuant to section 301.9100-2” at the Cooperatives tronage dividend. You must cash the
top of the amended return and file it at the same check by the 90th day after the close
address you filed the original return. If you buy farm supplies through a cooperative, of the payment period for the cooper-
you may receive income from the cooperative in ative's tax year for which the patron-
the form of patronage dividends (refunds). If age dividend was paid.
CFAP you sell your farm products through a coopera-
tive, you may receive either patronage divi- Qualified check. A qualified check is any
The CFAP provides direct payments to produc- dends or a per-unit retain certificate, explained instrument that's redeemable in money and
ers of eligible agricultural commodities ad- later, from the cooperative. meets both of the following requirements.
versely affected by the coronavirus (COVID–19) • It's part of a patronage dividend that also
pandemic to help offset sales losses and in- Form 1099-PATR. The cooperative will report includes a qualified written notice of alloca-
creased marketing costs associated with the the income to you on Form 1099-PATR or a tion for which you met condition 2c above.
COVID-19 pandemic. similar form and send a copy to the IRS. Form • It's imprinted with a statement that endors-
1099-PATR may also show an alternative mini- ing and cashing it constitutes the payee's
CFAP payments are agricultural program mum tax adjustment that you must include on consent to include in income the stated
payments that you must include in gross in- Form 6251 if you're required to file the form. For dollar value of any written notices of alloca-
come. Report the full amount of your CFAP pay- information on the alternative minimum tax, see tion paid as part of the same patronage
ments on Schedule F (Form 1040), lines 4a and the Instructions for Form 6251. dividend.
4b. Go to USDA.gov for more information.
Loss on redemption. You can deduct on
Patronage Dividends Schedule F, Part II, any loss incurred on the re-
Other Payments demption of a qualified written notice of alloca-
You generally report patronage dividends as in- tion you received in the ordinary course of your
You must include most other government pro- come on Schedule F for the tax year you re- farming business. The loss is the difference be-
gram payments in income. ceive them. They include the following items. tween the stated dollar amount of the qualified
• Money paid as a patronage dividend, in- written notice you included in income and the
Fertilizer and Lime cluding cash advances received (for exam- amount you received when you redeemed it.
ple, from a marketing cooperative).
• The stated dollar value of qualified written Nonqualified notice of allocation. Don’t in-
Include in income the value of fertilizer or lime notices of allocation. clude the stated dollar value of any nonqualified
you receive under a government program. How • The fair market value of other property. notice of allocation in income when you receive
to claim the offsetting deduction is explained it. Your basis in the notice is zero. You must in-
under Fertilizer and Lime in chapter 4. Don’t report as income any patronage divi-
dends you receive from expenditures that clude in income for the tax year of disposition
weren't deductible, such as buying personal or any amount you receive from its sale, redemp-
Improvements family items, capital assets, or depreciable tion, or other disposition. Report that amount,
property. You must reduce the cost or other ba- up to the stated dollar value of the notice, on
If government payments are based on improve- sis of these items by the amount of such patron- Schedule F. However, don't include that
ments, such as a pollution control facility, you age dividends received. Personal items include amount in your income if the notice resulted
must include them in income. You must also fuel purchased for personal use and basic local from buying or selling capital assets or depreci-
capitalize the full cost of the improvement. telephone service. able property or from buying personal items, as
Since you have included the payments in in- explained in the following discussions.
come, they don't reduce your basis. However, If you can't determine what the dividend is If the amount you receive is more than the
see Cost-Sharing Exclusion (Improvements), for, report it as income on Schedule F, lines 3a stated dollar value of the notice, report the ex-
earlier, for additional information. and 3b. cess as the type of income it represents. For
example, if it represents interest income, report
Qualified written notice of allocation. If you it on your return as interest.
Payment to More Than One receive a qualified written notice of allocation as
Person part of a patronage dividend, you must gener- Buying or selling capital assets or depreci-
ally include its stated dollar value in your in- able property. Patronage dividends from buy-
The USDA reports program payments to the come on Schedule F in the year you receive it. ing capital assets or depreciable property used
IRS. It reports a program payment intended for A written notice of allocation is qualified if at in your business are not included in income.
more than one person as having been paid to least 20% of the patronage dividend is paid in You must, however, reduce the basis of these
the person whose identification number is on money or by qualified check and either of the assets by the dividends. This reduction is taken
record for that payment (payee of record). If following conditions is met. into account as of the first day of the tax year in
which the dividends are received. If the divi-
you, as the payee of record, receive a program 1. The notice must be redeemable in cash dends are more than your unrecovered basis,
payment belonging to someone else, such as for at least 90 days after it's issued, and reduce the unrecovered basis to zero and in-
your landlord, the amount belonging to the you must have received a written notice of clude the difference on Schedule F for the tax
other person is a nominee distribution. You your right of redemption at the same time year you receive them.
should file Form 1099-G to report the identity of as the written notice of allocation. This rule and the exceptions explained be-
the actual recipient to the IRS. You should also
give this information to the recipient. You can 2. You must have agreed to include the sta- low also apply to amounts you receive from the
avoid the inconvenience of unnecessary inqui- ted dollar value in income in the year you sale, redemption, or other disposition of a non-
ries about the identity of the recipient if you file receive the notice by doing one of the fol- qualified notice of allocation that resulted from
this form. lowing.
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buying or selling capital assets or depreciable them that's fixed without regard to the net earn- Exceptions
property. ings of the cooperative. These allocations can
be paid in money, other property, or qualified
Example. On July 1, 2021, Mr. Brown, a certificates. The following discussion covers some excep-
patron of a cooperative association, bought a tions to the general rule for canceled debt.
used machine for his dairy farm business from Per-unit retain certificates issued by a coop- These exceptions apply before the exclusions
the association for $2,900. The machine has a erative generally receive the same tax treat- discussed below.
life of 7 years under MACRS. Mr. Brown files ment as patronage dividends, discussed ear-
his return on a calendar year basis. For 2021, lier. Price reduced after purchase. If your pur-
he claimed a depreciation deduction of $311, chase of property was financed by the seller
using the 10.71% depreciation rate from the Qualified certificates. Qualified per-unit retain and the seller reduces the amount of the debt at
150% declining balance, half-year convention certificates are those issued to patrons who a time when you aren't insolvent and the reduc-
table (shown in Table A-14 in Appendix A of have agreed to include the stated dollar amount tion doesn't occur in a chapter 11 bankruptcy
Pub. 946). On July 2, 2022, the cooperative as- of these certificates in income in the year of re- case, the amount of the debt reduction will be
sociation paid Mr. Brown a $300 cash patron- ceipt. The agreement may be made in writing or treated as a reduction in the purchase price of
age dividend for buying the machine. Mr. Brown by getting or keeping membership in a coopera- the property. Reduce your basis in the property
adjusts the basis of the machine and figures his tive whose bylaws or charter states that mem- by the amount of the reduction in the debt. The
depreciation deduction for 2021 (and later bership constitutes agreement. If you receive rules that apply to bankruptcy and insolvency
years) as follows. qualified per-unit retain certificates, include the are explained below under Exclusions.
stated dollar amount of the certificates in in-
come on Schedule F, for the tax year you re- Deductible debt. You don't realize income
Cost of machine on July 1, 2021 . . . . . . . . . . $2,900 ceive them. from a canceled debt to the extent the payment
Minus: 2021 depreciation . . . . . . . . $311 of the debt would have been a deductible ex-
2022 cash dividend . . . . . . . $300 $611
Nonqualified certificates. Don't include the pense. This exception applies before the price
Adjusted basis for stated dollar value of a nonqualified per-unit re- reduction exception discussed above and the
depreciation for 2022:. . . . . . . . . . . $2,289 tain certificate in income when you receive it. bankruptcy and insolvency exclusions dis-
Depreciation rate: 1.0 ÷ 6 / (remaining recovery period 1 2 Your basis in the certificate is zero. You must in- cussed next.
as of 1/1/2022) = (0.1538) × 1.5 = 23.07% clude in income any amount you receive from
its sale, redemption, or other disposition. Re- Example. You get accounting services for
Depreciation deduction for 2022 port the amount you receive from the disposi- your farm on credit. Later, you have trouble pay-
($2,289 × 0.2307). . . . . . . . . . . . . . $528 tion as ordinary income on Schedule F, lines 3a ing your farm debts, but you aren't bankrupt or
and 3b, for the tax year of disposition. insolvent. Your accountant forgives part of the
Exceptions. If the dividends are for buying amount you owe for the accounting services.
or selling capital assets or depreciable property How you treat the canceled debt depends on
you didn't own at any time during the year you Cancellation of Debt your method of accounting.
received the dividends, you must include them • Cash method—You don't include the can-
on Schedule F, unless one of the following rules This section explains the general rule for includ- celed debt in income because payment of
applies. ing canceled debt in income and the exceptions the debt would have been deductible as a
• If the dividends relate to a capital asset you to the general rule. For more information on business expense.
held for more than 1 year for which a loss canceled debt, see Pub. 4681. • Accrual method—You include the can-
celed debt in income because the expense
was or would have been deductible, treat Under section 1106 of the CARES Act, was deductible when you incurred the
them as gain from the sale or exchange of TIP an eligible recipient of a Paycheck Pro- debt.
a capital asset held for more than 1 year. tection Program loan is eligible for for-
• If the dividends relate to a capital asset for giveness of indebtedness for all or a portion of
which a loss wasn't or wouldn't have been the stated principal amount of a covered loan if Exclusions
deductible, don't report them as income certain conditions are satisfied (qualifying for-
(ordinary or capital gain). giveness); in addition, the forgiven debt isn’t Don't include canceled debt in income in the fol-
If the dividends are for selling capital assets taxable. See Announcement 2020-12. lowing situations.
or depreciable property during the year you re- 1. The cancellation takes place in a bank-
ceived the dividends, treat them as an addi- ruptcy case under title 11 of the U.S.
tional amount received on the sale. General Rule Code.
Personal purchases. Because you can't de- Generally, if your debt is canceled or forgiven, 2. The cancellation takes place when you're
duct the cost of personal, living, or family items, other than as a gift or bequest to you, you must insolvent.
such as supplies, equipment, or services not re- include the canceled amount in gross income 3. The canceled debt is a qualified farm debt.
lated to the production of farm income, you can for tax purposes. Report the canceled amount
omit from the taxable amount of patronage divi- on Schedule F if you incurred the debt in your 4. The canceled debt is a qualified real prop-
dends on Schedule F any dividends from buy- farming business. If the debt is a nonbusiness erty business debt (in the case of a tax-
ing those items (and you must reduce the cost debt, report the canceled amount as “Other in- payer other than a C corporation). See
or other basis of those items by the amount of come” on Schedule 1 (Form 1040), line 8. chapter 5 of Pub. 334.
the dividends). This rule also applies to 5. The canceled debt is qualified principal
amounts you receive from the sale, redemption, Special rules apply to C and S corporations
or other disposition of a nonqualified written no- and partnerships. See section 108(i), Regula- residence indebtedness which is:
tice of allocation resulting from these purcha- tions sections 1.108(i)-0 and 1.108(i)-2, and a. Discharged before 2022, or
ses. Pub. 4681 for details.
b. Subject to an arrangement that is en-
Form 1099-C. If a federal agency, financial in- tered into and evidenced in writing be-
Per-Unit Retain Certificates stitution, credit union, finance company, or fore January 1, 2026.
credit card company cancels or forgives your
A per-unit retain certificate is any written notice debt of $600 or more, you may receive a Form The exclusions don't apply in the following
that shows the stated dollar amount of a 1099-C, Cancellation of Debt. The amount of situations.
per-unit retain allocation made to you by the co- debt canceled is shown in box 2. • If a canceled debt is excluded from income
operative. A per-unit retain allocation is an because it takes place in a bankruptcy
amount paid to patrons for products sold for case, the exclusions in situations (2), (3),
(4), and (5) don't apply.
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• If a canceled debt is excluded from income tax attributes in the order listed unless you elect debt cancellation. Reduce the carryover
because it takes place when you're insol- to reduce the basis of depreciable property first, 33 / cents for each dollar of excluded 1 3
vent, the exclusions in situations (3) and as explained later. canceled debt.
(4) don't apply to the extent you're insol- 1. Net operating loss (NOL). Reduce any How to make tax attribute reductions.
vent. NOL for the tax year of the debt cancella- Always make the required reductions in tax at-
• If a canceled debt is excluded from income tion, and then any NOL carryover to that tributes after figuring your tax for the year of the
because it’s qualified principal residence year. Reduce the NOL or NOL carryover debt cancellation. In making the reductions in
indebtedness, the exclusion in situation (2) one dollar for each dollar of excluded can- (1) and (4) earlier, first reduce the loss for the
doesn't apply unless you elect to apply sit- celed debt. tax year of the debt cancellation. Then reduce
uation (2) instead of the exclusion for quali-
fied principal residence indebtedness. 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,
See Form 982, later, for information on how year of the debt cancellation. Reduce the starting with the earliest year. In making the re-
to claim an exclusion for a canceled debt. carryover 33 / cents for each dollar of ex-1 3 ductions in (2) and (7) earlier, reduce the credit
cluded canceled debt. carryovers to the tax year of the debt cancella-
Debt. For this discussion, debt includes any tion in the order in which they are taken into ac-
debt for which you're liable or that attaches to 3. Minimum tax credit. Reduce the mini- count for that year.
property you hold. mum tax credit available at the beginning
of the tax year following the tax year of the Electing to reduce the basis of depreciable
Bankruptcy and Insolvency debt cancellation. Reduce the credit 33 /1 3 property first. You can elect to apply any por-
cents for each dollar of excluded canceled tion of the excluded canceled debt first to re-
You can exclude a canceled debt from income debt. duce the basis of depreciable property you hold
if you're bankrupt or to the extent you're insol- 4. Capital loss. Reduce any net capital loss at the beginning of the tax year following the tax
vent. for the tax year of the debt cancellation, year of the debt cancellation in the following or-
and then any capital loss carryover to that der.
Bankruptcy. A bankruptcy case is a case un- year. Reduce the capital loss or loss carry- 1. Depreciable real property used in your
der title 11 of the U.S. Code if you're under the over one dollar for each dollar of excluded trade or business or held for investment
jurisdiction of the court and the cancellation of canceled debt. that secured the canceled debt.
the debt is granted by the court or is the result
of a plan approved by the court. 5. Basis. Reduce the basis of the property 2. Depreciable personal property used in
Don't include debt canceled in a bankruptcy you hold at the beginning of the tax year your trade or business or held for invest-
case in your income in the year it's canceled. In- following the tax year of the debt cancella- ment that secured the canceled debt.
stead, you must use the amount canceled to re- tion in the following order.
3. Other depreciable property used in your
duce your tax attributes, explained below under a. Real property (except inventory) used trade or business or held for investment.
Reduction of tax attributes. in your trade or business or held for
investment that secured the canceled 4. Real property held as inventory if you elect
Insolvency. You're insolvent to the extent your debt. to treat it as depreciable property on Form
liabilities are more than the fair market value of 982.
your assets immediately before the cancellation b. Personal property (except inventory
of debt. and accounts and notes receivable) The amount you apply can't be more than
You can exclude canceled debt from gross used in your trade or business or held the total adjusted basis of all the depreciable
income up to the amount by which you're insol- for investment that secured the can- properties. Depreciable property for this pur-
vent. If the canceled debt is more than this celed debt. pose means any property subject to deprecia-
tion, but only if a reduction of basis will reduce
amount and the debt qualifies, you can apply c. Other property (except inventory and the depreciation or amortization otherwise al-
the rules for qualified farm debt or qualified real accounts and notes receivable) used lowable for the period immediately following the
property business debt to the difference. Other- in your trade or business or held for basis reduction.
wise, you include the difference in gross in- investment. You make this reduction before reducing the
come. Use the amount excluded because of in- d. Inventory and accounts and notes re- other tax attributes listed earlier. If the excluded
solvency to reduce any tax attributes, as ceivable. canceled debt is more than the depreciable ba-
explained below under Reduction of tax attrib- sis you elect to reduce first, use the difference
utes. You must reduce the tax attributes under e. Other property. to reduce the other tax attributes. In figuring the
the insolvency rules before applying the rules limit on the basis reduction in (5) under Order of
for qualified farm debt or for qualified real prop- Reduce the basis one dollar for each
erty business debt. dollar of excluded canceled debt. How- reduction, earlier, use the remaining adjusted
ever, the reduction can't be more than the basis of your properties after making this elec-
Example. You had a $15,000 debt that total basis of property and the amount of tion.
wasn't qualified principal residence debt can- money you hold immediately after the debt See Form 982, later, for information on how
celed outside of bankruptcy. Immediately be- cancellation minus your total liabilities im- to make this election. If you make this election,
fore the cancellation, your liabilities totaled mediately after the cancellation. you can revoke it only with the consent of the
$80,000 and your assets totaled $75,000. Since For allocation rules that apply to basis IRS.
your liabilities were more than your assets, you reductions for multiple canceled debts,
were insolvent to the extent of $5,000 ($80,000 see Regulations section 1.1017-1(b)(2). Recapture of basis reductions. If you reduce
− $75,000). You can exclude this amount from Also see Electing to reduce the basis of the basis of property under these provisions (ei-
income. The remaining canceled debt depreciable property first, later. ther the election to reduce basis first or the ba-
sis reduction without that election) and later sell
($10,000) may be subject to the qualified farm 6. Passive activity loss and credit carry- or otherwise dispose of the property at a gain,
debt or qualified real property business debt overs. Reduce the passive activity loss the part of the gain due to this basis reduction is
rules. If not, you must include it in income. and credit carryovers from the tax year of taxable as ordinary income under the deprecia-
the debt cancellation. Reduce the loss tion recapture provisions. Treat any property
Reduction of tax attributes. If you exclude carryover one dollar for each dollar of ex- that isn't section 1245 or section 1250 property
canceled debt from income in a bankruptcy cluded canceled debt. Reduce the credit as section 1245 property. For section 1250
case or during insolvency, you must use the ex- carryover 33 / cents for each dollar of ex-1 3
property, determine the straight-line deprecia-
cluded debt to reduce certain tax attributes. cluded canceled debt. tion adjustments as though there were no basis
Order of reduction. You must use the ex- 7. Foreign tax credit. Reduce the credit reduction for debt cancellation. Sections 1245
cluded canceled debt to reduce the following carryover to or from the tax year of the
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and 1250 property and the recapture of gain as year of the debt cancellation, multiplied by
ordinary income are explained in chapter 9. 3.
Income From Other
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- Sources
during insolvency, see Pub. 908. ryover to that year.
5. Any passive activity loss and credit carry- This section discusses other types of income
Qualified Farm Debt overs from the tax year of the debt cancel- you may receive.
lation. Any credit carryover is multiplied by Barter income. If you're paid for your work in
You can exclude from income a canceled debt 3. farm products, other property, or services, you
that's qualified farm debt owed to a qualified 6. Any foreign tax credit carryovers to or from must report as income the fair market value of
person. This exclusion applies only if you were the tax year of the debt cancellation, multi- what you receive. The same rule applies if you
solvent when the debt was canceled or, if you plied by 3. trade farm products for other farm products,
were insolvent, only to the extent the canceled property, or someone else's labor. This is called
debt is more than the amount by which you Qualified property. This is any property barter income. For example, if you help a neigh-
were insolvent. This exclusion doesn't apply to you use or hold for use in your trade or business bor build a barn and receive a cow for your
a canceled debt excluded from income be- or for the production of income. work, you must report the fair market value of
cause it relates to your principal residence or it the cow as ordinary income. Your basis for
takes place in a bankruptcy case. Reduction of tax attributes. If you exclude property you receive in a barter transaction is
canceled debt from income under the qualified usually the fair market value that you include in
Your debt is qualified farm debt if both the farm debt rules, you must use the excluded income. If you pay someone with property, see
following requirements are met. debt to reduce tax attributes. (If you also exclu- Property for services under Labor Hired in
• You incurred it directly in operating a farm- ded canceled debt under the insolvency rules, chapter 4.
ing business. you reduce the amount of the tax attributes re-
• At least 50% of your total gross receipts for maining after reduction for the exclusion al- Below-market loans. A below-market loan is
the 3 tax years preceding the year of debt lowed under the insolvency rules.) You must a loan on which either no interest is charged or
cancellation were from your farming busi- generally follow the reduction rules previously interest is charged at a rate below the applica-
ness. explained under Bankruptcy and Insolvency. ble federal rate. If you make a below-market
However, don't follow the rules in (5) under Or- loan, you may have to report income from the
For more information, see Pub. 4681. der of reduction, earlier. Instead, follow the spe- loan in addition to any stated interest you re-
cial rules explained next.
Qualified person. This is a person who is ac- ceive from the borrower. See chapter 1 of Pub.
tively and regularly engaged in the business of Special rules for reducing the basis of 550 for more information on below-market
lending money. A qualified person includes any property. You must use special rules to re- loans.
federal, state, or local government, or any of duce the basis of property for excluded can-
their agencies or subdivisions. The USDA is a celed qualified farm debt. Under these special Commodity futures and options. See Hedg-
qualified person. A qualified person doesn't in- rules, you only reduce the basis of qualified ing in chapter 8 for information on gains and
clude any of the following. property (defined earlier). Reduce it in the fol- losses from commodity futures and options
• A person related to you. lowing order. transactions.
• A person from whom you acquired the 1. Depreciable qualified property. You may Custom hire (machine work). Pay you re-
property (or a person related to this per- elect on Form 982 to treat real property ceive for contract work or custom work that you
son). held as inventory as depreciable property. or your hired help perform off your farm for oth-
• A person who receives a fee from your in- ers, or for the use of your property or machines,
vestment in the property (or a person rela- 2. Land that's qualified property and is used
ted to this person). or held for use in your farming business. is income to you whether or not income tax was
withheld. This rule applies whether you receive
For the definition of a related person, see 3. Other qualified property. the pay in cash, services, or merchandise. Re-
Related persons under At-Risk Amounts in Pub. port this income on Schedule F. If you perform
925. Form 982 custom work activities that are more than inci-
dental to your farming business, include the in-
Exclusion limit. The amount of canceled Use Form 982 to show the amounts of canceled come and expenses from the custom work on
qualified farm debt you can exclude from in- debt excluded from income and the reduction of Schedule C.
come is limited. It can't be more than the sum of tax attributes in the order listed on the form.
your adjusted tax attributes and the total adjus- Also use it if you're electing to apply the exclu- Easements and rights-of-way. Income you
ted basis of the qualified property you hold at ded canceled debt to reduce the basis of depre- receive for granting easements or rights-of-way
the beginning of the tax year following the tax ciable property before reducing tax attributes. on your farm or ranch for flooding land, laying
year of the debt cancellation. Figure this limit af- You make this election by showing the amount pipelines, constructing electric or telephone
ter taking into account any reduction of tax at- you elect to apply on line 5 of the form. lines, etc., may result in income, a reduction in
tributes because of the exclusion of canceled the basis of all or part of your farmland, or both.
debt from gross income during insolvency. When to file. You must file Form 982 with your Income you received for granting a tempo-
If the canceled debt is more than this limit, timely filed income tax return (including exten- rary construction easement is rental income.
you must include the difference in gross in- sions) for the tax year in which the cancellation Report the income as rent on Part I of Sched-
come. of debt occurred. If you timely filed your return ule E (Form 1040).
Adjusted tax attributes. Adjusted tax at- for the year without electing to apply the exclu-
tributes means the sum of the following items. ded canceled debt to reduce the basis of depre- Example. You granted a permanent
ciable property first, you can still make the elec- right-of-way for a gas pipeline through your
1. Any NOL for the tax year of the debt can- tion by filing an amended return within 6 months property for $10,000. Only a specific part of
cellation and any NOL carryover to that of the due date of the return (excluding exten- your farmland was affected. You reserved the
year. sions). For more information, see When To File right to continue farming the surface land after
2. Any general business credit carryover to in the Form 982 instructions. the pipe was laid. Treat the payment for the
right-of-way in one of the following ways.
or from the year of the debt cancellation,
multiplied by 3.
3. Any minimum tax credit available at the
beginning of the tax year following the tax
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1. If the payment is less than the basis prop- the gain to a later year. See chapters 8 through Timber sales. Timber sales, including sales of
erly allocated to the part of your land affec- 11. logs, firewood, and pulpwood, are discussed in
ted by the right-of-way, reduce the basis chapter 8.
by $10,000. Recapture of section 179 expense deduc-
tion. If you took a section 179 expense deduc- Tree farmers, in the business of tree
2. If the payment is equal to or more than the tion for property used in your farming business TIP farming, may use section 631(a) to
basis of the affected part of your land, re- and at any time during the property's recovery capture favorable income tax treatment
duce the basis to zero and the rest, if any, period you don't use it more than 50% in your of timber sales and then report the actual cash
is gain from a sale. The gain is reported on business, you must include part of the deduc- sale of timber on Schedule F. Section 2032A
Form 4797 and is treated as section 1231 tion in income. See chapter 7 for information on defines sale of trees as farm income (under the
gain if you held the land for more than 1 the section 179 expense deduction and when to special use valuation for estate tax purposes).
year. See chapter 9. recapture that deduction. However, land owners who make frequent
sales (for example, two to three within 5 years,
The contract also contained a provision for a In addition, if the percentage of business per case law) may use Schedule F to report this
temporary workspace (temporary easement) to use of listed property (see chapter 7) falls to business income.
allow for the collection of topsoil and for equip- 50% or less in any tax year during the recovery
ment movement. This temporary easement is period, you must include in income any excess
only for the construction period (usually a pe- section 179 expense deduction you took on the
riod of months). The gain is reported on Sched- property. Income Averaging for
ule E and does not affect the basis of the land. Both of these amounts are farm income.
Easement contracts usually describe Use Form 4797, Part IV, to figure how much to Farmers
include in income.
TIP the affected land using square feet. If you're engaged in a farming business, you
Your basis may be figured per acre. Refund or reimbursement. You must gener- may be able to average all or some of your farm
One acre equals 43,560 square feet. ally include in income a reimbursement, refund, income by using income tax rates from the 3
If construction of the pipeline damaged or recovery of an item for which you took a de- prior years (base years) to calculate the tax on
growing crops and you later receive a settle- duction in an earlier year. Include it for the tax that income. Income averaging may lower your
ment of $250 for this damage, the $250 is in- year you receive it. However, if any part of the income tax liability in a year where farm income
come and is included on Schedule F. It doesn't earlier deduction didn't decrease your income and taxable income are higher compared to one
affect the basis of your land. tax, you don't have to include that part of the re- or more of the 3 prior years. See the Instruc-
imbursement, refund, or recovery. tions for Schedule J (Form 1040) for the defini-
Fuel tax credit and refund. Include any credit tion of the term “farming business.”
or refund of federal excise taxes on fuels in your Example. A tenant farmer purchased fertil- Farmers electing farm income averag-
gross income if you deducted the cost of the izer for $1,000 in April 2021. He deducted TIP ing may want to include taxable income
fuel (including excise tax) as an expense that $1,000 on his 2021 Schedule F and the entire from the fair market value (trade value)
reduced your income tax. See chapter 14 for deduction reduced his tax. The landowner reim- of traded farm assets as electable farm income.
more information about fuel tax credits and re- bursed him $500 of the cost of the fertilizer in Under the Tax Cuts and Jobs Act, personal
funds. February 2022. The tenant farmer must include property, such as tractors and equipment, no
$500 in income on his 2022 tax return because longer qualifies for a like-kind exchange and is
Illegal federal irrigation subsidy. The federal the entire deduction decreased his 2021 tax. now subject to depreciation recapture on the
government, operating through the Bureau of fair market value of the trade as if cash was ex-
Reclamation, has made irrigation water from Sale of soil and other natural deposits. If changed.
certain reclamation and irrigation projects avail- you remove and sell topsoil, loam, fill dirt, sand,
able for agricultural purposes. The excess of gravel, or other natural deposits from your prop-
the amount required to be paid for water from erty, the proceeds are ordinary income. A rea- Who can use income averaging? You can
these projects over the amount you actually sonable allowance for depletion of the natural use income averaging to figure your tax for any
paid is an illegal subsidy. deposit sold may be claimed as a deduction. year in which you were engaged in a farming
For example, if the amount required to be See Depletion in chapter 7. business as an individual, a partner in a partner-
paid is full cost and you paid less than full cost, ship, or a shareholder in an S corporation. Serv-
the difference is an illegal subsidy and you must Sod. Report proceeds from the sale of sod ices performed as an employee are disregar-
include it in income. Report this on Schedule F, on Schedule F. A deduction for cost depletion is ded in determining whether an individual is
line 8. You can't take a deduction for the allowed, but only for the topsoil removed with engaged in a farming business. However, if
amount you must include in income. the sod. you're a shareholder of an S corporation en-
For more information on reclamation and irri- Granting the right to remove deposits. If gaged in a farming business, you may treat
gation projects, contact your local Bureau of you enter into a legal relationship granting compensation received from the corporation
Reclamation. someone else the right to excavate and remove that's attributable to the farming business as
natural deposits from your property, you must farm income. You don't need to have been en-
Prizes. Report prizes you win on farm livestock determine whether the transaction is a sale or gaged in a farming business in any base year.
or products at contests, exhibitions, fairs, etc., another type of transaction (for example, a Corporations, partnerships, S corporations,
on Schedule F, line 8. If you receive a prize in lease). estates, and trusts can't use income averaging.
cash, include the full amount in income. If you If you receive a specified sum or an amount
receive a prize in produce or other property, in- fixed without regard to the quantity produced Elected Farm Income (EFI)
clude the fair market value of the property. For and sold from the deposit and you retain no
prizes of $600 or more, you should receive a economic interest in the deposit, your transac- EFI is the amount of income from your farming
Form 1099-MISC. tion is a sale. You're considered to retain an business that you elect to have taxed at base
See chapter 12 for information about prizes economic interest if, under the terms of the le- year rates. You can designate as EFI any type
related to 4-H Club or FFA projects. See Pub. gal relationship, you depend on the income de- of income attributable to your farming business.
525 for information about other prizes. rived from extraction of the deposit for a return However, your EFI can't be more than your tax-
of your capital investment in the deposit. able income, and any EFI from a net capital
Property sold, destroyed, stolen, or con- Your income from the deposit is capital gain gain attributable to your farming business can't
demned. You may have an ordinary or capital if the transaction is a sale. Otherwise, it's ordi- be more than your total net capital gain.
gain if property you own is sold or exchanged; nary income subject to an allowance for deple-
stolen; destroyed by fire, flood, or other casu- tion. See chapter 7 for information on depletion Income from your farming business is the
alty; or condemned by a public authority. In and chapter 8 for the tax treatment of capital sum of any farm income or gain minus any farm
some situations, you can postpone the tax on gains. expenses or losses allowed as deductions in
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figuring your taxable income. However, it • The limit on itemized deductions based on 1, 2022, through December 31, 2022, the rate is
doesn't include gain or loss from the sale or your adjusted gross income. 62.5 cents. See Truck and Car Expenses, later.
other disposition of land, or from the sale of de- • The amount of any net capital loss or NOL
velopment rights, grazing rights, and other simi- in a base year.
lar rights. Reminders
Gains or losses from the sale or other dis- Tax for Certain Children Who
Temporary meal expense deduction in-
position of farm property. Gains or losses Have Unearned Income crease for 2022. Section 210 of the Taxpayer
from the sale or other disposition of farm prop- Certainty and Disaster Tax Relief Act of 2020
erty other than land can be designated as EFI if If your child was under age 19 (24 if a full-time provides for the temporary allowance of a 100%
you (or your partnership or S corporation) used student) at the end of the tax year and had un- business meal deduction for food or beverages,
the property regularly for a substantial period in earned income of more than $2,300, this in- if provided by a restaurant (including carry-out
a farming business. Whether the property has come will be taxed at the parent’s tax rate if the or delivery), and the expense is paid or incurred
been regularly used for a substantial period de- parent’s tax rate is higher than the child’s rate. after December 31, 2020, and before January
pends on all the facts and circumstances. For more information, see the Instructions for 1, 2023.
Form 8615.
Liquidation of a farming business. If you
(or your partnership or S corporation) liquidate Topics
your farming business, gains or losses on prop- Alternative Minimum Tax This chapter discusses:
erty sold within a reasonable time after opera- (AMT)
tions stop can be designated as EFI. A period of • Deductible expenses
1 year after stopping operations is a reasonable You can elect to use income averaging to com- • Domestic production activities deduction
time. After that, what is a reasonable time de- pute your regular tax liability. However, income • Capital expenses
pends on the facts and circumstances. averaging isn't used to determine your regular • Nondeductible expenses
tax or tentative minimum tax when figuring your • Losses from operating a farm
EFI and base year rates. If your EFI includes AMT. Using income averaging may reduce your • Not-for-profit farming
both ordinary income and capital gains, you total tax even if you owe AMT.
must use tax rates from each base year to com-
pute tax on an equal portion of each type of in- Credit for prior year minimum tax. You may Useful Items
come. For example, you can't tax all of the capi- be able to claim a nonrefundable tax credit if You may want to see:
tal gains at the rate for capital gains from a you owed AMT in a prior year. See the Instruc-
single base year. tions for Form 8801. Publication
463 463 Travel, Gift, and Car Expenses
How To Figure the Tax Schedule J 535 535 Business Expenses
If you average your farm income, you will figure You can use income averaging by filing Sched- 587 587 Business Use of Your Home
your tax on Schedule J (Form 1040). ule J (Form 1040) with your timely filed (includ- 925 925 Passive Activity and At-Risk Rules
ing extensions) return for the year. You can also
Negative taxable income for base year. If use income averaging on a late return, or use, 936 936 Home Mortgage Interest Deduction
your taxable income for any base year was zero change, or cancel it on an amended return if the
because your deductions were more than your time for filing a claim for refund hasn't expired Form (and Instructions)
income, you may have negative taxable income for that election year. You must generally file Sch A (Form 1040) Sch A (Form 1040) Itemized
for that year to combine with your EFI on the claim for refund within 3 years from the date Deductions
Schedule J. you filed your original return or 2 years from the
date you paid the tax, whichever is later. Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From
Filing status. You aren't prohibited from using Farming
income averaging solely because your filing 461 461 Limitation on Business Losses
status isn't the same as your filing status in the
base years. For example, if you're married and 1045 1045 Application for Tentative Refund
file jointly, but filed as single in all of the base 5213 5213 Election To Postpone
years, you may still average farm income.
Determination as To Whether the
4. Presumption Applies That an
Effect on Other Tax Activity Is Engaged in for Profit
Determinations 8903 8903 Domestic Production Activities
You subtract your EFI from your taxable income Farm Business Deduction
and add one-third of it to the taxable income of 8990 8990 Limitation on Business Interest
each of the base years to determine the tax rate Expenses Expense IRC 163(j)
to use for income averaging. The allocation of
your EFI to the base years doesn't affect other See chapter 16 for information about getting
tax determinations. For example, you make the publications and forms.
following determinations before subtracting What's New
your EFI (or adding it to income in the base
years). Standard mileage rate. For the period Janu- Deductible Expenses
• The amount of your self-employment tax. ary 1, 2022, through June 30, 2022, the stand-
• Whether, in the aggregate, sales and other ard mileage rate for the cost of operating your The ordinary and necessary costs of operating
dispositions of business property (section car, van, pickup, or panel truck for each mile of a farm for profit are deductible business expen-
1231 transactions) produce long-term cap- business use is 58.5 cents. For the period July ses. “Ordinary” means what most farmers do,
ital gain or ordinary loss. and “necessary” means what is useful and help-
• The amount of any NOL carryover or net ful in farming. Schedule F, Part II, lists some
capital loss carryover applied and the common farm expenses that are typically de-
amount of any carryover to another year. ductible. This chapter discusses many of these
expenses, as well as others not listed on
Schedule F.
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Reimbursed expenses. If the reimbursement resale is deductible in the year you sell or other- This rule doesn't apply to the purchase
is received in the same year that the expense is wise dispose of that poultry. ! of commodity futures contracts.
claimed, reduce the expense by the amount of CAUTION
the reimbursement. If the reimbursement is re- Example. During 2022, you bought fertilizer
ceived in a year after the expense is claimed, ($40,000), feed ($10,000), and seed ($5,000) Payment for the purchase of feed. Whether
include the reimbursement amount in income. for use on your farm in the following year. Your a payment is for the purchase of feed or a de-
See Refund or reimbursement under Income total prepaid farm supplies expense for 2022 is posit depends on the facts and circumstances
From Other Sources in chapter 3. $55,000. Your other deductible farm expenses in each case. It is for the purchase of feed if you
totaled $100,000 for 2022. Therefore, your de- can show you made it under a binding commit-
Personal and business expenses. Some ex- duction for prepaid farm supplies can't be more ment to accept delivery of a specific quantity of
penses you pay during the tax year may be part than $50,000 (50% of $100,000) for 2022. The feed at a fixed price and you aren't entitled, by
personal and part business. These may include excess prepaid farm supplies expense of contract or business custom, to a refund or re-
expenses for gasoline, oil, fuel, water, rent, $5,000 ($55,000 − $50,000) is deductible in a purchase.
electricity, telephone, automobile upkeep, re- later tax year when you use or consume the The following are some factors that show a
pairs, insurance, interest, and taxes. supplies. However, the deduction limit doesn't payment is a deposit rather than for the pur-
You must allocate these mixed expenses apply if you qualify for the exceptions listed chase of feed.
between their business and personal parts. next. • The absence of specific quantity terms.
Generally, the personal part of these expenses • The right to a refund of any unapplied pay-
isn't deductible. The business portion of the ex- Exceptions. This limit on the deduction for
penses is deductible on Schedule F. prepaid farm supplies expense doesn't apply if ment credit at the end of the contract.
you are a farm-related taxpayer and either of • The seller's treatment of the payment as a
Example. You paid $3,600 for electricity the following apply. deposit.
• The right to substitute other goods or prod-
during the tax year. You used / of the electric-1 3 1. Your prepaid farm supplies expense is ucts for those specified in the contract.
ity for personal purposes and / for farming. 2 3 more than 50% of your other deductible A provision permitting substitution of ingredi-
Under these circumstances, you can deduct farm expenses because of a change in ents to vary the particular feed mix to meet your
$2,400 ( / of $3,600) of your electricity ex-2 3 business operations caused by unusual livestock's current diet requirements won't sug-
pense as a farm business expense. circumstances. gest a deposit. Further, a price adjustment to
Reasonable allocation. It isn't always 2. Your total prepaid farm supplies expense reflect market value at the date of delivery isn't,
easy to determine the business and nonbusi- for the preceding 3 tax years is less than by itself, proof of a deposit.
ness parts of an expense. There is no method 50% of your total other deductible farm ex-
of allocation that applies to all mixed expenses. penses for those 3 tax years. Business purpose. The prepayment has a
Any reasonable allocation is acceptable. What business purpose only if you have a reasonable
is reasonable depends on the circumstances in You are a farm-related taxpayer if any of the expectation of receiving some business benefit
each case. following tests apply. from prepaying the cost of livestock feed. The
1. Your main home is on a farm. following are some examples of business bene-
fits.
Prepaid Farm Supplies 2. Your principal business is farming. • Fixing maximum prices and securing an
3. A member of your family meets (1) or (2). assured feed supply.
Prepaid farm supplies include the following • Securing preferential treatment in anticipa-
items if paid for during the year. For this purpose, your family includes your tion of a feed shortage.
• Feed, seed, fertilizer, and similar farm sup- brothers and sisters, half brothers and half sis-
plies not used or consumed during the ters, spouse, parents, grandparents, children, Other factors considered in determining the
year, but not including farm supplies that grandchildren, and aunts and uncles and their existence of a business purpose are whether
you would have consumed during the year children. the prepayment was a condition imposed by the
seller and whether that condition was meaning-
if not for a fire, storm, flood, other casualty, Whether or not the deduction limit for ful.
disease, or drought. ! prepaid farm supplies applies, your ex-
• Poultry (including egg-laying hens and CAUTION penses for prepaid livestock feed may No material distortion of income. The fol-
baby chicks) bought for use (or for both be subject to the rules for advance payment of lowing are some factors considered in deter-
use and resale) in your farm business. livestock feed, discussed next. mining whether deducting prepaid livestock
However, include only the amount that feed materially distorts income.
would be deductible in the following year if Your customary business practice in con-
you had capitalized the cost and deducted •
it ratably over the lesser of 12 months or Prepaid Livestock Feed ducting your livestock operations.
• The expense in relation to past purchases.
the useful life of the poultry. If you report your income and expenses under • The time of year you made the purchase.
• Poultry bought for resale and not resold the cash method of accounting, you can't de- • The expense in relation to your income for
during the year. duct in the year paid the cost of feed your live- the year.
stock will consume in a later year unless you
Deduction limit. If you use the cash method of meet all the following tests.
accounting to report your income and expen- Labor Hired
ses, your deduction for prepaid farm supplies in 1. The payment is for the purchase of feed
the year you pay for them may be limited to rather than a deposit. You can deduct reasonable wages paid for reg-
50% of your other deductible farm expenses for 2. The prepayment has a business purpose ular farm labor, piecework, contract labor, and
the year (all Schedule F deductions except pre- and isn't merely for tax avoidance. other forms of labor hired to perform your farm-
paid farm supplies). This limit doesn't apply if ing operations. You can pay wages in cash or in
you meet one of the exceptions described later. 3. Deducting the prepayment doesn't result noncash items such as inventory, capital as-
See chapter 2 for a discussion of the Cash in a material distortion of your income. sets, or assets used in your business. The cost
Method of accounting. of boarding farm labor is a deductible labor
If the limit applies, you can deduct the ex- If you meet all three tests, you can deduct
cess cost of farm supplies other than poultry in the prepaid feed, subject to the limit on prepaid cost. Other deductible costs you incur for farm
the year you use or consume the supplies. The farm supplies discussed earlier. labor include health insurance, workers' com-
pensation insurance, and other benefits.
excess cost of poultry bought for use (or for If you fail any of these tests, you can deduct
both use and resale) in your farm business is the prepaid feed only in the year it is consumed. If you must withhold social security, Medi-
deductible in the year following the year you care, and income taxes from your employees'
pay for it. The excess cost of poultry bought for cash wages, you can still deduct the full amount
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of wages before withholding. See chapter 13 for buildings or other improvements. These wages for purposes of the business interest limitation
more information on Employment Taxes. Also, are part of the cost of the building or other im- the gross receipts test applies to individuals as
deduct the employer's share of the social secur- provement. You must capitalize them. if they were corporations or partnerships. Thus,
ity and Medicare taxes you must pay on your any individual with a farming trade or business
employees' wages as a farm business expense Maintaining your home. If your farm em- operating as a sole proprietorship is subject to
on Schedule F, line 29. See Taxes, later. ployee spends time maintaining or repairing the gross receipts test.
your home, the wages and employment taxes
Property for services. If you transfer property you pay for that work are nondeductible per- Certain businesses subject to the business
to an employee in payment for services, you sonal expenses. For example, assume you interest expense limitation may elect out of the
can deduct as wages paid the fair market value have a farm employee for the entire tax year limitation. Certain farming businesses and
of the property on the date of transfer. If the em- and the employee spends 5% of the time main- specified agricultural or horticultural coopera-
ployee pays you anything for the property, de- taining your home. The employee devotes the tives (as defined in section 199A(g)(4)) qualify
duct as wages the fair market value of the prop- remaining time to work on your farm. You can't to make an election not to limit business interest
erty minus the payment by the employee for the deduct 5% of the wages and employment taxes expenses. This is an irrevocable election. If you
property. you pay for that employee. make this election, you are required to use the
Treat the wages deducted as an amount re- alternative depreciation system (ADS), dis-
ceived for the property. You may have a gain or Employment Credits cussed later in chapter 7, to depreciate any
loss to report if the property's adjusted basis on farming property with a recovery period of 10
the date of transfer is different from its fair mar- Reduce your deduction for wages by the years or more. Also, you are not entitled to the
ket value. Any gain or loss has the same char- amount of any employment credits you claim special depreciation allowance for that prop-
acter the exchanged property had in your such as the work opportunity credit (Form 5884) erty. For an individual with more than one quali-
hands. For more information, see chapter 8. and the employee retention credit (Form 943). fying business, the election is made with re-
spect to each business. If you are required to
Child as an employee. You can deduct rea- limit your business interest expense, the
sonable wages or other compensation you pay Repairs and Maintenance amount you cannot deduct for the tax year is
to your child for doing farmwork if a true em- generally carried forward to the next tax year.
ployer-employee relationship exists between You can deduct most expenses for the repair However, there are special rules for partnership
you and your child. Include these wages in the and maintenance of your farm property. Com- treatment of disallowed business interest. See
child's income. The child may have to file an in- mon items of repair and maintenance are re- the Instructions for Form 8990 for more informa-
come tax return. These wages may also be painting, sealing cracks or replacing broken tion.
subject to social security and Medicare taxes if windows on a farm building, and routine mainte-
your child is age 18 or older. Wages paid to mi- nance of trucks, tractors, and other farm machi- Subject to the preceding rules, and assum-
nor children become subject to social security nery. However, expenses for improvements to ing other limitations do not apply, you can de-
and Medicare taxes in the month the dependent depreciable property are generally capital ex- duct as a farm business expense interest paid
child turns 18 years of age. For more informa- penditures. Amounts are paid for improvements or accrued during the tax year related to your
tion, see Family Employees in chapter 13. if they are for the betterment of your property, farming business, such as for farm mortgages
are for a restoration of your property, such as and other farm obligations.
A Form W-2 should be issued to the the replacement of major components and sub-
TIP child employee. stantial structural parts, or if your expenditures Cash method. If you use the cash method of
adapt your property to a new or different use. accounting, you can generally deduct interest
The fact that your child spends the wages to For example, if you replace a few shingles on paid during the tax year. You can't deduct inter-
buy clothes or other necessities you normally the barn roof, these expenses are generally de- est paid with funds received from the original
furnish doesn't prevent you from deducting your ductible as repairs and maintenance. If you re- lender through another loan, advance, or other
child's wages as a farm expense. place (not repair) the entire barn roof with a new arrangement similar to a loan. You can, how-
roof, then this expense is generally a capital ex- ever, deduct the interest when you start making
The amount of wages paid to the child penditure. For more information, see Capital payments on the new loan. For more informa-
! could cause a loss of the dependency Expenses, later. tion, see Cash Method in chapter 2.
CAUTION exemption depending on how the child
uses the money. Under certain conditions, you can elect to Prepaid interest. Under the cash method,
capitalize amounts paid for repair and mainte- you generally can't deduct any interest paid be-
Spouse as an employee. You can deduct nance. See Regulations section 1.263(a)-3(n) fore the year it is due. Interest paid in advance
reasonable wages or other compensation you for more information. may be deducted only in the tax year in which it
pay to your spouse if a true employer-employee is due.
relationship exists between you and your Interest Accrual method. If you use an accrual method
spouse. Wages you pay to your spouse are
subject to social security and Medicare taxes. There may be a limit on the amount you can de- of accounting, you can deduct only interest that
For more information, see Family Employees in duct as farming business interest paid or ac- has accrued during the tax year. However, you
chapter 13. crued during the tax year related to your farming can't deduct interest owed to a related person
business, such as for farm mortgages and other who uses the cash method until payment is
Nondeductible Pay farm obligations. However, a small business made and the interest is includible in the gross
taxpayer is not subject to the business interest income of that person. For more information,
You can't deduct wages paid for certain house- expense limitation and is not required to file see Accrual Method in chapter 2.
hold work, construction work, and maintenance Form 8990. A small business taxpayer is a tax-
of your home. However, those wages may be payer that is not a tax shelter (as defined in sec- Allocation of interest. If you use the proceeds
subject to the employment taxes discussed in tion 448(d)(3)) and has average annual gross of a loan for more than one purpose, you must
chapter 13. receipts of $27 million or less for the 3 prior tax allocate the interest on that loan to each use.
years under the gross receipts test of section Allocate the interest to the following categories.
Household workers. Do not deduct amounts 448(c). Gross receipts include the aggregate • Trade or business interest.
paid to persons engaged in household work, gross receipts from all persons treated as a sin- • Passive activity interest.
except to the extent their services are used in gle employer, such as a controlled group of cor- • Investment interest.
boarding or otherwise caring for farm laborers. porations, commonly controlled partnerships or • Portfolio interest.
proprietorships, and affiliated service groups. • Personal interest.
Construction labor. Do not deduct wages You generally allocate interest on a loan the
paid to hired help for the construction of new The gross receipts test of section 448(c) ap- same way you allocate the loan proceeds. You
plies only to corporations and partnerships, but
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allocate loan proceeds by tracing disburse- include land you have never used previously for Insurance
ments to specific uses. producing crops or sustaining livestock. You
can't deduct initial land preparation costs. (See You can generally deduct the ordinary and nec-
The easiest way to trace disburse- Capital Expenses, later.) essary cost of insurance for your farm business
TIP ments to specific uses is to keep the
proceeds of a particular loan separate Include government payments you receive as a business expense. This includes premiums
from any other funds. for lime or fertilizer in income. See Fertilizer and you pay for the following types of insurance.
Lime under Agricultural Program Payments in • Fire, storm, crop, theft, liability, and other
Secured loan. The allocation of loan pro- chapter 3. insurance on farm business assets.
ceeds and the related interest is generally not • Health and accident insurance on your
affected by the use of property that secures the farm employees.
loan. Taxes • Workers' compensation insurance set by
state law that covers any claims for job-re-
Example. You secure a loan with property You can deduct as a farm business expense lated bodily injuries or diseases suffered
used in your farming business. You use the loan the real estate and personal property taxes on by employees on your farm, regardless of
proceeds to buy a car for personal use. You farm business assets, such as farm equipment, fault.
must allocate interest expense on the loan to animals, farmland, and farm buildings. You can • Business interruption insurance.
personal use (purchase of the car) even though also deduct the social security and Medicare • State unemployment insurance on your
the loan is secured by farm business property. taxes you pay to match the amount withheld farm employees (deductible as taxes if
from the wages of farm employees and any fed- they are considered taxes under state
Allocation period. The period for which a eral unemployment tax you pay. For information law).
loan is allocated to a particular use begins on on employment taxes, see chapter 13.
the date the proceeds are used and ends on the Insurance to secure a loan. If you take out a
earlier of the following dates. Allocation of taxes. The taxes on the part of policy on your life or on the life of another per-
• The date the loan is repaid. your farm you use as your home (including the son with a financial interest in your farm busi-
• The date the loan is reallocated to another furnishings and surrounding land not used for ness to get or protect a business loan, you can't
use. farming) are nonbusiness taxes. You may be deduct the premiums as a business expense. In
able to deduct these nonbusiness taxes as the event of death, the proceeds of the policy
More information. For more information on in- itemized deductions on Schedule A (Form aren't taxed as income even if they are used to
terest, see chapter 4 of Pub. 535. 1040). To determine the nonbusiness part, allo- liquidate the debt.
cate the taxes between the farm assets and
nonbusiness assets. The allocation can be Advance premiums. Deduct advance pay-
Breeding Fees done from the assessed valuations. If your tax ments of insurance premiums only in the year to
statement doesn't show the assessed valua- which they apply, regardless of your accounting
You can generally deduct breeding fees as a tions, you can usually get them from the tax as- method.
farm business expense. However, if the breeder sessor.
guarantees live offspring as a result of the Example. On June 29, 2022, you paid a
breeding or other veterinary procedure, you State and local general sales taxes. State premium of $3,000 for fire insurance on your
must capitalize these costs as the cost basis of and local general sales taxes on nondeprecia- barn. The policy will cover a period of 3 years
the offspring. Also, if you use an accrual ble farm business expense items are deductible beginning on July 1, 2022. Only the cost for the
method of accounting, you must capitalize as part of the cost of those items. Include state 6 months in 2022 is deductible as an insurance
breeding fees and allocate them to the cost ba- and local general sales taxes imposed on the expense on your 2022 calendar year tax return.
sis of the calf, foal, etc. For more information on purchase of assets for use in your farm busi- Deduct $500, which is the premium for 6
who must use an accrual method of accounting, ness as part of the cost you depreciate. Also months of the 36-month premium period, or /6 36
see Accrual Method Required under Account- treat the taxes as part of your cost if they are im- of $3,000. In both 2023 and 2024, deduct
ing Methods in chapter 2. posed on the seller and passed on to you. $1,000 ( / of $3,000). Deduct the remaining 12 36
$500 in 2024. Had the policy been effective on
Fertilizer and Lime State and federal income taxes. Individuals January 1, 2022, the deductible expense would
can't deduct state and federal income taxes as have been $1,000 for each of the years 2022,
You can deduct in the year paid or incurred the farm business expenses. Individuals can de- 2023, and 2024, based on one-third of the pre-
cost of fertilizer, lime, and other materials ap- duct state and local income taxes only as an mium used each year.
plied to farmland to enrich, neutralize, or condi- itemized deduction on Schedule A (Form 1040).
tion it if the benefits last a year or less. You can For tax years after 2017 and before 2026, the Business interruption insurance. Use and
also deduct the cost of applying these materials Schedule A (Form 1040) deduction for com- occupancy and business interruption insurance
in the year you pay or incur it. However, see bined state and local income and property premiums are deductible as a business ex-
Prepaid Farm Supplies, earlier, for a rule that taxes is limited to $10,000 ($5,000 if married fil- pense. This insurance pays for lost profits if
may limit your deduction for these materials. ing separately). However, you can't deduct fed- your business is shut down due to a fire or other
eral income tax. cause. Report any proceeds in full on Sched-
If the benefits of the fertilizer, lime, or other ule F, Part I.
materials last substantially more than 1 year, Highway use tax. You can deduct the federal
you generally capitalize their cost and deduct a use tax on highway motor vehicles paid on a Self-employed health insurance deduction.
part each year the benefits last. However, you truck or truck tractor used in your farm busi- If you are self-employed, you can deduct as an
can choose to deduct these expenses in the ness. For information on the tax itself, including adjustment to income on Schedule 1 (Form
year paid or incurred. If you make this choice, information on vehicles subject to the tax, see 1040) your payments for medical, dental, and
you will need IRS approval if you later decide to the Instructions for Form 2290. qualified long-term care insurance coverage for
capitalize the cost of previously deducted items. yourself (including Medicare premiums), your
If you sell farmland on which fertilizer or lime Self-employment tax. You cannot deduct the spouse, and your dependents when figuring
has been applied and if the selling price of the self-employment tax you pay as a farm busi- your adjusted gross income on your Schedule 1
land includes part or all of the cost of the fertil- ness expense. However, you can deduct as an (Form 1040). The insurance can also cover any
izer or lime, you report the sale amount attribut- adjustment to income on Schedule 1 (Form child of yours under age 27 at the end of 2022,
able to the fertilizer or lime as ordinary income. 1040), line 15, one-half of your self-employment even if the child was not your dependent. Gen-
See section 180 for more information. tax in figuring your adjusted gross income. For erally, this deduction can't be more than the net
more information, see chapter 12.
Farmland, for these purposes, is land used profit from the business under which the plan
for producing crops, fruits, or other agricultural was established.
products or for sustaining livestock. It doesn't
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If you or your spouse is also an employee of • You have an option to buy the property at a for its use if you meet both of the following re-
another person, you can't take the deduction for nominal price compared to the total quirements.
any month in which you are eligible to partici- amount you have to pay under the agree- • You use it exclusively and regularly for the
pate in a subsidized health plan maintained by ment. administrative or management activities of
your employer or your spouse's employer. • The agreement designates part of the pay- your trade or business.
Generally, use the Self-Employed Health In- ments as interest, or part of the payments • You have no other fixed location where
surance Deduction Worksheet in the Instruc- can be easily recognized as interest. you conduct substantial administrative or
tions for Schedule 1 (Form 1040) to figure your management activities of your trade or
deduction. Include the remaining part of the in- Example. You lease new farm equipment business.
surance payment in your medical expenses on from a dealer who both sells and leases. The If you use part of your home for business,
Schedule A (Form 1040) if you itemize your de- agreement includes an option to purchase the you must divide the expenses of operating your
ductions. equipment for a specified price. The lease pay- home between personal and business use.
For more information, see Deductible Premi- ments and the specified option price equal the
ums in chapter 6 of Pub. 535. sales price of the equipment plus interest. Un- The IRS now provides a simplified method
der the agreement, you are responsible for to determine your expenses for business use of
maintenance, repairs, and the risk of loss. For your home. For more information, see Pub. 587.
Rent and Leasing federal income tax purposes, the agreement is
a conditional sales contract. You can't deduct Deduction limit. If your gross income from
If you lease property for use in your farm busi- any of the lease payments as rent. You can de- farming equals or exceeds your total farm ex-
ness, you can generally deduct the rent you pay duct interest, repairs, insurance, depreciation, penses (including expenses for the business
on Schedule F. However, you can't deduct rent and other expenses related to the equipment. use of your home), you can deduct all your farm
you pay in crop shares if you deduct the cost of expenses. But if your gross income from farm-
raising the crops as farm expenses. Motor vehicle leases. Special rules apply to ing is less than your total farm expenses, your
lease agreements that have a terminal rental deduction for certain expenses for the use of
Advance payments. Deduct advance pay- adjustment clause. In general, this is a clause your home in your farming business is limited.
ments of rent only in the year to which they ap- that provides for a rental price adjustment Your deduction for otherwise nondeductible
ply, regardless of your accounting method. based on the amount the lessor is able to sell expenses, such as utilities, insurance, and de-
the vehicle for at the end of the lease. If your preciation (with depreciation taken last), can't
Farm home. If you rent a farm, don't deduct rental agreement contains a terminal rental ad- be more than the gross income from farming
the part of the rental expense that represents justment clause, treat the agreement as a lease minus the following expenses.
the fair rental value of the farm home in which if the agreement otherwise qualifies as a lease. • The business part of expenses you could
you live. For more information, see section 7701(h). deduct even if you didn't use your home for
business (such as deductible mortgage in-
Lease or Purchase Leveraged leases. Special rules apply to terest, real estate taxes, and casualty and
leveraged leases of equipment (arrangements theft losses).
If you lease a farm building or equipment, you in which the equipment is financed by a nonre- • Farm expenses other than expenses that
must determine whether or not the agreement course loan from a third party). For more infor- relate to the use of your home. If you are
must be treated as a conditional sales contract mation, see chapter 3 of Pub. 535, and Reve- self-employed, don't include your deduc-
rather than a lease. If the agreement is treated nue Procedure 2001-28, which begins on tion for half of your self-employment tax.
as a conditional sales contract, the payments page 1156 of Internal Revenue Bulletin 2001-19 Deductions over the current year's limit can
under the agreement (so far as they don't repre- at IRS.gov/pub/irs-irbs/irb01-19.pdf. be carried over to your next tax year. They are
sent interest or other charges) are payments for subject to the deduction limit for the next tax
the purchase of the property. Do not deduct year.
these payments as rent, but capitalize the cost Depreciation
of the property and recover this cost through More information. See Pub. 587 for more in-
depreciation. If property you acquire to use in your farm busi-
ness is expected to last more than 1 year, you formation on deducting expenses for the busi-
Conditional sales contract. Whether an generally can't deduct the entire cost in the year ness use of your home.
agreement is a conditional sales contract de- you acquire it. You must recover the cost over
pends on the intent of the parties. Determine more than 1 year and deduct part of it each year Telephone expense. You can't deduct the
intent based on the provisions of the agreement on Schedule F as depreciation or amortization. cost of basic local telephone service (including
and the facts and circumstances that exist However, you can choose to deduct part or all any taxes) for the first telephone line you have
when you make the agreement. No single test, of the cost of certain qualifying property, up to a in your home, even if you have an office in your
or special combination of tests, always applies. limit, as a section 179 deduction or special de- home. However, charges for business long-dis-
However, in general, an agreement may be preciation in the year you place it in service. tance phone calls on that line, as well as the
cost of a second line into your home used ex-
considered a conditional sales contract rather Depreciation, amortization, and the section clusively for your farm business, are deductible
than a lease if any of the following is true. 179 deduction are discussed in chapter 7. business expenses. Cell phone charges for
• The agreement applies part of each pay- calls relating to your farm business are deducti-
ment toward an equity interest you will re- ble. If the cell phone you use for your farm busi-
ceive. Business Use of Your Home ness is part of a family cell phone plan, you
• You get title to the property after you make must allocate and deduct only the portion of the
a stated amount of required payments. You can deduct expenses for the business use charges attributable to farm business calls.
• The amount you must pay to use the prop- of your home if you use part of your home ex-
erty for a short time is a large part of the clusively and regularly:
amount you would pay to get title to the • As the principal place of business for any Truck and Car Expenses
property. trade or business in which you engage;
• You pay much more than the current fair • As a place to meet or deal with patients, You can deduct the actual cost of operating a
rental value of the property. clients, or customers in the normal course truck or car in your farm business. Only expen-
• You have an option to buy the property at a of your trade or business; or ses for business use are deductible. These in-
nominal price compared to the value of the • In connection with your trade or business, clude such items as gasoline, oil, repairs, li-
property when you may exercise the op- if you are using a separate structure that cense tags, insurance, and depreciation
tion. Determine this value when you make isn't attached to your home. (subject to certain limits).
the agreement.
Your home office will qualify as your princi- Standard mileage rate. Instead of using ac-
pal place of business for deducting expenses tual costs, under certain conditions you can use
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the standard mileage rate. For the period Janu- The following are some types of deductible penses they incur in the conduct of your busi-
ary 1, 2022, through June 30, 2022, the rate for travel expenses. ness. Employees may be reimbursed under an
each mile of business use is 58.5 cents. For the • Air, rail, bus, and car transportation. accountable or nonaccountable plan. Under an
period July 1, 2022, through December 31, • Meals and lodging. accountable plan, the employee must provide
2022, the rate for each mile of business use is • Dry cleaning and laundry. evidence of expenses. Under a nonaccountable
62.5 cents. You can use the standard mileage • Telephone and fax. plan, no evidence of expenses is required. If
rate for a car or a light truck, such as a van, • Transportation between your hotel and you reimburse expenses under an accountable
pickup, or SUV, you own or lease. your temporary work or business meeting plan, deduct them as travel and transportation
You can't use the standard mileage rate if location. expenses. If you reimburse expenses under a
you operate five or more cars or light trucks at • Tips for any of the above expenses. nonaccountable plan, you must report the reim-
the same time. You aren't using five or more ve- bursements as wages on Form W-2 and deduct
hicles at the same time if you alternate using Meals. You can ordinarily deduct only 50% of them as wages. For more information, see
the vehicles (you use them at different times) your nonentertainment business-related meal chapter 11 of Pub. 535.
for business. expenses. You can deduct the cost of your
meals while traveling on business only if your
Example. You own a car and four pickup business trip is overnight or long enough to re- Marketing Quota Penalties
trucks that are used in your farm business. Your quire you to stop for sleep or rest to properly
farm employees use the trucks and you use the perform your duties. You can't deduct any of the You can deduct as Other expenses on Sched-
car for business. You can't use the standard cost of meals if it isn't necessary for you to rest. ule F penalties you pay for marketing crops in
mileage rate for the car or the trucks. This is be- For information on entertainment expenses, see excess of farm marketing quotas. However, if
cause all five vehicles are used in your farm chapter 2 of Pub. 463. you don't pay the penalty, but instead the pur-
business at the same time. You must use actual The expense of a meal includes amounts chaser of your crop deducts it from the payment
expenses for all vehicles. you spend for your food, beverages, taxes, and to you, include in gross income only the amount
tips relating to the meal. You can deduct either you received. Do not take a separate deduction
Business use percentage. You can claim 50% of the actual cost or 50% of a standard for the penalty.
75% of the use of a car or light truck as busi- meal allowance that covers your daily meal and
ness use without any allocation records if you incidental expenses. Tenant House Expenses
used the vehicle during most of the normal busi-
ness day directly in connection with the busi- Temporary meal expenses deduction in- You can deduct the costs of maintaining houses
ness of farming. You choose this method of crease. Section 210 of the Taxpayer Certainty and their furnishings for tenants or hired help as
substantiating business use the first year the and Disaster Tax Relief Act of 2020 provides for farm business expenses. These costs include
vehicle is placed in service. Once you make this the temporary allowance of a 100% business repairs, utilities, insurance, and depreciation.
choice, you may not change to another method meal deduction for food or beverages, if provi-
later. The following are uses directly connected ded by a restaurant (including carry-out or deliv- The value of a dwelling you furnish to a ten-
with the business of farming. ery), and the expense is paid or incurred after ant under the usual tenant-farmer arrangement
• Cultivating land. December 31, 2020, and before January 1, isn't taxable income to the tenant.
• Raising or harvesting any agricultural or 2023.
horticultural commodity. Items Purchased for Resale
• Raising, shearing, feeding, caring for, Note. No deduction is allowed for certain
training, and managing animals. entertainment expenses, membership dues, If you use the cash method of accounting, you
• Driving to the feed or supply store. and facilities used in connection with these ac- ordinarily deduct the cost of livestock and other
If you keep records and they show that your tivities for amounts paid or incurred after De- items purchased for resale only in the year of
business use was more than 75%, you may be cember 31, 2017. See section 274, as amen- sale. You deduct this cost, including freight
able to claim more. See Recordkeeping require- ded by the Tax Cuts and Jobs Act, section charges for transporting the livestock to the
ments under Travel Expenses, later. 13304. farm, on Schedule F, Part I. However, see
Recordkeeping requirements. You Chickens, seeds, and young plants below.
More information. For more information on must be able to prove your deductions
deductible truck and car expenses and disposi- RECORDS for travel by adequate records or other Example. You use the cash method of ac-
tion of truck or car in reference, see chapter 4 of evidence that will support your own statement. counting. In 2022, you buy 50 steers you will
Pub. 463. If you pay your employees for the use Estimates or approximations don't qualify as sell in 2023. You can't deduct the cost of the
of their truck or car in your farm business, see proof of an expense. steers on your 2022 tax return. You deduct their
Reimbursements to employees under Travel cost on your 2023 Schedule F, Part I.
Expenses next. You should keep an account book or similar Chickens, seeds, and young plants. If you
record, supported by adequate documentary
Travel Expenses evidence, such as receipts, that together sup- are a cash method farmer, you can deduct the
port each element of an expense. Generally, it cost of hens and baby chicks bought for com-
You can deduct ordinary and necessary expen- is best to record the expense and get documen- mercial egg production, or for raising and re-
ses you incur while traveling away from home tation of it at the time you pay it. sale, as an expense on Schedule F, Part I, in
the year paid if you do it consistently and it
for your farm business. You can't deduct lavish doesn't distort income. You can also deduct the
or extravagant expenses. Usually, the location If you choose to deduct a standard meal al-
of your farm business is considered your home lowance rather than the actual expense, you cost of seeds and young plants bought for fur-
for tax purposes. You are traveling away from don't have to keep records to prove amounts ther development and cultivation before sale as
home if: spent for meals and incidental items. However, an expense on Schedule F, Part I, when paid if
• Your duties require you to be absent from you must still keep records to prove the actual you do this consistently and you don't figure
your farm substantially longer than an ordi- amount of other travel expenses, and the time, your income on the crop method. However, see
nary workday, and place, and business purpose of your travel. Prepaid Farm Supplies, earlier, for a rule that
may limit your deduction for these items.
• You need to get sleep or rest to meet the If you deduct the cost of chickens, seeds,
demands of your work while away from More information. For detailed information on
home. travel, recordkeeping, and the standard meal al- and young plants as an expense, report their
lowance, see Pub. 463. entire selling price as income. You also can't
If you meet these requirements and can deduct the cost from the selling price.
prove the time, place, and business purpose of Reimbursements to employees. You can You can't deduct the cost of seeds and
your travel, you can deduct your ordinary and generally deduct reimbursements you pay to young plants for Christmas trees and timber as
necessary travel expenses. your employees for travel and transportation ex- an expense. Deduct the cost of these seeds
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and plants through depletion allowances. For • Subscriptions to professional, technical, a. Clearing land for farming;
more information, see Depletion in chapter 7. and trade journals that deal with farming. b. Leveling and conditioning land;
The cost of chickens and plants used as • Tying material and containers.
food for your family is never deductible. • Utilities and Internet c. Purchasing and planting trees;
Capitalize the cost of plants with a prepro- d. Building irrigation canals and ditches;
ductive period of more than 2 years, unless you De minimis safe harbor for tangible prop-
can elect out of the uniform capitalization rules. erty. If you elected to use the de minimis safe e. Laying irrigation pipes;
These rules are discussed in chapter 6. harbor for tangible property for the tax year, you
can deduct as a farm business expense on f. Installing drain tile;
Example. You use the cash method of ac- Schedule F amounts paid for tangible property g. Modifying channels or streams;
counting. In 2022, you buy 500 baby chicks to qualifying under the de minimis safe harbor. For
raise for resale in 2023. You also buy 50 bush- more information, see Capital Expenses, later. h. Constructing earthen, masonry, or
concrete tanks, reservoirs, or dams;
els of winter wheat seed in 2022 that you sow in and
the fall. Unless you previously adopted the Loan expenses. You prorate and deduct loan
method of deducting these costs in the year you expenses, such as legal fees and commissions, i. Building roads.
sell the chickens or the harvested crops, you you pay to get a farm loan over the term of the
can deduct the cost of both the baby chicks and loan. Business start-up and organizational costs.
the seed wheat in 2022. You can elect to deduct up to $5,000 of busi-
Tax preparation fees. You can deduct as a ness start-up costs and $5,000 of organiza-
Election to use crop method. If you use farm business expense on Schedule F the cost tional costs paid or incurred after October 22,
the crop method, you can delay deducting the of preparing that part of your tax return relating 2004. The $5,000 deduction is reduced by the
cost of seeds and young plants until you sell to your farm business. amount your total start-up or organizational
them. You must get IRS approval to use the You can also deduct on Schedule F the costs exceed $50,000. Any remaining costs
crop method. If you follow this method, deduct amount you pay or incur in resolving tax issues must be amortized. See chapter 7 for more in-
the cost from the selling price to determine your relating to your farm business. formation.
profit on Schedule F, Part I. For more informa- You elect to deduct start-up or organiza-
tion, see Crop method under Special Methods tional costs by claiming the deduction on the in-
of Accounting in chapter 2. Capital Expenses come tax return filed by the due date (including
Choosing a method. You can adopt either extensions) for the tax year in which the active
the crop method or the cash method for deduct- A capital expense is payment, or debt incurred, trade or business begins. However, if you timely
ing the cost in the first year you buy egg-laying for the acquisition, production, or improvement filed your return for the year without making the
hens, pullets, chicks, or seeds and young of a unit of property. You include the expense in election, you can still make the election by filing
plants. the basis of the asset. Uniform capitalization an amended return within 6 months of the due
Although you must use the same method for rules also require you to capitalize or include in date of the return (excluding extensions).
egg-laying hens, pullets, and chicks, you can inventory certain other expenses. See chapters Clearly indicate the election on your amended
use a different method for seeds and young 2 and for more information.6 return and write “Filed pursuant to section
301.9100-2” at the top of the amended return.
plants. Once you use a particular method for Capital expenses are generally not deducti- File the amended return at the same address
any of these items, use it for those items until ble, but they may be depreciable. However, you you filed the original return. The election applies
you get IRS approval to change your method. can elect to deduct certain capital expenses, when figuring taxable income for the current tax
For more information, see Change in Account- such as the following. year and all subsequent years.
ing Method in chapter 2. • The cost of fertilizer, lime, etc. (See Fertil-
izer and Lime under Deductible Expenses, You can choose to forgo the election by
Other Expenses earlier.) clearly electing to capitalize your start-up or or-
• Soil and water conservation expenses. ganizational costs on an income tax return filed
The following list, while not all-inclusive, shows (See chapter 5.) by the due date (including extensions) for the
some expenses you can deduct as other farm • The cost of property that qualifies for a de- tax year in which the active trade or business
expenses on Schedule F, Part II. These expen- duction under section 179. (See chap- begins. For more information about start-up and
ses must be for business purposes and ter 7.) organizational costs, see chapter 7.
(1) paid, if you use the cash method of account- • Business start-up costs. (See Business Exception for tangible real and personal
ing; or (2) incurred, if you use an accrual start-up and organizational costs, later.) property under the de minimis safe harbor.
method of accounting. • Forestation and reforestation costs. (See If you elect the de minimis safe harbor for your
• Accounting fees. Forestation and reforestation costs, later.) farming business for the tax year, you’re not re-
• Advertising. Generally, the costs of the following items, quired to capitalize the de minimis costs of ac-
• Business travel and meals. including the costs of material, hired labor, and quiring or producing certain real and tangible
• Commissions. installation, are capital expenses. personal property and may deduct these
• Consultant fees. amounts as farm expenses on Schedule F. For
• Crop scouting expenses. 1. Land and buildings.
more information on electing and using the de
• Dues to cooperatives. 2. Additions, alterations, and improvements minimis safe harbor, see chapter 1 of Pub. 535.
• Educational expenses (to maintain and im- to buildings, etc.
prove farming skills). Crop production expenses. The uniform
• Farm-related attorney fees. 3. Cars and trucks.
capitalization rules generally require you to cap-
• Farm magazines. 4. Equipment and machinery. italize expenses incurred in producing plants.
• Ginning. However, except for certain taxpayers required
• Insect sprays and dusts. 5. Fences.
to use an accrual method of accounting, the
• Litter and bedding. 6. Draft, breeding, sport, and dairy livestock. capitalization rules don't apply to plants with a
• Livestock fees. preproductive period of 2 years or less. For
• Marketing fees. 7. Repairs to machinery, equipment, trucks,
• Milk assessment. and cars that prolong their useful life, in- more information, see Uniform Capitalization
• Recordkeeping expenses. crease their value, or adapt them to differ- Rules in chapter 6.
• Service charges. ent use.
Timber. Capitalize the cost of acquiring timber.
• Small tools expected to last 1 year or less. 8. Water wells, including drilling and equip- Do not include the cost of land in the cost of the
• Stamps and stationery. ping costs. timber. You must generally capitalize direct
9. Land preparation costs, such as: costs incurred in reforestation. However, you

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can elect to deduct some forestation and refor- For more information about forestation and plants with a preproductive period of more than
estation costs. See Forestation and reforesta- reforestation costs, see chapter 7. 2 years. See chapter 11 for more information.
tion costs next. Reforestation costs include the
following. For more information about timber, see Repayment of loans. You can't deduct the re-
the National Timber Organization, and payment of a loan. However, if you use the pro-
1. Site preparation costs, such as: the Agriculture Handbook Number 731, ceeds of a loan for farm business expenses,
a. Girdling, Forest Landowners' Guide to the Federal you can deduct the interest on the loan. See In-
Income Tax. terest, earlier.
b. Applying herbicide,
c. Baiting rodents, and Christmas tree cultivation. If you are in the Estate, inheritance, legacy, succession,
business of planting and cultivating Christmas and gift taxes. You can't deduct estate, inheri-
d. Clearing and controlling brush. trees to sell when they are more than 6 years tance, legacy, succession, and gift taxes.
2. The cost of seed or seedlings. old, capitalize expenses incurred for planting
and stump culture and add them to the basis of Loss of livestock. You can't deduct as a loss
3. Labor and tool expenses. the standing trees. Recover these expenses as the value of raised livestock that die if you de-
4. Depreciation on equipment used in plant- part of your adjusted basis when you sell the ducted the cost of raising them as an expense.
ing or seeding. standing trees or as depletion allowances when
you cut the trees. For more information, see Losses from sales or exchanges between
5. Costs incurred in replanting to replace lost Timber Depletion under Depletion in chapter 7. related persons. You can't deduct losses from
seedlings. You can deduct as business expenses the sales or exchanges of property between you
You can choose to capitalize certain indirect re- costs incurred for shearing and basal pruning of and certain related persons, including your
forestation costs. these trees. Expenses incurred for silviculture spouse, brother, sister, ancestor, or lineal de-
These capitalized amounts are your basis practices, such as weeding or cleaning, and scendant. For more information, see chapter 2
for the timber. Recover your basis when you noncommercial thinning are also deductible as of Pub. 544.
sell the timber or take depletion allowances business expenses.
when you cut the timber. See Depletion in chap- Capitalize the cost of land improvements, Cost of raising unharvested crops. You
ter 7. such as road grading, ditching, and fire breaks, can't deduct the cost of raising unharvested
that have a useful life beyond the tax year. If the crops sold with land owned more than 1 year if
Forestation and reforestation costs. You improvements don't have a determinable useful you sell both at the same time and to the same
can elect to deduct up to $10,000 ($5,000 if life, add their cost to the basis of the land. The person. Add these costs to the basis of the land
married filing separately; $0 for a trust) of quali- cost is recovered when you sell or otherwise to determine the gain or loss on the sale. For
fying reforestation costs paid or incurred after dispose of it. If the improvements have a deter- more information, see Section 1231 Gains and
October 22, 2004, for each qualified timber minable useful life, recover their cost through Losses in chapter 9.
property. Any remaining costs can be amortized depreciation. Capitalize the cost of equipment
over an 84-month period. See chapter 7. If you and other depreciable assets, such as culverts Cost of unharvested crops bought with
make an election to deduct or amortize qualify- and fences, to the extent you don't use them in land. Capitalize the purchase price of land, in-
ing reforestation costs, you should create and planting Christmas trees. Recover these costs cluding the cost allocable to unharvested crops.
maintain separate timber accounts for each through depreciation. You can't deduct the cost of the crops at the
qualified timber property. The accounts should time of purchase. However, you can deduct this
include all reforestation treatments and the cost in figuring net profit or loss in the tax year
you sell the crops.
dates they were applied. Any qualified timber Nondeductible
property that is subject to the deduction or am-
ortization election can't be included in any other Expenses Cost related to gifts. You can't deduct costs
timber account for which depletion is allowed. related to your gifts of agricultural products or
The timber account should be maintained until You can't deduct personal expenses and cer- property held for sale in the ordinary course of
the timber is disposed of. For more information, tain other items on your tax return even if they your business. The costs aren't deductible in
see Notice 2006-47, 2006-20 I.R.B. 892, availa- relate to your farm. the year of the gift or any later year. For exam-
ble at IRS.gov/irb/2006-20_IRB/ar11.html. ple, you can't deduct the cost of raising cattle or
You elect to deduct forestation and refores- the cost of planting and raising unharvested
tation costs by claiming the deduction on the in- Personal, Living, and Family wheat on parcels of land given as a gift to your
come tax return filed by the due date (including Expenses children.
extensions) for the tax year in which the expen-
ses were paid or incurred. If you are filing Form You can't deduct certain personal, living, and Club dues and membership fees. Generally,
T (Timber), Forest Activities Schedule, also family expenses as business expenses. These you can't deduct amounts you pay or incur for
complete Form T (Timber), Part IV. If you aren't include rent and insurance premiums paid on membership in any club organized for business,
filing Form T (Timber), attach a statement to property used as your home; life insurance pre- pleasure, recreation, or any other social pur-
your return with the following information. miums on yourself or your family; the cost of pose. This includes country clubs, golf and ath-
• The unique stand identification numbers. maintaining cars, trucks, or horses for personal letic clubs, hotel clubs, sporting clubs, airline
• The total number of acres reforested dur- use; allowances to minor children; attorneys' clubs, and clubs operated to provide meals un-
ing the tax year. fees and legal expenses incurred in personal der circumstances generally considered to be
• The nature of the reforestation treatments. matters; and household expenses. Likewise, conducive to business discussions.
• The total amounts of the qualified refores- the cost of purchasing or raising produce or Exception. The following organizations
tation expenditures eligible to be amortized livestock consumed by you or your family isn't won't be treated as a club organized for busi-
or deducted. deductible. ness, pleasure, recreation, or other social pur-
However, if you timely filed your return for poses, unless one of its main purposes is to
the year without making the election, you can Other Nondeductible Items conduct entertainment activities for members or
still make the election by filing an amended re- their guests or to provide members or their
turn within 6 months of the due date of the re- You can't deduct the following items on your tax guests with access to entertainment facilities.
turn (excluding extensions). Clearly indicate the return. • Boards of trade.
election on your amended return and write • Business leagues.
“Filed pursuant to section 301.9100-2” at the Loss of growing plants, produce, and • Chambers of commerce.
top of the amended return. File the amended re- crops. Losses of plants, produce, and crops • Civic or public service organizations.
turn at the same address you filed the original raised for sale are generally not deductible. • Professional associations.
return. However, you may have a deductible loss on • Trade associations.

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• Real estate boards. b. You pledge property (other than prop- a later year. See the Instructions for Form 1045
erty used in the activity) as security for or Form 1138 for more information.
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
the violation of any law except: borrow for use in a farming activity from a per- Not-for-Profit Farming
• Amounts that constitute restitution, son who has an interest in the activity (other
• Amount paid to come into compliance with than as a creditor) or a person related to some- If you operate a farm for profit, you can deduct
the law, one (other than you) having such an interest. all the ordinary and necessary expenses of car-
rying on the business of farming on Schedule F.
• Amounts paid or incurred as the result of For more information, see Pub. 925. However, if you don't carry on your farming ac-
certain court orders in which no govern- 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 in-
On or after December 22, 2017, no deduc- volving the conduct of any trade or business in the activity, even if you itemize your deductions
tion is allowed for the restitution amount or which you don't materially participate. Gener- on Schedule A (Form 1040).
amount paid to come into compliance with the ally, a rental activity is a passive activity. Activities you do as a hobby, or mainly for
law unless the amounts are specifically identi- sport or recreation can not be deducted. This
fied in the settlement agreement or court order. If you have a passive activity, special rules
Also, any amount paid or incurred as reim- limit the loss you can deduct in the tax year. also applies to an investment activity intended
bursement to the government for the costs of You can generally deduct losses from passive only to produce tax losses for the investors.
any investigation or litigation are not eligible for activities only up to income from passive activi- The deductibility of not-for-profit losses ap-
the exceptions and are nondeductible. ties. Credits are similarly limited. plies to individuals, partnerships, estates,
See section 162(f), as amended by the Tax For more information, see Pub. 925. trusts, and S corporations. It doesn't apply to
corporations other than S corporations.
Cuts and Jobs Act, section 13306.
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
taken into account. No one factor alone is deci-
Penalties, discussed earlier. sive. Among the factors to consider are
Noncorporate taxpayers may be subject to ex-
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 $270,000 (or • Your losses are due to circumstances be-
can deduct when figuring your taxable income $540,000 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
ease or drought. Excess business losses that needed to carry on the farming activity as a
The following discussions explain these limits. 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;
• You make a profit from farming in some
year, you may have a net operating loss. See Taxpayers with losses from a farming busi- years and the amount of profit you make;
Pub. 536. ness must apply the excess business loss limi- and
If you don't carry on your farming activ- tation before carrying any net operating losses • You can expect to make a future profit from
back 2 years. See the Instructions for Form the appreciation of the assets used in the
CAUTION may be limited by the not-for-profit
! ity to make a profit, your loss deduction 1045, Application for Tentative Refund. farming activity.
rules. See Not-for-Profit Farming, later. If you incur both farming and nonfarming Presumption of profit. Your farming or other
business losses that are more than the thresh- activity is presumed carried on for profit if it pro-
old amount you must allocate the threshold duced a profit in at least 3 of the last 5 tax
At-Risk Limits amount first to the farming losses to the extent years, including the current year. Activities that
The at-risk rules limit your deduction for losses you have a net operating loss. consist primarily of breeding, training, showing,
from most business or income-producing activi- Excess farm losses that are disallowed can or racing horses are presumed carried on for
ties, including farming. These rules limit the los- be carried forward to the next tax year and trea- profit if they produced a profit in at least 2 of the
ses you can deduct when figuring your taxable ted as a net operating loss deduction from that last 7 tax years, including the current year. The
income. The deductible loss from an activity is year. activity must be substantially the same for each
limited to the amount you have at risk in the ac- year within this period. You have a profit when
tivity. the gross income from an activity is more than
the deductions for it.
You are at risk in any activity for: Net Operating Loss
If a taxpayer dies before the end of the
1. The money and adjusted basis of property Limitation 5-year (or 7-year) period, the period ends on
you contribute to the activity; and the date of the taxpayer's death.
2. Amounts you borrow for use in the activity If you have a 2022 net operating loss attributa- If your business or investment activity
if: ble to farming, you must carry it back two years, passes this 3- (or 2-) years-of-profit test, pre-
unless you elect to forgo the carryback. Farm- sume it is carried on for profit. This means the
a. You are personally liable for repay- ing businesses can elect to forgo the carryback limits discussed here don't apply. You can take
ment, or and carry forward the farm net operating loss to all your business deductions from the activity on
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Schedule F, even for the years that you have a the part of a casualty loss an individual could To get the full deduction to which you
loss. You can rely on this presumption in every not deduct in category 1 belong in this category. TIP are entitled, you should maintain your
case, unless the IRS shows it isn't valid. Where more than one asset is involved, divide records to clearly distinguish between
If you fail the 3- (or 2-) years-of-profit test, depreciation and these other deductions pro- your ordinary and necessary farm business ex-
you may still be considered to operate your portionally among those assets. penses and your soil and water conservation
farm for profit by considering the factors listed expenses.
earlier. Partnerships and S corporations. If a part-
nership or S corporation carries on a Topics. This chapter discusses the following.
Using the presumption later. If you are not-for-profit activity, these limits apply at the • Business of farming,
starting out in farming and don't have 3 (or 2) partnership or S corporation level. They are re- • Plan certification,
years showing a profit, you may want to take flected in the individual shareholder's or part- • Conservation expenses,
advantage of this presumption later, after you ner's distributive shares. • Assessment by conservation district,
have had the 5 (or 7) years of experience al- • 25% limit on deduction,
lowed by the test. More information. For more information on • When to deduct or capitalize, and
You can choose to do this by filing Form not-for-profit activities, see Not-for-Profit Activi- • Sale of a farm.
5213. Filing this form postpones any determina- ties in chapter 1 of Pub. 535.
tion that your farming activity isn't carried on for
profit until 5 (or 7) years have passed since you Business of Farming
first started farming. You must file Form 5213
within 3 years after the due date of your return For purposes of soil and water conservation ex-
for the year in which you first carried on the ac- penses, you are in the business of farming if
tivity, or, if earlier, within 60 days after receiving you cultivate, operate, or manage a farm for
a written notice from the IRS proposing to disal- profit, either as an owner or a tenant. You are
low deductions attributable to the activity. 5.
not in the business of farming if you cultivate or
The benefit gained by making this choice is operate a farm for recreation or pleasure, rather
that the IRS won't immediately question than for profit. You are not farming if you are en-
whether your farming activity is engaged in for Soil and Water gaged only in forestry or the growing of timber.
profit. Accordingly, it won't limit your deduc-
tions. Rather, you will gain time to earn a profit Farm defined. A farm includes livestock, dairy,
in 3 (or 2) out of the first 5 (or 7) years you carry Conservation poultry, fish, fruit, and truck farms. It also in-
on the farming activity. If you show 3 (or 2) cludes plantations, ranches, ranges, and or-
years of profit at the end of this period, your de- chards. A fish farm is an area where fish and
ductions aren't limited under these rules. If you Expenses
other marine animals are grown or raised and
don't have 3 (or 2) years of profit (and can't oth- artificially fed, protected, etc. It doesn't include
erwise show that you operated your farm for an area where they are merely caught or har-
profit), the limit applies retroactively to any year Introduction vested. A plant nursery is a farm for purposes of
in the 5-year (or 7-year) period with a loss. deducting soil and water conservation expen-
Filing Form 5213 automatically extends the If you are in the business of farming, you can
period of limitations on any year in the 5-year choose to deduct certain expenses for: ses.
(or 7-year) period to 2 years after the due date • Soil or water conservation, Farm rental. If you own a farm and receive
of the return for the last year of the period. The • Prevention of erosion of land used in farm- farm rental payments based on farm produc-
period is extended only for deductions of the ing, or tion, either in cash or crop shares, you are in the
activity and any related deductions that might • Endangered species recovery. business of farming. If you get cash rental for a
be affected. Otherwise, these are capital expenses that farm you own that is not used in farm produc-
must be added to the basis of the land. (See tion, you can't deduct soil and water conserva-
Limit on deductions and losses. If your ac- chapter 6 for information on determining basis.) tion expenses for that farm.
tivity isn't carried on for profit, take deductions Conservation expenses for land in a foreign If you receive a fixed rental payment that is
only in the following order, only to the extent country do not qualify for this special treatment. not based on farm production, you are in the
stated in the three categories. The deduction for conservation expenses business of farming only if you materially partici-
Category 1. Deductions you can take for cannot be more than 25% of your gross income pate in operating or managing the farm.
personal as well as for business activities are from farming. See 25% Limit on Deduction,
allowed in full. For individuals, all nonbusiness later. Example. You own a farm in Iowa. You rent
deductions, such as those for home mortgage Although some expenses are not deductible out the farm for $250 in cash per acre and don't
interest, taxes, and casualty losses (attributable as soil and water conservation expenses, they materially participate in producing or managing
to a federally declared disaster), belong in this may be deductible as ordinary and necessary production of the crops grown on the farm. You
category. See chapter 11 for more information. farm expenses. These include interest and can't deduct your soil conservation expenses
For the limits that apply to mortgage interest, taxes, the cost of periodically clearing brush for this farm. You must capitalize the expenses
see Pub. 936. from productive land, the regular removal of and add them to the basis of the land.
sediment from a drainage ditch, and expenses For more information, see Material participa-
Category 2. Deductions that don't result in paid or incurred primarily to produce an agricul- tion for landlords under Landlord Participation in
an adjustment to the basis of property are al- tural crop that may also conserve soil. Farming in chapter 12.
lowed next, but only to the extent your gross in- You must include in income most govern-
come from the activity is more than the deduc- ment payments for approved conservation
tions you take (or could take) under the first practices. However, you can exclude some Plan Certification
category. Most business deductions, such as payments you receive under certain cost-shar-
those for fertilizer, feed, insurance premiums, ing conservation programs. For more informa- You can deduct soil and water conservation ex-
utilities, wages, etc., belong in this category. tion, see Agricultural Program Payments in penses only if they are consistent with a plan
chapter 3.
Category 3. Business deductions that de- approved by the Natural Resources Conserva-
crease the basis of property are allowed last, tion Service (NRCS) of the Department of Agri-
but only to the extent the gross income from the culture. If no such plan exists, the expenses
activity is more than deductions you take (or must be consistent with a soil conservation plan
could take) under the first two categories. The of a comparable state agency. Keep a copy of
deductions for depreciation, amortization, and the plan with your books and records to support
your deductions.
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Table 5-1. Limits on Deducting an Assessment by a Conservation of the expenses. You can use another method
District for Depreciable Property to allocate these expenses if you can clearly
show that your method is more reasonable.
Total Limit on Deduction Yearly Limit on Deduction
for Assessment for for Assessment for Yearly Limit for All Depreciable conservation assets. You gen-
Depreciable Property Depreciable Property Conservation Expenses erally can't deduct your expenses for deprecia-
ble conservation assets. However, you can de-
10% of: $500 + 10% of: 25% of: duct certain amounts you pay or incur for an
Total assessment against all Your deductible share of the Your gross income from assessment for depreciable property that a soil
members of the district for the cost to the district for the farming. and water conservation or drainage district lev-
ies against your farm. See Assessment for De-
property. property. preciable Property, later.
• No one taxpayer can • If the amount you pay or • Limit for all conservation You must capitalize expenses to buy, build,
deduct more than 10% of incur for any year is expenses, including install, or improve depreciable structures or fa-
the total assessment. more than the limit, you assessments for cilities. These expenses include those for mate-
• Any amount over 10% is can deduct for that year depreciable property. rials, tile (including drainage tile), pipe, pumps
a capital expense and is only 10% of your • Amounts greater than (and other equipment), supplies, wages, fuel,
added to the basis of deductible share of the 25% can be carried to the hauling, and moving dirt when making or instal-
your land. cost. following year and added ling structures such as tanks, reservoirs, cul-
• If an assessment is paid • You can deduct the to that year's expenses. verts, canals, dams, drainage systems, waste
in installments, each remainder in equal The total is then subject management systems or wells composed of
payment must be amounts over the next 9 to the 25% of gross masonry, concrete, tile (including drainage tile),
prorated between the tax years. income from farming limit metal, or wood. You recover your capital invest-
ment through annual allowances for deprecia-
conservation expense in that year. tion.
and the capital expense. You can deduct soil and water conservation
Conservation plan. A conservation plan in- a. Diversion channels; expenses for nondepreciable earthen items.
Nondepreciable earthen items include certain
cludes the farming conservation practices ap- b. Drainage ditches; dams, ponds, and terraces described under
proved for the area where your farmland is loca- Property Having a Determinable Useful Life in
ted. There are three types of approved plans. c. Irrigation ditches; chapter 7.
• NRCS individual site plans. These plans d. Earthen dams; and
are issued individually to farmers who re- Water well. You can't deduct the cost of
quest assistance from NRCS to develop a e. Watercourses, outlets, and ponds. drilling a water well for irrigation and other agri-
conservation plan designed specifically for 3. The eradication of brush. cultural purposes as a soil and water conserva-
their farmland. tion expense. It is a capital expense. You re-
• NRCS county plans. These plans include a 4. The planting of windbreaks. cover your cost through depreciation. You must
listing of farm conservation practices ap- also capitalize your cost for drilling a test hole. If
proved for the county where the farmland You can't deduct expenses to drain or fill wet- the test hole produces no water and you con-
is located. You can deduct expenses for lands, or to prepare land for center pivot irriga- tinue drilling, the cost of the test hole is added
conservation practices not included on the tion systems, as soil and water conservation ex- to the cost of the producing well. You can re-
NRCS county plans only if the practice is a penses. These expenses are added to the cover the total cost through depreciation deduc-
part of an individual site plan. basis of the land. tions.
• Comparable state agency plans. These If you choose to deduct soil and water If a test hole, dry hole, or dried-up well (re-
plans are approved by state agencies and ! conservation expenses, you must in- sulting from prolonged lack of rain, for instance)
can be approved individual site plans or CAUTION clude as gross income any cost-shar- is abandoned, you can deduct your unrecov-
county plans. ing payments you receive for those expenses. ered cost in the year of abandonment. Aban-
A list of NRCS conservation programs is See chapter 3 for information about payments donment means that all economic benefits from
available at NRCS.USDA.gov/programs. Indi- eligible for the cost-sharing exclusion. the well are terminated. For example, filling or
vidual site plans can be obtained from NRCS sealing a well excavation or casing so that all
offices and the comparable state agencies. 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.
using it in farming immediately before you ac-
Conservation Expenses quired the land, soil and water conservation ex- Endangered species recovery expenses. If
penses you incur on it will be treated as made you are in the business of farming and meet
You can deduct conservation expenses only for on land used in farming at the time the expen- other specific requirements, you can choose to
land you or your tenant are using, or have used ses were paid or incurred. You can deduct soil deduct the conservation expenses discussed
in the past, for farming. These expenses in- and water conservation expenses for this land if earlier as endangered species recovery expen-
clude, but are not limited to, the following. your use of it is substantially a continuation of ses. Otherwise, these are capital expenses that
its use in farming. The new farming activity must be added to the basis of the land.
1. The treatment or movement of earth, such doesn't have to be the same as the old farming The expenses must be paid or incurred for
as: activity. For example, if you buy land that was the purpose of achieving site-specific manage-
a. Leveling, used for grazing cattle and then prepare it for ment actions recommended in a recovery plan
use as an apple orchard, you can deduct your approved under section 4(f) of the Endangered
b. Conditioning, conservation expenses. Species Act of 1973. See section 175 for more
information.
c. Grading,
Land not used for farming. If your conserva-
d. Terracing, tion expenses benefit both land that doesn’t
e. Contour furrowing, and qualify as land used for farming and land that Assessment by
does qualify, you must allocate the expenses
f. Restoration of soil fertility. between the two types of land. For example, if Conservation District
2. The construction, control, and protection the expenses benefit 200 acres of your land,
of: but only 120 acres of this land are used for In some localities, a soil or water conservation
farming, then you can deduct 60% (120 ÷ 200) or drainage district incurs expenses for soil or

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water conservation and levies an assessment deduct the remainder in equal amounts over the
against the farmers who benefit from the expen- next 9 tax years. Your total conservation ex-
ses. You can deduct as a conservation expense pense deduction for each year is also subject to 25% Limit on Deduction
amounts you pay or incur for the part of an as- the 25% of gross income from farming limit on
sessment that: the deduction, discussed later. The total deduction for conservation expenses
• Covers expenses you could deduct if you in any tax year is limited to 25% of your gross
had paid them directly, or Example 1. This year, the soil conservation income from farming for the year.
• Covers expenses for depreciable property district levies, and you pay, an assessment of
used in the district's business. $2,400 against your farm. Of the assessment, Gross income from farming. Gross income
$1,500 is for digging drainage ditches. You can from farming is the income you derive in the
A water or drainage district assessment for deduct this part as a soil or conservation ex- business of farming from the production of
repairs or maintenance of district property or for pense as if you had paid it directly. The remain- crops, fish, fruits, other agricultural products, or
interest paid by the district for a loan to buy ing $900 is for depreciable equipment to be livestock. Gains from sales of draft, breeding, or
property may qualify as a business deduction. used in the district's irrigation activities. The to- dairy livestock are included. Gains from sales of
See Regulations section 1.164-4(b)(1). tal amount assessed by the district against all assets such as farm machinery, or from the dis-
its members for the depreciable equipment is position of land, are not included.
Assessment for Depreciable $7,000.
The total amount you can deduct for the de- Example. In 2022, you report gross income
Property preciable equipment is limited to 10% of the to- from farming for your single-member LLC
tal amount assessed by the district against all (SMLLC) on Schedule F (Form 1040) of
You can generally deduct as a conservation ex- its members for depreciable equipment, or $85,000. Additionally, your gain from sales of
pense amounts you pay or incur for the part of a $700. The $200 excess ($900 − $700) is a capi- cull raised breeding animals reported on Form
conservation or drainage district assessment tal expense you must add to the basis of your 4797, line 2(g), is $15,000. Therefore, your
that covers expenses for depreciable property. farm. gross income from farming is $100,000
This includes items such as pumps, locks, con- To figure the maximum amount you can de- ($85,000 + $15,000). Thus, the applicable 25%
crete structures (including dams and weir duct for the depreciable equipment this year, limitation ($100,000 x 25% (0.25)) is $25,000
gates), draglines, and similar equipment. The multiply your deductible share of the total as- for soil and water expenses in 2022.
depreciable property must be used in the dis- sessment ($700) by 10% (0.10). Add $500 to The calculation of farm income for soil
trict's soil and water conservation activities. the result for a total of $570. Your deductible TIP and water conservation expenses dif-
However, the following limits apply to these as- share, $700, is greater than the maximum fers from the calculations for income
sessments. amount deductible in 1 year, so you can deduct averaging and estimated tax payments. For
• The total assessment limit. only $70 of the amount you paid or incurred for more information, see Income Averaging for
• The yearly assessment limit. depreciable property this year (10% of $700). Farmers in chapter 3 and Gross Income in
After you apply these limits, the amount you You can deduct the balance at the rate of $70 a chapter 15.
can deduct is added to your other conservation year over the next 9 years.
expenses for the year. The total for these ex- You add $70 to the $1,500 portion of the as-
penses is then subject to the 25% of gross in- sessment for drainage ditches. You can deduct Carryover of deduction. If your deductible
come from farming limit on the deduction, dis- $1,570 of the $2,400 assessment as a soil and conservation expenses in any year are more
cussed later. See Table 5-1 for a brief summary water conservation expense this year, subject than 25% of your gross income from farming for
of these limits. to the 25% of gross income from farming limit that year, you can carry the unused deduction
on the deduction, discussed later. over to later years. However, the deduction in
To ensure your deduction is within the any later year is limited to 25% of the gross in-
TIP deduction limits, keep records to show Example 2. Assume the same facts as in come from farming for that year as well.
the following. Example 1 except that $1,850 of the $2,400 as-
• The total assessment against all members sessment is for digging drainage ditches and Example. In 2022, you have gross income
of the district for the depreciable property. $550 is for depreciable equipment. The total of $32,000. During the year, you incurred
• Your deductible share of the cost to the amount assessed by the district against all its $10,000 of deductible soil and water conserva-
district for the depreciable property. members for depreciable equipment is $5,500. tion expenses. However, your deduction is limi-
• Your gross income from farming. The total amount you can deduct for the depre- ted to 25% of $32,000, or $8,000. The $2,000
ciable equipment is limited to 10% of this excess ($10,000 − $8,000) is carried over to
amount, or $550. 2023 and added to deductible soil and water
Total assessment limit. You can't deduct The maximum amount you can deduct this conservation expenses made in that year. The
more than 10% of the total amount assessed to year for the depreciable equipment is $555 total of the 2022 carryover plus 2023 expenses
all members of the conservation or drainage (10% of your deductible share of the total as- is deductible in 2023, subject to the limit of 25%
district for the depreciable property. This ap- sessment, $55, plus $500). Since your deducti- of your gross income from farming in 2023. Any
plies whether you pay the assessment in one ble share is less than the maximum amount de- expenses over the limit in that year are carried
payment or in installments. If your assessment ductible in 1 year, you can deduct the entire to 2024 and later years.
is more than 10% of the total amount assessed, $550 this year. You can deduct the entire as- Net operating loss (NOL). The deduction
both the following rules apply. sessment, $2,400, as a soil and water conser- for soil and water conservation expenses, after
• The amount over 10% is a capital expense vation expense this year, subject to the 25% of applying the 25% limit, is included when figuring
and is added to the basis of your land. gross income from farming limit on the deduc- an NOL for the year. If the NOL is carried to an-
• If the assessment is paid in installments, tion, discussed below. other year, the soil and water conservation de-
each payment must be prorated between duction included in the NOL is not subject to the
the conservation expense and the capital Sale or other disposal of land during 9-year 25% limit in the year to which it is carried.
expense. period. If you dispose of the land during the
9-year period for deducting conservation ex-
Yearly assessment limit. The maximum penses subject to the yearly limit, any amounts
amount you can deduct in any 1 year is the total you have not yet deducted because of this limit When To Deduct or
of 10% of your deductible share of the cost as are added to the basis of the property. Capitalize
explained earlier, plus $500. If the amount you
pay or incur is equal to or less than the maxi- Death of farmer during 9-year period. If a If you choose to deduct soil and water conser-
mum amount, you can deduct it in the year it is farmer dies during the 9-year period, any re- vation expenses, you must deduct the total al-
paid or incurred. If the amount you pay or incur maining amounts not yet deducted are deduc- lowable amount on your tax return for the first
is more, you can deduct in that year only 10% of ted in the year of death. year you pay or incur these expenses. If you
your deductible share of the cost. You can
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don't choose 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 6. 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
farm in a different manner, you must get the ap- Basis of Assets Loans with low or no interest. If you buy
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 little or no interest, the basis of your property is
for the first tax year you want the new method to Introduction 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 Your basis is the amount of your investment in ally have unstated interest if your interest rate is
for this request. Use the procedure outlined be- property for tax purposes. Use basis to figure less than the applicable federal rate. See the
low. the gain or loss on the sale, exchange, or other discussion of unstated interest in Pub. 537, In-
The request must include the following infor- disposition of property. Also use basis to figure stallment Sales.
mation. depreciation, amortization, depletion, and casu-
• Your name and address. alty losses. You may have property that you use
• The first tax year the method or change of for both business or the production of income Real Property
method is to apply. purposes and for personal purposes. You must
• Whether the method or change of method allocate the basis of this property based on its Real property, also called real estate, is land
applies to all your soil and water conserva- use. Only the basis allocated to the business or and generally anything built on, growing on, or
tion expenses or only to those for a particu- the production of income use of the property attached to land.
lar project or farm. If the method or change can be depreciated.
of method doesn't apply to all your expen- Your original basis in property is adjusted If you buy real property, certain fees and
ses, identify the project or farm to which (increased or decreased) by certain events. For other expenses related to the purchase of the
the expenses apply. example, if you make improvements to the property are part of your cost basis in the prop-
• The total expenses you paid or incurred in property, increase your basis. If you take de- erty. Some of these expenses are discussed
the first tax year the method or change of ductions for depreciation, or casualty losses, or next.
method is to apply. claim certain credits, reduce your basis.
Lump-sum purchase. If you buy improve-
• A statement that you will account sepa- Keep accurate records of all items that ments, such as buildings, and the land on which
rately in your books for the expenses to affect the basis of your assets. For in- they stand for a lump sum, allocate your cost
which this method or change of method re- RECORDS formation on keeping records, see
basis between the land and improvements. Al-
lates. chapter 1. locate the cost basis according to the respec-
Send your request to the following ad- tive fair market values (FMVs) of the land and
dress. improvements at the time of purchase. Figure
Topics the basis of each asset by multiplying the lump
This chapter discusses:
sum by a fraction. The numerator is the FMV of
Department of the Treasury that asset, and the denominator is the FMV of
Internal Revenue Service Center • Cost basis the whole property at the time of purchase.
Cincinnati, OH 45999 • Adjusted basis
• Basis other than cost Fair market value (FMV). FMV is the price
at which property would change hands between
For more information, see Change in a willing buyer and a willing seller, neither hav-
Accounting Method in chapter 2. Useful Items
You may want to see: ing to buy or sell, and both having reasonable
knowledge of all necessary facts. Sales of simi-
lar property on or about the same date may help
Sale of a Farm Publication in figuring the FMV of the property.
535
If you sell your farm, you can't adjust the basis 535 Business Expenses If you are not certain of the FMV of the
TIP land and improvements, you can allo-
of the land at the time of the sale for any unused 544 544 Sales and Other Dispositions of cate the basis according to their as-
carryover of soil and water conservation expen- Assets sessed values for real estate tax purposes.
ses (except for deductions of assessments for
depreciable property, discussed earlier). How- 551 551 Basis of Assets
ever, if you acquire another farm and return to Real estate taxes. If you pay the real estate
the business of farming, you can start taking de- 946 946 How To Depreciate Property taxes the seller owed on real property you
ductions again for the unused carryovers. bought, and the seller did not reimburse you,
See chapter 16 for information about getting treat those taxes as part of your basis.
Gain on sale of farmland. If you held the land publications and forms. If you reimburse the seller for taxes the
5 years or less before you sold it, gain on the seller paid for you, you can generally deduct
sale of the land is treated as ordinary income up that amount as a tax expense in the year of pur-
to the amount you previously deducted for soil Cost Basis chase. Whether or not you reimburse the seller,
and water conservation expenses. If you held do not include that amount in the basis of your
the land less than 10 but more than 5 years, the The basis of property you buy is usually its cost. property.
gain is treated as ordinary income up to a speci- Cost is the amount you pay in cash, debt obli-
fied percentage of the previous deductions. See gations, other property, or services. Your cost Settlement costs. Your basis includes the set-
Section 1252 property under Other Gains in includes amounts you pay for sales tax, freight, tlement fees and closing costs for buying the
chapter 9. installation, and testing. The basis of real estate property. See Pub. 551 for a detailed list of
and business assets will include other items, items you can and cannot include in basis.
discussed later. Basis generally does not in- Do not include fees and costs for getting a
clude interest payments. However, see Carry- loan on the property. Also, do not include
ing charges and Capitalized interest in chap- amounts placed in escrow for the future pay-
ter 4 of Pub. 535. ment of items such as taxes and insurance.

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Points. If you pay points to get a loan (includ- Table 6-1. Plants With a Preproductive Period of More Than 2 Years
ing a mortgage, second mortgage, home equity
loan, or line of credit), do not add the points to Plants producing the following crops or yields have a nationwide weighted average
the basis of the related property. You may be preproductive period of more than 2 years.
able to deduct the points currently or over the Almonds • Dates • Macadamia nuts • Pistachio nuts
term of the loan. For more information about de- •
ducting points, see Points in chapter 4 of Pub. • Apples • Figs • Mangoes • Plums
535. • Apricots • Grapefruit • Nectarines • Pomegranates
• Avocados • Grapes • Olives • Prunes
Assumption of a mortgage. If you buy prop- • Blueberries • Guavas • Oranges • Tangelos
erty and assume (or buy the property subject to) • Cherries • Kiwifruit • Peaches • Tangerines
an existing mortgage, your basis includes the Chestnuts • Kumquats • Pears • Tangors
amount you pay for the property plus the •
amount you owe on the mortgage. • Coffee beans • Lemons • Pecans • Walnuts
• Currants • Limes • Persimmons
Example. If you buy a farm for $100,000 ness, there are special rules you must use to al- • An ornamental tree.
cash and assume a mortgage of $400,000, your locate the purchase price among the assets. • A vine.
basis is $500,000. Generally, reduce the purchase price by any • A bush.
Constructing assets. If you build property or cash received. Allocate the remaining purchase • Sod.
have assets built for you, your expenses for this price to the other business assets received in • The crop or yield of a plant that will have
construction are part of your basis. Some of proportion to (but not more than) their FMVs more than one crop or yield.
these expenses include the following costs. and in a certain order. See Trade or Business
• Land. Acquired under Allocating the Basis in Pub. 551 Animals. An animal produced in a farming
• Labor and materials. for more information. Also, see the examples business includes any stock, poultry or other
• Architect's fees. under Sale of a Farm in chapter 8. bird, and fish or other sea life.
• Building permit charges. Transplanted embryo. If you buy a cow that is The direct and indirect costs of producing
• Payments to contractors. pregnant with a transplanted embryo, allocate plants or animals include preparatory costs and
• Payments for rental equipment. to the basis of the cow the part of the purchase preproductive period costs. Preparatory costs
• Inspection fees. price equal to the FMV of the cow without the include the acquisition costs of the seed, seed-
In addition, if you use your own employees, implant. Allocate the rest of the purchase price ling, plant, or animal. For plants, preproductive
farm materials, and equipment to build an as- to the basis of the calf. Neither the cost alloca- period costs include the costs of items such as
set, do not deduct the following expenses. ted to the cow nor the cost allocated to the calf irrigation, pruning, frost protection, spraying,
• Employee wages paid for the construction is deductible as a current business expense. and harvesting. For animals, preproductive pe-
work, reduced by any employment credits riod costs include the costs of items such as
allowed. feed, maintaining pasture or pen areas, breed-
• Depreciation on equipment you own while Uniform Capitalization Rules ing, veterinary services, and bedding.
it is used in the construction.
• Operating and maintenance costs for Under the uniform capitalization rules, you must Exceptions. In a farming business, the uniform
equipment used in the construction. include certain direct and indirect costs in the capitalization rules do not apply to:
basis of property you produce or in your inven-
• The cost of business supplies and materi- tory costs, rather than claim them as a current 1. Any animal,
als used in construction. year deduction. You recover these costs 2. Any plant with a preproductive period of 2
You must capitalize these expenses by in- through depreciation, amortization, or cost of years or less, or
cluding them in the asset's basis. goods sold when you use, sell, or otherwise dis-
pose of the property. 3. Any costs of replanting certain plants lost
Do not include the value of your own la- or damaged due to casualty.
Any farming business that has average
! bor, or any other labor you did not pay TIP annual gross receipts of $27 million or Exceptions (1) and (2) do not apply to a cor-
CAUTION for, in the basis of any property you
construct. less for the 3 preceding tax years and poration, partnership, or tax shelter required to
is not a tax shelter is not subject to the uniform use an accrual method of accounting. See Ac-
capitalization rules. crual Method Required under Accounting Meth-
Allocating the Basis ods in chapter 2.
Generally, you are subject to the uniform In addition, you can elect not to use the uni-
In some instances, the rules for determining ba- capitalization rules if you do any of the follow- form capitalization rules for plants with a prepro-
sis apply to a group of assets acquired in the ing. ductive period of more than 2 years. This elec-
same transaction or to property that consists of 1. Produce real property or tangible personal tion cannot be made by a corporation,
separate items. To determine the basis of these property. partnership, or tax shelter required to use an
assets or separate items, there must be an allo- accrual method of accounting. This election
cation of basis. 2. Acquire property for resale. also does not apply to any costs incurred for the
Group of assets acquired. If you buy multiple You produce property if you construct, build, planting, cultivation, maintenance, or develop-
assets for a lump sum, allocate the amount you install, manufacture, develop, improve, or cre- ment of any citrus or almond grove (or any part
pay among the assets. Use this allocation to fig- ate the property. thereof) within the first 4 years the trees were
planted.
ure your basis for depreciation and gain or loss You are not subject to the uniform capi-
on a later disposition of any of these assets. TIP talization rules if the property is pro- If you elect not to use the uniform capi-
You and the seller may agree in the sales con- duced for personal use. ! talization rules, you must use the alter-
tract to a specific allocation of the purchase CAUTION native depreciation system for all prop-
price among the assets. If this allocation is In a farming business, you produce property erty used in any of your farming businesses and
based on the value of each asset and you and if you raise or grow any agricultural or horticul- placed in service in any tax year during which
the seller have adverse tax interests, the alloca- tural commodity, including plants and animals. the election is in effect. See chapter 7 for addi-
tion will generally be accepted. tional information on depreciation.
Plants. A plant produced in a farming business
Farming business acquired. If you buy a includes the following items. Example. You grow trees that have a pre-
group of assets that makes up a farming busi- • A fruit, nut, or other crop-bearing tree. productive period of more than 2 years. The
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trees produce an annual crop. You are an indi- Deducting vs. capitalizing costs. Do not add the cost of qualifying business property, de-
vidual and the uniform capitalization rules apply to your basis costs that you can deduct as cur- crease the basis of the property by the deduc-
to your farming business. You must capitalize rent expenses. For example, amounts paid for tion.
the direct costs and an allocable part of indirect incidental repairs or maintenance are deducti-
costs incurred due to the production of the ble as business expenses and are not added to Depreciation. Decrease the basis of prop-
trees. You are not required to capitalize the basis. However, you can elect either to deduct erty by the depreciation you deducted or could
costs of producing the annual crop because its or to capitalize certain other costs. See chap- have deducted on your tax returns under the
preproductive period is 2 years or less. ter 7 of Pub. 535. method of depreciation you chose. If you took
less depreciation than you could have under the
Preproductive period of more than 2 years. Note. Generally, you can deduct amounts method chosen, decrease the basis by the
The preproductive period of plants grown in paid for repairs and maintenance to your tangi- amount you could have taken under that
commercial quantities in the United States is ble property if the amounts paid are not other- method. If you did not take a depreciation de-
based on their nationwide weighted average wise required to be capitalized. However, you duction, reduce the basis by the full amount of
preproductive period. Plants producing the may elect to capitalize amounts paid for repair the depreciation you could have taken.
crops or yields shown in Table 6-1 have a na- and maintenance consistent with the treatment If you deducted more depreciation than you
tionwide weighted average preproductive pe- on your books and records. If you make this should have, decrease your basis by the
riod of more than 2 years. Other plants (not election, it applies to all amounts paid for repair amount you should have deducted plus the part
shown in Table 6-1) may also have a nation- and maintenance to tangible property that you of the excess depreciation you deducted that
wide weighted average preproductive period of treat as capital expenditures on your books and actually reduced your tax liability for any year.
more than 2 years. records for the tax year. To make the election to See chapter 7 for information on figuring the
treat repairs and maintenance as capital expen- depreciation you should have claimed.
More information. For more information on ditures, attach a statement titled “Section In decreasing your basis for depreciation,
the uniform capitalization rules that apply to 1.263(a)-3(n) Election” to your timely filed return take into account the amount deducted on your
property produced in a farming business, see (excluding extensions). For more information on tax returns as depreciation and any deprecia-
Regulations section 1.263A-4. what to include in the statement, see Regula- tion you must capitalize under the uniform capi-
tions section 1.263(a)-3(n). If you timely filed talization rules.
your return for the year without making the elec-
Adjusted Basis tion, you can still make the election by filing an Casualty and theft losses. If you have a
amended return within 6 months of the due date casualty or theft loss, decrease the basis in
Before figuring gain or loss on a sale, ex- of the return (excluding extensions). Attach the your property by any insurance or other reim-
change, or other disposition of property or figur- statement to the amended return and enter bursement and by any deductible loss not cov-
ing allowable depreciation, depletion, or amorti- “Filed pursuant to section 301.9100-2” on the ered by insurance. See chapter 11 for informa-
zation, you must usually make certain statement. File the amended return at the same tion about figuring your casualty or theft loss.
adjustments to the cost basis or basis other address you filed the original return. You must increase your basis in the property
than cost (discussed later) of the property. The by the amount you spend on clean-up costs
(such as debris removal) and repairs that sub-
adjustments to the original basis are increases Decreases to Basis stantially prolong the life of the property, in-
or decreases to the cost basis or other basis
crease its value, or adapt it to a different use.
which result in the adjusted basis of the prop- The following are some items that reduce the To make this determination, compare the re-
erty. basis of property. paired property to the property before the casu-
• Section 179 deduction. alty. For more information on casualty and theft
Increases to Basis • Deductions previously allowed or allowa- losses, see Pub. 547.
ble for amortization, depreciation, and de-
pletion. Easements. The amount you receive for grant-
properly added to a capital account. These in- •
Increase the basis of any property by all items Residential energy efficient property cred- ing an easement is usually considered to be
its. See Form 5695. proceeds from the sale of an interest in the real
useful life of more than 1 year. •
clude the cost of any improvements having a Investment credit (part or all) taken. property. It reduces the basis of the affected
• Casualty and theft losses and insurance part of the property. If the amount received is
The following costs increase the basis of reimbursements. more than the basis of the part of the property
property. • Payments you receive for granting an affected by the easement, reduce your basis in
• The cost of extending utility service lines to easement. that part to zero and treat the excess as a rec-
property. • Exclusion from income of subsidies for en- ognized gain. See Easements and rights-of-way
• Legal fees, such as the cost of defending ergy conservation measures. in chapter 3.
and perfecting title. • Certain canceled debt excluded from in-
• Legal fees for seeking a decrease in an as- come. Exclusion from income of subsidies for en-
sessment levied against property to pay for • Rebates from a manufacturer or seller. ergy conservation measures. You can ex-
local improvements. • Patronage dividends received from a co- clude from gross income any subsidy you re-
• Assessments for items such as paving operative association as a result of a pur- ceived from a public utility company for the
roads and building ditches that increase chase of property. See Patronage Divi- purchase or installation of an energy conserva-
the value of the property assessed. Do not dends in chapter 3. tion measure for a dwelling unit. Reduce the ba-
deduct these expenses as taxes. How- • Gas-guzzler tax. See Form 6197. sis of the property by the excluded amount.
ever, you can deduct as taxes amounts as- Some of these items are discussed next. For a
sessed for maintenance or repairs, or for more detailed list of items that decrease basis, Canceled debt excluded from income. If a
meeting interest charges related to the im- see section 1016 of the Internal Revenue Code debt you owe is canceled or forgiven, other
provements. and Pub. 551. than as a gift or bequest, you must generally in-
clude the canceled amount in your gross in-
If you make additions or improvements to Depreciation and section 179 deduction. come for tax purposes. A debt includes any in-
business property, depreciate the basis of each The adjustments you must make to the basis of debtedness for which you are liable or which
addition or improvement as separate deprecia- the property if you take the section 179 deduc- attaches to property you hold.
ble property using the rules that would apply to tion or depreciate the property are explained You can exclude your canceled debt from
the original property if you had placed it in serv- next. For more information on these deductions, income if the debt is any of the following.
ice at the same time you placed the addition or see chapter 7. 1. Debt canceled in a bankruptcy case or
improvement in service. See chapter 7 for more when you are insolvent.
information. Section 179 deduction. If you take the
section 179 expense deduction for all or part of
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2. Qualified farm debt. Taxable Exchanges Basis for depreciation. Special rules apply in
3. Qualified real property business debt (pro- determining and depreciating the basis of
MACRS property acquired in an involuntary
vided you are not a C corporation). A taxable exchange is one in which the gain is conversion. For more information, see Figuring
taxable, or the loss is deductible. A taxable gain the Deduction for Property Acquired in a Non-
If you exclude canceled debt from income as or deductible loss is also known as a recog- taxable Exchange under Figuring Depreciation
described in (1) or (2), you may have to reduce nized gain or loss. A taxable exchange occurs Under MACRS in chapter 7.
the basis of your depreciable and nondeprecia- when you receive cash or get property that is
ble property. If you exclude canceled debt de- not similar or related in use to the property ex-
scribed in (3), you must only reduce the basis of changed. If you receive property in exchange For more information about involuntary con-
your depreciable property by the excluded for other property in a taxable exchange, the versions, see chapter 11.
amount. basis of the property you receive is usually its
For more information about canceled debt in FMV at the time of the exchange. Like-Kind Exchanges
a bankruptcy case, see Pub. 908, Bankruptcy
Tax Guide. For more information about insol- Example. You trade a tract of farmland with Generally, if you exchange real property you
vency and canceled debt that is qualified farm an adjusted basis of $20,000 for a tractor that use in your business or hold for investment
debt, see chapter 3. For more information about has an FMV of $60,000. You must report a tax- solely for other business or investment real
qualified real property business debt, see Pub. able gain of $40,000 for the land. The tractor property of a like kind, you do not recognize the
334, Tax Guide for Small Business. has a basis of $60,000. gain or loss from the exchange. If you also re-
ceive non-like-kind property or money as part of
the exchange, you do recognize gain, but only
Basis Other Than Cost Nontaxable Exchanges to the extent of the value of the other property or
money you received in the exchange, and you
There are times when you cannot use cost as A nontaxable exchange is an exchange in do not recognize any loss.
basis. In these situations, the FMV or the adjus- which you are not taxed on any gain and you
ted basis of property may be used. Examples cannot deduct any loss. A nontaxable gain or For an exchange to qualify as a like-kind ex-
are discussed next. loss is also known as an unrecognized gain or change, you must hold for business or invest-
loss. If you receive property in a nontaxable ex- ment purposes both the property you transfer
Property changed from personal to busi- change, its basis is usually the same as the ba- and the property you receive. There must also
ness or rental use. When you hold property sis of the property you transferred. be an exchange of like-kind property. For more
for personal use and then change it to business information, see Like-Kind Exchanges in chap-
use or use it to produce rent, you must figure its Involuntary Conversions ter 8.
basis for depreciation. An example of changing
property from personal to business use would If you receive property as a result of an involun- The basis of the property you receive is gen-
be changing the use of your pickup truck that tary conversion, such as a casualty, theft, or erally the same as the adjusted basis of the
you originally purchased for your personal use condemnation, figure the basis of the replace- property you gave up.
to use in your farming business. ment property you receive using the basis of the
The basis for depreciation is the lesser of: converted property. Example. You trade farmland for another
• The FMV of the property on the date of the larger tract of farmland. Your adjusted basis in
change, or Similar or related property. If the replace- your farmland is $110,000. The FMV of the new
• Your adjusted basis on the date of the ment property is similar or related in service or tract of farmland is $150,000. Because this is a
change. use to the converted property, the replacement nontaxable exchange, you do not recognize any
If you later sell or dispose of this property, property's basis is the same as the old proper- gain and your basis in the farmland you receive
the basis you use will depend on whether you ty's basis on the date of the conversion. How- is $110,000, the same as the adjusted basis in
are figuring a gain or loss. The basis for figuring ever, make the following adjustments. the farmland you exchanged.
a gain is your adjusted basis in the property 1. Decrease the basis by the following Exchange expenses. Exchange expenses
when you sell the property. Figure the basis for amounts. are generally the closing costs that you pay.
a loss starting with the smaller of your adjusted
basis or the FMV of the property at the time of a. Any loss you recognize on the invol- They include such items as brokerage commis-
the change to business or rental use. Then untary conversion. sions, attorney fees, and deed preparation fees.
Add them to the basis of the like-kind property
make adjustments (increases and decreases) b. Any money you receive that you do you receive.
for the period after the change in the property's not spend on similar property.
use, as discussed earlier under Adjusted Basis.
2. Increase the basis by the following Property plus cash. If you trade property in a
Property received for services. If you re- amounts. like-kind exchange and also pay money, the ba-
sis of the property you receive is increased by
ceive property for services, include the proper- a. Any gain you recognize on the invol- the money you paid.
ty's FMV in income. The amount you include in untary conversion.
income becomes your basis. If the services
were performed for a price agreed on before- b. Any cost of acquiring the replacement Example. Assume the same facts from the
hand, it will be accepted as the FMV of the property. previous example except you pay an additional
property if there is no evidence to the contrary. $20,000 in cash. Your adjusted basis in the
Money or property not similar or related. If newly acquired farming real estate is $130,000
Example. Rocco Stowsa is an accountant you receive money or property not similar or re- ($110,000 adjusted basis of your old farmland
and also operates a farming business. Rocco lated in service or use to the converted property plus the $20,000 cash you paid).
agreed to do some accounting work for his and you buy replacement property similar or re-
neighbor in exchange for a dairy cow. The ac- lated in service or use to the converted prop- Special rules for related persons. If a
counting work and the cow are each worth erty, the basis of the replacement property is its like-kind exchange takes place directly or indi-
$1,500. Rocco must include $1,500 in income cost decreased by the gain not recognized on rectly between related persons and either party
for his accounting services. Rocco's basis in the the involuntary conversion. disposes of the property within 2 years after the
cow is $1,500. exchange, the exchange no longer qualifies for
Allocating the basis. If you buy more than like-kind exchange treatment. Each person
one piece of replacement property, allocate must report any gain or loss not recognized on
your basis among the properties based on their the original exchange unless the loss is not de-
respective costs. ductible under the related-party rules. Each per-
son reports it on the tax return filed for the year
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in which the later disposition occurred. If this FMV of the tract of farmland you receive, the basis) by any required adjustments to basis
rule applies, the basis of the property received FMV of the truck you receive, and the cash you while you held the property. See Adjusted Ba-
in the original exchange will be its FMV. For receive, minus the adjusted basis of the farm- sis, earlier.
more information, see chapter 8. land you traded ($92,500 + $11,000 + $4,000 – If you received a gift during the tax year, in-
$100,000). You include in income (recognize) crease your basis in the gift (the donor's adjus-
Basis for depreciation. Special rules apply in all $7,500 of the gain because it is the lesser of ted basis) by the part of the gift tax paid on it
determining and depreciating the basis of the realized gain ($7,500) and the sum of the due to the net increase in value of the gift. Fig-
MACRS property acquired in a like-kind trans- FMV of the unlike property and the cash re- ure the increase by multiplying the gift tax paid
action. For more information, see Figuring the ceived ($15,000). Your basis in the properties by the following fraction.
Deduction for Property Acquired in a Nontaxa- you received is figured as follows.
ble Exchange under Figuring Depreciation Un-
Net increase in value of the gift
der MACRS in chapter 7. Adjusted basis old farmland . . . . . . $100,000 Amount of the gift
Minus: Cash received (adjustment
Partially Nontaxable Exchanges 1a) . . . . . . . . . . . . . . . . . . . . . . . . . . − 4,000 The net increase in value of the gift is the
$96,000 FMV of the gift minus the donor's adjusted ba-
A partially nontaxable exchange is an exchange Plus: Gain recognized (adjustment sis. The amount of the gift is its value for gift tax
in which you receive property that is not a 2b) . . . . . . . . . . . . . . . . . . . . . . . . . . + 7,500 purposes after reduction by any annual exclu-
like-kind property or money in addition to a Total basis of properties sion and marital or charitable deduction that ap-
like-kind property. The basis of the property you received. . . . . . . . . . . . . . . . $103,500 plies to the gift.
receive is the same as the adjusted basis of the
property you gave up with the following adjust- Allocate the basis of $103,500 first to the unlike Example. In 2022, you received a gift of
ments. property, the truck ($11,000). This is the truck's property from your mother that had an FMV of
1. Decrease the basis by the following FMV. The rest ($92,500) is the basis in the $50,000. Her adjusted basis was $20,000. The
amounts. farmland. amount of the gift for gift tax purposes was
a. Any money you receive. $34,000 ($50,000 minus the $16,000 annual
Sale and Purchase exclusion). She paid a gift tax of $6,880. Your
b. Any loss you recognize on the ex- basis, $26,054, is figured as follows.
change. If you sell property and buy similar property in
2. Increase the basis by the following two mutually dependent transactions, you may Fair market value . . . . . . . . . . . . . . . . . . $50,000
amounts. have to treat the sale and purchase as a single Minus: Adjusted basis . . . . . . . . . . . . . . − 20,000
nontaxable exchange. Net increase in value . . . . . . . . . . . . . . . $30,000
a. Any additional costs you incur. Gift tax paid . . . . . . . . . . . . . . . . . . . . . $6,880
b. Any gain you recognize on the ex- Example. You own farmland with a barn. Multiplied by ($30,000 ÷ $34,000) . . . . . . × 0.88
change. The properties have a combined adjusted basis Gift tax due to net increase in value . . . . . $6,054
of $70,000, and an FMV of $150,000. You are Adjusted basis of property to your
If the other party to the exchange assumes your interested in another tract of farmland with a mother . . . . . . . . . . . . . . . . . . . . . . . + 20,000
liabilities, treat the debt assumption as money larger barn owned by your neighbor who is in- Your basis in the property. . . . . . . $26,054
you received in the exchange. terested in exchanging the property with you.
The total FMV of your neighbor's farmland and Note. If you received a gift before 1977,
Example. You trade farmland (basis of barn is $200,000. You want the new barn to your basis in the gift (the donor's adjusted ba-
$100,000) for another tract of farmland (FMV of have a larger basis for depreciation, so you ar- sis) includes any gift tax paid on it. However,
$110,000) and $30,000 cash. You realize a gain range to sell your old farmland and barn to your your basis cannot exceed the FMV of the gift
of $40,000. This is the FMV of the land received neighbor for $150,000. Your neighbor then sells when it was given to you.
plus the cash minus the basis of the land you his farmland and barn to you for $200,000.
traded ($110,000 + $30,000 − $100,000). In- However, you are treated as having exchanged FMV less than donor's adjusted basis. If the
clude your gain in income (recognize gain) only the old property for the new property because FMV of the property at the time of the gift is less
to the extent of the cash received. Your basis in the sale and purchase are reciprocal and mutu- than the donor's adjusted basis, your basis de-
the land you received is figured as follows. ally dependent. Your basis in the new property pends on whether you have a gain or a loss
is $120,000 ($50,000 cash paid plus $70,000 when you dispose of the property. Your basis
Basis of land traded . . . . . . . . . . . . . $100,000 adjusted basis in your old property), which must for figuring gain is the donor's adjusted basis
Minus: Cash received (adjustment be allocated between the farmland and the plus or minus any required adjustments to basis
1a) . . . . . . . . . . . . . . . . . . . . . . . . . . − 30,000 barn. while you held the property. Your basis for figur-
$70,000 ing loss is its FMV when you received the gift
Plus: Gain recognized (adjustment Property Received as a Gift plus or minus any required adjustments to basis
2b) . . . . . . . . . . . . . . . . . . . . . . . . . . + 30,000 while you held the property. (See Adjusted Ba-
Basis of land received. . . . . . . $100,000 To figure the basis of property you receive as a sis, earlier.)
gift, you must know the donor's adjusted basis If you use the donor's adjusted basis for fig-
Allocation of basis. If you receive like-kind (defined earlier) just before it was given to you. uring a gain and get a loss, and then use the
and unlike properties in the exchange, allocate You must also know its FMV at the time it was FMV for figuring a loss and get a gain, you have
the basis first to the unlike property, other than given to you and any gift tax paid on it. neither gain nor loss on the sale or other dispo-
money, up to its FMV on the date of the ex- sition of the property.
change. The rest is the basis of the like-kind FMV equal to or greater than donor's adjus-
property. ted basis. If the FMV of the property is equal Example. You received farmland as a gift
to or greater than the donor's adjusted basis, from your parents when they retired from farm-
Example. You trade a tract of farmland with your basis is the donor's adjusted basis when ing. At the time of the gift, the land had an FMV
an adjusted basis of $100,000 for another tract you received the gift. Increase your basis by all of $80,000. Your parents' adjusted basis was
of farmland that has an FMV of $92,500. You or part of any gift tax paid, depending on the $100,000. After you received the land, no
also receive $4,000 in cash and a pickup truck date of the gift. events occurred that would increase or de-
with an FMV of $11,000. Since only real prop- Also, for figuring gain or loss from a sale or crease your basis.
erty qualifies for like-kind exchange treatment, other disposition of the property, or for figuring If you sell the land for $120,000, you will
your receipt of the truck and cash means you depreciation, depletion, or amortization deduc- have a $20,000 gain because you must use the
must recognize gain on the exchange. You tions on business property, you must increase donor's adjusted basis at the time of the gift
realize a gain of $7,500. This is the sum of the or decrease your basis (the donor's adjusted ($100,000) as your basis to figure a gain. If you

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sell the land for $70,000, you will have a basis of the property for the qualified heirs. The partner cannot be more than the adjusted basis
$10,000 loss because you must use the FMV at qualified heirs should be able to get the neces- of his or her interest in the partnership reduced
the time of the gift ($80,000) as your basis to sary value from the executor or personal repre- by any money received in the same transaction.
figure a loss. sentative of the estate. For more information, see Partner's Basis for
If the sales price is between $80,000 and If you are a qualified heir who received spe- Distributed Property in Pub. 541, Partnerships.
$100,000, you have neither gain nor loss. For cial-use valuation property, increase your basis
instance, if the sales price was $90,000 and you by any gain recognized by the estate or trust Shareholder's basis. The basis of property
tried to figure a gain using the donor's adjusted because of post-death appreciation. Post-death distributed by a corporation to a shareholder is
basis ($100,000), you would get a $10,000 loss. appreciation is the property's FMV on the date its FMV. For more information about corporate
If you then tried to figure a loss using the FMV of distribution minus the property's FMV either distributions, see Distributions to Shareholders
($80,000), you would get a $10,000 gain. on the date of the individual's death or on the al- in Pub. 542, Corporations.
ternate valuation date. Figure all FMVs without
Business property. If you hold the gift as regard to the special-use valuation.
business property, your basis for figuring any
depreciation, depletion, or amortization deduc- You may be liable for an additional estate
tions is the same as the donor's adjusted basis tax if, within 10 years after the death of the de-
plus or minus any required adjustments to basis cedent, you transfer the property or the property
while you hold the property. stops being used as a farm. This tax does not
apply if you dispose of the property in a 7.
like-kind exchange or in an involuntary conver-
Property Transferred From a sion in which all of the proceeds are reinvested
Spouse in qualified replacement property. The tax also
does not apply if you transfer the property to a Depreciation,
The basis of property transferred to you or member of your family and certain requirements
transferred in trust for your benefit by your are met.
spouse is the same as your spouse's adjusted You can elect to increase your basis in spe- Depletion, and
basis. The same rule applies to a transfer by cial-use valuation property if it becomes subject
your former spouse if the transfer is incident to to the additional estate tax. To increase your Amortization
divorce. However, for property transferred in basis, you must make an irrevocable election
trust, adjust your basis for any gain recognized and pay interest on the additional estate tax fig-
by your spouse or former spouse if the liabilities ured from the date 9 months after the dece-
assumed plus the liabilities to which the prop- dent's death until the date of payment of the ad- What's New for 2022
erty is subject are more than the adjusted basis ditional estate tax. If you meet these
of the property transferred. requirements, increase your basis in the prop- Increased section 179 expense deduction
erty to its FMV on the date of the decedent's dollar limits. The maximum amount you can
The transferor must give you the records death or the alternate valuation date. The in- elect to deduct for most section 179 property
needed to determine the adjusted basis and crease in your basis is considered to have oc- you placed in service in 2022 is $1,080,000.
holding period of the property as of the date of curred immediately before the event that resul- This limit is reduced by the amount by which the
the transfer. ted in the additional estate tax. cost of the property placed in service during the
For more information, see Property Settle- You make the election by filing, with Form tax year exceeds $2,700,000. Also, the maxi-
ments in Pub. 504, Divorced or Separated Indi- 706-A, United States Additional Estate Tax Re- mum section 179 expense deduction for sport
viduals. turn, a statement that: utility vehicles placed in service in tax years be-
• Contains your (and the estate's) name, ad- ginning in 2022 is $27,000. See Dollar Limits
dress, and taxpayer identification number; under Section 179 Expense Deduction, later.
Inherited Property • Identifies the election as an election under Phase down of special depreciation allow-
Your basis in property you inherited from a de- section 1016(c) of the Internal Revenue ance. The special depreciation allowance is
cedent is generally one of the following. Code; 80% for certain qualified property acquired after
• The FMV of the property at the date of the • Specifies the property for which you are September 27, 2017, and placed in service af-
decedent's death. If a federal estate return making the election; and ter December 31, 2022, and before January 1,
is filed, you can use its appraised value. • Provides any additional information re- 2024 (other than certain property with a long
• The FMV on the alternate valuation date if quired by the Form 706-A instructions. production period and certain aircraft). The spe-
the personal representative for the estate For more information, see Form 706, United cial depreciation allowance is also 80% for cer-
elects to use alternate valuation. For infor- States Estate (and Generation-Skipping Trans- tain specified plants bearing fruits and nuts
mation on the alternate valuation, see the fer) Tax Return; Form 706-A; and the related in- planted or grafted after December 31, 2022,
Instructions for Form 706. structions. and before January 1, 2024. See Certain quali-
• The decedent's adjusted basis in land to fied property acquired after September 27,
2017 and Certain specified plants under What
the extent of the value that is excluded Property Distributed From a Is Qualified Property later.
from the decedent's taxable estate as a
qualified conservation easement. Partnership or Corporation
If a federal estate tax return does not have The following rules apply to determine a part-
to be filed, your basis in the inherited property is ner's basis and a shareholder's basis in prop- Introduction
its appraised value at the date of death for state erty distributed respectively from a partnership If you buy or make improvements to farm prop-
inheritance or transmission taxes. to the partner with respect to the partner's inter- erty, such as machinery, equipment, livestock,
est in the partnership and from a corporation to or a structure with a useful life of more than a
Special-use valuation method. Under certain the shareholder with respect to the sharehold- year, you generally cannot deduct its entire cost
conditions, when a person dies, the executor or er's ownership of stock in the corporation. in one year. Instead, you must spread the cost
personal representative of that person's estate over the time you use the property and deduct
may elect to value qualified real property at Partner's basis. Unless there is a complete part of it each year. For most types of property,
other than its FMV. If so, the executor or per- liquidation of a partner's interest, the basis of this is called depreciation.
sonal representative values the qualified real property (other than money) distributed by a This chapter gives information on deprecia-
property based on its use as a farm or other partnership to the partner is its adjusted basis to tion methods that generally apply to property
closely held business. If the executor or per- the partnership immediately before the distribu- placed in service after 1986. For information on
sonal representative elects this method of valu- tion. However, the basis of the property to the depreciating pre-1987 property, see Pub. 534,
ation for estate tax purposes, this value is the
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Depreciating Property Placed in Service Before • What is the basis of your depreciable prop- depreciation based only on the percentage of
1987. erty. business or investment use.
• How to treat repairs and improvements.
Topics • When you must file Form 4562. Example 1. If you use your car for farm
This chapter discusses: • How you can correct depreciation claimed business, you can deduct depreciation based
incorrectly. on its percentage of use in farming. If you also
use it for investment purposes, you can depre-
• Overview of depreciation ciate it based on its percentage of investment
• Section 179 expense deduction What Property Can Be use.
• Special depreciation allowance Depreciated? Example 2. If you use part of your home for
• Modified Accelerated Cost Recovery
System (MACRS) You can depreciate most types of tangible prop- business, you may be able to deduct deprecia-
• Listed property erty (except land), such as buildings, machi- tion on that part based on its business use. For
• Basic information on cost depletion nery, equipment, vehicles, certain livestock, more information, see Business Use of Your
(including timber depletion) and and furniture. You can also depreciate certain Home in chapter 4.
percentage depletion intangible property, such as copyrights, patents, You may be able to use the simplified
• Amortization of the costs of going into and computer software. To be depreciable, the TIP method to determine your business
business, reforestation costs, the costs of property must meet all the following require- use of the home deduction. If you
pollution control facilities, and the costs of ments. choose to use the simplified method, you can-
section 197 intangibles • It must be property you own. not also deduct depreciation on the part of the
• It must be used in your business or in- home used for business. For more information
Useful Items come-producing activity. about the simplified method, see Pub. 587,
You may want to see: • It must have a determinable useful life. Business Use of Your Home.
• It must have a useful life that extends sub-
Publication stantially beyond the year you place it in Inventory. You can never depreciate inventory
service. because it is not held for use in your business.
463 463 Travel, Gift, and Car Expenses Inventory is any property you hold primarily for
534 534 Depreciating Property Placed in Property You Own sale to customers in the ordinary course of your
Service Before 1987 business.
To claim depreciation, you must usually be the
535 535 Business Expenses owner of the property. You are considered as Livestock. Livestock purchased for draft,
544 544 Sales and Other Dispositions of owning property even if it is subject to a debt. breeding, or dairy purposes can be depreciated
only if they are not kept in an inventory account.
Assets Livestock you raise usually has no depreciable
Leased property. You can depreciate leased
551 551 Basis of Assets property only if you retain the incidents of own- basis because the costs of raising them are de-
ership in the property. This means you bear the ducted and not added to their basis. However,
946 946 How To Depreciate Property burden of exhaustion of the capital investment see Immature livestock under When Does De-
in the property. If you lease property from preciation Begin and End, later, for a special
Form (and Instructions) someone to use in your trade or business or for rule.
T T (Timber), Forest Activities Schedule the production of income, you generally cannot
depreciate its cost because you do not have the Property Having a Determinable
3115 3115 Application for Change in incidents of ownership. You can, however, de- Useful Life
Accounting Method preciate any capital improvements you make to
4562 4562 Depreciation and Amortization the leased property. See Additions and Im- To be depreciable, your property must have a
provements under Which Recovery Period Ap- determinable useful life. This means it must be
4797 4797 Sales of Business Property plies? in chapter 4 of Pub. 946. something that wears out, decays, gets used
See chapter 16 for information about getting You can generally depreciate the cost of up, becomes obsolete, or loses its value from
publications and forms. property you lease to someone even if the les- natural causes.
see (the person leasing from you) has agreed to
It is important to keep good records for preserve, replace, renew, and maintain the Irrigation systems and water wells. Irriga-
property you depreciate. Do not file property. However, you cannot depreciate the tion systems and water wells used in a trade or
RECORDS these records with your return. Instead, cost of the property if the lease provides that business can be depreciated if their useful life
you should keep them as part of the permanent the lessee is to maintain the property and return can be determined. You can depreciate irriga-
records of the depreciated property. They will to you the same property or its equivalent in tion systems and water wells composed of ma-
help you verify the accuracy of the depreciation value at the expiration of the lease in as good sonry, concrete, tile (including drainage tile),
of assets placed in service in the current and condition and value as when leased. metal, or wood. In addition, you can depreciate
previous tax years. For general information on costs for moving dirt to construct irrigation sys-
recordkeeping, see Pub. 583, Starting a Busi- Life tenant. Generally, if you hold business or tems and water wells composed of these mate-
ness and Keeping Records. For specific infor- investment property as a life tenant, you can rials. However, land preparation costs for center
mation on keeping records for section 179 depreciate it as if you were the absolute owner pivot irrigation systems are not depreciable.
property and listed property, see Pub. 946. of the property. See Certain term interests in
property, later, for an exception. Dams, ponds, and terraces. In general, you
cannot depreciate earthen dams, ponds, and
Overview of Property Used in Your Business or terraces unless the structures have a determi-
Income-Producing Activity nable useful life.
Depreciation
To claim depreciation on property, you must
This overview discusses basic information on use it in your business or income-producing ac-
the following. tivity. If you use property to produce income (in-
• What property can be depreciated. vestment use), the income must be taxable.
• What property cannot be depreciated. You cannot depreciate property that you use
• When depreciation begins and ends. solely for personal activities. However, if you
• Whether MACRS can be used to figure de- use property for business or investment purpo-
preciation. ses and for personal purposes, you can deduct
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What Property Cannot Be Placed in Service Cost or Other Basis Fully
Recovered
Depreciated? Property is placed in service when it is ready
Certain property cannot be depreciated, even if and available for a specific use, whether in a You stop depreciating property when you have
the requirements explained earlier are met. This business activity, an income-producing activity, fully recovered your cost or other basis. This
includes the following. a tax-exempt activity, or a personal activity. happens when your section 179 and allowed or
• Land. You can never depreciate the cost of Even if you are not using the property, it is in allowable depreciation deductions equal your
land because land does not wear out, be- service when it is ready and available for its cost or investment in the property.
come obsolete, or get used up. The cost of specific use.
land generally includes the cost of clear- Example. You bought a planter for use in Retired From Service
ing, grading, planting, and landscaping. Al- your farm business. The planter was delivered You stop depreciating property when you retire
though you cannot depreciate land, you in December 2021 after harvest was over. You it from service, even if you have not fully recov-
can depreciate certain costs incurred in begin to depreciate the planter in 2021 because ered its cost or other basis. You retire property
preparing land for business use. See chap- it was ready and available for its specific use in from service when you permanently withdraw it
ter 1 of Pub. 946. 2021, even though it will not be used until the from use in a trade or business or from use in
• Property placed in service and disposed of spring of 2022. the production of income because of any of the
in the same year. Determining when prop- If your planter comes unassembled in De- following events.
erty is placed in service is explained later. cember 2021 and is put together in February You sell or exchange the property.
• Equipment used to build capital improve- 2022, it is not placed in service until 2022. You •
ments. You must add otherwise allowable begin to depreciate it in 2022. • You convert the property to personal use.
depreciation on the equipment during the If your planter was delivered and assembled • You abandon the property.
period of construction to the basis of your in February 2022 but not used until April 2022, it • You transfer the property to a supplies or
scrap account.
improvements. is placed in service in February 2022, because The property is destroyed.
• Intangible property such as section 197 in- this is when the planter was ready for its speci- •
tangibles. This property does not have a fied use. You begin to depreciate it in 2022. For information on abandonment of prop-
determinable useful life and generally can-
not be depreciated. However, see Amorti- Fruit or nut trees and vines. If you acquire an erty, see chapter 8. For information on de-
zation, later. Special rules apply to com- orchard, grove, or vineyard before the trees or stroyed property, see chapter 11, and Pub. 547,
puter software (discussed below). vines have reached the income-producing Casualties, Disasters, and Thefts.
• Certain term interests (discussed below). stage, and they have a preproductive period of
more than 2 years, you must capitalize the pre- Can You Use MACRS To
Computer software. Computer software is productive-period costs under the uniform capi- Depreciate Your Property?
generally not a section 197 intangible even if talization rules (unless you meet the small busi-
acquired in connection with the acquisition of a ness taxpayer exception or elect not to use You must use the Modified Accelerated Cost
business, if it meets all of the following tests. these rules). See chapter 6 for information Recovery System (MACRS) to depreciate most
• It is readily available for purchase by the about the uniform capitalization rules. Your de- business and investment property placed in
general public. preciation begins when the trees and vines service after 1986. MACRS is explained later
• It is subject to a nonexclusive license. reach the income-producing stage (that is, under Figuring Depreciation Under MACRS.
• It has not been substantially modified. when they bear fruits, nuts, or grapes in quanti-
If the software meets the tests above, it can ties sufficient to commercially warrant harvest- You cannot use MACRS to depreciate the
be depreciated and may qualify for the section ing). For information on claiming the special de- following property.
179 expense deduction and the special depre- preciation allowance for certain specified plants • Property you placed in service before
ciation allowance (if applicable), discussed bearing fruits and nuts, see Certain specified 1987. Use the methods discussed in Pub.
later. plants, later. 534.
• Certain property owned or used in 1986.
Certain term interests in property. You can- Note. Any farming business that has aver- See chapter 1 of Pub. 946.
not depreciate a term interest in property cre- age annual gross receipts of $27 million or less • Intangible property.
ated or acquired after July 27, 1989, for any pe- for the 3 preceding tax years and is not a tax • Films, videotapes, and recordings.
riod during which the remainder interest is held, shelter is not subject to the uniform capitaliza- • Certain corporate or partnership property
directly or indirectly, by a person related to you. tion rules. acquired in a nontaxable transfer.
This rule does not apply to the holder of a term • Property you elected to exclude from
interest in property acquired by gift, bequest, or Immature livestock. Depreciation for live- MACRS.
inheritance. For more information, see chap- stock begins when the livestock reaches the
ter 1 of Pub. 946. age of maturity. If you bought immature live- For more information, see chapter 1 of Pub.
stock for drafting purposes, depreciation begins 946.
Example. You retain a life interest in a dairy when they can be worked. If you bought imma-
facility but transfer the remainder interest to ture livestock for breeding or dairy purposes, What Is the Basis of Your
your daughter. Your term interest in the dairy fa- depreciation begins when they can be bred.
cility is not depreciable even though you may Your basis for depreciation is your initial cost for Depreciable Property?
still be using it in your dairy operation. the immature livestock.
To figure your depreciation deduction, you must
determine the basis of your property. To deter-
When Does Depreciation Idle Property mine basis, you need to know the cost or other
basis of your property.
Begin and End? Continue to claim a deduction for depreciation
You begin to depreciate your property when on property used in your business or for the pro- Cost or other basis. The basis of property
you place it in service for use in your trade or duction of income even if it is temporarily idle. you buy is usually its cost plus amounts you
business or for the production of income. You For example, if you stop using a machine be- paid for items such as sales tax, freight
stop depreciating property either when you cause there is a temporary lack of a market for charges, and installation and testing fees. The
have fully recovered your cost or other basis or a product made with that machine, continue to cost includes the amount you pay in cash, debt
when you retire it from service, whichever hap- deduct depreciation on the machine. obligations, other property, or services. For
pens first. more information, see chapter 6.
There are times when you cannot use cost
as basis. In these situations, the fair market
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value (FMV) or the adjusted basis of the prop- Do You Have To File For more information, see chapter 2 of Pub.
erty may be used. 946.
Form 4562?
Adjusted basis. To find your property's basis
for depreciation, you may have to make certain Use Form 4562 to claim your deduction for de- What Property Qualifies?
adjustments (increases and decreases) to the preciation and amortization. You must complete
basis of the property for events occurring be- and attach Form 4562 to your tax return if you To qualify for the section 179 expense deduc-
tween the time you acquired the property and are claiming any of the following. tion, your property must meet all the following
the time you placed it in service. • A section 179 expense deduction for the requirements.
current year or a section 179 carryover • It must be eligible property.
Basis adjustment for depreciation allowed from a prior year. • It must be acquired primarily for business
or allowable. After you place your property in • Depreciation for property placed in service use.
service, you must reduce the basis of the prop- during the current year. • It must have been acquired by purchase.
erty by the depreciation allowed or allowable, • Depreciation on any vehicle or other listed
whichever is greater. Depreciation allowed is property, regardless of when it was placed Eligible Property
depreciation you actually deducted (from which in service.
you received a tax benefit). Depreciation allow- • Amortization of costs that began in the cur- To qualify for the section 179 expense deduc-
able is depreciation you are entitled to deduct. rent year. tion, your property must be one of the following
If you do not claim depreciation you are enti- For more information, see the Instructions types of depreciable property.
tled to deduct, you must still reduce the basis of for Form 4562. 1. Tangible personal property.
the property by the full amount of depreciation
allowable. 2. Other tangible property (except buildings
If you deduct more depreciation than you How Do You Correct and their structural components) used as:
should, you must reduce your basis by any Depreciation Deductions?
a. An integral part of manufacturing, pro-
amount deducted from which you received a tax duction, or extraction or of furnishing
benefit (the depreciation allowed). If you deducted an incorrect amount of depreci-
For more information, see chapter 6. ation in any year, you may be able to make a transportation, communications, elec-
correction by filing an amended return for that tricity, gas, water, or sewage disposal
year. You can file an amended return to correct services;
How Do You Treat Repairs the amount of depreciation claimed for any b. A research facility used in connection
and Improvements? property in any of the following situations. with any of the activities in (a) above;
• You claimed the incorrect amount because or
If you improve depreciable property, you must of a mathematical error made in any year.
treat the improvement as separate depreciable • You claimed the incorrect amount because c. A facility used in connection with any
property. Improvement means an addition to or of a posting error made in any year, for ex- of the activities in (a) for the bulk stor-
partial replacement of property that is a better- ample, omitting an asset from the depreci- age of fungible commodities.
ment to the property, restores the property, or ation schedule. 3. Single-purpose agricultural (livestock) or
adapts it to a new or different use. See Regula- • You have not adopted a method of ac- horticultural structures.
tions section 1.263(a)-3. counting for the property placed in service
by you in tax years ending after December 4. Storage facilities (except buildings and
You generally deduct the cost of repairing 29, 2003. their structural components) used in con-
business property in the same way as any other • You claimed the incorrect amount on prop- nection with distributing petroleum or any
business expense. However, if the cost is for a erty placed in service by you in tax years primary product of petroleum.
betterment to the property, restores the prop- ending before December 30, 2003. 5. Qualified real property. (Special rules ap-
erty, or adapts it to a new or different use, you ply to qualified real property that you elect
must treat it as an improvement and depreciate Note. You have adopted a method of account- to treat as qualified section 179 real prop-
it. See chapter 1 of Pub. 946 for more informa- ing if you used the same incorrect method of erty. For more information, see chapter 2
tion. depreciation for two or more consecutively filed of Pub. 946, and section 179(f) of the In-
returns. ternal Revenue Code.)
Example. You repair a small section on a If you are not allowed to make the correction
corner of the roof of a barn that you rent to oth- on an amended return, you may be able to 6. Off-the-shelf computer software that is
ers. You deduct the cost of the repair as a busi- change your accounting method to claim the readily available for purchase by the gen-
ness expense. However, if you replace the en- correct amount of depreciation. See the Instruc- eral public, is subject to a nonexclusive
tire roof, the new roof is considered to be an tions for Form 3115. lease, and has not been substantially
modified.
improvement because it increases the value
and lengthens the life of the property. You de- Tangible personal property. Tangible per-
preciate the cost of the new roof. Section 179 Expense sonal property is any tangible property that is
Improvements to rented property. You can Deduction not real property. It includes the following prop-
erty.
depreciate permanent improvements you make • Machinery and equipment.
to business property you rent from someone You can elect to recover all or part of the cost of
else. certain qualifying property, up to a limit, by de- • Property contained in or attached to a
ducting it in the year you place the property in building (other than structural compo-
Example. You rent 100 acres from your service. This is the section 179 expense deduc- nents), such as milk tanks, automatic feed-
landlord on a 5-year term. You install $25,000 tion. You can elect the section 179 expense de- ers, barn cleaners, and office equipment.
of drainage tile. The recovery period for drain- duction instead of recovering the cost by taking • Gasoline storage tanks and pumps at retail
age tile is 15 years, not the term of the lease. depreciation deductions. service stations.
• Livestock, including horses, cattle, hogs,
You may be able to take a section 179 expense This part of the chapter explains the rules for sheep, goats, and mink and other fur-bear-
deduction, special depreciation allowance, or the section 179 expense deduction. It explains ing animals.
depreciation expense under MACRS for the what property qualifies for the deduction, what
drainage tile. See Section 179 Expense Deduc- property does not qualify for the deduction, the Facility used for the bulk storage of fungi-
tion Claiming the Special Depreciation Allow-, limits that may apply, how to elect the deduc- ble commodities. A facility used for the bulk
ance Figuring Depreciation Under MACRS, , tion, and when you may have to recapture the storage of fungible commodities is qualifying
later. deduction. property for purposes of the section 179
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expense deduction if it is used in connection • Heating, ventilation, and air conditioning. If you deduct only part of the cost of qualify-
with any of the activities listed earlier in item 2c • Fire protection and alarms. ing property as a section 179 expense deduc-
under Eligible Property. Bulk storage means the • Security systems. tion, you can generally depreciate the cost you
storage of a commodity in a large mass before do not deduct.
it is used. Property Acquired by Purchase
Use Part I of Form 4562 to figure your sec-
Grain bins. A grain bin is an example of a tion 179 expense deduction.
storage facility that is qualifying section 179 To qualify for the section 179 expense deduc-
property. It is a facility used in connection with tion, your property must have been acquired by
the production of grain or livestock for the bulk purchase. For example, property acquired by Partial business use. When you use property
storage of fungible commodities. gift or inheritance does not qualify. Property ac- for business and nonbusiness purposes, you
quired from a related person (that is, your can elect the section 179 expense deduction
Single-purpose agricultural or horticultural spouse, ancestors, or lineal descendants) is not only if you use it more than 50% for business in
structures. A single-purpose agricultural (live- considered acquired by purchase. New or used the year you place it in service. If you used the
stock) or horticultural structure is qualifying equipment you acquired by purchase during the property more than 50% for business, multiply
property for purposes of the section 179 ex- current tax year qualifies for the section 179 de- the cost of the property by the percentage of
pense deduction. duction. business use. Use the resulting business cost
to figure your section 179 expense deduction.
Agricultural structure. A single-purpose Example. You are a farmer. You purchased
agricultural (livestock) structure is any building two tractors, one from your sibling and one from Trade-in of other property. If you buy qualify-
or enclosure specifically designed, constructed, your parent. You placed both tractors in service ing property with cash and a trade-in, its cost for
and used for both the following reasons. in the same year you bought them. The tractor purposes of the section 179 expense deduction
• To house, raise, and feed a particular type purchased from your parent does not qualify for includes only the cash you paid.
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). Example. Adyo Farms traded real property
placements, needed to house, raise, or The tractor purchased from your sibling does X having a total adjusted basis of $6,800 for
feed the livestock. qualify for the deduction because you are not a new real property Z costing $13,200. They re-
For this purpose, livestock includes poultry. related person (as defined above). ceived an $8,000 trade-in allowance for the old
real property X, and paid $5,200 in cash for the
Single-purpose structures are qualifying new real property Z.
property if used, for example, to breed chickens What Property Does Not For purposes of the section 179 expense
or hogs, produce milk from dairy cattle, or pro- Qualify? deduction, only the cash paid by Adyo qualifies
duce feeder cattle or pigs, broiler chickens, or for the section 179 expense deduction. Adyo's
eggs. The facility must include, as an integral Land and improvements. Land and land im- business costs that qualify for a section 179 ex-
part of the structure or enclosure, equipment provements do not qualify as section 179 prop- pense deduction are $5,200. For information on
necessary to house, raise, and feed the live- erty. Land improvements include swimming the maximum amount you can elect to deduct,
stock. pools, paved parking areas, wharves, docks, see Dollar Limits next.
Horticultural structure. A single-purpose bridges, and nonagricultural fences. However,
horticultural structure is either of the following. agricultural fences do qualify as section 179 Dollar Limits
• A greenhouse specifically designed, con- property. Similarly, field drainage tile also quali-
structed, and used for the commercial pro- fies as section 179 property. The total amount you can elect to deduct under
duction of plants. section 179 for most property placed in service
• A structure specifically designed, construc- Excepted property. Even if the requirements in 2022 is $1,080,000. If you acquire and place
ted, and used for the commercial produc- explained in the preceding discussions are met, in service more than one item of qualifying
tion of mushrooms. farmers cannot elect the section 179 expense property during the year, you can allocate the
deduction for the following property. section 179 expense deduction among the
Use of structure. A structure must be used • Certain property you lease to others (if you items in any way, as long as the total deduction
only for the purpose that qualified it. For exam- are a noncorporate lessor). is not more than $1,080,000. You cannot carry
ple, a hog barn will not be qualifying property if • Certain property used predominantly to fur- costs in excess of the $1,080,000 limit over to
you use it to house poultry. Similarly, using part nish lodging or in connection with the fur- future years.
of your greenhouse to sell plants will make the nishing of lodging.
greenhouse nonqualifying property. • Property used by a tax-exempt organiza- Reduced dollar limit for cost exceeding
If a structure includes work space, the work tion (other than a tax-exempt farmers' co- $2,700,000. If the cost of your qualifying sec-
space can be used only for the following activi- operative) unless the property is used tion 179 property placed in service in 2022 is
ties. mainly in a taxable unrelated trade or busi- over $2,700,000, you must reduce the dollar
• Stocking, caring for, or collecting livestock ness. limit (but not below zero) by the amount of cost
or plants or their produce. • Property used by governmental units or over $2,700,000. If the cost of your section 179
• Maintaining the enclosure or structure. foreign persons or entities (except property property placed in service during 2022 is
• Maintaining or replacing the equipment or used under a lease with a term of less than $3,780,000 or more, you cannot take a section
stock enclosed or housed in the structure. 6 months). 179 expense deduction and you cannot carry
over any of the cost that is more than
Note. Recent legislation has changed the $3,780,000.
treatment of qualified improvement property How Much Can You Deduct?
placed in service after December 31, 2017, to Example. This year, George Thomas
15-year property under MACRS. See chapter 3 Your section 179 expense deduction is gener-
of Pub. 946 for more information. ally the cost of the qualifying property. How- placed in service machinery costing
ever, the total amount you can elect to deduct $2,800,000. Because this cost is $100,000
Qualified real property. Qualified real under section 179 is subject to a dollar limit and more than $2,700,000, George must reduce the
property is any qualified improvement property a business income limit. These limits apply to dollar limit to $980,000 ($1,080,000 −
described in section 168(e)(6), and any of the each taxpayer, not to each business. However, $100,000). George cannot carry over any of the
following improvements to nonresidential real see Married individuals under Dollar Limits, costs that exceed the $980,000 reduced limit.
property placed in service after the date such later. Also, see the special rules for applying the The remaining cost of the machinery not al-
qualified real property was first placed in serv- limits for partnerships and S corporations under lowed as a section 179 expense deduction is el-
ice. Partnerships and S Corporations, later. igible for a depreciation expense under
• Roofs. MACRS. See Figuring Depreciation Under
MACRS, later.
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Limits for sport utility vehicles. The total • Wages, salaries, tips, or other pay earned Step 4. Using $200,000 (from Step 3) as
amount you can elect to deduct for certain sport by you (or your spouse if you file a joint re- taxable income, XYZ's hypothetical charita-
utility vehicles and certain other vehicles placed turn) as an employee of any employer. ble contribution (limited to 10% of taxable
in service in 2022 is $27,000. This rule applies In addition, figure taxable income without re- income) is $20,000.
to any 4-wheeled vehicle primarily designed or gard to any of the following. Step 5. $680,000 ($700,000 − $20,000).
used to carry passengers over public streets, • The section 179 expense deduction. Step 6. Using $680,000 (from Step 5) as
roads, and highways that is rated at more than • The self-employment tax deduction. taxable income, XYZ figures the actual
6,000 pounds gross vehicle weight and not • Any net operating loss carryback or carry- section 179 expense deduction. Because
more than 14,000 pounds gross vehicle weight. forward. the taxable income is at least $500,000,
For more information, see chapter 2 of Pub. • Any unreimbursed employee business ex- XYZ can take a $500,000 section 179 ex-
946. penses. pense deduction.
Step 7. $200,000 ($700,000 − $500,000).
Limits for passenger automobiles. For a Also, see chapter 2 of Pub. 946. Step 8. Using $200,000 (from Step 7) as
passenger automobile that is placed in service taxable income, XYZ's actual charitable
in 2022, the total section 179 and depreciation Two different taxable income limits. In addi- contribution (limited to 10% of taxable in-
deduction is limited. See Do the Passenger Au- tion to the business income limit for your section come) is $20,000.
tomobile Limits Apply, later. 179 expense deduction, you may have a taxa-
ble income limit for some other deduction (for Carryover of disallowed deduction. You can
Married individuals. If you are married, how example, charitable contributions). You may carry over for an unlimited number of years the
you figure your section 179 expense deduction have to figure the limit for this other deduction cost of any section 179 property you elected to
depends on whether you file jointly or sepa- taking into account the section 179 expense de- expense but were unable to because of the
rately. If you file a joint return, you and your duction. If so, complete the following steps. business income limit.
spouse are treated as one taxpayer in determin- The amount you carry over is used in deter-
ing any reduction to the dollar limit, regardless Step Action mining your section 179 expense deduction in
of which of you purchased the property or 1 Figure taxable income without the the next year. However, it is subject to the limits
placed it in service. If you and your spouse file section 179 expense deduction or the in that year. If you place more than one property
separate returns, you are treated as one tax- other deduction. in service in a year, you can select the proper-
payer for the dollar limit, including the reduction 2 Figure a hypothetical section 179 ties for which all or a part of the cost will be car-
for costs over $2,700,000. You must allocate expense deduction using the taxable ried forward. Your selections must be shown in
the dollar limit (after any reduction) equally be- income figured in Step 1. your books and records.
tween you, unless you both elect a different al- 3 Subtract the hypothetical section 179
location. If the percentages elected by each of expense deduction figured in Step 2 Example. Last year, Diana Reynolds
you do not total 100%, 50% will be allocated to from the taxable income figured in Step placed in service a machine that cost $100,000
each of you. 1. and elected to deduct all $100,000 under sec-
4 Figure a hypothetical amount for the tion 179. The taxable income from Diana’s busi-
Joint return after separate returns. If you other deduction using the amount ness (determined without regard to both a sec-
and your spouse elect to amend your separate figured in Step 3 as taxable income.
tion 179 expense deduction for the cost of the
returns by filing a joint return after the due date 5 Subtract the hypothetical other machine and the self-employment tax deduc-
for filing your return, the dollar limit on the joint deduction figured in Step 4 from the tion) was $80,000. Diana’s section 179 ex-
return is the lesser of the following amounts. taxable income figured in
• The dollar limit (after reduction for any cost Step 1. pense deduction was limited to $80,000. The
of section 179 property over $2,700,000). 6 Figure your actual section 179 expense $20,000 cost that was not allowed as a section
• The total cost of section 179 property you deduction using the taxable income 179 expense deduction (because of the busi-
figured in Step 5. ness income limit) is carried to this year.
and your spouse elected to expense on This year, Diana placed another machine in
your separate returns. 7 Subtract your actual section 179
expense deduction figured in Step 6 service that cost $110,000. Diana’s taxable in-
from the taxable income figured in Step come from business (determined without regard
Business Income Limit 1. to both a section 179 expense deduction for the
8 Figure your actual other deduction using cost of the machine and the self-employment
The total cost you can deduct each year after the taxable income figured in Step 7. tax deduction) is $120,000. Diana can deduct
you apply the dollar limit is limited to the taxable the full cost of the machine ($110,000) but only
income from the active conduct of any trade or Example. On February 1, 2022, the XYZ $10,000 of the carryover from last year because
business during the year. Generally, you are farm corporation purchased and placed in serv- of the business income limit. Diana can carry
considered to actively conduct a trade or busi- ice qualifying section 179 property that cost over the balance of $10,000 to next year.
ness if you meaningfully participate in the man- $500,000. It elects to expense the entire
agement or operations of the trade or business. $500,000 cost under section 179. In June, the Partnerships and S Corporations
corporation gave a charitable contribution of
Any cost not deductible in one year under $100,000. A corporation's limit on charitable The section 179 expense deduction limits apply
section 179 because of this limit can be carried contributions is figured after subtracting any both to the partnership or S corporation and to
to the next year. See Carryover of disallowed section 179 expense deduction. The business each partner or shareholder. The partnership or
deduction, later. income limit for the section 179 expense deduc- S corporation determines its section 179 ex-
tion is figured after subtracting any allowable pense deduction subject to the limits. It then al-
Taxable income. In general, figure taxable in- charitable contributions. XYZ's taxable income locates the deduction among its partners or
come for this purpose by totaling the net in- figured without the section 179 expense deduc- shareholders.
come and losses from all trades and busi- tion or the deduction for charitable contributions
nesses you actively conducted during the year. is $700,000. XYZ figures its section 179 ex- If you are a partner in a partnership or share-
In addition to net income or loss from a sole pense deduction and its deduction for charita- holder of an S corporation, you add the amount
proprietorship, partnership, or S corporation, ble contributions as follows. allocated from the partnership or S corporation
net income or loss derived from a trade or busi-
ness also includes the following items. Step 1. Taxable income figured without ei- to any section 179 costs not related to the part-
• Section 1231 gains (or losses) as dis- ther deduction is $700,000. nership or S corporation and then apply the dol-
cussed in chapter 9. Step 2. Using $700,000 as taxable in- lar limit to this total. To determine any reduction
• Interest from working capital of your trade come, XYZ's hypothetical section 179 ex- in the dollar limit for costs over $2,700,000, you
or business. pense deduction is $500,000. do not include any of the cost of section 179
Step 3. $200,000 ($700,000 − $500,000). property placed in service by the partnership or
S corporation. After you apply the dollar limit,
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you apply the business income limit to any re- business use drops to 50% or less, you include
maining section 179 costs. For more informa- the recapture amount as ordinary income. You
tion, see chapter 2 of Pub. 946. also increase the basis of the property by the Claiming the Special
recapture amount. Recovery periods for prop-
Example. In 2022, Partnership P placed in erty are discussed later. Depreciation Allowance
service section 179 property with a total cost of
$2,800,000. P must reduce its dollar limit by If you sell, exchange, or otherwise dis- For qualified property (defined below) placed in
$100,000 ($2,800,000 − $2,700,000). Its maxi- ! pose of the property, do not figure the service in 2022, you can take a special depreci-
mum section 179 expense deduction is CAUTION recapture amount under the rules ex- ation allowance depending on the date you ac-
$980,000 ($1,080,000 − $100,000), and it plained in this discussion. Instead, use the rules quired the qualified property. The allowance is
elects to expense that amount. Because P's for recapturing depreciation explained under an additional deduction you can take before you
taxable income from the active conduct of all its Section 1245 Property in chapter 9. figure regular depreciation under MACRS. Fig-
trades or businesses for the year was ure the special depreciation allowance by multi-
$2,000,000, it can deduct the full $980,000. P If the property is listed property, do not plying the depreciable basis of the qualified
allocates $200,000 of its section 179 expense ! figure the recapture amount under the property by the applicable percentage.
deduction and $500,000 of its taxable income CAUTION rules explained in this discussion when
to John, one of its partners. the percentage of business use drops to 50% or
John also conducts a business as a sole less. Instead, use the rules for recapturing de- What Is Qualified Property?
proprietor and, in 2022, placed in service in that preciation explained under Recapture of Ex-
business, section 179 property costing cess Depreciation in chapter 5 of Pub. 946. For farmers, qualified property is certain prop-
erty acquired after September 27, 2017, and
$800,000. John's taxable income from that certain specified plants.
business was $200,000. In addition to the Figuring the recapture amount. To figure the
$200,000 allocated from P, John elects to ex- amount to recapture, take the following steps. Certain qualified property acquired after
pense the $550,000 of the sole proprietorship's 1. Figure the allowable depreciation for the September 27, 2017. You can elect to take a
section 179 costs. However, John's deduction section 179 expense deduction you 100% special depreciation allowance for prop-
is limited to the business taxable income of claimed. Begin with the year you placed erty acquired and placed in service after Sep-
$700,000 ($500,000 from P plus $200,000 from the property in service and include the tember 27, 2017, and before January 1, 2023
the sole proprietorship). John carries over year of recapture. (or before January 1, 2024, for certain property
$50,000 ($750,000 − $700,000) of the elected with a long production period and for certain air-
section 179 costs to 2023. 2. Subtract the depreciation figured in (1) craft). For certain qualified property acquired af-
from the section 179 expense deduction ter September 27, 2017, and placed in service
you actually claimed. The result is the after December 31, 2022, and before January
How Do You Elect the amount you must recapture. 1, 2024 (other than certain property with a long
Deduction? production period and certain aircraft), you can
Example. In January 2020, you are a cal- elect to take an 80% special depreciation allow-
You elect to take the section 179 expense de- endar year taxpayer. You bought and placed in ance. Your property is qualified property if it
duction by completing Part I of Form 4562. service section 179 property costing $10,000. meets the following requirements.
The property is 3-year property and is depreci-
If you elect the deduction for listed ated under MACRS and a half-year convention. 1. It is one of the following types of property.
! property, complete Part V of Form The property is not listed property. You elected a. Tangible property depreciated under
CAUTION 4562 before completing Part I.
a $5,000 section 179 expense deduction for the MACRS with a recovery period of 20
property and also elected not to claim a special years or less.
File Form 4562 with either of the following. depreciation allowance. You used the property
• Your original tax return (whether or not you only for business in 2020 and 2021. During b. Water utility property depreciated un-
filed it timely). 2022, you used the property 40% for business der MACRS.
• An amended return filed within the time and 60% for personal use. You figure the recap- c. Computer software defined in and de-
prescribed by law. An election made on an ture amount as follows. preciated under section 167(f)(1) of
amended return must specify the item of the Internal Revenue Code.
section 179 property to which the election Section 179 expense deduction claimed 2. Qualified property can be either new prop-
applies and the part of the cost of each (2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000
such item to be taken into account. The erty or certain used property.
amended return must also include any re- Minus: Allowable depreciation
sulting adjustments to taxable income. (instead of section 179 expense deduction): 3. It is not excepted property.
2020 . . . . . . . . . . . . . . . . . . . . . . $1,250
2021 . . . . . . . . . . . . . . . . . . . . . . 1,875 For more information, see chapter 3 of Pub.
Revoking an election. An election (or any 2022 ($1,250 × 40% (business)) . . . 500 3,625 946.
specification made in the election) to take a 2022 — Recapture amount. . . . . . . . . $1,375
section 179 expense deduction for 2022 can be Certain specified plants. You can elect to
revoked without IRS approval by filing an amen- claim a 100% special depreciation allowance
ded return. The amended return must be filed You must include $1,375 in income for for the adjusted basis of certain specified plants
within the time prescribed by law. The amended 2022. (defined later) bearing fruits and nuts planted or
return must also include any resulting adjust- grafted after September 27, 2017, and before
ments to taxable income (for example, allowa- Where to report recapture. Report any re- January 1, 2023. For certain specified plants
ble depreciation in that tax year for the item of capture of the section 179 expense deduction bearing fruits and nuts planted or grafted after
section 179 property for which the election per- as ordinary income in Part IV of Form 4797 and December 31, 2022, and before January 1,
tains). Once made, the revocation is irrevoca- include it in income on Schedule F (Form 1040). 2024, you can elect to claim an 80% special al-
ble. lowance.
Recapture for qualified section 179 GO A specified plant is:
When Must You Recapture Zone property. If any qualified section 179 • Any tree or vine that bears fruits or nuts,
GO Zone property ceases to be used in the GO and
the Deduction? Zone in a later year, you must recapture the • Any other plant that will have more than
benefit of the increased section 179 expense one yield of fruits or nuts and generally has
You may have to recapture the section 179 ex- deduction as “other income.” a pre-productive period of more than 2
pense deduction if, in any year during the prop- years from planting and grafting to the time
erty's recovery period, the percentage of busi- it begins bearing fruits or nuts.
ness use drops to 50% or less. In the year the
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Any property planted or grafted outside the To be sure you can use MACRS to fig- Which Property Class
United States does not qualify as a specified ! ure depreciation for your property, see Applies Under GDS?
plant. CAUTION Can You Use MACRS To Depreciate
If you elect to claim the special depreciation Your Property, earlier.
The following is a list of the nine property
allowance for any specified plant, the plant will classes under GDS.
not be treated as qualified property eligible for This part explains how to determine which
the special depreciation allowance in the sub- MACRS depreciation system applies to your 1. 3-year property.
sequent tax year in which it is placed in service. property. It also discusses the following infor- 2. 5-year property.
To make the election, attach a statement to mation that you need to know before you can
your timely filed return (including extensions) for figure depreciation under MACRS. 3. 7-year property.
the tax year in which you plant or graft the • Property's recovery class. 4. 10-year property.
specified plant(s) indicating you are electing to • Placed-in-service date.
apply section 168(k)(5) and identifying the • Basis for depreciation. 5. 15-year property.
specified plant(s) for which you are making the • Recovery period. 6. 20-year property.
election. Once made, the election cannot be re- • Convention.
voked without IRS consent. • Depreciation method. 7. 25-year property.
See section 168(k)(5) of the Internal Reve- Finally, this part explains how to use this infor- 8. Residential rental property.
nue Code. mation to figure your depreciation deduction.
9. Nonresidential real property.
How Can You Elect Not To Which Depreciation System See Which Property Class Applies Under GDS?
in chapter 4 of Pub. 946 for examples of the
Claim the Allowance? (GDS or ADS) Applies? types of property included in each class.
You can elect, for any class of property, not to Your use of either GDS or ADS to depreciate
deduct the special depreciation allowance for property under MACRS determines what depre- What Is the
all property in such class placed in service dur- ciation method and recovery period you use. Placed-in-Service Date?
ing the tax year. To make the election, attach a You must generally use GDS unless you are
statement to your return indicating the class of specifically required by law to use ADS or you You begin to claim depreciation when your
property for which you are making the election. elect to use ADS. property is placed in service for use either in a
trade or business or for the production of in-
Generally, you must make the election on a Required use of ADS. You must use ADS for come. The placed-in-service date for your prop-
timely filed tax return (including extensions) for the following property. erty is the date the property is ready and availa-
the year in which you place the property in serv- • All property used predominantly in a farm- ble for a specific use. It is therefore not
ice. However, if you timely filed your return for ing business and placed in service in any necessarily the date it is first used. If you con-
the year without making the election, you can tax year during which an election not to ap- verted property held for personal use to use in a
still make the election by filing an amended re- ply the uniform capitalization rules to cer- trade or business or for the production of in-
turn within 6 months of the due date of the origi- tain farming costs is in effect. come, treat the property as being placed in
nal return (not including extensions). Attach the • Listed property used 50% or less in a service on the conversion date. See Placed in
election statement to the amended return. On qualified business use. See Additional Service under When Does Depreciation Begin
the amended return, write “Filed pursuant to Rules for Listed Property, later. and End, earlier, for examples illustrating when
section 301.9100-2.” • Any tax-exempt use property. property is placed in service.
Once made, the election may not be re- • Any tax-exempt bond-financed property.
voked without IRS consent. • Any property imported from a foreign coun- Also, see Certain specified plants, earlier,
try for which an Executive order is in effect for information on the placed-in-service date for
If you elect not to have the special de- because the country maintains trade re- specified plants bearing fruits and nuts for
! preciation allowance apply, the prop- strictions or engages in other discrimina- which you elect to claim the special deprecia-
CAUTION erty may be subject to an alternative tory acts. tion allowance.
minimum tax adjustment for depreciation. • Any tangible property used predominantly
outside the United States during the year.
What Is the Basis for
When Must You Recapture Note. You must use ADS if you are required Depreciation?
an Allowance? to file Form 8990 and you elect to expense
farming interest expense. The basis for depreciation of MACRS property
is the property's cost or other basis multiplied
When you dispose of property for which you If you are required to use ADS to de- by the percentage of business/investment use.
claimed a special depreciation allowance, any ! preciate your property, you cannot Reduce that amount by any credits and deduc-
gain on the disposition is generally recaptured CAUTION claim the special depreciation allow-
tions allocable to the property. The following are
(included in income) as ordinary income up to ance. examples of some of the credits and deductions
the amount of the special depreciation allow-
ance previously allowed or allowable. For more that reduce basis.
information, see chapter 3 of Pub. 946. Electing ADS. Although your property may • Any deduction for section 179 property.
qualify for GDS, you can elect to use ADS. The • Any deduction for removal of barriers to
election must generally cover all property in the the disabled and the elderly.
same property class you placed in service dur- • Any disabled access credit, enhanced oil
Figuring Depreciation ing the year. However, the election for residen- recovery credit, and credit for em-
Under MACRS tial rental property and nonresidential real prop- ployer-provided childcare facilities and
erty can be made on a property-by-property services.
MACRS is used to recover the basis of most basis. Once you make this election, you can • Any special depreciation allowance.
business and investment property placed in never revoke it. • Basis adjustment for investment credit
service after 1986. MACRS consists of two de- You make the election by completing line 20 property under section 50(c) of the Internal
preciation systems, the General Depreciation in Part III of Form 4562. Revenue Code.
System (GDS) and the Alternative Depreciation For information about how to determine the cost
System (ADS). Generally, these systems pro- or other basis of property, see What Is the Basis
vide different methods and recovery periods to of Your Depreciable Property, earlier. Also, see
use in figuring depreciation deductions. chapter 6.
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Table 7-1. Farm Property Recovery Periods                                                                                                          For a detailed explanation of each conven-
                                                                                                                  Recovery Period in Years        tion,  see Which  Convention  Applies?  in  chap-
                                                                                                                                                  ter 4 of Pub. 946. Also, see the Instructions for 
Assets                                                                                                            GDS   ADS                       Form 4562.
Agricultural structures (single purpose) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            10          15
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5           5
                                                                                                                                                  Which Depreciation Method 
Calculators and copiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       5           6
Cattle (dairy or breeding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      5           7                   Applies?
Communication equipment1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            7           10
Computer and peripheral equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               5           5                   MACRS  provides  three  depreciation  methods 
                                                                                                                                                  under GDS and one depreciation method under 
Drainage facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15          20                  ADS.
Farm buildings2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20          25                  • The 200% declining balance method over 
New farm machinery and equipment3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               5           10
Used farm machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               7           10                    a GDS recovery period.
Fences (agricultural) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7           10                  • The 150% declining balance method over 
                                                                                                                                                    a GDS recovery period.
Goats and sheep (breeding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          5           5                   • The straight line method over a GDS re-
Grain bin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7           10                    covery period.
Hogs (breeding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3           3                   • The straight line method over an ADS re-
Horses (age when placed in service)                                                                                                                 covery period.
  Breeding and working (12 years or less) . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 7           10
  Breeding and working (more than 12 years) . . . . . . . . . . . . . . . . . . . . . . . . .                     3           10                  Depreciation  Table. The  following  table  lists 
  Racing horses (more than 2 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               3           12                  the types of property you can depreciate under 
Horticultural structures (single purpose) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           10          15                  each method. The declining balance method is 
Logging machinery and equipment4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              5           6                   abbreviated as DB and the straight line method 
Nonresidential real property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        395         40                  is abbreviated as SL.
Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) . . .                        7           10
Paved lots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15          20                             Depreciation Table
Residential rental property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       27.5        40                   System/Method             Type of Property
Tractor units (over-the-road) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3           4                   GDS using        • All 15- and 20-year property
Trees or vines bearing fruits or nuts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         10          20                  150% DB
Truck (heavy duty, unloaded weight 13,000 lbs. or more) . . . . . . . . . . . . . . . . . . .                     5           6                                    • Farm or Nonfarm 3-, 5-, 7-, and 
Truck (actual weight less than 13,000 lbs.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             5           5                                        10-year property1
Water wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15          20                  GDS using SL     • Nonresidential real property
                                                                                                                                                                   • Residential rental property
1 Not including communication equipment listed in other classes.                                                                                                   • Trees or vines bearing fruits or 
2 Not including single-purpose agricultural or horticultural structures.                                                                                               nuts
                                                                                                                                                                       20-year property1
3 Not including grain bin, cotton ginning, asset fence, or other land improvement and the original use                                                             • All 3-, 5-, 7-, 10-, 15-, and 
starts with you and placed in service after December 31, 2017.                                                                                    ADS using SL     • Property used predomi-
4 Used by logging and sawmill operators for cutting of timber.                                                                                                         nantly outside the United 
5 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,                                                               States
 the recovery period is 31.5 years.                                                                                                                                • Farm property used when an 
                                                                                                                                                                       election not to apply the 
 For  additional  credits  and  deductions  that                                  utilities and pipes attached to it), use one of the                                  uniform capitalization rules is 
affect  basis,  see  section  1016  of  the  Internal                             following recovery periods.                                                          in effect
Revenue Code.                                                                         •     A 20-year recovery period under GDS.                                   • Tax-exempt property
                                                                                      •     A 25-year recovery period under ADS.                                   • Tax-exempt bond-financed 
                                                                                                                                                                       property
Which Recovery Period                                                                   Water  wells.             Water  wells  used  to  provide                  • Imported property2
Applies?                                                                          water for raising poultry and livestock are land                                 • Any property for which you 
                                                                                  improvements. If they are depreciable, use one                                       elect to use this method1
The recovery period of property is the number                                     of the following recovery periods.                              GDS using        • Nonfarm 3-, 5-, 7-, and
of years over which you recover its cost or other                                     •     A 15-year recovery period under GDS.                  200% DB              10-year property
basis. It is determined based on the deprecia-                                        •     A 20-year recovery period under ADS.                                   • Farm 3-, 5-, 7-, and 10-year 
                                                                                                                                                                       property placed in service after 
tion system (GDS or ADS) used. See                          Table 7-1                   The types of water wells that can be depre-                                    2017
for recovery periods under both GDS and ADS                                       ciated  were  discussed  earlier  in  Irrigation  sys-
for  some  commonly  used  assets.  For  a  com-                                  tems and water wells under          Property Having a           1Elective method.
plete list of recovery periods, see the Table of                                  Determinable Useful Life.                                       2See section 168(g)(6) of the Internal Revenue 
Class Lives and Recovery Periods in Appendix 
B of Pub. 946.                                                                                                                                     Code.
                                                                                  Which Convention Applies?
 House  trailers  for  farm  laborers.                          To  de-                                                                           Property  used  in  farming  business.         For  3-, 
preciate a house trailer you supply as housing                                    Under  MACRS,  averaging  conventions  estab-                   5-,  7-,  or  10-year  property  used  in  a  farming 
for those who work on your farm, use one of the                                   lish when the recovery period begins and ends.                  business and placed in service after 2017, the 
following recovery periods if the house trailer is                                The convention you use determines the number                    150% declining balance method is no longer re-
mobile  (it  has  wheels  and  a  history  of  move-                              of months for which you can claim depreciation                  quired.  However,  for  15-  or  20-year  property 
ment).                                                                            in the year you place property in service and in                placed  in  service  in  a  farming  business,  you 
• A 7-year recovery period under GDS.                                             the year you dispose of the property. Use one                   must  use  the  150%  declining  balance  method 
• A 10-year recovery period under ADS.                                            of the following conventions.                                   over  a  GDS  recovery  period  or  you  can  elect 
 However,  if  the  house  trailer  is  not  mobile                                   •     The half-year convention.                             one of the following methods.
(its wheels have been removed and permanent                                           •     The mid-month convention.                             • The straight line method over a GDS re-
                                                                                      •     The mid-quarter convention.                             covery period.

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• The straight line method over an ADS re- ADS election. As explained earlier under the percentage tables. For the year of the ad-
covery period. Which Depreciation System (GDS or ADS) Ap- justment and the remaining recovery period,
plies, you can elect to use ADS even though you must figure the depreciation yourself using
For property placed in service before your property may come under GDS. ADS uses the property's adjusted basis at the end of the
! 1999, you could have elected to use the straight line method of depreciation over the year. See Figuring the Deduction Without Using
CAUTION the 150% declining balance method
ADS recovery periods, which are generally lon- the Tables in chapter 4 of Pub. 946.
using the ADS recovery periods for certain ger than the GDS recovery periods. The ADS
property classes. If you made this election, con- recovery periods for many assets used in the Figuring depreciation using the 150% DB
tinue to use the same method and recovery pe- business of farming are listed in Table 7-1. Ad- method and half-year convention. Table 7-2
riod for that property. ditional ADS recovery periods for other classes has the percentages for 3-, 5-, 7-, and 20-year
of property may be found in the Table of Class property. The percentages are based on the
Real property. You can depreciate real prop- Lives and Recovery Periods in Appendix B of 150% declining balance method with a change
erty using the straight line method under either Pub. 946. to the straight line method. This table covers
GDS or ADS. only the half-year convention and the first 8
years for 20-year property. See Appendix A of
Switching to straight line. If you use a declin- How Is the Depreciation Pub. 946 for complete MACRS tables, including
ing balance method, you switch to the straight Deduction Figured? tables for the mid-quarter and mid-month con-
line method in the year it provides an equal or ventions.
greater deduction. If you use the MACRS per- To figure your depreciation deduction under The following examples show how to figure
centage tables, discussed later under How Is MACRS, you first determine the depreciation depreciation under MACRS using the percen-
the Depreciation Deduction Figured, you do not system, property class, placed-in-service date, tages in Table 7-2.
need to determine in which year your deduction basis amount, recovery period, convention, and
is greater using the straight line method. The ta- depreciation method that applies to your prop- Example 1. During the year, you bought an
bles have the switch to the straight line method erty. Then you are ready to figure your depreci- item of 7-year property for $10,000 and placed
built into their rates. ation deduction. You can figure it in one of two it in service. You do not elect a section 179 ex-
ways. pense deduction for this property. In addition,
Fruit or nut trees and vines. Depreciate • You can use the percentage tables provi- the property is not qualified property for purpo-
trees and vines bearing fruits or nuts under ded by the IRS. ses of the special depreciation allowance. The
GDS using the straight line method over a • You can figure your own deduction without unadjusted basis of the property is $10,000.
10-year recovery period. using the tables. You use the percentages in Table 7-2 to figure
your deduction.
ADS required for some farmers. If you elect Figuring your own MACRS deduction Since this is 7-year property, you multiply
not to limit interest expense, you must use ADS ! will generally result in a slightly differ- $10,000 by 10.71% to get this year's deprecia-
to depreciate any property with a recovery pe- CAUTION ent amount than using the tables.
tion of $1,071. For next year, your depreciation
riod of 10 years or more. See chapter 4 for a will be $1,913 ($10,000 × 19.13%).
discussion of interest rules. If you elect not to
apply the uniform capitalization rules to any Using the MACRS Percentage
plant shown in Table 6-1 of chapter 6 and pro- Tables Example 2. You had a barn constructed on
your farm at a cost of $20,000. You placed the
duced in your farming business, you must use barn in service this year. You elect not to claim
ADS for all property you place in service in any To help you figure your deduction under the special depreciation allowance. The barn is
year the election is in effect. See chapter 6 for a MACRS, the IRS has established percentage 20-year property and you use the table percen-
discussion of the application of the uniform cap- tables that incorporate the applicable conven- tages to figure your deduction. You figure this
italization rules to farm property. tion and depreciation method. These percent- year's depreciation by multiplying $20,000 (un-
age tables are in Appendix A of Pub. 946. adjusted basis) by 3.75% to get $750. For next
Electing a different method. As shown in the year, your depreciation will be $1,443.80
Depreciation Table, you can elect a different Rules for using the tables. The following ($20,000 × 7.219%).
method for depreciation for certain types of rules cover the use of the percentage tables.
property. You must make the election by the 1. You must apply the rates in the percent- Table 7-2. 150% Declining Balance
due date of the return (including extensions) for age tables to your property's unadjusted Method (Half-Year Convention)
the year you placed the property in service. basis. Unadjusted basis is the same basis
However, if you timely filed your return for the amount you would use to figure gain on a Year 3-Year 5-Year 7-Year 20-Year
year without making the election, you can still sale but figured without reducing your orig- 1 25.0% 15.00% 10.71% 3.750%
make the election by filing an amended return inal basis by any MACRS depreciation 2 37.5 25.50 19.13 7.219
within 6 months of the due date of your return taken in earlier years. 3 25.0 17.85 15.03 6.677
(excluding extensions). Attach the election to
the amended return and write “Filed pursuant to 2. You cannot use the percentage tables for 4 12.5 16.66 12.25 6.177
section 301.9100-2” on the election statement. a short tax year. See chapter 4 of Pub. 5 16.66 12.25 5.713
File the amended return at the same address 946 for information on how to figure the 6 8.33 12.25 5.285
you filed the original return. Once you make the deduction for a short tax year. 7 12.25 4.888
election, you cannot change it. 3. You must generally continue to use them 8 6.13 4.522
If you elect to use a different method for the entire recovery period of the prop-
erty. Figuring depreciation using the straight
CAUTION must apply the same method to all
! for one item in a property class, you line method and half-year convention. The
4. You must stop using the tables if you ad- following table has the straight line percentages
property in that class placed in service during just the basis of the property for any rea- for 3-, 5-, 7-, and 20-year property using the
the year of the election. However, you can son other than: half-year convention. The table covers only the
make the election on a property-by-property ba-
sis for residential rental and nonresidential real a. Depreciation allowed or allowable; or first 8 years for 20-year property. See Appendix
A of Pub. 946 for complete MACRS tables, in-
property. b. An addition or improvement to the cluding tables for the mid-quarter and
property, which is depreciated as a mid-month conventions.
Straight line election. Instead of using the separate property.
declining balance method, you can elect to use
the straight line method over the GDS recovery Basis adjustment due to casualty loss.
period. Make the election by entering “S/L” un- If you reduce the basis of your property be-
der column (f) in Part III of Form 4562. cause of a casualty, you cannot continue to use
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Table 7-3. Straight Line Method disposed of at the time of the exchange or con-
(Half-Year Convention) version.
Additional Rules for
Year 3-Year 5-Year 7-Year 20-Year When to make the election. You must
1 16.67% 10% 7.14% 2.5% make the election on a timely filed return (in- Listed Property
2 33.33 20 14.29 5.0 cluding extensions) for the year of replacement.
Once made, the election may not be revoked Listed property includes cars and other property
3 33.33 20 14.29 5.0 without IRS consent. used for transportation, property used for enter-
4 16.67 20 14.28 5.0 For more information and special rules, see tainment, and certain computers.
5 20 14.29 5.0 chapter 4 of Pub. 946.
6 10 14.28 5.0 Deductions for listed property (other than
7 14.29 5.0 Property acquired in a nontaxable transfer. certain leased property) are subject to the fol-
8 7.14 5.0 You must depreciate MACRS property acquired lowing special rules and limits.
by a corporation or partnership in certain non- • Deduction for employees.
The following example shows how to figure taxable transfers over the property's remaining • Business-use requirement.
depreciation under MACRS using the straight recovery period in the transferor's hands, as if • Passenger automobile limits and rules.
line percentages in Table 7-3. the transfer had not occurred. You must con-
tinue to use the same depreciation method and
Example. If, in Example 2, earlier, you had convention as the transferor. You can depreci- What Is Listed Property?
elected the straight line method, you figure this ate the part of the property's basis in excess of
year's depreciation by multiplying $20,000 (un- its carried-over basis (the transferor's adjusted Listed property is any of the following.
adjusted basis) by 2.5% to get $500. For next basis in the property) as newly purchased • Passenger automobiles weighing 6,000
year, your depreciation will be $1,000 MACRS property. For information on the kinds pounds or less.
($20,000 × 5%). of nontaxable transfers covered by this rule, see • Any other property used for transportation,
chapter 4 of Pub. 946. unless it is an excepted vehicle.
Figuring Depreciation Without the • Property generally used for entertainment,
recreation, or amusement.
Tables How Do You Use General • Certain aircraft.
If you are required to or would prefer to figure Asset Accounts?
Passenger automobiles. A passenger auto-
your own depreciation without using the tables, To make it easier to figure MACRS deprecia- mobile is any 4-wheeled vehicle made primarily
see Figuring the Deduction Without Using the tion, you can group separate assets into one or for use on public streets, roads, and highways
Tables in chapter 4 of Pub. 946. more general asset accounts (GAAs). You can and rated at 6,000 pounds or less of unloaded
then depreciate all the assets in each account gross vehicle weight (6,000 pounds or less of
Figuring the Deduction for as a single asset. Each account must include gross vehicle weight for trucks and vans). It in-
Property Acquired in a Nontaxable only assets of the same recovery period, depre- cludes any part, component, or other item phys-
Exchange ciation method, and convention. You cannot in- ically attached to the automobile or usually in-
clude an asset if you use it in both a personal cluded in the purchase price of an automobile.
If your property has a carryover basis because activity and a trade or business (or for the pro- Electric passenger automobiles are vehicles
you acquired it in an exchange or involuntary duction of income) in the year in which you first produced by an original equipment manufac-
conversion of other property or in a nontaxable placed it in service. turer and designed to run primarily on electric-
ity.
transfer, you generally figure depreciation for After you have set up a GAA, you generally
the property as if the exchange, conversion, or figure the depreciation for it by using the appli- Note. A truck or van that is a qualified nonper-
transfer had not occurred. cable depreciation method, recovery period, sonal use vehicle is not considered a passen-
and convention for the assets in the GAA. For ger automobile. See Qualified nonpersonal use
Property acquired in a like-kind exchange each GAA, record the depreciation allowance in vehicles under Passenger Automobiles in chap-
or involuntary conversion. You must gener- a separate depreciation reserve account. ter 5 of Pub. 946 for the definition of qualified
ally depreciate the carryover basis of MACRS
property acquired in a like-kind exchange or in- There are additional rules for grouping as- nonpersonal use vehicles.
voluntary conversion over the remaining recov- sets in a GAA, figuring depreciation for a GAA, For most vehicles, the gross vehicle
ery period of the property exchanged or invol- disposing of GAA assets, and terminating GAA TIP weight rating can generally be found on
untarily converted. You also generally continue treatment. Special rules apply in determining the driver door post of the vehicle.
to use the same depreciation method and con- the basis and figuring the depreciation deduc-
vention used for the exchanged or involuntarily tion for MACRS property in a GAA acquired in a Other property used for transportation.
converted property. This applies only to ac- like-kind exchange or involuntary conversion. This includes trucks, buses, boats, airplanes,
quired property with the same or a shorter re- For more details, see Regulations section motorcycles, and other vehicles used for trans-
covery period and the same or more acceler- 1.168(i)-1 (as in effect for tax years beginning porting persons or goods.
ated depreciation method than the property after December 31, 2013). Also, see chapter 4
exchanged or involuntarily converted. The ex- of Pub. 946. Excepted vehicles. Other property used
cess basis, if any, of the acquired MACRS for transportation does not include the following
property is treated as newly placed-in-service vehicles.
MACRS property. When Do You Recapture Tractors and other special-purpose farm
•
MACRS Depreciation? vehicles.
Election out. You can elect not to use the • Bucket trucks (cherry pickers), dump
above rules. The election, if made, applies to When you dispose of property you depreciated trucks, flatbed trucks, and refrigerated
both the acquired property and the exchanged using MACRS, any gain on the disposition is trucks.
or involuntarily converted property. If you make generally recaptured (included in income) as or- • Combines, cranes and derricks, and fork-
the election, figure depreciation by treating the dinary income up to the amount of the deprecia- lifts.
carryover basis and excess basis, if any, for the tion previously allowed or allowable for the • Any vehicle designed to carry cargo with a
acquired property as if placed in service the property. For more information on depreciation loaded gross vehicle weight of over 14,000
later of the date you acquired it, or the time of recapture, see chapter 9. Also, see chapter 4 of pounds.
the disposition of the exchanged or involuntarily Pub. 946.
converted property. For depreciation purposes, For more information, see chapter 5 of Pub.
the adjusted basis of the exchanged or involun- 946.
tarily converted property is treated as if it were
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What Is the Business-Use Mineral property is each separate interest Step Action Result
you own in each mineral deposit in each sepa-
Requirement? rate tract or parcel of land. You can treat two or 1 Divide your property's basis Rate per unit.
You can claim the section 179 expense deduc- more separate interests as one property or as for depletion by total
tion for listed property and depreciate listed separate properties. See section 614 of the In- recoverable units.
property using GDS and a declining balance ternal Revenue Code and the related regula- 2 Multiply the rate per unit by Cost depletion
method, if the property meets the business-use tions for rules on how to treat separate mineral units sold during the tax deduction.
requirement. To meet this requirement, listed interests. year.
property must be used predominantly (more Timber property is your economic interest in Cost depletion for ground water in Ogal-
than 50% of its total use) for qualified business standing timber in each tract or block represent- lala Formation. Farmers who extract ground
use. To determine whether the business-use re- ing a separate timber account. water from the Ogallala Formation for irrigation
quirement is met, you must allocate the use of are allowed cost depletion. Cost depletion is al-
any item of listed property used for more than lowed when it can be demonstrated the ground
one purpose during the year among its various Figuring Depletion
water is being depleted and the rate of recharge
uses. is so low that, once extracted, the water would
There are two ways of figuring depletion.
• Cost depletion. be lost to the taxpayer and immediately suc-
Do the Passenger • Percentage depletion. ceeding generations. To figure your cost deple-
tion deduction, use the guidance provided in
Automobile Limits Apply? For mineral property, you must generally use Revenue Procedure 66-11 in Cumulative Bulle-
the method that gives you the larger deduction. tin 1966-1.
The depreciation deduction (including the sec- For standing timber, you must use cost deple-
tion 179 expense deduction) you can claim for a tion.
passenger automobile each year is limited. The Timber Depletion
passenger automobile limits are the maximum
depreciation amounts you can deduct for a pas- Cost Depletion Depletion takes place when you cut standing
senger automobile. They are based on the date timber (including Christmas trees). You can fig-
you placed the vehicle in service. See chapter 5 To figure cost depletion, you must first deter- ure your depletion deduction when the quantity
of Pub. 946 for tables that show the maximum mine the following. of cut timber is first accurately measured in the
depreciation deduction for passenger automo- • The property's basis for depletion. process of exploitation.
biles. Also, see the Instructions for Form 4562. • The total recoverable units of mineral in the
property's natural deposit. Figuring the timber depletion deduction. To
For information about deducting expenses • The number of units of mineral sold during figure your cost depletion allowance, multiply
for the business use of your passenger automo- the tax year. the number of units of standing timber cut by
bile, see chapter 4 of Pub. 463. your depletion unit.
You must estimate or determine recoverable
Deductions for passenger automobiles ac- units (tons, barrels, board feet, thousands of cu- Timber units. When you acquire timber
quired in a trade-in. Special rules apply in fig- bic feet, or other measure) using the current in- property, you must make an estimate of the
uring the depreciation for a passenger automo- dustry method and the most accurate and relia- quantity of marketable timber that exists on the
bile received in a like-kind exchange or ble information you can obtain. property. You measure the timber using board
involuntary conversion. See chapter 5 of Pub. feet, log scale, cords, or other units. If you later
946 and Regulations section 1.168(i)-6(d)(3). Basis for depletion and total recoverable determine that you have more or less units of
units are explained in chapter 9 of Pub. 535. timber, you must adjust the original estimate.
Depletion Number of units sold. You determine the Depletion units. You figure your depletion
number of units sold during the tax year based unit each year by taking the following steps.
Depletion is the using up of natural resources on your method of accounting. Use the follow- 1. Determine your cost or the adjusted basis
by mining, quarrying, drilling, or cutting. The de- ing table to make this determination. of the timber on hand at the beginning of
pletion deduction allows an owner or operator the year.
to account for the reduction of a product's re- IF you use... THEN the units sold 2. Add to the amount determined in (1) the
serves. during the year are...
cost of any timber units acquired during
the cash method of the units sold for which you the year and any additions to capital.
Who Can Claim Depletion? accounting receive payment during the
tax year (regardless of the 3. Figure the number of timber units to take
If you have an economic interest in mineral year of sale). into account by adding the number of tim-
property or standing timber (defined below), an accrual method of the units sold based on ber units acquired during the year to the
you can take a deduction for depletion. More accounting your inventories. number of timber units on hand in the ac-
count at the beginning of the year and
than one person can have an economic interest then adding (or subtracting) any correction
in the same mineral deposit or timber. The number of units sold during the tax year
does not include any units for which depletion to the estimate of the number of timber
You have an economic interest if both the deductions were allowed or allowable in earlier units remaining in the account.
following apply. years. 4. Divide the result of (2) by the result of (3).
• You have acquired by investment any in- This is your depletion unit.
terest in mineral deposits or standing tim- Figuring the cost depletion deduction.
ber. Once you have figured your property's basis for When to claim timber depletion. Claim your
• You have a legal right to income from the depletion, the total recoverable units, and the depletion allowance as a deduction in the year
extraction of the mineral or the cutting of number of units sold during the tax year, you of sale or other disposition of the products cut
the timber, to which you must look for a re- can figure your cost depletion deduction by tak- from the timber, unless you elect to treat the
turn of your capital investment. ing the following steps. cutting of timber as a sale or exchange, as ex-
A contractual relationship that allows you an plained in chapter 8. Include allowable deple-
economic or monetary advantage from prod- tion for timber products not sold during the tax
ucts of the mineral deposit or standing timber is year the timber is cut as a cost item in the clos-
not, in itself, an economic interest. A production ing inventory of timber products for the year.
payment carved out of, or retained on the sale The inventory is your basis for determining gain
of, mineral property is not an economic interest.
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or loss in the tax year you sell the timber prod- and include in the adjusted basis of the prop-
ucts. erty. They include costs for the following items.
Amortization • Site preparation.
Form T (Timber). Complete and attach Form • Seeds or seedlings.
T (Timber) to your income tax return if you are Amortization is a method of recovering (deduct- • Labor.
claiming a deduction for timber depletion, elect- ing) certain capital costs over a fixed period of • Tools.
ing to treat the cutting of timber as a sale or ex- time. It is similar to the straight line method of • Depreciation on equipment used in plant-
change, or making an outright sale of timber. depreciation. The amortizable costs discussed ing and seeding.
See the Instructions for Form T (Timber). in this section include the startup costs of going
into business, reforestation costs, the costs of If the government reimburses you for refor-
Example. You bought a farm that included pollution control facilities, and the costs of sec- estation costs under a cost-sharing program,
standing timber. This year you determined that tion 197 intangibles. See chapter 8 of Pub. 535 you can amortize these costs only if you include
the standing timber could produce 300,000 for more information on these topics. the reimbursement in your income.
units when cut. At that time, the adjusted basis Qualified timber property. Qualified timber
of the standing timber was $24,000. You then property is property that contains trees in signif-
cut and sold 27,000 units. (You did not elect to Business Startup Costs
icant commercial quantities. It can be a woodlot
treat the cutting of the timber as a sale or ex- or other site that you own or lease. The property
change.) your depletion for each unit for the When you go into business, treat all costs you
year is $0.08 ($24,000 ÷ 300,000). Your deduc- incur to get your business started as capital ex- qualifies only if it meets all the following require-
tion for depletion is $2,160 (27,000 × $0.08). If penses. Capital expenses are a part of your ba- ments.
you had cut 27,000 units but sold only 20,000 sis in the business. Generally, you recover • It is located in the United States.
units during the year, your depletion for each costs for particular assets through depreciation • It is held for the growing and cutting of tim-
unit would have remained at $0.08. However, deductions. However, you generally cannot re- ber you will either use in or sell for use in
your depletion deduction would have been cover other costs until you sell the business or the commercial production of timber prod-
$1,600 (20,000 × $0.08) for this year and you otherwise go out of business. ucts.
• It consists of at least 1 acre planted with
would have included the balance of $560 Startup costs are costs for creating an active tree seedlings in the manner normally used
(7,000 × $0.08) in the closing inventory for the trade or business or investigating the creation in forestation or reforestation.
year. or acquisition of an active trade or business. Qualified timber property does not include
Startup costs include any amounts paid or in-
Percentage Depletion curred in connection with any activity engaged property on which you have planted shelter
in for profit and for the production of income be- belts or ornamental trees, such as Christmas
You can use percentage depletion on certain fore the trade or business begins, in anticipation trees.
mines, wells, and other natural deposits. You of the activity becoming an active trade or busi- Amortization period. The 84-month amortiza-
cannot use the percentage method to figure de- ness. tion period starts on the first day of the first
pletion for standing timber, soil, sod, dirt, or turf.
You can elect to currently deduct a limited month of the second half of the tax year you in-
To figure percentage depletion, you multiply amount of business startup costs paid or incur- cur the costs (July 1 for a calendar year tax-
a certain percentage, specified for each min- red after October 22, 2004. See Capital Expen- payer), regardless of the month you actually in-
eral, by your gross income from the property ses in chapter 4. If this election is made, any cur the costs. You can claim amortization
during the year. See Mines and other natural costs that are not currently deducted can be deductions for no more than 6 months of the
deposits in chapter 9 of Pub. 535 for a list of the amortized. first and last (eighth) tax years of the period.
percentages. You can find a complete list in
section 613(b) of the Internal Revenue Code. Amortization period. The amortization period How to make the election. To elect to amor-
for business startup costs paid or incurred be- tize qualifying reforestation costs, enter your
Taxable income limit. The percentage deple- fore October 23, 2004, is 60 months or more. deduction in Part VI of Form 4562. Attach a
tion deduction cannot be more than 50% (100% For startup costs paid or incurred after October statement containing any required information.
for oil and gas property) of your taxable income 22, 2004, the amortization period is 180 See the Instructions for Form 4562.
from the property figured without the depletion months. The period starts with the month your Generally, you must make the election on a
deduction and the domestic production activi- active trade or business begins. timely filed return (including extensions) for the
ties deduction. year in which you incurred the costs. However,
The following rules apply when figuring your Reporting requirements. To amortize your if you timely filed your return for the year without
taxable income from the property for purposes startup costs that are not currently deductible making the election, you can still make the elec-
of the taxable income limit. under the election to deduct, complete Part VI tion by filing an amended return within 6 months
• Do not deduct any net operating loss de- of Form 4562 and attach a statement containing of the due date of your return (excluding exten-
duction from the gross income from the any required information. See the Instructions sions). Attach Form 4562 and the statement to
property. for Form 4562. the amended return and write “Filed pursuant to
• Corporations do not deduct charitable con- section 301.9100-2” on Form 4562. File the
tributions from the gross income from the For more information, see Starting a Busi- amended return at the same address you filed
property. ness in chapter 8 of Pub. 535. the original return.
• If, during the year, you disposed of an item For additional information on reforestation
costs, see chapter 8 of Pub. 535.
of section 1245 property used in connec- Reforestation Costs
tion with the mineral property, reduce any
allowable deduction for mining expenses You can elect to currently deduct a limited Section 197 Intangibles
by the part of any gain you must report as amount of qualifying reforestation costs for
ordinary income that is allocable to the each qualified timber property. See Capital Ex- You must generally amortize over 15 years the
mineral property. See Regulations section penses in chapter 4. You can elect to amortize capitalized costs of section 197 intangibles you
1.613-5(b)(1) for information on how to fig- over 84 months any amount not deducted. acquired after August 10, 1993. You must am-
ure the ordinary gain allocable to the prop- There is no annual limit on the amount you can ortize these costs if you hold the section 197 in-
erty. elect to amortize. Reforestation costs are the di- tangible in connection with your farming busi-
rect costs of planting or seeding for forestation ness or in an activity engaged in for the
For more information on depletion, see or reforestation. production of income. Your amortization deduc-
chapter 9 of Pub. 535. tion each year is the applicable part of the intan-
Qualifying costs. Qualifying costs include gible's adjusted basis (for purposes of deter-
only those costs you must otherwise capitalize mining gain), figured by amortizing it ratably
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over 15 years (180 months). You are not al- Form (and Instructions) If the liabilities relate to an exchange of mul-
tiple properties, see Multiple Property Ex-
lowed any other depreciation or amortization 982 982 Reduction of Tax Attributes Due to changes in chapter 1 of Pub. 544.
deduction for an amortizable section 197 intan-
gible. Discharge of Indebtedness (and
Section 1082 Basis Adjustment) Amount recognized. Your gain or loss real-
Section 197 intangibles include the following Sch D (Form 1040) Sch D (Form 1040) Capital Gains and ized from a sale or exchange of certain property
assets. Losses is usually a recognized gain or loss for tax pur-
poses. A recognized gain is a gain you must in-
• Patents.
• Goodwill. Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From clude in gross income and report on your in-
• Copyrights. Farming come tax return. A recognized loss is a loss you
• Designs. 1099-A 1099-A Acquisition or Abandonment of deduct from gross income. However, your gain
• Formulas. Secured Property or loss realized from the exchange of certain
• Licenses. property may not be recognized for tax purpo-
• Permits. 1099-C 1099-C Cancellation of Debt ses. See Like-Kind Exchanges next. Also, a
• Covenants not to compete. 4797 4797 Sales of Business Property loss from the disposition of property held for
• Franchises. personal use is not deductible.
• Trademarks. 8824 8824 Like-Kind Exchanges
See chapter 8 of Pub. 535 for more information, 8949 8949 Sales and Other Dispositions of Like-Kind Exchanges
including a complete list of assets that are sec- Capital Assets
tion 197 intangibles and special rules. 8960 8960 Net Investment Income Generally, if you exchange real property you
Tax—Individuals, Estates, and Trusts use in your business or hold for investment
solely for other business or investment real
8995 8995 Qualified Business Income property of a like kind, you do not recognize the
Deduction Simplified Computation gain or loss from the exchange. However, if you
8995-A 8995-A Qualified Business Income also receive non-like-kind property or money as
Deduction part of the exchange, you recognize gain to the
8. extent of the value of the other property or
See chapter 16 for information about getting money you received in the exchange. You do
publications and forms. not recognize any losses. In general, your gain
or loss will not be recognized until you sell or
Gains and otherwise dispose of the property you receive in
Sales and Exchanges the exchange. See Qualifying property, later, for
Losses details and exceptions.
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-
Introduction ing whether any gain you have is taxable and able exchange. To qualify for treatment as a
whether any loss you have is deductible. like-kind exchange, the property traded and the
This chapter explains how to figure, and report property received must be both of the following
on your tax return, your gain or loss on the dis- A sale is a transfer of property for money or (discussed later).
position of your property or debt and whether a mortgage, a note, or other promise to pay • Qualifying property.
such gain or loss is ordinary or capital. Ordinary money. An exchange is a transfer of property • Like-kind property.
gain is taxed at the same rates as wages and for other property or services.
interest income, while net capital gain is gener- For more information on like-kind exchanges,
ally taxed at a lower rate. This chapter dis- Property sold or exchanged may include the see Pub. 544.
cusses dispositions such as sales and ex- sale of a portion of a MACRS asset. For details,
changes (including like-kind exchanges and see Partial Dispositions of MACRS Property in Multiple-party transactions. The like-kind ex-
sales of capital and noncapital assets); hedging chapter 1 of Pub. 544. change rules also apply to property exchanges
transactions; sale of livestock; cutting timber; that involve three- and four-party transactions.
Any part of these multiple-party transactions
sale of a farm; and cancellation of debt from Determining Gain or Loss can qualify as a like-kind exchange if it meets all
foreclosures, repossessions, and abandon-
the requirements described in this section.
ments. 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.
erty you buy is usually its cost. The adjusted ba-
Useful Items sis of the property is the basis plus certain addi- Basis of property received. If you receive
You may want to see: 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
from a sale or exchange is the total of all money Money paid. If, in addition to giving up
523 523 Selling Your Home 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
cludes any of your liabilities assumed by the the money paid.
550 550 Investment Income and Expenses buyer and any liabilities to which the property
you transferred is subject, such as real estate Example. You own farmland with a barn.
908 908 Bankruptcy Tax Guide taxes or a mortgage. The combined adjusted basis of the properties
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is $70,000 and the FMV is $150,000. You are or by applicable state statute as constitut- exchange is disqualified from nonrecognition
interested in another tract of farmland, with a ing or representing real property or an in- treatment. The gain or loss on the original ex-
larger barn, worth $200,000. You exchange terest in real property. change must be recognized as of the date of
your existing property and $50,000 in cash for the later disposition. The 2-year holding period
the new property. Your basis in the new prop- Like-kind property. To qualify as a nontaxa- begins on the date of the last transfer of prop-
erty is $120,000 ($70,000 adjusted basis in ble exchange, the properties exchanged must erty that was part of the like-kind exchange.
your old property plus $50,000 in cash paid). be of like kind. Like-kind properties are proper-
ties of the same nature or character, even if Related persons. Under these rules, rela-
Reporting the exchange. Report the ex- they differ in grade or quality. Generally, real ted persons include, for example, you and a
change of like-kind property, even though no property exchanged for real property qualifies member of your family (spouse, sibling, parent,
gain or loss is recognized, on Form 8824. The as an exchange of like-kind property. For exam- child, etc.), you and a corporation in which you
Instructions for Form 8824 explain how to report ple, an exchange of city property for farm prop- have more than 50% ownership, you and a
the details of the exchange. erty or improved property for unimproved prop- partnership in which you directly or indirectly
If you have any recognized gain because erty is a like-kind exchange. own more than a 50% interest of the capital or
you received money or unlike property, report it profits, and two partnerships in which you di-
on Schedule D (Form 1040) or Form 4797, Note. Whether you engaged in a like-kind rectly or indirectly own more than 50% of the
whichever applies. You may also have to report exchange depends on an analysis of each as- capital interests or profits.
the recognized gain as ordinary income be- set involved in the exchange. For the complete list of related persons, see
Related persons in chapter 2 of Pub. 544.
cause of depreciation recapture on Form 4797. Partially nontaxable exchange. If, in addition
See chapter 9 for more information. to like-kind property, you receive money or un- If you transfer property using a quali-
Qualifying property. In a like-kind exchange, like property in an exchange on which you real- ! fied intermediary involving related per-
both the real property you give up and the real ize gain, you have a partially nontaxable ex- CAUTION sons, see Multiple-party transactions
property you receive must be held by you for in- change. You are taxed on the gain you realize, involving related persons in chapter 1 of Pub.
vestment or for productive use in your trade or but only to the extent of the money and the FMV 544.
business. The nonrecognition rules for like-kind of the unlike property you receive. If you realize
exchanges apply only to exchanges of real a loss on the exchange, no loss is deductible. Example. You own real property used in
property (as defined in Treasury Regulations However, see Unlike property given up below. your business. Your sibling owns real property
used in their business. In December 2021, you
section 1.1031(a)-3). The following are exam- Example 1. You trade farmland that cost exchanged your property plus $15,000 for your
ples of property that may qualify. $130,000 for $10,000 cash and other land to be sibling’s property. At that time, the FMV of your
• Land and improvements to land. used in farming with an FMV of $150,000. You real property was $200,000 and its adjusted ba-
• Unsevered natural products of land. have a realized gain of $30,000 ($150,000 FMV sis was $65,000. The FMV of your sibling’s real
• Water and air space super adjacent to of new land + $10,000 cash − $130,000 basis of property was $215,000 and its adjusted basis
land. old farmland = $30,000 realized gain). How- was $70,000. You realized a gain of $135,000
ever, only $10,000, the cash received, is recog- (the $215,000 FMV of the real property re-
• An intangible interest in real property in- nized gain (included in income). ceived, minus the $15,000 you paid, minus your
cluding fee ownership; co-ownership; a $65,000 adjusted basis in the property). Your
leasehold; an option to acquire real prop- Example 2. Assume the same facts as in sibling realized a gain of $145,000 (the
erty; an easement; and stock in a coopera- Example 1, except that, instead of money, you $200,000 FMV of your real property, plus the
tive housing corporation. received a tractor with an FMV of $10,000. Your $15,000 you paid, minus their $70,000 adjusted
• Real property that, on the date it is trans- recognized gain is still limited to $10,000, the basis in the property).
ferred in an exchange, is real property un- value of the tractor (the unlike property). However, because this was a like-kind ex-
der the law of the state or local jurisdiction change and you received no cash or
in which that property is located. Example 3. Assume in Example 1 that the non-like-kind property in the exchange, you rec-
FMV of the land you received was only ognize no gain on the exchange. Your basis in
Nonqualifying property. The rules for $115,000. You have a realized loss of $5,000 the real property you received is $80,000 (the
like-kind exchanges do not apply to exchanges ($115,000 FMV + $10,000 cash – $130,000 ba- $65,000 adjusted basis of the real property
of the following property. sis of old farmland = $5,000 loss). However, given up plus the $15,000 you paid). Your sib-
• Real property used for personal purposes, your $5,000 loss is not recognized. ling recognizes gain only to the extent of the
such as your home. money they received, $15,000. The basis in the
Unlike property given up. If, in addition to
• Real property held primarily for sale. like-kind property, you give up unlike property, real property received was $70,000 (the
• Any personal or intangible property. you must recognize gain or loss on the unlike $70,000 adjusted basis of the real property ex-
property you give up. The gain or loss is the dif- changed minus the $15,000 received, plus the
You may have a nontaxable exchange un- ference between the FMV of the unlike property $15,000 gain recognized).
der other rules. See Other Nontaxable Ex- and the adjusted basis of the unlike property. In 2022, you sold the real property you re-
changes in chapter 1 of Pub. 544. ceived to a third party for $220,000. Because
Liabilities. If, in a like-kind exchange, you you sold property you acquired from a related
Special rule for stock in a mutual ditch, transfer property subject to debt, the debt trans- party (your sibling) within 2 years after the ex-
reservoir, or irrigation company. For purpo- ferred is considered the same as the receipt of change with your sibling, that exchange is dis-
ses of real property, stock in a mutual ditch, res- unlike property. For purposes of figuring your qualified from nonrecognition treatment and the
ervoir, or irrigation company is treated as real realized gain, add any liabilities assumed by the deferred gain must be recognized on your 2022
property if both of the following conditions are other party to your amount realized. Subtract return. On your 2022 tax return, you must report
met at the time of the trade. any liabilities of the other party that you assume your $135,000 gain on the 2021 exchange. You
1. The mutual ditch, reservoir, or irrigation from your amount realized. For more informa- must also report the gain on the 2022 sale on
company is an organization described in tion, see Partial Nontaxable Exchanges in your 2022 return. Additionally, for 2022, your
section 501(c)(12)(A) of the Internal Reve- chapter 1 of Pub. 544. sibling must report a gain of $130,000, which is
nue Code (determined without regard to the $145,000 gain on the 2021 exchange, mi-
the percentage of its income that is collec- Like-kind exchanges between related per- nus the $15,000 recognized in 2021. Your sib-
ted from its members for the purpose of sons. Special rules apply to like-kind ex- ling’s adjusted basis in the property is increased
meeting losses and expenses). changes between related persons. These rules to $200,000 ($70,000 basis plus the $130,000
affect both direct and indirect exchanges. Un- gain recognized).
2. The shares in the company have been der these rules, if either person disposes of the
recognized by the highest court of the property within 2 years after the exchange, the
state in which the company was organized

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Exceptions to the rules for related per- applies for determining loss as well as gain. Any (Form 1040) for more information, including
sons. The following property dispositions are gain recognized on a transfer in trust increases when Form 8949 is required. Also see chapter 4
excluded from these rules. the basis. of Pub. 544.
• Dispositions due to the death of either rela-
ted person. Holding period. To figure if you held property
• Involuntary conversions. Ordinary or Capital Gain longer than 1 year, start counting on the day af-
• Dispositions where it is established to the ter the day you acquired the property. The day
satisfaction of the IRS that neither the ex- or Loss you disposed of the property is part of your
change nor the disposition has, as a main holding period.
purpose, the avoidance of federal income Generally, you will have a capital gain or loss if
tax. you sell or exchange a capital asset (defined Example. If you bought an asset on June
below). You may also have a capital gain if your 19, 2021, you should start counting on June 20,
Multiple property exchanges. Under the section 1231 transactions result in a net gain. 2021. If you sold the asset on June 19, 2022,
like-kind exchange rules, you must generally See Section 1231 Gains and Losses in your holding period is not longer than 1 year,
make a property-by-property comparison to fig- chapter 9. but if you sold it on June 20, 2022, your holding
ure your recognized gain and the basis of the period is longer than 1 year.
property you receive in the exchange. However, To figure your net capital gain or loss, you
for exchanges of multiple properties, you do not must classify your gains and losses as either or- Inherited property. If you inherit property,
make a property-by-property comparison if you dinary or capital, and your capital gains or los- you are considered to have held the property
do either of the following. ses as either short term or long term. longer than 1 year, regardless of how long you
actually held it. This rule does not apply to live-
• Transfer and receive properties in two or Your net capital gains may be taxed at a stock used in a farm business. See Holding pe-
more exchange groups. lower tax rate than ordinary income. See Capi- riod under Livestock, later.
• Transfer or receive more than one property tal Gains Tax Rates, later. Your deduction for a
within a single exchange group. net capital loss may be limited. See Treatment Nonbusiness bad debt. A nonbusiness
For more information, see Multiple Property of Capital Losses, later. bad debt is a short-term capital loss, deductible
Exchanges in chapter 1 of Pub. 544. in the year the debt becomes worthless. See
chapter 4 of Pub. 550.
Capital Assets
Deferred exchange. A deferred exchange for Nontaxable exchange. If you acquire an
like-kind property may qualify for nonrecogni- Almost everything you own and use for per- asset in exchange for another asset and your
tion of gain or loss. A deferred exchange is an sonal purposes, pleasure, or investment is a basis for the new asset is figured, in whole or in
exchange in which you transfer property you capital asset. part, by using your basis in the old property, the
use in business or hold for investment and later holding period of the new property includes the
receive like-kind property you will use in busi- The following items are examples of capital
ness or hold for investment. The property you assets. holding period of the old property. That is, it be-
receive is replacement property. The transac- • A home owned and occupied by you and gins on the same day as your holding period for
tion must be an exchange of property for prop- your family. the old property.
erty rather than a transfer of property for money • Household furnishings. Gift. If you receive a gift of property and
used to buy replacement property. In addition, • A car used for pleasure. If your car is used your basis in it is figured using the donor's ba-
the replacement property will not be treated as both for pleasure and for farm business, it sis, your holding period includes the donor's
like-kind property unless certain identification is partly a capital asset and partly a nonca- holding period.
and receipt requirements are met. pital asset, defined later.
For more information, see Deferred Ex- • Stocks and bonds. However, there are Real property. To figure how long you held
change in chapter 1 of Pub. 544. special rules for gains on qualified small real property, start counting on the day after you
business stock. For more information on received title to it or, if earlier, on the day after
this subject, see Gains on Qualified Small you took possession of it and assumed the bur-
Transfer to Spouse Business Stock and Losses on Section dens and privileges of ownership.
1244 (Small Business) Stock in chapter 4 However, taking possession of real property
Generally, no gain or loss is recognized on a of Pub. 550. under an option agreement is not enough to
transfer of property from an individual to (or in start the holding period. The holding period
trust for the benefit of) a spouse, or a former Personal-use property. Gain from a sale or cannot start until there is an actual contract of
spouse if incident to divorce. This rule does not exchange of personal-use property is a capital sale. The holding period of the seller cannot
apply in the following situations. gain and is taxable. Loss from the sale or ex- end before that time.
• Your spouse or former spouse is a nonresi- change of personal-use property is not deducti-
dent alien (unless special elections have ble. You can deduct a loss relating to per- Figuring Net Gain or Loss
been made). sonal-use property only if it results from a
• Certain transfers in trust. casualty or theft. For information on casualties The totals for short-term capital gains and los-
• Certain stock redemptions under a divorce and thefts, see chapter 11. ses and the totals for long-term capital gains
or separation instrument or a valid written
agreement. and losses must be figured separately.
Long and Short Term
For more information and special rules for Net short-term capital gain or loss. Com-
transfers of property incident to divorce, see Where you report a capital gain or loss depends bine your short-term capital gains and losses.
Property Settlements in Pub. 504, Divorced or on how long you own the asset before you sell Do this by adding all of your short-term capital
Separated Individuals. or exchange it. The time you own an asset be- gains. Then add all of your short-term capital
fore disposing of it is the holding period. losses. Subtract the lesser total from the
Any transfer of property to a spouse or for- greater. The difference is your net short-term
mer spouse on which gain or loss is not recog- If you hold a capital asset 1 year or less, the capital gain or loss.
nized is not considered a sale or exchange. The gain or loss resulting from its disposition is short
recipient's basis in the property will be the same term. Report it in Part I of Form 8949, and/or Net long-term capital gain or loss. Follow
as the adjusted basis of the giver immediately Schedule D (Form 1040), as applicable. If you the same steps to combine your long-term capi-
before the transfer. This carryover basis rule hold a capital asset longer than 1 year, the gain tal gains and losses. The result is your net
applies whether the adjusted basis of the trans- or loss resulting from its disposition is long term. long-term capital gain or loss.
ferred property is less than, equal to, or greater Report it in Part II of Form 8949 and/or Sched-
than either its FMV at the time of transfer or any ule D, as applicable. See the Instructions for Net gain. If the total of your capital gains is
consideration paid by the recipient. This rule Form 8949 and the Instructions for Schedule D more than the total of your capital losses, the
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difference is taxable. However, part of your gain other dispositions of this property is reported on Gains or losses from hedging transactions
(but not more than your net capital gain) may be Schedule F (Form 1040) (not on Schedule D that hedge supplies of a type regularly used or
taxed at a lower rate than the rate of tax on your (Form 1040) or Form 4797). The treatment of consumed in the ordinary course of your trade
ordinary income. See Capital Gains Tax Rates, this property is discussed in chapter 3. or business may be ordinary gains or losses.
later. Examples include fuel and feed.
Land and depreciable properties. Land and
Net loss. If the total of your capital losses is depreciable property you use in farming are not If you have numerous transactions in
more than the total of your capital gains, the dif- capital assets. Noncapital assets also include the commodity futures market during
ference is deductible. But there are limits on livestock held for draft, breeding, dairy, or sport- RECORDS the year, you must be able to show
how much loss you can deduct and when you ing purposes. However, your gains and losses which transactions are hedging transactions.
can deduct it. See Treatment of Capital Losses from sales and exchanges of your farmland and Clearly identify a hedging transaction on your
next. depreciable properties must be considered to- books and records before the end of the day
gether with certain other transactions to deter- you entered into the transaction. It may be help-
Treatment of Capital Losses mine whether the gains and losses are treated ful to have separate brokerage accounts for
as capital or ordinary gains and losses. The your hedging and speculation transactions.
If your capital losses are more than your capital sales of these business assets are reported on
gains, you must claim the difference even if you Form 4797. See chapter 9 for more information. Retain the identification of each hedging
do not have ordinary income to offset it. For tax- transaction with your books and records. Also,
identify the item(s) or aggregate risk that is be-
payers other than corporations, the yearly limit Hedging ing hedged in your records. Although the identi-
on the capital loss you can deduct is $3,000
fication of the hedging transaction must be
($1,500 if you are married and file a separate Hedging transactions are transactions that you made before the end of the day it was entered
return). If your other income is low, you may not enter into in the normal course of business pri- into, you have 35 days after entering into the
be able to use the full $3,000. The part of the marily to manage the risk of interest rate or transaction to identify the hedged item(s) or
$3,000 you cannot use becomes part of your price changes, or currency fluctuations, with re- risk.
capital loss carryover (discussed next). spect to borrowings, ordinary property, or ordi-
nary obligations. Ordinary property or obliga- For more information on the tax treatment of
Capital loss carryover. Generally, you have a tions are those that cannot produce capital gain futures and options contracts, see Commodity
capital loss carryover if either of the following or loss if sold or exchanged. Futures and Section 1256 Contracts Marked to
situations applies to you.
• 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.
2022, 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 2023. 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 2022 to 2023, 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 2022 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
tures contracts, or options on futures contracts the transaction. You must make the additional
Generally, noncapital assets include property and the contracts cover an amount of the com- identification no more than 35 days after enter-
such as inventory and depreciable property modity within your range of production, the ing into the hedging transaction.
used in a trade or business. A list of properties transactions are generally considered hedging
that are not capital assets is provided in the In- transactions. They can take place at any time Example of a hedging transaction. You file
structions for Schedule D (Form 1040). Nonca- you have the commodity under production, your income tax returns on the cash method.
pital assets used in farming are discussed be- have it on hand for sale, or reasonably expect to On July 2, you anticipate a yield of 50,000
low. have it on hand. bushels of corn this year. The December fu-
Property held for sale in the ordinary The gain or loss on the termination of these tures price is $3.75 a bushel, but there are indi-
course of your farm business. Property you hedges is generally ordinary gain or loss. Farm- cations that by harvest time the price will drop.
hold mainly for sale to customers, such as live- ers who file their income tax returns on the cash To protect yourself against a drop in the price,
stock, poultry, livestock products, and crops, is method report any profit or loss on the hedging you enter into the following hedging transaction.
a noncapital asset. Gain or loss from sales or transaction on Schedule F, line 8. You sell 10 December futures contracts of

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5,000 bushels each for a total of 50,000 bushels The rules discussed here do not apply ordinary and necessary for selling them as reg-
of corn at $3.75 a bushel. ! to the sale of livestock held primarily for istered breeding cattle. Such use does not
The price did not drop as anticipated but CAUTION sale to customers. The sale of this live- demonstrate that you are holding the cattle for
rose to $4 a bushel. In November, you sell your stock is reported on Schedule F. See chapter 3 breeding purposes, but rather you are holding
crop at a local elevator for $4 a bushel. You also for more information. them primarily for sale to customers. However,
close out your futures position by buying 10 De- those cattle you held as additions or replace-
cember contracts for $4 a bushel. You paid a Also, special rules apply to sales or exchanges ments to your own breeding herd to produce
broker's commission of $1,400 ($70 per con- caused by weather-related conditions. See calves are considered to be held for breeding
tract) for the complete in-and-out position in the Sales Caused by Weather-Related Conditions purposes, even though they may not actually
futures market. in chapter 3 for more information. have produced calves. The same applies to
The result is that the price of corn rose 25 hog and sheep breeders.
cents a bushel and the actual selling price is $4 Holding period. The sale or exchange of live-
a bushel. Your loss on the hedge is 25 cents a stock used in your farm business (defined be- Example 5. You breed, raise, and train
bushel. In effect, the net selling price of your low) qualifies as a section 1231 transaction if horses for racing purposes. Every year, you cull
corn is $3.75 a bushel. you held the livestock for 12 months or more horses from your racing stable. In 2022, you de-
Report the results of your futures transac- (24 months or more for horses and cattle). cided that to prevent your racing stable from
tions and your sale of corn separately on getting too large to be effectively operated, you
Schedule F. See the Instructions for Schedule F Livestock. For section 1231 transactions, live- must cull six horses that had been raced at pub-
(Form 1040). stock includes cattle, hogs, horses, mules, don- lic tracks in 2021. These horses are all consid-
The loss on your futures transactions is keys, sheep, goats, fur-bearing animals, and ered held for sporting purposes.
$13,900, figured as follows. other mammals. Also, for section 1231 transac-
tions, livestock does not include chickens, tur- Figuring gain or loss on the cash method.
keys, pigeons, geese, emus, ostriches, rheas, Farmers or ranchers who use the cash method
July 2—Sold December corn futures or other birds, fish, frogs, reptiles, etc. of accounting figure their gain or loss on the
(50,000 bu. @ $3.75) . . . . . . . . . . . . . . . $187,500 sale of livestock used in their farming business
November 6—Bought December corn Livestock used in farm business. If live- as follows.
futures (50,000 bu. @ $4 plus $1,400 stock is held primarily for draft, breeding, dairy,
broker's commission) . . . . . . . . . . . . . . . 201,400
Futures loss. . . . . . . . . . . . . . . . ($13,900) or sporting purposes, it is considered to be Raised livestock. Gain on the sale of
used in your farm business. The purpose for raised livestock is generally the gross sales
This loss is reported as a negative figure on which an animal is held is ordinarily determined price reduced by any expenses of the sale. Ex-
Schedule F, Part I, line 8, as other income. by a farmer's actual use of the animal. An ani- penses of sale include sales commissions,
mal is not held for draft, breeding, dairy, or freight or hauling from farm to commission com-
The proceeds from your corn sale at the lo- sporting purposes merely because it is suitable pany, and other similar expenses. The basis of
cal elevator are $200,000 (50,000 bu. × $4). for that purpose, or because it is held for sale to the animal sold is zero if the costs of raising it
Report it on Schedule F, Part I, line 2, as in- other persons for use by them for that purpose. were deducted during the years the animal was
come from sales of products you raised. However, a draft, breeding, dairy, or sporting being raised. However, if you are required to
Assume you were right and the price went purpose may be present if an animal is dis- use the accrual accounting method, see Uni-
down 25 cents a bushel. In effect, you would posed of within a reasonable time after it is pre- form Capitalization Rules in chapter 6.
still net $3.75 a bushel, figured as follows. vented from its intended use or made undesira-
ble as a result of an accident, disease, drought, Purchased livestock. The gross sales
Sold cash corn, per bushel . . . . . . . . . . . . $3.50 or unfitness of the animal. price minus your adjusted basis and any expen-
Gain on hedge, per bushel . . . . . . . . . . . . .25 ses of sale is the gain or loss.
Net price, per bushel. . . . . . . . . . . $3.75 Example 1. You discover an animal that
you intend to use for breeding purposes is ster- Example. A farmer sold a breeding cow on
The gain on your futures transactions would ile. You dispose of it within a reasonable time. January 8, 2022, for $1,250. Expenses of the
have been $11,100, figured as follows. This animal was held for breeding purposes. sale were $125. The cow was bought July 2,
2018, for $1,300. Depreciation (not less than
July 2—Sold December corn futures (50,000 Example 2. You retire and sell your entire the amount allowable) was $1,225.
bu. @ $3.75) . . . . . . . . . . . . . . . . . . . . . . $187,500 herd, including young animals that you would
November 6—Bought December corn have used for breeding or dairy purposes had Gross sales price . . . . . . . . . . . . . . . . . . . . $1,250
futures (50,000 bu. @ $3.50 plus $1,400 you remained in business. These young ani- Cost (basis) . . . . . . . . . . . . . . . . . $1,300
broker's commission) . . . . . . . . . . . . . . . . 176,400 mals were held for breeding or dairy purposes. Minus: Depreciation deduction . . . . 1,225
Futures gain . . . . . . . . . . . . . . . $11,100 Also, if you sell young animals to reduce your Unrecovered cost
breeding or dairy herd because of drought, (adjusted basis) . . . . . . . . . . . . . . $ 75
Expense of sale . . . . . . . . . . . . . . 125 200
The $11,100 is reported on Schedule F, Part I, these animals are treated as having been held Gain realized. . . . . . . . . . . . . . . . $1,050
line 8, as other income. for breeding or dairy purposes. See Sales
The proceeds from the sale of your corn at Caused by Weather-Related Conditions in
the local elevator, $175,000 (50,000 bu. x chapter 3.
$3.50), are reported on Schedule F, Part I, Converted Wetland and
line 2, as income from sales of products you Example 3. You are in the business of rais- Highly Erodible Cropland
raised. ing hogs for slaughter. Customarily, before sell-
ing your sows, you obtain a single litter of pigs Special rules apply to dispositions of land con-
that you will raise for sale. You sell the brood verted to farming use after March 1, 1986. Any
Livestock sows after obtaining the litter. Even though you gain realized on the disposition of converted
hold these brood sows for ultimate sale to cus- wetland or highly erodible cropland is treated as
This part discusses the sale or exchange of tomers in the ordinary course of your business, ordinary income. Any loss on the disposition of
livestock used in your farm business. Gain or they are considered to be held for breeding pur- such property is treated as a long-term capital
loss from the sale or exchange of this livestock poses. loss.
may qualify as a section 1231 gain or loss.
However, any part of the gain that is ordinary in- Example 4. You are in the business of rais- Converted wetland. This is generally land that
come from the recapture of depreciation is not ing registered cattle for sale to others for use as was drained or filled to make the production of
included as section 1231 gain. See chapter 9 breeding cattle. The business practice is to agricultural commodities possible. It includes
for more information on section 1231 gains and breed the cattle before sale to establish their fit- converted wetland held by the person who orig-
losses and the recapture of depreciation under ness as registered breeding cattle. Your use of inally converted it or held by any other person
section 1245. the young cattle for breeding purposes is
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who used the converted wetland at any time af- Election to treat cutting as a sale or ex- You report the difference between the FMV and
ter conversion for farming. change. Under the general rule, the cutting of your adjusted basis for depletion as a gain. This
A wetland (before conversion) is land that timber results in no gain or loss. It is not until a amount is reported on Form 4797 along with
meets all the following conditions. sale or exchange occurs that gain or loss is re- your other section 1231 gains and losses to fig-
• It is mostly soil that, in its undrained condi- alized. But if you owned or had a contractual ure whether it is treated as a capital gain or as
tion, is saturated, flooded, or ponded long right to cut timber, you can elect to treat the cut- ordinary gain. You figure your gain as follows.
enough during a growing season to de- ting of timber as a section 1231 transaction in
velop an oxygen-deficient state that sup- the year it is cut. Even though the cut timber is FMV of timber January 1, 2022 . . . . . . . $1,400,000
ports the growth and regeneration of plants not actually sold or exchanged, you report your Minus: Adjusted basis for depletion . . . . 160,000
growing in water. gain or loss on the cutting for the year the tim- Section 1231 gain. . . . . . . . . . . . $1,240,000
• It is saturated by surface or groundwater at ber is cut. Any later sale results in ordinary busi-
a frequency and duration sufficient to sup- ness income or loss. See the example below.
port mostly plants that are adapted for life To elect this treatment, you must: Outright sales of timber. Outright sales of
timber by landowners qualify for capital gains
in saturated soil. 1. Own or hold a contractual right to cut the treatment using rules similar to the rules for cer-
• It supports, under normal circumstances, timber for a period of more than 1 year be- tain disposal of timber under a contract with re-
mostly plants that grow in saturated soil. fore it is cut, and tained economic interest (defined later). How-
Highly erodible cropland. This is cropland 2. Cut the timber for sale or use in your trade ever, for outright sales, the date of disposal is
subject to erosion that you used at any time for or business. not deemed to be the date the timber is cut be-
farming purposes other than grazing animals. cause the landowner can elect to treat the pay-
Generally, highly erodible cropland is land cur- Making the election. You make the elec- ment date as the date of disposal (see Date of
rently classified by the Department of Agricul- tion on your return for the year the cutting takes disposal, later).
ture as Class IV, VI, VII, or VIII under its classifi- place by including in income the gain or loss on
cation system. Highly erodible cropland also the cutting and including a computation of your Cutting contract. You must treat the disposal
includes land that would have an excessive gain or loss. You do not have to make the elec- of standing timber under a cutting contract as a
average annual erosion rate in relation to the tion in the first year you cut timber. You can section 1231 transaction if all the following ap-
soil loss tolerance level, as determined by the make it in any year to which the election would ply to you.
Department of Agriculture. apply. If the timber is partnership property, the • You are the owner of the timber.
election is made on the partnership return. This • You held the timber longer than 1 year be-
Successor. Converted wetland or highly erodi- election cannot be made on an amended re- fore its disposal.
ble cropland is also land held by any person turn. • You kept an economic interest in the tim-
whose basis in the land is figured by reference Once you have made the election, it re- ber.
to the adjusted basis of a person in whose mains in effect for all later years unless you re- You have kept an economic interest in
hands the property was converted wetland or voke it. standing timber if, under the cutting contract,
highly erodible cropland. Election under section 631(a) may be re- the expected return on your investment is con-
voked. If you previously elected for any tax ditioned on the cutting of the timber.
Timber year ending before October 23, 2004, to treat The difference between the amount realized
the cutting of timber as a sale or exchange un- from the disposal of the timber and its adjusted
Standing timber you held as investment prop- der section 631(a), you may revoke this election basis for depletion is treated as gain or loss on
erty is a capital asset. Gain or loss from its sale without the consent of the IRS for any tax year its sale. Include this amount on Form 4797
is capital gain or loss reported on Form 8949 ending after October 22, 2004. The prior elec- along with your other section 1231 gains or los-
and Schedule D (Form 1040), as applicable. If tion (and revocation) is disregarded for purpo- ses.
you held the timber primarily for sale to custom- ses of making a subsequent election. See Form Date of disposal. The date of disposal is
ers, it is not a capital asset. Gain or loss on its T (Timber), Forest Activities Schedule, for more the date the timber is cut. However, for outright
sale is ordinary business income or loss. It is re- information. sales by landowners or if you receive payment
ported on Schedule F, line 1 (if purchased tim- under the contract before the timber is cut, you
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 can elect to treat the date of payment as the
Farmers who cut timber on their land and its adjusted basis for depletion and its FMV on date of disposal.
sell it as logs, firewood, or pulpwood usually the first day of your tax year in which it is cut. This election applies only to figure the hold-
have no cost or other basis for that timber if no The FMV becomes your basis in the cut timber, ing period of the timber. It has no effect on the
allocation was made at the time of acquisition. and a later sale of the cut timber, including any time for reporting gain or loss (generally when
Amounts realized from these sales, and the ex- by-product or tree tops, will result in ordinary the timber is sold or exchanged).
penses incurred in cutting, hauling, etc., are or- business income or loss. To make this election, attach a statement to
dinary farm income and expenses reported on Your adjusted basis for depletion of cut tim- the tax return filed by the due date (including
Schedule F. ber is based on the number of units (board feet, extensions) for the year payment is received.
Different rules apply if you owned the timber log scale, or other units) of timber cut during the The statement must identify the advance pay-
longer than 1 year and elect to treat timber cut- tax year and considered to be sold or ex- ments subject to the election and the contract
ting as a sale or exchange or you enter into a changed. Your adjusted basis for depletion is under which they were made.
cutting contract, discussed below. also based on the depletion unit of timber in the If you timely filed your return for the year you
account used for the cut timber, and should be received payment without making the election,
Timber considered cut. Timber is considered figured in the same manner as shown in section you can still make the election by filing an
cut on the date when, in the ordinary course of 611 and Regulations section 1.611-3. amended return within 6 months after the due
business, the quantity of felled timber is first Depletion of timber is discussed in chap- date for that year's return (excluding exten-
definitely determined. This is true whether the ter 7. sions). Attach the statement to the amended re-
turn and enter “Filed pursuant to section
timber is cut under contract or whether you cut Example. In April 2022, you owned 4,000 301.9100-2” at the top of the statement. File the
it yourself. MBF (1,000 board feet) of standing timber lon- amended return at the same address the origi-
ger than 1 year. It had an adjusted basis for de- nal return was filed.
Christmas trees. Evergreen trees, such as pletion of $40 per MBF. You are a calendar year
Christmas trees, that are more than 6 years old taxpayer. On January 1, 2022, the timber had Owner. An owner is any person who owns
when severed from their roots and sold for or- an FMV of $350 per MBF. It was cut in April for an interest in the timber, including a sublessor
namental purposes are included in the term sale. On your 2022 tax return, you elect to treat and the holder of a contract to cut the timber.
“timber.” They qualify for both rules discussed the cutting of the timber as a sale or exchange. You own an interest in timber if you have the
below.
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right to cut it for sale on your own account or for Worksheet 8-1. Worksheet for Foreclosures
use in your business. and Repossessions Keep for Your Records
Tree stumps. Tree stumps are a capital asset Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt
if they are on land held by an investor who is not upon foreclosure or repossession. Complete this part only if you were personally
in the timber or stump business as a buyer, liable for the debt. Otherwise, go to Part 2.
seller, or processor. Gain from the sale of
stumps sold in one lot by such a holder is taxed 1. Enter the amount of outstanding debt immediately before the transfer of
as a capital gain. However, tree stumps held by property reduced by any amount for which you remain personally liable after the
timber operators after the saleable standing tim- transfer of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ber was cut and removed from the land are con- 2. Enter the fair market value of the transferred property . . . . . . . . . . . . . . . . . .
sidered by-products. Gain from the sale of 3. Ordinary income from cancellation of debt upon foreclosure or
stumps in lots or tonnage by such operators is repossession.* Subtract line 2 from line 1. If zero or less, enter -0- . . . . . . . . . .
taxed as ordinary income.
See Form T (Timber) and its separate in- Part 2. Figure your gain or loss from foreclosure or repossession.
structions for more information about disposi- 4. If you completed Part 1, enter the smaller of line 1 or line 2. If you did not
tions of timber. complete Part 1, enter the outstanding debt immediately before the transfer of
property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of a Farm 5. Enter any proceeds you received from the foreclosure sale . . . . . . . . . . . . . .
6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The sale of your farm may involve the sale of 7. Enter the adjusted basis of the transferred property . . . . . . . . . . . . . . . . . . .
both nonbusiness property (your home) and
business property (the land and buildings used 8. Gain or loss from foreclosure or repossession. Subtract line 7
in the farm operation and perhaps machinery from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
and livestock). If any gain from the sale includes
a gain from the sale of your home, you may be * The income may not be taxable. See Cancellation of debt, later.
allowed to exclude the gain on your home. For For more information, see Sale of a Business in necessary adjustments for improvements, de-
more information, see Pub. 523. chapter 2 of Pub. 544. preciation, etc., on the part sold. If your home is
The gain on the sale of your business prop- on the farm, you must properly adjust the basis
erty is taxable. A loss on the sale of your busi- Property used in farm operation. The rules to exclude those costs from your farm asset
ness property to an unrelated person is deduc- for excluding the gain on the sale of your home, costs, as discussed later under Sale of your
ted as an ordinary loss. Your taxable gain or described later under Sale of your home, do not home.
loss on the sale of property used in your farm apply to the property used for your farming busi-
business is taxed under the rules for section ness. Recognized gains and losses on busi- Example. You bought a 600-acre farm for
1231 transactions. See chapter 9. Losses from ness property must be reported on your return $700,000. The farm included land and build-
personal-use property, other than casualty or for the year of the sale. If the property was held ings. The purchase contract designated
theft losses, are not deductible. If you receive longer than 1 year, it may qualify for section $600,000 of the purchase price to the land. You
payments for your farm in installments, certain 1231 treatment (see chapter 9). later sold 60 acres of land on which you had in-
gains may be eligible to be taxed over the pe- stalled a fence. Your adjusted basis for the part
riod of years the payments are received. See Example. You sell your farm, including your of your farm sold is $60,000 ( / of $600,000), 1 10
chapter 10 for information about installment main home, which you have owned since De- plus any unrecovered cost (cost not depreci-
sales. cember 2006. You realize gain on the sale as ated) of the fence on the 60 acres at the time of
follows. sale. Use this amount to determine your gain or
When you sell your farm, the gain or loss on loss on the sale of the 60 acres.
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
determined by the classification of the asset. Home Only Home taxes. If you paid a flat sum for the entire farm
Each of the assets sold must be classified as Selling price . . . . $382,000 $158,000 $224,000 and no other facts are available for properly al-
Cost (or other locating your original cost or other basis be-
one of the following. basis) . . . . . . . . 240,000 110,000 130,000 tween the land and the buildings, you can use
• Capital asset held 1 year or less. Gain. . . . . . . $142,000 $48,000 $94,000 the assessed values for local property taxes for
• 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
your business and held 1 year or less (in- sale of the property used in your farm business. Example. Assume that in the preceding ex-
cluding draft, breeding, dairy, and sporting All or a part of that gain may have to be repor- ample there was no breakdown of the $700,000
animals held less than the holding periods ted as ordinary income from the recapture of purchase price between land and buildings.
discussed earlier under Livestock). depreciation or soil and water conservation ex- However, in the year of purchase, local taxes
• Property (including real estate) used in penses. Treat the balance as section 1231 on the entire property were based on assessed
your business and held longer than 1 year gain. valuations of $420,000 for land and $140,000
(including only draft, breeding, dairy, and The $48,000 gain from the sale of your for improvements, or a total of $560,000. The
sporting animals held for the holding peri- home is not taxable if you meet the require- assessed valuation of the land is / (75%) of 3 4
ods discussed earlier). ments explained later under Sale of your home. the total assessed valuation. Multiply the
• Property held primarily for sale or which is $700,000 total purchase price by 75% to figure
of the kind that would be included in inven- Partial sale. If you sell only part of your farm, basis of $525,000 for the 600 acres of land. The
tory if on hand at the end of your tax year. you must report any recognized gain or loss on unadjusted basis of the 60 acres you sold
the sale of that part on your tax return for the would 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 Sale of your home. Your home is a capital as-
a sale of each individual asset rather than a sin- cost before reporting gain or loss. For a detailed set and not property used in the trade or busi-
gle asset. If the group of assets sold constitutes discussion on installment sales, see Pub. 544. ness of farming. If you sell a farm that includes
a trade or business, the residual method must a house you and your family occupy, you must
be used. This method determines gain or loss Adjusted basis of the part sold. This is determine the part of the selling price and the
from the transfer of each asset. It also deter- the properly allocated part of your original cost part of the cost or other basis allocable to your
mines the buyer's basis in the business assets. or other basis of the entire farm plus or minus
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home. Your home includes the immediate sur- Example 2. Assume the same facts as in voluntarily and permanently give up possession
roundings and outbuildings relating to it that are Example 1, except the FMV of the land was and use of the property with the intention of
not used for business purposes. $210,000. The result is the same. The amount ending your ownership, but without passing it
If you use part of your home for business, you realized on the foreclosure is $180,000, the on to anyone else.
you must make an appropriate adjustment to debt canceled by the foreclosure. Because your
the basis for depreciation allowed or allowable. adjusted basis is $200,000, you have a deducti- Business or investment property. Loss from
For more information on basis, see chapter 6. 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-
More information. For more information ment of business or investment property that is
on selling your home, see Pub. 523. 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
Gain from condemnation. If you have a debt), the amount realized on the foreclosure or than the amount you realize (if any), then you
gain from a condemnation or sale of your home repossession includes the lesser of: have a loss. If the amount you realize (if any) is
under threat of condemnation, you may use the • The outstanding debt immediately before more than your adjusted basis, then you have a
preceding rules for excluding the gain, rather the transfer reduced by any amount for gain. This rule also applies to leasehold im-
than the rules discussed under Postponing which you remain personally liable immedi- provements the lessor made for the lessee.
Gain in chapter 11. However, any gain that can- ately after the transfer, or However, if the property is foreclosed on or re-
not be excluded (because it is more than the • The FMV of the transferred property. possessed in lieu of abandonment, gain or loss
limit) may be postponed under the rules dis-
cussed under Postponing Gain in chapter 11. You are treated as receiving ordinary in- is figured as discussed earlier under Foreclo-
come from the canceled debt for the part of the sure or Repossession.
debt that is more than the FMV. The amount re- If the abandoned property is secured by
Foreclosure or alized does not include the canceled debt that debt, special rules apply. The tax consequen-
Repossession is your income from cancellation of debt. See ces of abandonment of property that secures a
Cancellation of debt, later. debt depend on whether you are personally lia-
If you do not make payments you owe on a loan ble for the debt (recourse debt) or were not per-
secured by property, the lender may foreclose Example 3. Assume the same facts as in sonally liable for the debt (nonrecourse debt).
on the loan or repossess the property. The fore- Example 1 earlier, except you are personally li- For more information, see chapter 3 of Pub.
closure or repossession is treated as a sale or able for the loan (recourse debt). In this case, 4681, Canceled Debts, Foreclosures, Repos-
exchange from which you may realize gain or the amount you realize is $170,000. This is the sessions, and Abandonments.
loss. This is true even if you voluntarily return canceled debt ($180,000) up to the FMV of the
the property to the lender. You may also realize land ($170,000). You figure your gain or loss on The abandonment loss is deducted in the
ordinary income from cancellation of debt if the the foreclosure by comparing the amount real- tax year in which the loss is sustained. Report
loan balance is more than the FMV of the prop- ized ($170,000) with your adjusted basis the loss on Form 4797, Part II, line 10.
erty. ($200,000). You have a $30,000 deductible
loss, which you figure on Form 4797, Part I. You Personal-use property. You cannot deduct
Buyer's (borrower's) gain or loss. You figure are also treated as receiving ordinary income any loss from abandonment of your home or
and report gain or loss from a foreclosure or re- from cancellation of debt. That income is other property held for personal use.
possession in the same way as gain or loss $10,000 ($180,000 − $170,000). This is the part
from a sale or exchange. The gain or loss is the of the canceled debt not included in the amount Canceled debt. If the abandoned property se-
difference between your adjusted basis in the realized. You report this as other income on cures a debt for which you are personally liable
transferred property and the amount realized. Schedule F, line 8. and the debt is canceled, you may realize ordi-
See Determining Gain or Loss, earlier. nary income equal to the canceled debt. This
Seller's (lender's) gain or loss on reposses- income is separate from any loss realized from
You can use Worksheet 8-1 to figure sion. If you finance a buyer's purchase of your abandonment of the property. Report income
TIP your gain or loss from a foreclosure or property in an installment sale and later acquire from cancellation of a debt related to a business
repossession. an interest in it through foreclosure or reposses- or rental activity as business or rental income.
sion, you may have a gain or loss on the acquis- Report income from cancellation of a nonbusi-
Amount realized on a nonrecourse debt. ition. For more information, see Repossession ness debt on Form 1040 or Form 1040-SR.
If you are not personally liable for repaying the in Pub. 537, Installment Sales. However, income from cancellation of debt
debt (nonrecourse debt) secured by the trans- is not taxed in certain circumstances. See Can-
ferred property, the amount you realize includes Cancellation of debt. If property that is repos- cellation of debt, earlier, under Foreclosure or
the full amount of the debt canceled by the sessed or foreclosed upon secures a debt for Repossession.
transfer. The full canceled debt is included in which you are personally liable (recourse debt),
the amount realized even if the FMV of the you must generally report as ordinary income Forms 1099-A and 1099-C. A lender who ac-
property is less than the canceled debt. the amount by which the canceled debt is more quires an interest in your property in a foreclo-
than the FMV of the property. This income is sure, repossession, or abandonment should
Example 1. You paid $200,000 for land separate from any gain or loss realized from the send you Form 1099-A showing the information
used in your farming business. You paid foreclosure or repossession. Report the income you need to figure your loss from the foreclo-
$15,000 down and borrowed the remaining from cancellation of a business debt on Sched- sure, repossession, or abandonment. However,
$185,000 from a bank. You are not personally li- ule F, line 8. Report the income from cancella- if the lender cancels part of your debt and the
able for the loan (nonrecourse debt), but pledge tion of a nonbusiness debt as miscellaneous in- lender must file Form 1099-C, the lender may
the land as security. The bank foreclosed on the come on Form 1040 or Form 1040-SR. include the information about the foreclosure,
loan 2 years after you stopped making pay- repossession, or abandonment on that form in-
ments. When the bank foreclosed, the balance You can use Worksheet 8-1 to figure stead of Form 1099-A. The lender must file
due on the loan was $180,000 and the FMV of TIP your income from cancellation of debt. Form 1099-C and send you a copy if the can-
the land was $170,000. The amount you real- celed debt is $600 or more and the lender is a
ized on the foreclosure was $180,000, the debt However, income from cancellation of debt financial institution, credit union, or federal gov-
canceled by the foreclosure. You figure your is not taxed in certain situations. See Cancella- ernment agency, or any organization that has a
gain or loss on Form 4797, Part I, by comparing tion of Debt in chapter 3. significant trade or business of lending money.
the amount realized ($180,000) with your adjus- For foreclosures, repossessions, abandon-
ted basis ($200,000). You have a $20,000 de- ments of property, and debt cancellations oc-
ductible loss. Abandonment curring in 2022, these forms should be sent to
you by January 31, 2023.
The abandonment of property is a disposition of
property. You abandon property when you
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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  exam-         gain.  Only  gain  in  excess  of  the  recapture                                 the same time and to the same person, 
ples of items reported on Form 4797 and refers          amount  is  considered  section  1231  gain.  See                                 and the land must have been held longer 
to 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 
You may want to see:                                      and held for 24 months or longer.                                               for longer than 1 year (or for the required 
                                                        • Sale or exchange of other livestock.                                            period for certain livestock). You will re-
Publication                                               This livestock must be held for draft,                                          ceive Schedule K-1 (Form 1065) showing 
                                                          breeding, dairy, or sporting purposes and                                       the appropriate classification of any gains 
    544   544 Sales and Other Dispositions                held for 12 months or longer. Other live-                                       or losses 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 (2022) . . . . . $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 (2019) . . . . . . . . . . . . . . ($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 (2021) . . . . . . . . . . . . . . $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
2019 is completely recaptured in 2022. 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 If you dispose of depreciable property (section
applied against your net section 1231 gain be- 1245 or section 1250 property) or amortizable floors, windows, doors, central air conditioning
ginning with the earliest loss in the 5-year pe- property at a gain, you may have to treat all or systems, light fixtures, etc.
riod. part of the gain (even if it is otherwise nontaxa- Do not treat a structure that is essentially
ble) as ordinary income. Any remaining gain is machinery or equipment as a building or struc-
Example. In 2022, you have a $20,000 net section 1231 gain (discussed earlier). tural component. Also, do not treat a structure
that houses property used as an integral part of
section 1231 gain. To figure how much you To figure any gain that must be repor- an activity as a building or structural component
have to report as ordinary income and ted as ordinary income, you must keep if the structure's use is so closely related to the
long-term capital gain, you must first determine RECORDS permanent records of the facts neces- property's use that the structure can be expec-
your section 1231 gains and losses from the sary to figure the depreciation or amortization ted to be replaced when the property it initially
previous 5-year period. From 2017 through allowed or allowable on your property. For more houses is replaced.
2021, you had the following section 1231 gains information on depreciation recapture, see The fact that the structure is specially de-
and losses. chapter 3 of Pub. 544. Also see Pub. 946. signed to withstand the stress and other de-
Year Amount mands of the property and cannot be used eco-
nomically for other purposes indicates it is
2017 -0- Section 1245 Property closely related to the use of the property it
2018 -0-
2019 ($25,000) houses. Structures such as oil and gas storage
2020 -0- A gain on the disposition of section 1245 prop- tanks, grain storage bins, and silos are not trea-
2021 $18,000 erty is treated as ordinary income to the extent ted as buildings, but as section 1245 property.
of depreciation allowed or allowable. Any rec-
You used this information to figure how to ognized gain that is more than the part that is Facility for bulk storage of fungible com-
report your net section 1231 gain for 2022 as ordinary income is a section 1231 gain. modities. This is a facility used mainly for the
shown below. 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 You did not claim the section 179 expense de- Section 1250 Property
duction for the truck. You sold it in May 2022 for
The gain treated as ordinary income on the $21,000. The MACRS deduction in 2022, the Section 1250 property includes all real property
sale, exchange, or involuntary conversion of year of sale, is $2,880 ( / of $5,760). Figure the 1 2 subject to an allowance for depreciation that is
section 1245 property, including a sale and gain treated as ordinary income as follows. not and never has been section 1245 property.
leaseback transaction, is the lesser of the fol- It includes buildings and structural components
lowing amounts. 1. Amount realized . . . . . . . . . . . . . . . . . . $21,000 that are not section 1245 property (discussed
2. Cost (February 2020) . . . . . . $30,000 earlier). It includes a leasehold of land or sec-
1. The depreciation (which includes any sec- 3. Depreciation allowed or tion 1250 property subject to an allowance for
tion 179 deduction claimed) and amortiza- allowable (MACRS deductions: depreciation. A fee simple interest in land is not
tion allowed or allowable on the property. $6,000 + $9,600 + $2,880) . . . 18,480
4. Adjusted basis (subtract line 3 section 1250 property because, like land, it is
2. The gain realized on the disposition (the from line 2) . . . . . . . . . . . . . . . . . . . . . $11,520 not depreciable.
amount realized from the disposition mi- 5. Gain realized (subtract line 4 Gain on the disposition of section 1250
nus the adjusted basis of the property). from line 1) . . . . . . . . . . . . . . . . . . . . . $9,480
6. Gain treated as ordinary income property is treated as ordinary income to the ex-
See chapter 3 of Pub. 544 for more information (lesser of line 3 or line 5). . . . . . . . $9,480 tent of additional depreciation allowed or allow-
on dispositions of section 1245 property. able. To determine the additional depreciation
on section 1250 property, see Depreciation Re-
Depreciation allowed or allowable. You capture in chapter 3 of Pub. 544.
Use Part III of Form 4797 to figure the ordi- generally use the greater of the depreciation al-
nary income part of the gain. lowed or allowable when figuring the part of Use Part III of Form 4797 to figure the ordi-
gain to report as ordinary income. If, in prior nary income part of the gain.
Depreciation claimed on other property or years, you have consistently taken proper de-
claimed by other taxpayers. Depreciation ductions under one method, the amount al- You will not have additional depreciation if
and amortization include the amounts you lowed for your prior years will not be increased any of the following apply to the property dis-
claimed on the section 1245 property as well as even though a greater amount would have been posed of.
the following depreciation and amortization allowed under another proper method. If you • You figured depreciation for the property
amounts. did not take any deductions in prior years for using the straight line method or any other
• Amounts you claimed on property you ex- depreciation, your adjustments to basis for de- method that does not result in depreciation
changed for, or converted to, your section preciation allowable are figured by using the that is more than the amount figured by the
1245 property in an applicable like-kind ex- straight line method. This treatment applies only straight line method and you have held the
change or involuntary conversion. For de- when figuring what part of the gain is treated as property longer than 1 year.
tails on exchanges of property that are not ordinary income under the rules for section • You chose the alternate ACRS (straight
taxable, see Like-Kind Exchanges in chap- 1245 depreciation recapture. For more informa- line) method for the property, which was a
ter 8. tion on depreciation allowed or allowable, see type of 15-, 18-, or 19-year real property
• Amounts a previous owner of the section chapter 7. For information on adjustments to covered by the section 1250 rules.
1245 property claimed if your basis is de- basis for depreciation allowed or allowable, see • The property was nonresidential real prop-
termined with reference to that person's chapter 6. erty placed in service after 1986 (or after
adjusted basis (for example, the donor's July 31, 1986, if the choice to use MACRS
depreciation deductions on property you Disposition of plants. If you elect not to use was made) and you held it longer than 1
received as a gift). the uniform capitalization rules (see chapter 6), year. These properties are depreciated us-
you must treat any plant that would have been ing the straight line method.
Depreciation and amortization. Depreciation subject to the uniform capitalization rules as
and amortization deductions that must be re- section 1245 property. If you have a gain on the Installment Sale
captured as ordinary income include (but are property's disposition, you must recapture the
not limited to) the following items. See Depreci- pre-productive expenses you would have capi- If you report the sale of property under the in-
ation Recapture in chapter 3 of Pub. 544 for talized if you had not made the election by treat- stallment method, any depreciation recapture
more details. ing the gain, up to the amount of these expen- under section 1245 or 1250 is taxable as ordi-
1. Ordinary depreciation deductions. ses, as ordinary income. For section 1231 nary income in the year of sale. This applies
transactions, show these expenses as depreci- even if no payments are received in that year. If
2. Section 179 deduction (see chapter 7). ation on Form 4797, Part III, line 22. For plant the gain is more than the depreciation recapture
3. Any special depreciation allowance. sales that are reported on Schedule F (Form income, report the rest of the gain using the
1040), Profit or Loss From Farming, this recap- rules of the installment method. For this pur-
4. Amortization deductions for any of the fol- ture rule does not change the reporting of in- pose, include the recapture income in your in-
lowing costs. come because the gain is already ordinary in- stallment sale basis to determine your gross
a. Acquiring a lease. come. You can use the farm-price method profit on the installment sale.
discussed in chapter 2 to figure these expen-
b. Lessee improvements. ses. If you dispose of more than one asset in a
c. Pollution control facilities. single transaction, you must separately figure
Example. You sold your apple orchard in the gain on each asset so that it may be prop-
d. Reforestation expenses. 2022 for $80,000. Your adjusted basis at the erly reported. To do this, allocate the selling
e. Section 197 intangibles. time of sale was $60,000. You bought the or- price and the payments you receive in the year
chard in 2015, but the trees did not produce a of sale to each asset. Report any depreciation
f. Qualified disaster expenses. crop until 2018. Your pre-productive expenses recapture income in the year of sale before us-
g. Franchises, trademarks, and trade were $6,000. You elected not to use the uniform ing the installment method for any remaining
names acquired before August 11, capitalization rules. You must treat $6,000 of gain.
1993. the gain as ordinary income in addition to re-
capturing depreciation allowed or allowable on For more information on installment sales,
Example. You file your returns on a calen- the orchard. This amount would be reported on see chapter 10.
dar year basis. In February 2020, you bought Form 4797, Part III, as ordinary income.
and placed in service for 100% use in your See Uniform Capitalization Rules in
farming business a light-duty truck (5-year prop- ! chapter 6 for more information regard-
erty) that cost $30,000. You used the half-year CAUTION ing electing out of, or being exempt
convention and your MACRS deductions for the from, using the uniform capitalization rules.
truck were $6,000 in 2020 and $9,600 in 2021.
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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. 535 535 Business Expenses
the following. • The gain on the disposition of the property.
• Deductions for soil and water conservation 537 537 Installment Sales
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- 538 538 Accounting Periods and Methods
cost-sharing payments (section 1255 prop- nary income under sections 1231 through 1254,
erty). 1256, and 1257. However, if applicable, gain re- 544 544 Sales and Other Dispositions of
ported under this rule must be reported regard- 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. 551 551 Basis of Assets
than 10 years at a gain and you were allowed Applicable percentage. The applicable
deductions for soil and water conservation ex- percentage of the excluded cost-sharing pay- Form (and Instructions)
penses for the land, as discussed in chapter 5, ments to be reported as ordinary income is 4797 4797 Sales of Business Property
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 6252 6252 Installment Sale Income
gain. is held less than 10 years after you receive the
Exceptions. Do not treat gain on the fol- payments, the percentage is 100%. After 10 8594 8594 Asset Acquisition Statement Under
lowing transactions as gain on section 1252 years, the percentage is reduced by 10% a Section 1060
property. year, or part of a year, until the rate is 0%.
• Disposition of farmland by gift. 8949 8949 Sales and Other Dispositions of
• Transfer of farm property at death (except Form 4797, Part III. Use Form 4797, Part III, Capital Assets
for income in respect of a decedent). to figure the ordinary income part of a gain from
the sale, exchange, or involuntary conversion of See chapter 16 for information about getting
For more information, see Regulations section section 1252 property and section 1255 prop- publications and forms.
1.1252-2. erty.
Amount to report as ordinary income.
You report as ordinary income the lesser of the Installment Sale of a
following amounts.
• Your gain (determined by subtracting the Farm
adjusted basis from the amount realized
from a sale, exchange, or involuntary con- The installment sale of a farm for one overall
price under a single contract isn’t the sale of a
version, or the fair market value for all 10. single asset. It generally includes the sale of
other dispositions).
• The total deductions allowed for soil and real property and personal property reportable
water conservation expenses multiplied by on the installment method. It may also include
the applicable percentage, discussed next. Installment the sale of property for which you must maintain
an inventory, which can’t be reported on the in-
Applicable percentage. The applicable stallment method. See Inventory, later. The sell-
percentage is based on the length of time you Sales ing price must be allocated to determine the
held the land. If you dispose of your farmland amount received for each class of asset.
within 5 years after the date you acquired it, the
percentage is 100%. If you dispose of the land Note. You may be required to report the
within the 6th through 9th years after you ac- Introduction sale of your farm on Form 8594. For more infor-
quired it, the applicable percentage is reduced An installment sale is a sale of property where mation, see Form 8594 and its instructions.
by 20% a year for each year or part of a year you receive at least one payment after the tax
you hold the land after the 5th year. If you dis- year of the sale. If you realize a gain on an in- The tax treatment of the gain or loss on the
pose of the land 10 or more years after you ac- stallment sale, you may be able to report part of sale of each class of asset is determined by its
quired it, the percentage is 0%, and the entire your gain when you receive each payment. This classification as a capital asset, as property
gain is a section 1231 gain. method of reporting gain is called the install- used in the business, or as property held for
ment method. You can’t use the installment sale and by the length of time the asset was
Example. You acquired farmland on Janu- method to report a loss. You can choose to re- held. (See chapter 8 for a discussion of capital
ary 19, 2014. You incurred $15,000 of soil and port all of your gain in the year of sale. assets and chapter 9 for a discussion of prop-
water conservation expenditures for the land erty used in the business.) Separate computa-
that were fully deductible. On October 5, 2022, Installment obligation. The buyer’s obligation tions must be made to figure the gain or loss for
you sold the land at a $30,000 gain. The appli- to make future payments to you can be in the each class of asset sold. See Sale of a Farm in
cable percentage is 40% because you sold the chapter 8.
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If you report the sale of property on the procedures and user fees for obtaining a private You must continue to report the interest
! installment method, any depreciation letter ruling are published annually in the first ! income on payments you receive in
CAUTION recapture under section 1245 or 1250 revenue procedure issued each calendar year. CAUTION subsequent years as interest income
is generally taxable as ordinary income in the For 2022, go to IRS.gov/irb/ whether it’s stated or unstated.
year of sale. See Depreciation recapture, later. 2022-01_IRB#RP-2022-01, as modified by
This applies even if no payments are received IRS.gov/irb/2022-06_IRB#RP-2022-10. Adjusted basis and installment sale income
in that year. Send your request for a private letter ruling, (gain on sale). After you have determined
including the applicable user fee, to the IRS fol- how much of each payment to treat as interest,
Related parties. If you sell property to a rela- lowing the instructions in section 7 of Revenue you treat the rest of each payment as if it were
ted party, you may not be able to report the sale Procedure 2022-1. A schedule of the current made up of two parts.
using the installment method. Generally, mem- user fees is available in Appendix A of Revenue • A tax-free return of your adjusted basis in
bers of a family aren’t related parties for purpo- Procedure 2022-1, starting on page 85. the property.
ses of the installment method. For more infor- • Your gain (referred to as “installment sale
mation, see Related Person under Sale to a Inventory. If you aren’t required to maintain income” on Form 6252).
Related Person in Pub. 537. (keep a record of beginning and ending) inven-
tories under your method of accounting, you Figuring adjusted basis and gross profit
can report gain from the sale of farm inventory percentage for installment sale purposes.
using the installment method. Complete Form You can use Worksheet 10-1 to figure your ad-
Installment Method 6252 to figure the amount of installment gain to justed basis in the property for installment sale
report each year from the sale of farm inventory purposes. When you have completed the work-
An installment sale is a sale of property where and carry that amount to line 8 of Schedule F sheet, you will also have determined the gross
you receive at least one payment after the tax (Form 1040). profit percentage necessary to figure your in-
year of the sale. A farmer who isn’t required to If you are required to maintain inventories stallment sale income (gain) for this year.
maintain an inventory can use the installment under your method of accounting, you can’t re-
method to report gain from the sale of property port gain from the sale of farm inventory using 1. Selling price. The selling price is the total
used or produced in farming. See Inventory, the installment method. All gain or loss on the cost of the property to the buyer and in-
later, for information on the sale of farm prop- sale of farm inventory must be reported in the cludes the following.
erty where inventory items are included in the year of sale, even if you receive payment in • Any money you’re to receive.
assets sold. later years. If inventory items are included in an • The fair market value (FMV) of any
installment sale, you may have an agreement property you’re to receive (FMV is
If a sale qualifies as an installment sale, the stating which payments are for inventory and discussed under Property used as a
gain must be reported under the installment which are for the other assets being sold. If you payment, later).
method unless you elect out of using the install- don’t, each payment must be allocated between • Any existing mortgage or other debt
ment method. the inventory and the other assets sold. the buyer pays, assumes, or takes
the property subject to (a note, a
Electing out of the installment method. If More information. See Inventory under mortgage, or any other liability, such
you elect not to use the installment method, you Sale of a Business in Pub. 537 for more infor- as a lien, accrued interest, or taxes
generally report the entire gain in the year of mation. you owe on the property).
sale, even though you don’t receive all the sale • Any of your selling expenses the
proceeds in that year. Sale at a loss. If your sale results in a loss, buyer pays.
To make this election, don’t report your sale you can’t use the installment method. If the loss Don’t include stated interest, unstated
on Form 6252. Instead, report it on Schedule F is on an installment sale of business assets, you interest, any amount recomputed or re-
(Form 1040), Schedule D (Form 1040), Form can deduct it only in the tax year of sale. characterized as interest, or OID in the
4797, or all three. selling price.
You may also need to file Form 8949 along Figuring Installment Sale 2. Adjusted basis. Your adjusted basis in
with Schedule D (Form 1040), Capital Gains
and Losses. For more information, see Form Income property immediately before the install-
8949 and its instructions. ment sale is your original basis increased
Each payment on an installment sale usually or reduced as a result of various events
When to elect out. Make this election by consists of the following three parts. while you own the property.
the due date, including extensions, for filing • Interest income. • Some events, such as adding rooms
your tax return for the year the sale takes place. • Return of your adjusted basis in the prop- or making permanent improvements,
However, if you timely file your tax return for erty. increase basis. Others, such as de-
the year the sale takes place without making the • Gain on the sale. ductible casualty losses or deprecia-
election, you can still make the election by filing In each year you receive a payment, you must tion previously allowed or allowable,
an amended return within 6 months of the due include in income both the interest part and the decrease basis.
date of the return (excluding extensions). Enter part that is your gain on the sale. Don’t include • The way you figure your original basis
“Filed pursuant to section 301.9100-2” at the in income the part that is the return of your basis depends on how you acquire the
top of the amended return. File the amended re- in the property. Basis is the amount of your in- property. The basis of property you
turn at the same address you filed the original vestment in the property for installment sale buy is generally its cost. The basis of
return. If you electronically filed your Form 1040 purposes. property you inherit, receive as a gift,
or 1040-SR, you may electronically file the build yourself, or receive in a tax-free
Form 1040-X. Interest income. You must report interest as exchange is figured differently. See
Revoking the election. Once made, the ordinary income. Interest generally isn’t inclu- chapter 6 and Pub. 551 for more in-
election can be revoked only with IRS approval. ded in a down payment. However, you may formation.
An approved revocation is retroactive. have to treat part of each later payment as inter- • Generally, your adjusted basis in
The taxpayer can’t revoke the election if ei- est, even if it isn’t called interest in your agree- raised farm products, such as grain or
ther of the following applies. ment with the buyer. Interest provided in the market livestock, is zero.
• One of the purposes is to avoid federal in- agreement is called stated interest. If the agree- 3. Selling expenses. Selling expenses re-
come tax. ment doesn’t provide for enough stated interest, late to the sale of the property. Review the
• The tax year in which any payment was re- there may be unstated interest or original issue closing statement for fees, which may
ceived has closed. discount (OID). See Unstated interest, later. qualify as selling expenses. These may in-
clude appraisal fees, attorney fees, clos-
To revoke the election, you must obtain a ing fees, document preparation fees,
private letter ruling from the IRS. The
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   escrow fees, mortgage satisfaction fees,          Worksheet 10-1. Figuring Adjusted Basis and Gross Profit Percentage
   notary fees, points paid by the seller to ob-
   tain financing for the buyer, real estate 
   broker’s commission, recording fees (if 
   paid by the seller), costs of removing title                                                             Keep for Your Records
   clouds, settlement fees, title search fees, 
   and transfer or stamp taxes charged by            1. Enter the selling price for the property . . . . . . . . . . . . . . . . . . . . . . . . .                       
   city, county, or state governments.               2. Enter your adjusted basis for the property . . . . . . . . . . . . .                                  
4. Depreciation recapture. If the property           3. Enter your selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . .                       
   you sold was depreciable property:
   •  You may need to recapture part of the          4. Enter any depreciation recapture . . . . . . . . . . . . . . . . . . . . .                            
      gain on the sale as ordinary income,           5. Add lines 2, 3, and 4. 
      and
   •  See Depreciation Recapture in chap-            This is your adjusted basis 
      ter 9 and Depreciation Recapture In-           for installment sale purposes                . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            
      come in Pub. 537.                              6. Subtract line 5 from line 1. If zero or less, enter -0-.
5. Adjusted basis for installment sale               This is your gross profit    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              
   purposes. Your adjusted basis for install-        If the amount entered on line 6 is zero, stop here. You can’t use 
   ment sale purposes is the total of the fol-
   lowing three items.                               the installment method.
   •  Adjusted basis.                                7. Enter the contract price for the property . . . . . . . . . . . . . . . . . . . . . . .                          
   •  Selling expenses.
   •  Depreciation recapture.                        8. Divide line 6 by line 7. This is your gross 
6. Gross profit. Gross profit is the total gain      profit percentage        . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        
   you report on the installment method.
   •  To figure your gross profit, subtract          Worksheet 10-2. New Gross Profit Percentage — Selling Price Reduced
      your adjusted basis for installment 
      sale purposes from the selling price.
   •  If the property you sold was your                                                                     Keep for Your Records
      home, subtract from the gross profit 
      any gain you can exclude. See Pub.             1. Enter the reduced selling 
      523 for more information.                                                                                                                                          
                                                            price for the property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7. Contract price. Contract price equals:            2. Enter your adjusted 
   •  The selling price, minus
   •  The amount of any mortgages, debts,                   basis for the 
      and other liabilities assumed or taken                property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         
      by the buyer, plus                             3. Enter your selling 
   •  The amount, if any, by which the                                                                                                                       
      mortgages, debts, and other liabilities               expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
      assumed or taken by the buyer ex-              4. Enter any depreciation 
      ceed your adjusted basis for install-                 recapture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          
      ment sale purposes.
                                                     5. Add lines 2, 3, and 4  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         
8. Gross profit percentage. A certain per-
   centage of each payment (after subtract-          6. Subtract line 5 from line 1. 
   ing interest) is reported as installment sale            This is your adjusted
   income. This percentage is called the                    gross profit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              
   gross profit percentage and is figured by         7. Enter any installment sale 
   dividing your gross profit from the sale by 
   the contract price.                                      income reported in 
   •  The gross profit percentage generally                 prior year(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              
      remains the same for each payment              8. Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            
      you receive. However, see Example 
      under Selling price reduced, later, for        9. Future installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        
      a situation where the gross profit per-
      centage changes.                               10. Divide line 8 by line 9. 
                                                            This is your new
Example. You  sell  property  at  a  contract               gross profit percentage* . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             
price  of  $60,000  and  your  gross  profit  is 
$15,000.  Your  gross  profit  percentage  is  25%   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale 
($15,000  ÷  $60,000).  After  subtracting  interest income.
from  each  payment,  you  report  25%  of  each     for  the  tax  year.  In  certain  circumstances,  you the  gross  profit  percentage  for  the  remaining 
payment,  including  the  down  payment,  as  in-    may be treated as having received a payment,           payments.  Refigure  your  gross  profit  using 
stallment sale income from the sale for the tax      even though you received nothing directly. A re-       Worksheet 10-2. You will spread any remaining 
year  you  receive  the  payment.  The  remainder    ceipt  of  property  or  the  assumption  of  a  mort- gain over future installments.
(balance) of each payment is the tax-free return     gage on the property sold may be treated as a 
of your adjusted basis.                              payment.  For  a  detailed  discussion,  see Pay-      Example.                 In 2020, you sold land with a ba-
                                                     ments Received or Considered Received, later.          sis  of  $40,000  for  $100,000.  Your  gross  profit 
Amount  to  report  as  installment  sale  in-                                                              was  $60,000.  You  received  a  $20,000  down 
come. Multiply the payments you receive each         Selling  price  reduced. If  the  selling  price       payment and the buyer’s note for $80,000. The 
year (less interest) by the gross profit percent-    is reduced at a later date, the gross profit on the    note  provides  for  monthly  payments  of  $1,953 
age. The result is your installment sales income     sale  will  also  change.  You  must  then  refigure 

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each, figured at 8% interest, amortized over 4 considered gain or loss on the sale of the prop- Payments Received or
years, beginning in January 2021. Your gross erty for which you received the installment obli-
profit percentage was 60%. You received the gation. Considered Received
down payment of $20,000 in 2020 and total You must figure your gain each year on the pay-
payments of $23,436 in 2021, of which $17,675 Cancellation. If an installment obligation is
was principal and $5,761 was interest accord- canceled or otherwise becomes unenforceable, ments you receive, or are treated as receiving,
ing to the amortization schedule. You reported a it’s treated as a disposition other than a sale or from an installment sale.
gain of $12,000 on the down payment received exchange. Your gain or loss is the difference In certain situations, you’re considered to
in 2020 and $10,605 ($17,675 x 60% (0.60)) in between your basis in the obligation and its have received a payment, even though the
2021. FMV at the time you cancel it. If the parties are buyer doesn’t pay you directly. These situations
In January 2022, you and the buyer agreed related, the FMV of the obligation is considered occur when the buyer assumes or pays any of
to reduce the purchase price to $85,000; and to be no less than its full face value. your debts, such as a loan, or pays any of your
payments during 2022, 2023, and 2024 are re- expenses, such as a sales commission. How-
duced to $1,483 a month amortized over the re- Transfer due to death. The transfer of an in- ever, as discussed later, the buyer’s assump-
maining 3 years. stallment obligation (other than to a buyer) as a tion of your debt is treated as a recovery of ba-
The new gross profit percentage, 47.32%, is result of the death of the seller isn’t a disposi- sis, rather than as a payment, in many cases.
figured in Example — Worksheet 10-2. tion. Any unreported gain from the installment
obligation isn’t treated as gross income to the Buyer pays seller’s expenses. If the buyer
Example — New Gross Profit decedent. No income is reported on the dece- pays any of your expenses related to the sale of
Worksheet 10-2. Percentage — Sell- dent’s return due to the transfer. Whoever re- your property, it’s considered a payment to you
ing Price Reduced ceives the installment obligation as a result of in the year of sale. Include these expenses in
Keep for Your Records the seller’s death is taxed on the installment the selling and contract prices when figuring the
payments the same as the seller would’ve been gross profit percentage.
1. Enter the reduced selling had the seller lived to receive the payments.
price for the property . . . . . . . . . . 85,000
However, if the installment obligation is can- Buyer assumes mortgage. If the buyer as-
2. Enter your adjusted celed, becomes unenforceable, or is transfer- sumes or pays off your mortgage, or otherwise
basis for the red to the buyer because of the death of the takes the property subject to the mortgage, the
property . . . . . . . . . . . . 40,000
3. Enter your selling holder of the obligation, it’s a disposition. The following rules apply.
expenses . . . . . . . . . . . -0- estate must figure its gain or loss on the dispo-
4. Enter any depreciation sition. If the holder and the buyer were related, Mortgage less than basis. If the buyer as-
recapture . . . . . . . . . . . -0- the FMV of the installment obligation is consid- sumes a mortgage that isn’t more than your in-
5. Add lines 2, 3, and 4 . . . . . . . . . . 40,000 ered to be no less than its full face value. stallment sale basis in the property, it isn’t con-
sidered a payment to you. It’s considered a
6. Subtract line 5 from line 1. More information. For more information, recovery of your basis. The contract price is the
This is your adjusted see Disposition of an Installment Obligation in selling price minus the mortgage.
gross profit . . . . . . . . . . . . . . . 45,000
7. Enter any installment sale Pub. 537.
income reported in Example. You sell property with an adjus-
prior year(s) . . . . . . . . . . . . . . . 22,605 Sale of depreciable property. You generally ted basis of $19,000. You have selling expen-
8. Subtract line 7 from line 6 . . . . . . . 22,395 can’t report gain from the sale of depreciable ses of $1,000. The buyer assumes your existing
9. Future installments . . . . . . . . . . . 47,325 property to a related person on the installment mortgage of $15,000 and agrees to pay you
method. However, see Related parties under $10,000 (a cash down payment of $2,000 and
10. Divide line 8 by line 9. Installment Sale of a Farm, earlier. $2,000 (plus 8% interest) in each of the next 4
This is your new years).
gross profit percentage* . . . . . . . 47.32% You generally can’t use the installment
method to report any depreciation recapture in- The selling price is $25,000 ($15,000 +
* Apply this percentage to all future payments to determine come. However, you can report any gain $10,000). Your gross profit is $5,000 ($25,000 −
how much of each of those payments is installment sale greater than the recapture income on the install- $20,000 installment sale basis). The contract
income. ment method. price is $10,000 ($25,000 − $15,000 mortgage).
The recapture income reported in the year Your gross profit percentage is 50% ($5,000 ÷
You will report installment sale income of of sale is included in your installment sale basis $10,000). You report half of each $2,000 pay-
$6,878 (47.32% of $14,535) in 2022, $7,449 to determine your gross profit on the installment ment received as gain from the sale. You also
(47.32% of $15,742) in 2023, and $8,067 sale. report all interest you receive as ordinary in-
(47.32% of $17,048) in 2024. Figure your depreciation recapture income come.
Form 6252. Use Form 6252 to report an in- (including the section 179 deduction and the Mortgage more than basis. If the buyer
stallment sale in the year it takes place and to section 179A deduction recapture) in Part III of assumes a mortgage that is more than your in-
report payments received, or considered re- Form 4797. As instructed on the form, transfer stallment sale basis in the property, you recover
ceived because of related party resales, in later the depreciation recapture income to Part II of your entire basis. The part of the mortgage
years. Attach it to your tax return for each year. Form 4797 as ordinary income in the year of greater than your basis is treated as a payment
sale. received in the year of sale.
Disposition of Installment If you sell depreciable business prop- To figure the contract price, subtract the
Obligation TIP erty, prepare Form 4797 first in order to mortgage from the selling price. This is the total
figure the amount to enter on Form amount (other than interest) you will receive di-
6252, Part I, line 12. See the Form 6252 instruc- rectly from the buyer. Add to this amount the
A disposition generally includes a sale, ex- tions for details. payment you’re considered to have received
change, cancellation, bequest, distribution, or (the difference between the mortgage and your
transmission of an installment obligation. An in- For more information on the section 179 de- installment sale basis). The contract price is
stallment obligation is the buyer’s note, deed of duction, see Section 179 Expense Deduction in then the same as your gross profit from the
trust, or other evidence that the buyer will make chapter 7. For more information on depreciation sale.
future payments to you. recapture, see Depreciation Recapture in chap-
ter 9. If the mortgage the buyer assumes is
If you’re using the installment method and TIP equal to or more than your installment
you dispose of the installment obligation, you sale basis, the gross profit percentage
will generally have a gain or loss to report. It’s will always be 100%.

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

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property in which substantially all of its use by Depreciation recapture. The buildings are Reporting the sale. Report the installment
the buyer isn’t in connection with a trade or section 1250 property. There may be specific sale on three separate Forms 6252. One form
business or an investment activity. rules for depreciation recapture of buildings should be filed for each component of the sale.
If the debt is subject to section 483 rules and (1250 property) using the straight-line method. Then, report the amounts from Form 6252 on
is also subject to the below-market loan rules, See chapter 9 for more information on depreci- Form 4797 and Schedule D (Form 1040). At-
such as a gift loan, compensation-related loan, ation recapture. tach a separate page to each Form 6252 that
or corporation-shareholder loan, then both par- Special rules may apply when you sell sec- shows the computations in the example.
ties are subject to the below-market loan rules tion 1250 assets depreciated under the If you sell depreciable business prop-
rather than the unstated interest rules. straight-line method. See the Unrecaptured TIP erty, prepare Form 4797 first in order to
Unstated interest reduces the stated selling Section 1250 Gain Worksheet in the Instruc- figure the amount to enter on Form
price of the property and the buyer’s basis in tions for Schedule D (Form 1040). As payments 6252.
the property. It increases the seller’s interest in- are received on the installment sale, unrecog-
come and the buyer’s interest expense. nized 1250 gain must be recognized before any Section 1231 gains. The gains on the
In general, an installment sale contract pro- section 1231 gain is recognized. See chapter 3 farmland and buildings are section 1231 gains.
vides for adequate stated interest if the stated of Pub. 544 for more information on section They are combined with any other section 1231
interest rate (based on an appropriate com- 1250 assets. gains and losses. A net section 1231 gain is
pounding period) is at least equal to the appli- capital gain and a net section 1231 loss is an
cable federal rate (AFR). Gross profit. The following table shows each
asset reported on the installment method, its ordinary loss.
The AFRs are published monthly in the selling price, adjusted basis for installment sale, Installment income for years after 2022.
Internal Revenue Bulletin (IRB). You gain, and gross profit. You figure installment income for the years after
can access the IRBs at IRS.gov/
Guidance. Selling Adjusted Gross 2022 by applying the same gross profit percen-
Price Basis Gain Profit tages to the payments you receive each year. If
More information. For more information, Home $60,000 $36,743 $23,257 $0 you receive $50,000 during the year, the entire
see Unstated Interest and Original Issue Dis- Farmland 165,000 81,860 83,140 83,140 $50,000 is considered received on the install-
count (OID) in Pub. 537. Buildings 75,000 38,880 36,120 36,120 ment sale (100% × $50,000). You realize in-
$300,000 $157,483 $142,517 $119,260 come as follows:

Home. The gain on the home ($23,257) is Income
Example excluded from your income because it qualifies Home $0
On January 3, 2022, you sold your farm, includ- for the exclusion of gain from the sale of a prin- Farmland (33.256% × $50,000) 16,628
ing the home, farmland, and buildings. You re- cipal residence. Therefore, don’t include that Buildings (14.448% × $50,000) 7,224
ceived $50,000 down and the buyer’s note for gain when you figure your gross profit percent- Total installment income $23,852
$200,000. In addition, the buyer assumed an age.
In this example, no gain is ever recognized
outstanding $50,000 mortgage on the farmland. Section 1231 gains. The gain on the farmland from the sale of your home. You will combine
The total selling price was $300,000. The note and buildings is reported as section 1231 gains. your section 1231 gains from this sale with sec-
payments of $25,000 each, plus adequate inter- See Section 1231 Gains and Losses in chap- tion 1231 gains and losses from other sales in
est, are due every July 1 and January 1, begin- ter 9. each of the later years to determine whether to
ning in July 2022. Your selling expenses were report them as ordinary or capital gains. The in-
$15,000. Contract price and gross profit percentage. terest received with each payment will be inclu-
The contract price is $250,000. This is calcula- ded in full as ordinary income.
Adjusted basis and depreciation. The adjus- ted by subtracting the $50,000 mortgage as-
ted basis and depreciation claimed on each as- sumed from the $300,000 selling price. Note. Refer to Pub. 523 to determine
set sold are as follows: whether or not the sale of the personal resi-
Gross profit percentage for the sale is
Seller’s Depreciation Adjusted 47.704% ($119,260 gross profit ÷ $250,000 dence will result in a taxable event.
Basis Claimed Basis contract price). The gross profit percentage for Summary. The installment income (roun-
Home* $33,743 $0 $33,743 each asset is figured as follows: ded to the nearest dollar) from the sale of the
Farmland 73,610 0 73,610 farm is reported as follows:
Buildings 66,630 31,500 35,130 Percent
* Owned and used as main home for at least 2 of the 5 years Home 0
prior to the sale Farmland ($83,140 ÷ $250,000) 33.256 Selling price $300,000
Buildings ($36,120 ÷ $250,000) 14.448 Minus: Adjusted basis for installment (157,483)
Adjusted basis for installment sale purpo- Total 47.704 reporting
Minus: Excluded gain from home (23,257)
ses. To determine the adjusted basis for in- Gross profit $119,260
stallment sale purposes, prorate the selling ex- Figuring the gain to report on the install-
pense based on the relative FMV of each asset ment method. One hundred percent (100%)
and add it to the adjusted basis (see above). of each payment is reported on the installment Gain reported in 2022 (year of sale) $35,778
method. The total amount received on the sale Gain reported in 2023:
Selling Adjusted Adjusted in 2022 is $75,000 ($50,000 down payment + $50,000 × 47.704% 23,852
Gain reported in 2024:
Expense Basis Basis for $25,000 payment on July 1). The installment $50,000 × 47.704% 23,852
Installment
Sale sale part of the total payments received in 2022 Gain reported in 2025:
is also $75,000. Figure the gain to report for $50,000 × 47.704% 23,852
Home* $3,000 $33,743 $36,743 each asset by multiplying its gross profit per- Gain reported in 2026:
Farmland 8,250 73,610 81,860 $25,000 × 47.704% 11,926
Buildings 3,750 35,130 38,880 centage times $75,000.
$15,000 $142,483 $157,483 Total gain reported $119,260
* Owned and used as main home for at least 2 of the 5 years Income
prior to the sale Home $0
Farmland (33.256% × $75,000) 24,942
Buildings (14.448% × $75,000) 10,836
Total installment income for 2022 $35,778

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These special rules apply to farm NOLs for tax Sch D (Form 1040) Sch D (Form 1040) Capital Gains and
years 2018, 2019, and 2020. To make this elec- Losses
tion you may need to amend your returns for Sch F (Form 1040)
11. which you had already filed a claim for refund. Sch F (Form 1040) Profit or Loss From
Farming
4684 4684 Casualties and Thefts
Casualties, Introduction 4797 4797 Sales of Business Property
This chapter explains the tax treatment of casu-
Thefts, and alties, thefts, and condemnations. A casualty See chapter 16 for information about getting
occurs when property is damaged, destroyed, publications and forms.
or lost due to a sudden, unexpected, or unusual
Condemnations event. A theft occurs when property is stolen. A
condemnation occurs when private property is Casualties and Thefts
legally taken for public use without the owner's
consent. A casualty, theft, or condemnation For tax years 2018 through 2025, per-
Reminders may result in a deductible loss or taxable gain ! sonal casualty and theft losses of an in-
on your federal income tax return. You may CAUTION dividual are deductible only to the ex-
Special rules for qualified disaster losses. have a deductible loss or a taxable gain even if tent they're attributable to a federally declared
Personal casualty losses that are qualified dis- only a portion of your property was affected by disaster. An exception to the rule limiting the
aster losses attributable to a major disaster de- a casualty, theft, or condemnation. deduction for personal casualty and theft losses
clared by the President under section 401 of the An involuntary conversion occurs when you to federal disaster losses applies where you
Stafford Act may be claimed as a qualified dis- receive money or other property as reimburse- have personal casualty gains to the extent the
aster loss on Form 4684 for the year in which ment for a casualty, theft, condemnation, dispo- losses don't exceed your gains.
the loss was sustained. A qualified disaster loss sition of property under threat of condemnation,
is an individual's casualty or theft loss of per- or certain other events discussed in this chap- If your property is destroyed, damaged, or
sonal-use property that is attributable to a major ter. stolen, you may have a deductible loss. If the in-
disaster that was declared by the President dur- If an involuntary conversion results in a gain surance or other reimbursement is more than
ing the period between January 1, 2020 and and you buy qualified replacement property the adjusted basis of the destroyed, damaged,
February 25, 2021. Also, this disaster must within the specified replacement period, you or stolen property, you may have a taxable gain.
have an incident period that began on or after can postpone reporting the gain on your income
December 28, 2019, or on or before December tax return. For more information, see Postpon- Casualty. A casualty is the damage, destruc-
27, 2020, and must have ended no later than ing Gain, later. tion, or loss of property resulting from an identi-
January 26, 2021. The definition of a qualified fiable event that is sudden, unexpected, or un-
disaster loss does not extend to any major dis- Topics usual.
aster which has been declared only by reason This chapter discusses: • A sudden event is one that is swift, not
of COVID-19. gradual or progressive.
See Disaster Area Losses, later, and Pub. Casualties and thefts • An unexpected event is one that is ordina-
547, Casualties, Disasters, and Thefts, for more • rily unanticipated and unintended.
information on the special relief. Also, see • How to figure a loss or gain An unusual event is one that isn't a
IRS.gov/DisasterTaxRelief for more informa- • Other involuntary conversions •
tion. • Postponing gain day-to-day occurrence and that isn't typical
• Disaster area losses of the activity in which you were engaged.
Disaster losses. Section D of Form 4684, • Reporting gains and losses Deductible losses. Deductible casualty
Casualties and Thefts, may be used to make an • Drought involving property connected with losses can result from a number of different
election (or revoke a prior election) to deduct a a trade or business or a transaction causes, including the following.
loss attributable to a federally declared disaster entered into for profit • Airplane crashes.
and that occurred in a federally declared disas- • Car, truck, or farm equipment accidents
ter area in the tax year immediately preceding Useful Items not resulting from your willful act or willful
the tax year the loss was sustained. See Pub. You may want to see: negligence.
547 for more information about disaster losses. • Earthquakes.
Limitation on personal casualty and theft Publication • Fires (but see Nondeductible losses next
for exceptions).
losses. Personal casualty and theft losses of 523 523 Selling Your Home • Floods.
an individual are subject to special rules for
those personal casualty and theft losses attrib- 525 525 Taxable and Nontaxable Income • Freezing.
utable to federally declared disasters that occur • Government-ordered demolition or reloca-
during tax years beginning after 2017. 536 536 Net Operating Losses (NOLs) for tion of a home that is unsafe to use be-
Personal casualty and theft losses are sub- Individuals, Estates, and Trusts cause of a disaster, as discussed under
Disaster Area Losses in Pub. 547.
ject to the $100 per casualty and 10% of your 542 542 Corporations • Lightning.
adjusted gross income (AGI) limitations. In this 544 544 Sales and Other Dispositions of • Storms, including hurricanes and torna-
case you reduce your personal casualty gains does.
by any casualty losses not attributable to a fed- Assets
• Terrorist attacks.
erally declared disaster. Net disaster losses 547 547 Casualties, Disasters, and Thefts • Vandalism.
(disaster losses reduced by any excess per- Volcanic eruptions.
sonal casualty gains) are subject to the $500 584 584 Casualty, Disaster, and Theft Loss •
per casualty limitation but not subject to the Workbook (Personal-Use Property)
Note. For tax years 2018 through 2025, if
10% of your adjusted gross income (AGI) limita- 584-B 584-B Business Casualty, Disaster, and you are an individual, losses of personal-use
tion. Theft Loss Workbook property from the aforementioned listed, or
Farming losses for 2018, 2019, and 2020. If 976 976 Disaster Relief other casualty or theft are deductible only if the
you previously carried back farming losses for 2 loss is attributable to a federally declared disas-
years and limited those losses to 80% of taxa- Form (and Instructions) ter. See Pub. 547 for more information.
ble income (before any NOL deduction) of the If the event causing you to suffer a personal
carryback year, you may be able to carry back Sch A (Form 1040) Sch A (Form 1040) Itemized casualty loss occurred before January 1, 2018,
the losses 5 years without the 80% limitation. Deductions but the casualty loss was not sustained until
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January 1, 2018, or later, the casualty loss is becomes completely worthless. You report a placement property, you can postpone report-
not deductible. capital loss on Schedule D (Form 1040). For ing the gain. See Timber loss in the section
more information about stock sales, worthless Postponing Gain, later.
Nondeductible losses. A casualty loss stock, and capital losses, see chapter 4 of Pub.
isn't deductible if the damage or destruction is 550. Property used in farming. Casualty and theft
caused by the following. losses of property used in your farm business
• Accidentally breaking articles such as Mislaid or lost property. The simple dis- usually result in deductible losses. If a fire or
glassware or china under normal condi- appearance of money or property isn't a theft. storm destroyed your barn, or you lose by casu-
tions. However, an accidental loss or disappearance alty or theft farm equipment or an animal you
• A family pet (explained below). of property can qualify as a casualty if it results bought for draft, breeding, dairy, or sport, you
• A fire if you willfully set it, or pay someone from an identifiable event that is sudden, unex- may have a deductible loss. See How To Figure
else to set it. pected, or unusual. a Loss, later.
• A car, truck, or farm equipment accident if
your willful negligence or willful act caused Example. A car door is accidentally slam- Raised draft, breeding, dairy, or sporting
it. The same is true if the willful act or willful med on your hand, breaking the setting of your animals. Generally, losses of raised draft,
negligence of someone acting for you diamond ring. The diamond falls from the ring breeding, dairy, or sporting animals don't result
caused the accident. and is never found. The loss of the diamond is a in deductible casualty or theft losses because
• Progressive deterioration (explained be- casualty. you have no basis in the animals. However, you
low). may have a basis in the animal and therefore
may be able to claim a deduction if you use in-
Family pet. Loss of property due to dam- Farm Property Losses ventories to determine your income and you in-
age by a family pet isn't deductible as a casu- cluded the animals in your inventory.
alty loss unless the requirements discussed You can deduct certain casualty or theft losses When you include livestock in inventory, its
above under Casualty are met. that occur in the business of farming. The fol- last inventory value is its basis. When you lose
lowing is a discussion of some losses you can an inventoried animal held for draft, breeding,
Example. You keep your horse in your deduct and some you can't deduct. dairy, or sport by casualty or theft during the
yard. The ornamental fruit trees in your yard year, decrease ending inventory by the amount
were damaged when your horse stripped the Livestock or produce bought for resale. you included in inventory for the animal. You
bark from them. Some of the trees were com- Casualty or theft losses of livestock or produce can't take a separate deduction.
pletely girdled and died. Because the damage bought for resale are deductible if you report
wasn't unexpected or unusual, the loss isn't de- your income on the cash method. If you report
ductible. your income on an accrual method, take casu- How To Figure a Loss
alty and theft losses on property bought for re-
Progressive deterioration. Loss of prop- sale by omitting the item from the closing inven- How you figure a deductible casualty or theft
erty due to progressive deterioration isn't de- tory for the year of the loss. You can't take a loss depends on whether the loss was to farm
ductible as a casualty loss. This is because the separate deduction. or personal-use property and whether the prop-
damage results from a steadily operating cause erty was stolen or partly or completely de-
or a normal process, rather than from a sudden Livestock, plants, produce, and crops stroyed.
event. Examples of damage due to progressive raised for sale. Losses of livestock, plants,
deterioration include damage from rust, corro- produce, and crops raised for sale are generally Farm property. Farm property is the property
sion, or termites. However, weather-related not deductible if you report your income on the you use in your farming business. If your farm
conditions or disease may cause another type cash method. You have already deducted the property was completely destroyed or stolen,
of involuntary conversion. See Other Involun- cost of raising these items as farm expenses, your loss is figured as follows:
tary Conversions, later. so their basis is equal to zero.
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 MINUS
owner of it. The taking of property must be ille- loss if you have a tax basis in the plants. You Any salvage value
gal under the law of the state where it occurred usually have a tax basis if you capitalized the
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 Any insurance or other reimbursement you
capitalization rules are discussed in chapter 6.
Theft includes the taking of money or prop- receive or expect to receive
erty by the following means. If you report your income on an accrual
• 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 If your farm property was partially damaged,
• Larceny. a separate casualty or theft deduction. use the following steps to figure your casualty
• Robbery. Income loss. A loss of future income isn't de- loss.
• Threats. ductible. 1. Determine your adjusted basis in the prop-
• Timber trespass.
erty before the casualty or theft.
The taking of money or property through fraud Example. A severe flood destroyed your
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
the crops as farm expenses, this loss isn't de- casualty or theft.
Decline in market value of stock. You ductible, as explained above under Livestock, 3. From the smaller of the amounts you de-
can't deduct as a theft loss the decline in market plants, produce, and crops raised for sale. You termined in (1) and (2), subtract any insur-
value of stock acquired on the open market for estimate that the crop loss will reduce your farm ance or other reimbursement you receive
investment if the decline is caused by disclo- income by $25,000. This loss of future income or expect to receive.
sure of accounting fraud or other illegal miscon- is also not deductible.
duct by the officers or directors of the corpora- Personal-use property. For tax years 2018
tion that issued the stock. However, you may be Loss of timber. If you sell timber downed as a through 2025, personal casualty and theft los-
able to deduct it as a capital loss on Schedule D result of a casualty, you may have a reportable ses of an individual are deductible only to the
(Form 1040) if the stock is sold or exchanged or gain. If you use the proceeds to buy qualified re-
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extent they're attributable to a federally de- part of a casualty loss. Neither is the cost of re- Tractor Barn
clared disaster. An exception to the rule limiting pairing damaged property after a casualty. But 1) Adjusted basis . . . . . . . . . $3,300 $28,000
the deduction for personal casualty and theft you can use the cost of cleaning up or making 2) FMV before fire . . . . . . . . . $28,000 $55,000
losses to federal disaster losses applies where repairs after a casualty as a measure of the de- 3) FMV after fire . . . . . . . . . . 10,000 25,000
you have personal casualty gains to the extent crease in FMV if you meet all the following con- 4) Decrease in FMV
the losses don't exceed your gains. ditions. (line 2 − line 3) . . . . . . . . . $18,000 $30,000
Personal-use property is property used by • The repairs are actually made. 5) Loss (lesser of line 1 or
you or your family members for personal purpo- • The repairs are necessary to bring the line 4) . . . . . . . . . . . . . . . $3,300 $28,000
ses and not used in your farm business or for in- property back to its condition before the 6) Minus: Insurance . . . . . . . 2,100 26,000
come-producing purposes. The following items casualty. 7) Deductible casualty loss . . . $1,200 $2,000
are examples of personal-use property. • The amount spent for repairs isn't exces- 8) Total deductible casualty loss. . . . $3,200
• Your main home. sive.
• Furniture and electronics used in your • The repairs fix the damage only. You spent $10,800 restoring the tractor to its
main home and not used in a home office • The value of the property after the repairs pre-casualty condition and $30,000 restoring
or for business purposes. is not, due to the repairs, more than the the barn to its pre-casualty condition. Your ad-
• Clothing and jewelry. value of the property before the casualty. justed basis in the tractor after the casualty is
• An automobile used for nonbusiness pur- $10,800 ($3,300 – $2,100 – $1,200 + $10,800).
poses. Landscaping. The cost of restoring land-
scaping to its original condition after a casualty Your adjusted basis in the barn after the casu-
You figure the casualty or theft loss on this may indicate the decrease in FMV. You may be alty is $30,000 ($28,000 – $26,000 – $2,000 +
property by taking the following steps. able to measure your loss by what you spend $30,000).
1. Determine your adjusted basis in the prop- on the following. Exception for personal-use real prop-
erty before the casualty or theft. • Removing destroyed or damaged trees erty. In figuring a casualty loss on per-
and shrubs, minus any salvage you re- sonal-use real property, the entire property (in-
2. Determine the decrease in fair market ceive. cluding any improvements, such as buildings,
value of the property as a result of the • Pruning and other measures taken to pre- trees, and shrubs) is treated as one item. Figure
casualty or theft. serve damaged trees and shrubs. the loss using the smaller of the following.
3. From the smaller of the amounts you de- • Replanting necessary to restore the prop- • The decrease in FMV of the entire prop-
termined in (1) and (2), subtract any insur- erty to its approximate value before the erty.
ance or other reimbursement you receive casualty. • The adjusted basis of the entire property.
or expect to receive. Safe harbor methods for individual tax-
You must apply the deduction limits, discussed payers to determine casualty and theft los- Example. You bought a farm in 2000 for
later, to determine your deductible loss. ses. Revenue Procedure 2018-08, 2018-2 $300,000. The adjusted basis of the residential
I.R.B. 286, available at IRS.gov/IRB/ part is now $64,000. In 2022, a tornado, which
You can use Pub. 584 to list your sto- 2018-02_IRB#RP-2018-08, provides safe har- was a federally declared disaster, blew down
TIP len or damaged personal-use property bor methods that you may use to figure the shade trees and three ornamental trees planted
and figure your loss. It includes sched- amount of your casualty and theft losses of your at a cost of $3,750 on the residential part. The
ules to help you figure the loss on your home, personal-use residential real property and per- adjusted basis of the residential part includes
its contents, and your motor vehicles. sonal belongings. If you qualify for and use a the $3,750. The FMV of the residential part im-
safe harbor method described in Revenue Pro- mediately before the tornado was $120,000,
Adjusted basis. Adjusted basis is your ba- cedure 2018-08, the IRS won't challenge your and $112,500 immediately after the tornado.
sis (usually cost) increased or decreased by determination. The use of a safe harbor method The trees weren’t covered by insurance.
various events, such as improvements and described in Revenue Procedure 2018-08 isn't
casualty losses. For more information about ad- mandatory. For more information about this 1) Adjusted basis . . . . . . . . . . . . . . . . $64,000
justed basis, see chapter 6. safe harbor method, see Pub. 547. 2) FMV before the tornado . . . . . . . . . . $120,000
3) FMV after the tornado . . . . . . . . . . . . 112,500
Decrease in fair market value (FMV). Related expenses. The incidental expen- 4) Decrease in FMV (line 2 − line 3) . . . . $7,500
The decrease in FMV is the difference between ses due to a casualty or theft, such as expen- 5) Loss before insurance
the property's value immediately before the ses for the treatment of personal injuries, tem- (lesser of line 1 or line 4) . . . . . . . . . . $7,500
casualty or theft and its value immediately after- porary housing, or a rental car, aren't part of 6) Minus: Insurance . . . . . . . . . . . . . . -0-
ward. FMV is defined in chapter 10 under Pay- your casualty or theft loss. However, they may 7) Loss before applying limits . . . . $7,500
ments Received or Considered Received. be deductible as farm business expenses if the
damaged or stolen property is farm property. As explained later under Deduction Limits on Losses of
Appraisal. To figure the decrease in FMV Personal-Use Property, you have to reduce $7,500 by
because of a casualty or theft, you generally Separate computations for more than one $500 to get your deductible loss. Thus, your deductible
need a competent appraisal. But other meas- item of property. Generally, if a single casu- loss is figured as follows.
ures, such as the cost of cleaning up or making alty or theft involves more than one item of 8) Subtract $500 . . . . . . . . . . . . . . . . . $500
repairs and certain safe harbor methods, can property, you must figure your loss separately
be used to establish decreases in FMV. for each item of property. Then, combine the 9) Casualty loss deduction. . . . . . $7,000
An appraisal to determine the difference be- losses to determine your total loss.
tween the FMV of the property immediately be- You never replaced the trees. Your adjusted
fore a casualty or theft and immediately after- Example. A fire on your farm damaged a basis in the residential part of your property af-
ward should be made by a competent tractor and the barn in which it was stored. The ter the casualty is $57,000 ($64,000 - $7,000).
appraiser. The appraiser must recognize the ef- tractor had an adjusted basis of $3,300. Its FMV
fects of any general market decline that may oc- was $28,000 just before the fire and $10,000 Insurance and other reimbursements. If you
cur along with the casualty. This information is immediately afterward. The barn had an adjus- receive an insurance or other type of reimburse-
needed to limit any deduction to the actual loss ted basis of $28,000. Its FMV was $55,000 just ment, you must subtract the reimbursement
resulting from damage to the property. before the fire and $25,000 immediately after- when you figure your business or personal loss.
ward. You received insurance reimbursements You don't have a casualty or theft loss to the ex-
Note. Several factors are important in eval- of $2,100 on the tractor and $26,000 on the tent you are reimbursed.
uating the accuracy of an appraisal. See Pub. barn. Figure your deductible casualty loss sepa- If you expect to be reimbursed for part or all
547 for additional details regarding appraisals. rately for the two items of property. of your loss, you must subtract the expected re-
Cost of cleaning up or making repairs. imbursement when you figure your loss. You
The cost of cleaning up after a casualty isn't

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must reduce your loss even if you don't receive Qualified disaster relief payments for expen- Example. In June, you discovered that your
payment until a later tax year. ses you incurred as a result of a federally de- house had been burglarized. Your loss after in-
clared disaster aren't taxable income to you. surance reimbursement was $2,000. Your AGI
Don't subtract from your loss any insur- See Qualified disaster relief payments, later, for the year you discovered the burglary is
! ance payments you receive for living under Disaster Area Losses. $57,000. Figure your theft loss deduction as fol-
CAUTION expenses if you lose the use of your
lows:
main home or are denied access to it because Adjustments to basis. If you have a casualty
of a casualty. You may have to include a portion or theft loss, you must decrease your basis in 1) Loss after insurance . . . . . . . . . . . . . . . $2,000
of these payments in your income. See Insur- the property by any insurance or other reim- 2) Subtract $100 . . . . . . . . . . . . . . . . . . . . 100
ance payments for living expenses in Pub. 547 bursement you receive and by any deductible 3) Loss after $100 rule . . . . . . . . . . . . . . . . $1,900
for details. loss. The result is your adjusted basis in the 4) Subtract 10% (0.10) × $57,000 AGI . . . . . $5,700
property. If you make either of the basis adjust- 5) Theft loss deduction. . . . . . . . . . -0-
Reimbursement received after deduct- ments described above, amounts you spend on
ing loss. If you figure your casualty or theft repairs to restore your property to its pre-casu- You don't have a theft loss deduction be-
loss using your expected reimbursement, you alty condition increase your adjusted basis. See cause your loss ($1,900) is less than 10% of
may have to adjust your tax return for the tax Adjusted Basis in chapter 6 for more informa- your AGI ($5,700).
year in which you get your actual reimburse- tion.
ment. If you have personal casualty losses
Actual reimbursement less than expec- Example. You built a new grain storage fa- ! that were attributable to a major disas-
ted. If you later receive less reimbursement cility for $50,000. This is the basis in your grain CAUTION ter declared by the President under
than you expected, include that difference as a storage facility because that is the total cost you section 401 of the Stafford Act, your net casu-
loss with your other losses (if any) on your re- incurred to build it. During the year, a tornado alty loss from this qualified disaster doesn’t
turn for the year in which you can reasonably damaged your grain storage facility and your al- have to exceed 10% of your AGI to qualify for
expect no more reimbursement. lowable casualty loss deduction was $2,000. In the deduction. However, this disaster must
addition, your insurance company reimbursed meet the following requirements:
Actual reimbursement more than expec- you $8,000 for the damage and you spent • It must have been declared by the Presi-
ted. If you later receive more reimbursement $12,000 to restore the grain storage facility to dent during the period between January 1,
than you expected after you have claimed a de- its pre-casualty condition. Your adjusted basis 2020, and February 25, 2021.
duction for the loss, you may have to include in the grain storage facility after the casualty is • It must have an incident period that began
the extra reimbursement in your income for the $52,000 ($50,000 – $2,000 – $8,000 + on or after December 28, 2019, or on or
year you receive it. However, if any part of your $12,000). before December 27, 2020, and ended no
original deduction didn't reduce your tax for the later than January 25, 2021.
earlier year, don't include that part of the reim-
bursement in your income. Don't refigure your Deduction Limits on Losses Also, the $100 limit per casualty is increased to
tax for the year you claimed the deduction. See of Personal-Use Property $500. For more information, see the Instructions
Recoveries in Pub. 525 to find out how much for Form 4684.
extra reimbursement to include in income. Casualty and theft losses of personal-use prop-
If the total of all the reimbursements erty may be deducted using Form 4684. For If you have a casualty or theft gain in
more information see the Instructions for Form addition to a loss, you will have to
! you receive is more than your adjusted 4684. This deduction will be entered on Sched- CAUTION! make a special computation before you
CAUTION basis in the destroyed or stolen prop- figure your 10% limit. See 10% Rule in Pub.
erty, you will have a gain on the casualty or ule A (Form 1040) as an itemized deduction but
theft. See Figuring a Gain in Pub. 547 for infor- you can increase your standard deduction by 547.
mation on how to treat a gain from the reim- qualified disaster losses if you elect not to item-
bursement you receive because of a casualty or ize your deductions. See Increased standard
theft. deduction reporting, later. When Loss Is Deductible
For tax years 2018 through 2025, casualty Generally, you can deduct casualty losses that
Actual reimbursement same as expec- and theft losses of personal-use property are aren't reimbursable only in the tax year in which
ted. If you later receive exactly the reimburse- deductible only to the extent they're attributable they occur. You can generally deduct theft los-
ment you expected to receive, you don't have to to a federally declared disaster. ses that aren't reimbursable only in the year you
include any of the reimbursement in your in- discover your property was stolen.
come and you can't deduct any additional loss. An exception to the rule above, limiting the
Lump-sum reimbursement. If you have a personal casualty and theft loss deduction to Example. In November 2021, engine parts
casualty or theft loss of several assets at the losses attributable to a federally declared disas- were stolen from Frank’s stored tractor. Frank
same time without an allocation of reimburse- ter, applies if you have personal casualty gains didn’t know that the theft occurred until March
ment to specific assets, divide the lump-sum re- for the tax year. In this case, you may reduce 2022, when he attempted to start the tractor.
imbursement among the assets according to your personal casualty gains by any casualty Any theft loss to which Frank is entitled as a de-
the FMV of each asset at the time of the loss. losses not attributable to a federally declared duction will be deductible in the 2022 tax year.
Figure the gain or loss separately for each asset disaster. Any excess gain is used to reduce los- Losses in federally declared disaster areas
that has a separate basis. ses from a federally declared disaster. are subject to different rules. See Disaster Area
Losses, later, for an exception.
Disaster assistance. Food, medical sup- There are two limits on the deduction for
plies, and other forms of assistance you receive casualty or theft loss of personal-use property. If you aren't sure whether part of your casu-
don't reduce your casualty loss, unless they are You figure these limits on Form 4684. alty or theft loss will be reimbursed, don't de-
replacements for lost or destroyed property. Ex- duct that part until the tax year when you be-
cludable cash gifts you receive also do not re- $100 rule. You must reduce each casualty or come reasonably certain that it won’t be
duce your casualty loss if there are no restric- theft loss on personal-use property by $100. reimbursed.
tions on how you can use the money. This rule applies after you have subtracted any
Generally, disaster relief grants received un- reimbursement. Leased property. If you lease property from
der the Robert T. Stafford Disaster Relief and someone else, you can deduct a loss on the
Emergency Assistance Act aren't included in 10% rule. You must further reduce the total of property in the year your liability for the loss is
your income. See Federal disaster relief grants, all your casualty or theft losses on personal-use determined. This is true even if the loss occur-
later, under Disaster Area Losses. property by 10% of your AGI. Apply this rule af- red or the liability was paid in a different year.
ter you reduce each loss by $100. AGI is repor- You aren't entitled to a deduction until your
ted on line 11 of Form 1040 or 1040-SR. liability under the lease can be determined with
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reasonable accuracy. Your liability can be de- • Whether a claim for reimbursement exists Condemnation
termined when a claim for recovery is settled, for which there is a reasonable expectation
adjudicated, or abandoned. of recovery.
Condemnation is the process by which private
Example. Robert leased a tractor from First property is legally taken for public use without
Implement, Inc., for use in his farm business. Figuring a Gain the owner's consent. The property may be
The tractor was destroyed by a tornado in June taken by the federal government, a state gov-
2021. The loss wasn’t insured. First Implement A casualty or theft may result in a taxable gain. ernment, a political subdivision, or a private or-
billed Robert for the FMV of the tractor on the If you receive an insurance payment or other re- ganization that has the power to legally take
date of the loss. Robert disagreed with the bill imbursement that is more than your adjusted property. The owner receives a condemnation
and refused to pay it. First Implement later filed basis in the destroyed, damaged, or stolen award (money or property) in exchange for the
suit in court against Robert. In 2022, Robert and property, you have a gain from the casualty or property taken. A condemnation is a forced
First Implement agreed to settle the suit for theft. You generally report your gain as income sale, the owner being the seller and the con-
$20,000, and the court entered a judgment in in the year you receive the reimbursement. demning authority being the buyer.
favor of First Implement. Robert paid $20,000 in However, depending on the type of property
June 2022. He can claim the $20,000 as a loss you receive, you may not have to report your Threat of condemnation. Treat the sale of
on his 2022 tax return. gain. See Postponing Gain, later. your property under threat of condemnation as
a condemnation, provided you have reasonable
Net operating loss (NOL). If your deductions, Your gain is figured as follows: grounds to believe that your property will be
including casualty or theft loss deductions, are • The amount you receive, minus condemned.
more than your income for the year, you may • Your adjusted basis in the property at the
have an NOL. time of the casualty or theft. Main home condemned. If you have a gain
because your main home is condemned, you
Generally, an NOL arising in a tax year Even if the decrease in FMV of your prop- generally can exclude the gain from your in-
! beginning in 2018 or later may not be erty is smaller than the adjusted basis of your come as if you had sold or exchanged your
CAUTION carried back and instead must be car- property, use your adjusted basis to figure the home. For information on this exclusion, see
ried forward indefinitely. However, farming los- gain. Pub. 523. If your gain is more than the amount
ses arising in tax years beginning in 2018 or you can exclude, but you buy replacement
later may be carried back two years and carried Amount you receive. The amount you receive property, you may be able to postpone report-
forward indefinitely. includes any money plus the value of any prop- ing the excess gain. See Postponing Gain,
erty you receive, minus any expenses you have later. (You can't deduct a loss from the condem-
The special tax rules which applied to in obtaining reimbursement. It also includes any nation of your main home.)
! the net operating loss (NOL) carryback reimbursement used to pay off a mortgage or
CAUTION for tax years 2018, 2019, and 2020, other lien on the damaged, destroyed, or stolen More information. For information on how to
have expired. These special rules allowed tax- property. figure the gain or loss on condemned property,
payers to carry back NOLs 5 years for tax years see chapter 1 in Pub. 544. Also, see Postpon-
2018, 2019, and 2020. The net operating loss Example. A tornado severely damaged ing Gain, later, to find out if you can postpone
carryback has been repealed after tax year your barn. The adjusted basis of the barn was reporting the gain.
2020 for most taxpayers. Except for those spe- $25,000. Your insurance company reimbursed
cial rules that applied to tax years 2018, 2019, you $40,000 for the damaged barn. However, Irrigation Project
and 2020, most taxpayers can only carry NOLs you had legal expenses of $2,000 to collect that
arising from tax years ending after 2017 to a insurance. Your insurance minus your expen-
later year. See Pub. 536 for more information. ses to collect the insurance is more than your The sale or other disposition of property located
adjusted basis in the barn, so you have a gain. within an irrigation project to conform to the
acreage limits of federal reclamation laws is an
involuntary conversion.
Proof of Loss 1) Insurance reimbursement . . . . . . . . . . $40,000
2) Legal expenses . . . . . . . . . . . . . . . . . 2,000
To deduct a casualty or theft loss, you must be 3) Amount received Livestock Losses
able to prove that there was a casualty or theft. (line 1 − line 2) . . . . . . . . . . . . . . . . . . $38,000
You must have records to support the amount 4) Adjusted basis . . . . . . . . . . . . . . . . . . 25,000 Diseased livestock. If your livestock die from
you claim for the loss. 5) Gain on casualty (line 3 − line 4). . . . $13,000 disease, or are destroyed, sold, or exchanged
because of disease, even though the disease
Casualty loss proof. For a casualty loss, your The adjusted basis of the barn after the isn't of epidemic proportions, treat these occur-
records should show all the following informa- casualty is $0 ($25,000 + $13,000 – $38,000) if rences as involuntary conversions. If the live-
tion. you recognized gain and did not repair the barn. stock were raised or purchased for resale, fol-
• That you were the owner of the property or, low the rules for livestock discussed earlier
if you leased the property from someone under Farm Property Losses. Otherwise, figure
else, that you were contractually liable to the gain or loss from these conversions using
the owner for the damage. Other Involuntary
the rules discussed under Determining Gain or
• The type of casualty (car accident, fire, Conversions Loss in chapter 8. If you replace the livestock,
storm, etc.) and when it occurred. you may be able to postpone reporting the gain.
• That the loss was a direct result of the In addition to casualties and thefts, other events See Postponing Gain below.
casualty. cause involuntary conversions of property.
• Whether a claim for reimbursement exists Some of these are discussed in the following Reporting dispositions of diseased live-
for which there is a reasonable expectation paragraphs. stock. If you choose to postpone reporting
of recovery. gain on the disposition of diseased livestock,
Gain or loss from an involuntary conversion you must attach a statement to your return ex-
Theft loss proof. For a theft loss, your records of your property is usually recognized for tax plaining that the livestock were disposed of be-
should show all the following information. purposes. You report the gain or deduct the cause of disease. You must also include other
• That you were the owner of the property. loss on your tax return for the year you realize it. information on this statement. See How To
• That your property was stolen. However, depending on the type of property Postpone Gain, later, under Postponing Gain.
• When you discovered your property was you receive, you may not have to report your
missing. gain on the involuntary conversion. See Post- Weather-related sales of livestock. If you
poning Gain, later. sell or exchange livestock (other than poultry)
held for draft, breeding, or dairy purposes solely

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because of drought, flood, or other weather-re- the property was worth $70,000. In June, the ecutor of the estate or the person succeeding to
lated conditions, treat the sale or exchange as barn and grain storage facility were destroyed the funds from the involuntary conversion can't
an involuntary conversion. Only livestock sold in by a tornado. At the time of the tornado, you postpone reporting the gain by buying replace-
excess of the number you normally would sell had an adjusted basis of $0 in the property. You ment property.
under usual business practice, in the absence received $70,000 from the insurance company.
of weather-related conditions, are considered You had a gain of $70,000 ($70,000 – $0).
involuntary conversions. Figure the gain or loss You spent $65,000 to rebuild the barn and Replacement Property
using the rules discussed under Determining grain bin. Since this is less than the insurance
Gain or Loss in chapter 8. If you replace the proceeds received, you must include $5,000 You must buy replacement property for the spe-
livestock, you may be able to postpone report- ($70,000 – $65,000) in your income. You cific purpose of replacing your property. Your
ing the gain. See Postponing Gain below. choose to postpone the remaining $65,000 replacement property must be similar or related
gain. in service or use to the property it replaces. You
Example. It is your usual business practice don't have to use the same funds you receive
to sell five of your dairy animals during the year. Example 2. In 1993, you bought a cabin in as reimbursement for your old property to ac-
This year, you sold 20 dairy animals because of the mountains for your personal use at a cost of quire the replacement property. If you spend
drought. The sale of 15 animals is treated as an $48,000. You made no further improvements or the money you receive for other purposes, and
involuntary conversion. additions to it. When a storm destroyed the borrow money to buy replacement property,
cabin this January, the cabin was worth you can still choose to postpone reporting the
If you don't replace the livestock, you $250,000. You received $146,000 from the in- gain if you meet the other requirements. Prop-
TIP may be able to report the gain in the surance company in March. You had a gain of erty you acquire by gift or inheritance doesn’t
following year's income. This rule also $98,000 ($146,000 − $48,000). qualify as replacement property.
applies to other livestock (including poultry). You spent $144,000 to rebuild the cabin.
See Sales Caused by Weather-Related Condi- Since this is less than the insurance proceeds Owner-user. If you are an owner-user, similar
tions in chapter 3. received, you must include $2,000 ($146,000 − or related in service or use means that replace-
$144,000) in your income. You choose to post- ment property must function in the same way as
pone reporting the remaining $96,000 gain. the property it replaces. Examples of property
Tree Seedlings that functions in the same way as the property it
If, because of an abnormal drought, the failure Buying replacement property from a related replaces are a home that replaces another
of planted tree seedlings is greater than nor- person. You can't postpone reporting a gain home, a dairy cow that replaces another dairy
mally anticipated, you may have a deductible from a casualty, theft, or other involuntary con- cow, and farm land that replaces other farm
loss. Treat the loss as a loss from an involuntary version if you buy the replacement property land. A grinding mill that replaces a tractor
conversion. The loss equals the previously cap- from a related person (discussed later). This doesn’t qualify. Neither does a draft animal that
italized reforestation costs you had to duplicate rule applies to the following taxpayers. replaces a breeding or dairy cow.
on replanting. You deduct the loss on the return 1. C corporations. Soil or other environmental contamination.
for the year the seedlings died. If, because of soil or other environmental con-
2. Partnerships in which more than 50% of
the capital or profits interest is owned by C tamination, it isn't feasible for you to reinvest
corporations. your insurance money or other proceeds from
Postponing Gain destroyed or damaged livestock in property
3. Individuals, partnerships (other than those similar or related in service or use to the live-
Don't report a gain if you receive reimbursement in (2) above), and S corporations if the to- stock, you can treat other property (including
in the form of property similar or related in serv- tal realized gain for the tax year on all in- real property) used for farming purposes as
ice or use to the destroyed, stolen, or other in- voluntarily converted properties on which property similar or related in service or use to
voluntarily converted property. Your basis in the there are realized gains is more than the destroyed or damaged livestock.
new property is generally the same as your ad- $100,000.
justed basis in the property it replaces. For involuntary conversions described in (3) Weather-related conditions. If, because of
You must generally report the gain on your above, gains can't be offset by any losses when drought, flood, or other weather-related condi-
stolen, destroyed, or other involuntarily conver- determining whether the total gain is more than tions, it isn't feasible for you to reinvest the in-
ted property if you receive money or unlike $100,000. If the property is owned by a partner- surance money or other proceeds in property
property as reimbursement. However, you can ship, the $100,000 limit applies to the partner- similar or related in service or use to the live-
choose to postpone reporting the gain if you ship and each partner. If the property is owned stock, you can treat other property (excluding
purchase replacement property similar or rela- by an S corporation, the $100,000 limit applies real property) used for farming purposes as
ted in service or use to your destroyed, stolen, to the S corporation and each shareholder. property similar or related in service or use to
the livestock you disposed of.
or other involuntarily converted property within Exception. This rule doesn’t apply if the re-
a specific replacement period. lated person acquired the property from an un- Example. Each year, you normally sell 25
If you have a gain on damaged property, related person within the period of time allowed cows from your beef herd. However, this year
you can postpone reporting the gain if you for replacing the involuntarily converted prop- you had to sell 50 cows. This is because a se-
spend an amount at least equal to the reim- erty. vere drought significantly reduced the amount
of hay and pasture yield needed to feed your
bursement to restore the property. Related persons. Under this rule, related herd for the rest of the year. Because, as a re-
To postpone reporting all the gain, the cost persons include, for example, a parent and sult of the severe drought, it isn't feasible for
of your replacement property must be at least child, a brother and sister, a corporation and an you to use the proceeds from selling the extra
as much as the reimbursement you receive. If individual who owns more than 50% of its out- cows to buy new cows, you can treat other
the cost of the replacement property is less than standing stock, and two partnerships in which property (excluding real property) used for farm-
the reimbursement, you must include the gain in the same C corporations own more than 50% of ing purposes as property similar or related in
your income up to the amount of the unspent re- the capital or profits interests. For more infor- service or use to the cows you sold.
imbursement. For more information about post- mation on related persons, see Nondeductible
poning gain on the replacement of damaged Loss under Sales and Exchanges Between Re- Standing crop destroyed by casualty. If a
property, see Code section 1033. lated Persons in chapter 2 of Pub. 544. storm or other casualty destroyed your standing
crop and you use the insurance money to ac-
Example 1. In 1985, you constructed a Death of a taxpayer. If a taxpayer dies after quire either another standing crop or a harves-
barn to store farm equipment at a cost of realizing a gain, but before buying replacement ted crop, this purchase qualifies as replacement
$35,000. In 1990, you added a grain bin to the property, the gain must be reported for the year property. The costs of planting and raising a
barn at a cost of $15,000. In May of this year, in which the decedent realized the gain. The ex- new crop qualify as replacement costs for the
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destroyed crop only if you use the crop method Example. You are a calendar year tax- How To Postpone Gain
of accounting (discussed in chapter 2). In that payer. Farm equipment that cost $2,200 was
case, the costs of bringing the new crop to the stolen from your farm. You discovered the theft You postpone reporting your gain by reporting
same level of maturity as the destroyed crop when you returned to your farm on November your choice on your tax return for the year you
qualify as replacement costs to the extent they 11, 2021. Your insurance company investigated have the gain. You have the gain in the year you
are incurred during the replacement period. the theft and didn’t settle your claim until Janu- receive insurance proceeds or other reimburse-
ary 3, 2022, when they paid you $3,000. You ments that result in a gain.
Timber loss. Standing timber (not land) you first realized a gain from the reimbursement for
bought with the proceeds from the sale of tim- the theft during 2022, so you have until Decem- Required statement. You should attach a
ber downed as a result of a casualty, such as ber 31, 2024, to replace the property. statement to your return for the year you have
high winds, earthquakes, or volcanic eruptions, the gain. This statement should include all the
qualifies as replacement property. If you bought Main home in disaster area. For your main following information.
the standing timber within the replacement pe- home (or its contents) located in a federally de- • The date and details of the casualty, theft,
riod, you can postpone reporting the gain. clared disaster area, the replacement period or other involuntary conversion.
ends 4 years after the close of the first tax year • The insurance or other reimbursement you
Business or income-producing property lo- in which you realize any part of your gain from received.
cated in a federally declared disaster area. the involuntary conversion. See Disaster Area • How you figured the gain.
If your destroyed business or income-producing Losses, later.
property was located in a federally declared dis- Replacement property acquired before
aster area, any tangible replacement property Weather-related sales of livestock in an return filed. If you acquire replacement prop-
you acquire for use in any business is treated area eligible for federal assistance. For the erty before you file your return for the year you
as similar or related in service or use to the de- sale or exchange of livestock due to drought, have the gain, your statement should also in-
stroyed property. For more information, see flood, or other weather-related conditions in an clude detailed information about all the follow-
Disaster Area Losses in Pub. 547. area eligible for federal assistance, the replace- ing items.
ment period ends 4 years after the close of the • The replacement property.
Substituting replacement property. Once first tax year in which you realize any part of • The postponed gain.
you have acquired qualified replacement prop- your gain from the sale or exchange. The IRS • The basis adjustment that reflects the
erty and have designated it as replacement may extend the replacement period on a re- postponed gain.
property in a statement attached to your tax re- gional basis if the weather-related conditions • Any gain you are reporting as income.
turn, you can't substitute other qualified re- continue for longer than 3 years.
Replacement property acquired after re-
placement property. This is true even if you ac- For information on extensions of the re- turn filed. If you intend to buy replacement
quire the other property within the replacement placement period because of persistent property after you file your return for the year
period. However, if you discover that the origi- drought, see Notice 2006-82, 2006-39 I.R.B. you realize gain, your statement should also
nal replacement property wasn’t qualified re- 529, available at IRS.gov/IRB/2006-39_IRB/ say that you are choosing to replace the prop-
placement property, you can, within the re- ar11.html. For a list of counties for which excep- erty within the required replacement period.
placement period, substitute the new qualified tional, extreme, or severe drought was reported You should then attach another statement to
replacement property. during the 12 months ending August 31, 2021, your return for the year in which you buy the re-
see Notice 2021–55, available at IRS.gov.
Basis of replacement property. You must re- placement property. This statement should con-
tain detailed information on the replacement
duce the cost basis of your replacement prop- Condemnation. The replacement period for a property. If you acquire part of your replace-
erty by the amount of postponed gain. In this condemnation begins on the earlier of the fol- ment property in one year and part in another
way, tax on the gain is postponed until you dis- lowing dates. year, you must attach a statement to each
pose of the replacement property. Amounts • The date on which you disposed of the year's return. Include in the statement detailed
paid for replacement property that exceed the condemned property. information on the replacement property bought
amount of the gain postponed can be depreci- • The date on which the threat of condemna- in that year.
ated. tion began.
Example. In 2022, you sold 50 cows with a The replacement period generally ends 2 years Reporting weather-related sales of live-
$0 basis due to severe drought. This is more after the close of the first tax year in which any stock. If you choose to postpone reporting the
than the 25 cows you normally sell each year. part of the gain on the condemnation is real- gain on weather-related sales or exchanges of
The proceeds from the sale of the additional 25 ized. But see Main home in disaster area, ear- livestock, show all the following information on
cows are $31,250. Because of the severe lier, for an exception. a statement attached to your return for the tax
year in which you first realize any of the gain.
drought, it isn’t feasible for you to use these pro- Business or investment real property. If • Evidence of the weather-related conditions
ceeds to buy replacement cows. Instead, you real property held for use in a trade or business that forced the sale or exchange of the live-
use the proceeds to buy a hay baler for or for investment (not including property held stock.
$40,000. You choose to postpone reporting the primarily for sale) is condemned, the replace- • The gain realized on the sale or exchange.
$31,250 gain ($31,250 – $0) from the sale of ment period ends 3 years after the close of the • The number and kind of livestock sold or
the cows. Therefore, the basis of the hay baler first tax year in which any part of the gain on the exchanged.
is $8,750 ($40,000 – $31,250). condemnation is realized. • The number of livestock of each kind you
would have sold or exchanged under your
Replacement Period Extension. You can apply for an extension of usual business practice.
the replacement period. Send your written ap-
To postpone reporting your gain, you must buy plication to the Internal Revenue Service Center Show all the following information and the
replacement property within a specified period where you file your tax return. See your tax re- preceding information on the return for the year
of time. This is the replacement period. turn instructions for the address. Include all the in which you replace the livestock.
details about your need for an extension. Make • The dates you bought the replacement
The replacement period begins on the date your application before the end of the replace- property.
your property was damaged, destroyed, stolen, ment period. However, you can file an applica- • The cost of the replacement property.
sold, or exchanged. The replacement period tion within a reasonable time after the replace- • Description of the replacement property
generally ends 2 years after the close of the first ment period ends if you can show a good (for example, the number and kind of the
tax year in which you realize any part of your reason for the delay. You will get an extension replacement livestock).
gain from the involuntary conversion. of the replacement period if you can show rea-
sonable cause for not making the replacement
within the regular period.

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Amended return for changes regarding re- elect not to itemize your deductions. See In- The AMT adjustment for the standard
placement property. You must file an amen- creased standard deduction reporting, later. ! deduction is made retroactively inappli-
ded return (Form 1040-X) for the tax year of the Moreover, your net casualty loss from these CAUTION cable to net qualified disaster losses.
gain in either of the following situations. qualified disasters does not need to exceed See Taxpayers who also file the 2022 Form
• You don't acquire replacement property 10% of your adjusted gross income to qualify 6251, Alternative Minimum Tax for Individuals,
within the replacement period, plus exten- for the deduction, but the $100 limit per casualty in the Instructions for Form 4684 for more infor-
sions. On this amended return, you must is increased to $500. mation.
report the gain and pay any additional tax
due. Disaster year. The disaster year is the tax Federal disaster relief grants. Don't include
• You acquire replacement property within year in which you sustained the loss attributable post-disaster relief grants received under the
the required replacement period, plus ex- to a federally declared disaster. Generally, a Robert T. Stafford Disaster Relief and Emer-
tensions, but at a cost less than the disaster loss is sustained in the year the disas- gency Assistance Act in your income if the grant
amount you receive from the casualty, ter occurred. A disaster loss may also be sus- payments are made to help you meet neces-
theft, or other involuntary conversion. On tained in a year after the disaster occurred. For sary expenses or serious needs for medical,
this amended return, you must report the example, if a claim for reimbursement exists for dental, housing, personal property, transporta-
part of the gain that can't be postponed which there is a reasonable prospect of recov- tion, or funeral expenses. Don't deduct casualty
and pay any additional tax due. ery, no part of the loss for which reimbursement losses or medical expenses to the extent they
may be received is sustained until it can be as- are specifically reimbursed by these disaster re-
certained with reasonable certainty whether you lief grants. If the casualty loss was specifically
Disaster Area Losses will be reimbursed. reimbursed by the grant and you received the
grant after the year in which you deducted the
Special rules apply to federally declared disas- When to deduct the loss. You must generally casualty loss, see Reimbursement received af-
ter area losses. A federally declared disaster is deduct a casualty loss in the disaster year. ter deducting loss, earlier. Unemployment as-
a disaster that occurred in an area declared by However, if you have a deductible loss from a sistance payments under the Act are taxable
the President to be eligible for federal assis- disaster that occurred in an area warranting unemployment compensation.
tance under the Robert T. Stafford Disaster Re- public or individual assistance (or both), you
lief and Emergency Assistance Act. It includes can choose to deduct that loss on your return or Qualified disaster relief payments. Qualified
a major disaster or emergency declaration un- amended return for the tax year immediately disaster relief payments aren't included in the
der the Act. preceding the disaster year. If you make this income of individuals to the extent any expen-
choice, the loss is treated as having occurred in ses compensated by these payments aren't
For tax years 2018 through 2025, per- the preceding year. otherwise compensated for by insurance or
! sonal casualty and theft losses of an in- Claiming a qualifying disaster loss on other reimbursement. These payments aren't
CAUTION dividual are deductible only to the ex-
tent they're attributable to a federally declared TIP the previous year's return may result in subject to income tax, self-employment tax, or
disaster. An exception to the rule limiting the a lower tax for that year, often produc- employment taxes (social security, Medicare,
deduction for personal casualty and theft losses ing or increasing a cash refund. and federal unemployment taxes). No withhold-
ing applies to these payments.
to federal disaster losses applies where you You must make an election to deduct a 2022 Qualified disaster relief payments include
have personal casualty gains to the extent the disaster loss on your 2021 return on or before payments you receive (regardless of the
losses don't exceed your gains. the date that is 6 months after the regular due source) for the following expenses.
date for filing your original return (without exten-
A list of the areas warranting public or sions) for the disaster year. For calendar year • Reasonable and necessary personal, fam-
ily, living, or funeral expenses incurred as a
TIP individual assistance (or both) under individual taxpayers, the deadline for electing to result of a federally declared disaster.
the Act is available at the Federal take a 2022 disaster loss on your 2021 tax re- Reasonable and necessary expenses in-
Emergency Management Agency (FEMA) web turn is October 16, 2023. •
curred for the repair or rehabilitation of a
site at FEMA.gov/Disasters. If you claimed a deduction for a disaster loss personal residence due to a federally de-
in the disaster year and you wish to deduct the clared disaster. (A personal residence can
This part discusses the special rules for loss in the preceding year, you must file an be a rented residence or one you own.)
when to deduct a disaster area loss and what amended return to remove the previously de- • Reasonable and necessary expenses in-
tax deadlines may be postponed. For other spe- ducted loss on or before you file the return or curred for the repair or replacement of the
cial rules, see Disaster Area Losses in Pub. amended return for the preceding year that in- contents of a personal residence due to a
547. cludes the disaster loss deduction. For more in- federally declared disaster.
Qualified disaster losses. A qualified dis- formation, see Pub. 547.
Qualified disaster relief payments include
aster loss is an individual's casualty or theft loss amounts paid by a federal, state, or local gov-
of personal-use property that is attributable to a Increased standard deduction reporting. If
major disaster that was declared by the Presi- you have a net qualified disaster loss on Form ernment in connection with a federally declared
dent during the period between January 1, 4684, line 15, and you aren’t itemizing your de- disaster to individuals affected by the disaster.
2020, and February 25, 2021. However, in or- ductions, you can claim an increased standard These payments must be made from a govern-
der to qualify, this disaster must have an inci- deduction using Schedule A (Form 1040) by mental fund, be based on individual or family
dent period that began on or after December doing the following. needs, and not be compensation for services.
Payments to businesses generally don't qualify.
28, 2019, or on or before December 27, 2020, 1. Enter the amount from Form 4684, line 15,
and must have ended no later than January 26, on the dotted line next to line 16 on Qualified disaster relief payments don't
2021. The definition of a qualified disaster loss Schedule A and the description “Net ! include:
does not extend to any major disaster which Qualified Disaster Loss.” CAUTION
has been declared only by reason of • Payments for expenses otherwise paid for
COVID-19. See IRS.gov/DisasterTaxRelief for 2. Enter on the dotted line next to line 16
date-specific declarations associated with your standard deduction amount and the by insurance or other reimbursements; or
these disasters and for more information. description “Standard Deduction Claimed • Income replacement payments, such as
Casualty and theft losses of personal-use With Qualified Disaster Loss.” payments of lost wages, lost business in-
come, or unemployment compensation.
property may be claimed as a qualified disaster 3. Combine these two amounts and enter on
loss on your Form 4684 for the year in which the line 16 of Schedule A and Form 1040 or
loss was sustained. This deduction will be en- 1040-SR, line 12. Qualified disaster mitigation payments.
tered on Schedule A (Form 1040) as an item- Qualified disaster mitigation payments made
ized deduction but you can increase your stand- under the Robert T. Stafford Disaster Relief and
ard deduction by qualified disaster losses if you Emergency Assistance Act or the National
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Flood Insurance Act (as in effect on April 15, • The spouse on a joint return with a tax-
2005) aren’t included in income. These are pay- payer who is eligible for postponements.
ments you, as a property owner, received to re- • Any individual, business entity, or sole pro-
duce the risk of future damage to your property. prietorship not located in a covered disas- 12.
You can't increase your basis in property, or ter area, but whose necessary records to
take a deduction or credit, for expenditures meet a postponed tax deadline are located
made with respect to those payments. in the covered disaster area.
• Any individual visiting the covered disaster Self-Employment
Sale of property under hazard mitigation area who was killed or injured as a result of
program. Generally, if you sell or otherwise the disaster. Tax
transfer property, you must recognize any gain • Any other person determined by the IRS to
or loss for tax purposes unless the property is be affected by a federally declared disas-
your main home. You report the gain or deduct ter.
the loss on your tax return for the year you real- What's New for 2022
ize it. (You can't deduct a loss on personal-use Covered disaster area. This is an area of
property unless the loss resulted from a casu- a federally declared disaster area in which the Maximum net earnings. The maximum net
alty, as discussed earlier.) However, if you sell IRS has decided to postpone tax deadlines for self-employment earnings subject to the social
or otherwise transfer property to the federal up to 1 year. security part (12.4%) of the self-employment tax
government, a state or local government, or an is $147,000 for 2022, up from $142,800 for
Indian tribal government under a hazard mitiga- Abatement of interest and penalties. The 2021. There is no maximum limit on earnings
tion program, you can choose to postpone re- IRS may abate the interest and penalties on the subject to the Medicare part (2.9%) or, if appli-
porting the gain if you buy qualifying replace- underpaid income tax for the length of any post- cable, the Additional Medicare Tax (0.9%).
ment property within a certain period of time. ponement of tax deadlines.
The maximum net self-employment earn-
See Postponing Gain, earlier, for the rules that ings subject to the social security part of the
apply. self-employment tax for 2023 will be discussed
Reporting Gains in the 2022 Pub. 334.
Other federal assistance programs. For
more information about other federal assistance and Losses
programs, see Crop Insurance and Crop Disas- Reminder
ter Payments and Feed Assistance and Pay- You will have to file one or more of the following
ments in chapter 3. forms to report your gains or losses from invol-
untary conversions. Self-employed tax payments deferred in
Postponed tax deadlines. The IRS may post- 2020. If you elected to defer payments of cer-
pone for up to 1 year certain tax deadlines of Form 4684. Use this form to report your gains tain social security taxes from 2020, see How
taxpayers who are affected by a federally de- and losses from casualties and thefts. self-employed individuals and household
clared disaster. The tax deadlines the IRS may employers repay deferred Social Security tax.
postpone include those for filing income, ex- Form 4797. Use this form to report involuntary
cise, and employment tax returns, paying in- conversions (other than from casualty or theft)
come, excise, and employment taxes, and mak- of property used in your trade or business and Introduction
ing contributions to a traditional IRA or Roth capital assets held in connection with a trade or
IRA. business or a transaction entered into for profit. Self-employment tax (SE tax) is a social secur-
Also use this form if you have a gain from a ity and Medicare tax primarily for individuals
If any tax deadline is postponed, the IRS will casualty or theft on trade, business, or in- who work for themselves. It is similar to the so-
publicize the postponement in your area and come-producing property held for more than 1 cial security and Medicare taxes withheld from
publish a news release and, where necessary, year and you have to recapture some or all of the pay of most wage earners.
a revenue ruling, revenue procedure, notice, your gain as ordinary income. You usually have to pay SE tax if you are
announcement, or other guidance in the Internal self-employed. You are usually self-employed if
Revenue Bulletin (IRB). Go to IRS.gov/ Form 8949. Use this form to report gain from you operate your own farm on land you either
DisasterTaxRelief to find out if a tax deadline an involuntary conversion (other than from own or rent. You have to figure SE tax on
has been postponed for your area. casualty or theft) of personal-use property. Schedule SE (Form 1040).
Who is eligible. If the IRS postpones a tax Farmers who have employees may have to
deadline, the following taxpayers are eligible for Schedule A (Form 1040). Use this form to de- pay the employer's share of social security and
the postponement. duct your losses from casualties and thefts of Medicare taxes, as well. See chapter 13 for in-
• Any individual whose main home is located personal-use property and income-producing formation on employment taxes.
in a covered disaster area (defined next). property that you reported on Form 4684. If your self-employment income exceeds a
• Any business entity or sole proprietor certain threshold amount, you may also be sub-
whose principal place of business is loca- Schedule D (Form 1040). Use this form to ject to a 0.9% Additional Medicare Tax on the
ted in a covered disaster area. carry over the following gains. income that is more than that amount. You fig-
• Any individual who is a relief worker affili- • Net gain shown on Form 4797 from an in- ure this tax using Form 8959. For more informa-
ated with a recognized government or phil- voluntary conversion of business property tion about the Additional Medicare Tax, includ-
anthropic organization and who is assisting held for more than 1 year. ing the threshold amounts, see the Instructions
in a covered disaster area. • Net gain shown on Form 4684 from the for Form 8959.
• Any individual, business entity, or sole pro- casualty or theft of personal-use property.
Self-employment tax rate. The self-employ-
prietorship whose records are needed to Also use this form to figure the overall gain ment tax rate is 15.3%. The rate consists of two
meet a postponed tax deadline, provided or loss from transactions reported on Form parts: 12.4% for social security (old-age, survi-
those records are maintained in a covered 8949. vors, and disability insurance) and 2.9% for
disaster area. The main home or principal
Medicare (hospital insurance).
place of business doesn’t have to be loca- Schedule F (Form 1040). Use this form to de-
ted in the covered disaster area. duct your losses from casualty or theft of live-
• Any estate or trust that has tax records stock or produce bought for sale on line 32 Topics
necessary to meet a postponed tax dead- (Other expenses) if you use the cash method of This chapter discusses:
line, provided those records are main- accounting and haven’t otherwise deducted
tained in a covered disaster area. these losses. • Why pay self-employment tax
• How to pay self-employment tax

Chapter 12 Self-Employment Tax Page 75

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• Who must pay self-employment tax ings. Generally, the SSA will give you credit If you were assigned an ITIN before
• Figuring self-employment earnings only for self-employment earnings reported on a ! 2013, or if you have an ITIN that you
• Landlord participation in farming tax return filed within 3 years, 3 months, and 15 CAUTION haven't included on a tax return in the
• Methods for figuring net earnings days after the tax year you earned the income. last 3 consecutive years, you may need to re-
• Reporting self-employment tax new it. For more information, see the Instruc-
If you file your tax return or report a tions for Form W-7 or visit IRS.gov/ITIN.
change in your self-employment earn-
Useful Items CAUTION! ings after the SSA time limit for posting
You may want to see: self-employment earnings, the SSA may Paying estimated tax. Estimated tax is the
change its records, but only to remove or re- method used to pay tax (including SE tax) on in-
Publication duce the amount. The SSA won't change its re- come not subject to withholding. You generally
cords to increase your self-employment earn- have to make estimated tax payments if you ex-
541 541 Partnerships ings after the SSA time limit listed above. pect to owe tax, including SE tax, of $1,000 or
more when you file your return. Use Form
Form (and Instructions) 1040-ES, Estimated Tax for Individuals, to fig-
1040 1040 U.S. Individual Income Tax Return ure and pay the tax.
How To Pay However, if at least two-thirds of your gross
1040-SR 1040-SR U.S. Tax Return for Seniors income for the current tax year or the prior tax
Self-Employment Tax
Sch F (Form 1040) Sch F (Form 1040) Profit or Loss From year is from farming and you file your tax return
Farming To pay SE tax, you must have a social security and pay all the tax due by March 1, you don’t
Sch SE (Form 1040) Sch SE (Form 1040) Self-Employment number (SSN) or an individual taxpayer identifi- have to pay any estimated tax. For example, if
Tax cation number (ITIN). This section explains how at least two-thirds of your gross income for
to: 2021 or 2022 is from farming and you file your
1065 1065 U.S. Return of Partnership Income • Obtain an SSN or ITIN, and 2022 Form 1040 and pay all the tax due by
Sch K-1 (Form 1065) Sch K-1 (Form 1065) Partner's Share of • Pay your SE tax using estimated tax. March 1, 2023, you don’t have to make any es-
timated tax payments for 2022. For more infor-
Income, Deductions, Credits, etc. An ITIN doesn’t entitle you to social se- mation about estimated tax for farmers, the defi-
8959 8959 Additional Medicare Tax ! curity benefits. Obtaining an ITIN nition of “farming income,” and exceptions to
CAUTION doesn’t change your immigration or what constitutes farming income, see chap-
See chapter 16 for information about getting employment status under U.S. law. ter 15.
publications and forms.
Penalty for underpayment of estimated
Obtaining a social security number (SSN). tax. You may have to pay a penalty if you don’t
If you have never had an SSN, apply for one us- pay enough estimated tax by its due date.
Why Pay ing Form SS-5, Application for a Social Security
Self-Employment Tax? Card. The application is also available in Span-
ish. You can get this form at any social security
Social security benefits are available to self-em- office or by calling 800-772-1213, or by visiting Who Must Pay
ployed persons just as they are to wage earn- SSA.gov/forms. Self-Employment Tax?
ers. Your payments of SE tax contribute to your If you have an SSN from the time you were
coverage under the social security system. So- an employee, you must use that number. Don’t You must pay SE tax and file Schedule SE
cial security coverage provides you with retire- apply for a new one. (Form 1040) if your net earnings from self-em-
ment benefits, disability benefits, survivor bene- Replacing a lost social security card. If ployment were $400 or more.
fits, and hospital insurance (Medicare) benefits. you have a number but lost your card, file Form The SE tax rules apply no matter how
How to become insured under social secur- SS-5. You will get a new card showing your ! old you are and even if you are already
ity. You must be insured under the social se- original number, not a new number. In some CAUTION receiving social security or Medicare
curity system before you begin receiving social areas, you may be able to request a replace- benefits.
security benefits. You are insured if you have ment card online.
the required number of credits (also called Name change. If your name has changed Aliens. Generally, resident aliens must pay
“quarters of coverage”). since you received your social security card, self-employment tax under the same rules that
complete Form SS-5 to report a name change. apply to U.S. citizens. Nonresident aliens aren’t
Earning credits in 2022. You can earn a max- subject to self-employment tax unless an inter-
imum of four credits per year. For 2022, you You can find more information about national social security agreement determines
earn one credit for each $1,510 of combined obtaining a social security number, re- that they are covered under the U.S. social se-
wages and self-employment earnings subject to placing a lost card, or requesting a curity system. Residents of the Virgin Islands,
social security tax. You need $6,040 ($1,510 × name change at SSA.gov. Puerto Rico, Guam, the Commonwealth of the
4) of combined wages and self-employment Northern Mariana Islands, or American Samoa
earnings subject to social security tax to earn Obtaining an individual taxpayer identifica- are subject to self-employment tax, as they are
four credits in 2022. It doesn’t matter whether tion number (ITIN). The IRS will issue you an considered U.S. residents for self-employment
the income is earned in 1 quarter or is spread ITIN, for tax use only, if you are a nonresident or tax purposes. For more information on aliens,
over 2 or more quarters. resident alien and you don’t have, and aren’t eli- see Pub. 519, U.S. Tax Guide for Aliens, and
For an explanation of the number of credits gible to get, an SSN. To apply for an ITIN, file the Instructions for Schedule SE (Form 1040).
you must have to be insured and the benefits Form W-7, Application for IRS Individual Tax-
available to you and your family under the so- payer Identification Number. You can download Are you self-employed? You are self-em-
cial security program, consult your nearest So- Form W-7 from the IRS website at IRS.gov. For ployed if you carry on a trade or business (such
cial Security Administration (SSA) office or visit more information on ITINs, see Pub. 1915. as running a farm) as a sole proprietor, an inde-
the SSA website at SSA.gov. Form W-7 and Pub. 1915 are also available in pendent contractor, or a member of a partner-
Spanish. ship, or are otherwise in business for yourself. A
Making false statements to get or to in- trade or business is generally an activity carried
on for a livelihood or in good faith to make a
CAUTION subject you to penalties.
! crease social security benefits may profit.

The Social Security Administration (SSA)
time limit for posting self-employment earn-
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Share farmer. You are a self-employed farmer Partners in a partnership. Generally, you are Community income. If you and your
under an income-sharing arrangement if both self-employed if you are a member of a partner- spouse wholly own an unincorporated business
the following apply. ship that carries on a trade or business. as community property under the community
property laws of a state, foreign country, or U.S.
1. You produce a crop or raise livestock on Limited partner. If you are a limited part- possession, you can treat your wholly owned,
land belonging to another person. ner, your partnership income is generally not unincorporated business as a sole proprietor-
2. Your share of the crop or livestock, or the subject to SE tax. However, guaranteed pay- ship, instead of a partnership. Any change in
proceeds from their sale, depends on the ments you receive for services you perform for your reporting position will be treated as a con-
amount produced. the partnership are subject to SE tax and version of the entity.
should be reported to you in box 14 of your Report your income and deductions as fol-
Your net farm profit or loss from the in- Schedule K-1 (Form 1065). lows.
come-sharing arrangement is reported on • If only one spouse participates in the busi-
Schedule F (Form 1040) and included in your Community property. If you are a partner
self-employment earnings. and your distributive share of any income or ness, all of the income from that business
If you produce a crop or livestock on land loss from a trade or business carried on by the is the self-employment earnings of the
belonging to another person and are to receive partnership is community property, treat your spouse who carried on the business.
a specified rate of pay, a fixed sum of money, or share as your self-employment earnings. Don’t • If both spouses participate, the income and
a fixed quantity of the crop or livestock, and not treat any of your share as self-employment deductions are allocated to the spouses
a share of the crop or livestock or their pro- earnings of your spouse. based on their distributive shares.
• If you and your spouse elected to treat the
ceeds, you may be either self-employed or an Business owned and operated by spouses. business as a qualified joint venture, see
employee of the landowner. This will depend on If you and your spouse jointly own and operate Qualified joint venture, earlier.
whether the landowner has the right to direct or a farm as an unincorporated business and States with community property laws include
control your performance of services. share in the profits and losses, you are partners Arizona, California, Idaho, Louisiana, Nevada,
Example. A share farmer produces a crop in a partnership whether or not you have a for- New Mexico, Texas, Washington, and Wiscon-
on land owned by another person on a 50-50 mal partnership agreement. You must file Form sin. See Pub. 555 for more information about
crop-share basis. Under the terms of their 1065 instead of Schedule F (Form 1040). How- community property laws.
agreement, the share farmer furnishes the labor ever, you and your spouse may still report in-
and half the cost of seed and fertilizer. The come using Schedule F (Form 1040) instead of
landowner furnishes the machinery and equip- Form 1065 if either of the following applies. Figuring
ment used to produce and harvest the crop, • You and your spouse elect to be treated as
and half the cost of seed and fertilizer. The a qualified joint venture. See Qualified joint Self-Employment
share farmer is provided a house in which to venture, later.
live. The landowner and the share farmer de- • You and your spouse wholly own the unin- Earnings
cide on a cropping plan. corporated farming business as commun-
The share farmer is a self-employed farmer ity property and you treat the business as a Farmer. If you are self-employed as a farmer,
for purposes of the agreement to produce the sole proprietorship. See Community in- use Schedule F (Form 1040) to figure your
crops, and the share farmer's part of the profit come, later. self-employment earnings.
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. If you and your gross farming or fishing income (code B) and
Contract farming. Under typical contract spouse each materially participate as the only gross nonfarm income (code C). Use these
farming arrangements, the grower receives a members of a jointly owned and operated farm, amounts if you use the farm or nonfarm optional
fixed payment per unit of crops or finished live- and you file a joint tax return for the tax year, method to figure net earnings from self-employ-
stock delivered to the processor or packing you can make a joint election to be treated as a ment (see Methods for Figuring Net Earnings,
company. Because the grower typically fur- qualified joint venture instead of a partnership later).
nishes labor and bears some production risk, for the tax year. Making this election will allow If you are a general partner, you may need
the payments are reported on Schedule F you to avoid the complexity of Form 1065 but to reduce these reported earnings by amounts
(Form 1040) and are therefore subject to still give each spouse credit for social security you claim as a section 179 deduction, unreim-
self-employment tax. earnings on which retirement benefits are bursed partnership expenses, or depletion on
based. For an explanation of “material participa- oil and gas properties.
4-H Club or FFA project. If an individual par- tion,” see the instructions for Schedule C, line If the amount reported is a loss, include only
ticipates in a 4-H Club or National FFA Organi- G, and the instructions for Schedule F, line E. the deductible amount when you figure your to-
zation (FFA) project, any net income received
from sales or prizes related to the project may Only businesses that are owned and tal self-employment earnings.
be subject to income tax. Report the net income ! operated by spouses as co-owners For more information, see the Partner's In-
as “Other income” on Schedule 1 (Form 1040), CAUTION (and not in the name of a state law en- structions for Schedule K-1 (Form 1065).
line 8z. If necessary, attach a statement show- tity) qualify for the election. Thus, a business For general information on partnerships, see
ing the gross income and expenses. The net in- owned and operated by spouses through a limi- Pub. 541.
come may not be subject to SE tax if the project ted liability company does not qualify for the
is primarily for educational purposes and not for election of a qualified joint venture. More than one business. If you have self-em-
profit, and is completed by the individual under To make this election, you must divide all ployment earnings from more than one trade,
the rules and economic restrictions of the spon- items of income, gain, loss, deduction, and business, or profession, you must generally
soring 4-H or FFA organization. Such a project credit attributable to the business between you combine the net profit or loss from each to de-
is generally not considered a trade or business. and your spouse in accordance with your re- termine your total self-employment earnings. A
For information on the filing requirements and spective interests in the venture. Each of you loss from one business reduces your profit from
other tax information for dependents, see Pub. must file a separate Schedule F and a separate another business. However, don’t combine
929. Schedule SE. For more information, see Quali- earnings from farm and nonfarm businesses if
fied Joint Ventures in the Instructions for Sched- you are using one of the optional methods (dis-
ule SE (Form 1040). cussed later) to figure net earnings.

Chapter 12 Self-Employment Tax Page 77

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Community property. If any of the income • The retired partner's share (if any) of the what standards to follow, and what re-
from a farm or business, other than a partner- partnership capital was fully paid to the re- cords to keep.
ship, is community property under state law, it is tired partner. 3. You work 100 hours or more spread over a
included in the self-employment earnings of the • The payments to the retired partner are period of 5 weeks or more in activities con-
spouse carrying on the trade or business. lifelong periodic payments. nected with agricultural production.
Payments for lost income. Include in Conservation Reserve Program (CRP) pay- 4. You do things that, considered in their to-
self-employment earnings any payments you ments. Under the CRP, if you own or operate tality, show you are materially and signifi-
receive from insurance or other sources to re- highly erodible or other specified cropland, you cantly involved in the production of the
place income lost because you reduced or may enter into a long-term contract with the farm commodities.
stopped farming activities. These include USDA USDA, agreeing to convert to a less intensive
payments under the Dairy Margin Coverage use of that cropland. You must include the an- These tests may be used as general guides for
(DMC) Program, which provides dairy produc- nual rental payments and any one-time incen- determining whether you are a material partici-
ers with payments when dairy margins are be- tive payment you receive under the program on pant.
low the margin coverage levels. See USDA.gov Schedule F, lines 4a and 4b. Cost-share pay-
for additional information about other USDA ments you receive may qualify for the cost-shar- Crop shares. Rent paid in the form of crop
programs. Even if you aren’t farming when you ing exclusion. See Cost-Sharing Exclusion (Im- shares is included in self-employment earnings
receive the payment, it is included in self-em- provements), earlier, in chapter 3. CRP for the year you sell, exchange, give away, or
ployment earnings if it relates to your farm busi- payments are reported to you on Form 1099-G. use the crop shares if you meet one of the four
ness (even though it is temporarily inactive). A material participation tests (discussed above) at
connection exists if it is clear the payment Individuals who are receiving social se- the time the crop shares are produced. Feeding
would not have been made but for your conduct TIP curity retirement or disability benefits such crop shares to livestock is considered us-
of your farm business. may exclude CRP payments when cal- ing them. Your gross income for figuring your
culating self-employment tax. See the Instruc- self-employment earnings includes the fair mar-
Gain or loss. A gain or loss from the disposi- tions for Schedule SE (Form 1040). ket value of the crop shares when they are used
tion of property that is neither stock in trade nor as feed.
held primarily for sale to customers isn’t inclu- Self-employed health insurance deduction.
ded in self-employment earnings. It doesn’t You can’t deduct the self-employed health in- Example. Nancy agrees to produce a crop
matter whether the disposition is a sale, ex- surance deduction you report on Schedule 1 on G. Cohen's cotton farm, with each receiving
change, or involuntary conversion. For exam- (Form 1040), line 17, from self-employment half the proceeds. Cohen agrees to furnish all
ple, gains or losses from the disposition of the earnings on Schedule SE (Form 1040). the necessary equipment, and it is understood
following types of property aren’t included in that Cohen will advise Nancy on when to plant,
self-employment earnings. spray, and pick the cotton. It is also understood
• Investment property. Landlord Participation in that he will inspect the crop every few days to
• Depreciable property or other fixed assets Farming determine whether Nancy is properly taking
used in your trade or business. care of the crop. Under their arrangement, it is
• Livestock held for draft, breeding, sport, or As a general rule, income and deductions from further understood that Nancy will furnish all la-
dairy purposes, and not held primarily for rentals and from personal property leased with bor needed to grow and harvest the crop. Co-
sale, regardless of how long the livestock real estate aren’t included in determining hen provides the advice, makes inspections,
was held, or whether it was raised or pur- self-employment earnings. However, income and furnishes the equipment; Nancy furnishes
chased. and deductions from farm rentals, including all labor needed to grow and harvest the crop.
• Unharvested standing crops sold with land government commodity program payments re- The management decisions made by Cohen
held more than 1 year. ceived by a landowner who rents land, are in- in connection with the care of the cotton crop
• Timber, coal, or iron ore held for more than cluded if the rental arrangement provides that and his regular inspection of the crop establish
1 year if an economic interest was re- the landowner will, and does, materially partici- that Cohen participates to a material degree in
tained, such as a right to receive coal roy- pate in the production or management of pro- the cotton production operations. The income
alties. duction of the farm products on the land. Cohen receives from the cotton farm is included
in Cohen’s self-employment earnings.
A gain or loss from the cutting of timber isn’t Material participation for landlords. You
included in self-employment earnings if the cut- materially participate if you have an arrange-
ting is treated as a sale or exchange. For more ment with your tenant for your participation and Methods for Figuring Net
information on electing to treat the cutting of you meet one or more of the following tests.
timber as a sale or exchange, see Timber in Earnings
chapter 8. 1. You do at least three of the following.
a. Pay, using cash or credit, at least half There are three ways to figure net earnings
Wages and salaries. Wages and salaries re- the direct costs of producing the crop from self-employment.
ceived for services performed as an employee or livestock. 1. The regular method.
and covered by social security or railroad retire-
ment aren’t included in self-employment earn- b. Furnish at least half the tools, equip- 2. The farm optional method.
ings. ment, and livestock used in the pro-
Wages paid in kind to you for agricultural la- duction activities. 3. The nonfarm optional method.
bor performed as an employee, such as com- c. Advise or consult with your tenant on You must use the regular method to the extent
modity wages, aren’t included in self-employ- something like deciding what crops to you don’t use one or both of the optional meth-
ment earnings. plant, the type of seed or fertilizer to ods. See Figure 12-1 to see if you are eligible to
use, or when and at what price the use an optional method.
Retired partner. Retirement income received crops should be sold.
by a partner from his or her partnership under a
written plan isn’t included in self-employment d. Inspect the production activities peri- Why use an optional method? You may
earnings if all the following apply. odically. want to use the optional methods (discussed
• The retired partner performs no services 2. You regularly and frequently make, or take later) when you have a loss or a small net profit
for the partnership during the year. an important part in making, management and any one of the following applies.
• The retired partner is owed only the retire- decisions substantially contributing to or • You want to receive credit for social secur-
ment payments. affecting the success of the enterprise. For ity benefit coverage.
example, decisions about when and • You incurred child or dependent care ex-
where to plant or spray, when to harvest, penses for which you could claim a credit.
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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 $6,540? $9,060 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 $6,540?
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.

(An optional method may increase your gross income, regardless of which method you • Schedule K-1 (Form 1065), box 14, code A
earned income, which could increase your use to determine SE tax. (from farm partnerships).
credit.) If you received social security retirement or dis-
• You are entitled to the earned income ability benefits, you must subtract the amount of
credit. (An optional method may increase Regular Method
any CRP payments included on your Sched-
your earned income, which could increase ule F, line 4b, or listed on Schedule K-1 (Form
your credit.) To figure net earnings using the regular
• You are entitled to the additional child tax method, multiply your self-employment earn- 1065), box 20, code AH. You may also need to
credit. (An optional method may increase ings by 92.35% (0.9235). For your net earnings adjust the amount reported on Schedule K-1 if
your earned income, which could increase figured using the regular method, see line 4a of you are a general partner or if it is a loss. For
your credit.) your Schedule SE (Form 1040). more information, see Partnership income or
loss, earlier.
Effects of using an optional method. Using Net earnings figured using the regular
an optional method could increase your SE tax. method are also called “actual net earnings.” Figuring farm net earnings. If you meet ei-
ther of the two tests explained above, use Ta-
Paying more SE tax may result in you getting ble 12-1 to figure your net earnings from
higher social security disability or retirement Farm Optional Method self-employment under the farm optional
benefits. method.
Using the optional methods may also de- Use the farm optional method only for self-em-
crease your adjusted gross income (AGI) due to ployment earnings from a farming business. Table 12-1. Figuring Farm Net
the deduction for one-half of SE tax on Form You can use this method if you meet either of
1040, which may affect your eligibility for cred- the following tests. Earnings
its, deductions, or other items that are subject to 1. Your gross farm income is $9,060 or less. IF your gross farm THEN your net
an AGI limit. Figure your AGI with and without
using the optional methods to see if the optional 2. Your net farm profits are less than $6,540. income is... earnings are
methods will benefit you. equal to...
If you use either or both optional methods, Gross farm income. Your gross farm income $9,060 or less two-thirds of your
you must figure and pay the SE tax due under is the total of the amounts from: gross farm income.
these methods even if you would have had a • Schedule F (Form 1040), line 9; and
smaller SE tax or no SE tax using the regular • Schedule K-1 (Form 1065), box 14, code B more than $9,060 $6,040.
method. (from farm partnerships).
The optional methods may be used only to Optional method can reduce or eliminate
figure your SE tax. To figure your income tax, Net farm profits. Net farm profits are generally
include your actual self-employment earnings in the total of the amounts from: SE tax. If your gross farm income is $9,060 or
• Schedule F (Form 1040), line 34; and less and your farm net earnings figured under

Chapter 12 Self-Employment Tax Page 79

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the farm optional method are less than your ac-        Joint return. Even if you file a joint return, you    amended  and  extended  by  the  Taxpayer  Cer-
tual farm net earnings, you can use the farm op-       can’t  file  a  joint  Schedule  SE.  This  is  true  tainty and Disaster Tax Relief Act of 2020 was 
tional  method  to  reduce  or  eliminate  your  SE    whether  one  spouse  or  both  spouses  have         limited to qualified wages paid after March 12, 
tax. Your actual farm net earnings are your farm       self-employment  earnings.  Your  spouse  isn’t       2020,  and  before  July  1,  2021.  The  employee 
net earnings figured using the regular method,         considered  self-employed  just  because  you         retention credit under section 3134 of the Inter-
explained earlier.                                     are. If both of you have self-employment earn-        nal Revenue Code, as enacted by the ARP and 
                                                       ings,  each  of  you  must  complete  a  separate     amended  by  the  Infrastructure  Investment  and 
Example. Your gross farm income is $540                Schedule SE. Attach both schedules to the joint       Jobs Act, was limited to wages paid after June 
and your net farm profit is $460. Consequently,        return. If you and your spouse operate a busi-        30,  2021,  and  before  October  1,  2021,  unless 
your  net  earnings  figured  under  the  farm  op-    ness as a partnership, see Business owned and         the employer was a recovery startup business. 
tional method are $360 (2/3 of $540) and your          operated  by  spouses  and Qualified  joint  ven-     An employer that was a recovery startup busi-
actual net earnings are $425 (92.35% of $460).         ture, earlier, under Who Must Pay Self-Employ-        ness  could  also  claim  the  employee  retention 
You  owe  no  SE  tax  if  you  use  the  optional     ment Tax.                                             credit for wages paid after September 30, 2021, 
method  because  your  net  earnings  under  the                                                             and before January 1, 2022.
farm optional method are less than $400.
                                                                                                                    An employer who receives a refund of 
                                                                                                             TIP    payroll  taxes  resulting  from  qualified 
Nonfarm Optional Method                                                                                             sick and family leave credit reported on 
                                                                                                             a  2021  Form  943  generally  won't  receive  that 
This is  an  optional  method available  for deter-                                                          refund  until  the  2022  calendar  year.  Even 
mining net earnings from nonfarm self-employ-          13.                                                   though  that  credit  isn't  received  until  2022,  in-
ment, much like the farm optional method.                                                                    come  reported  in  2021  must  be  increased  by 
                                                                                                             the  refundable  and  nonrefundable  portions  of 
If you are also engaged in a nonfarm busi-                                                                   the qualified sick and family leave credit repor-
ness, you may be able to use this method to fig-       Employment                                            ted on their 2021 Form 943. For more informa-
ure your nonfarm net earnings. You can use this                                                              tion, see the instructions for the income tax re-
method even if you don’t use the farm optional         Taxes                                                 turn or the Form 1040 schedule you file for your 
method for determining your farm net earnings                                                                business.
and even if you have a net loss from your non-                                                               Credit for COBRA premium assistance pay-
farm business. For more information about the                                                                ments is limited to periods of coverage be-
nonfarm optional method, see Pub. 334.                 What's New for 2022
                                                                                                             ginning  on  or  after  April  1,  2021,  through 
                                                                                                             periods of coverage beginning on or before 
        You  can’t  combine  farm  and  nonfarm        The  COVID-19  related  credit  for  qualified        September  30,  2021. Section  9501  of  the 
CAUTION your  net  earnings  under  either  of  the 
!       self-employment  earnings  to  figure          sick  and  family  leave  wages  is  limited  to      ARP provides for COBRA premium assistance 
                                                       leave  taken  after  March  31,  2020,  and  be-      in  the  form  of  a  full  reduction  in  the  premium 
optional methods.                                      fore October 1, 2021. Generally, the credit for       otherwise  payable  by  certain  individuals  and 
                                                       qualified sick and family leave wages, as enac-       their  families  who  elect  COBRA  continuation 
                                                       ted  under  the  Families  First  Coronavirus  Re-    coverage due to a loss of coverage as the result 
Using Both Optional                                    sponse Act (FFCRA) and amended and exten-             of a reduction in hours or an involuntary termi-
Methods                                                ded  by  the  COVID-related  Tax  Relief  Act  of     nation of employment (assistance eligible indi-
                                                       2020, for leave taken after March 31, 2020, and       viduals).  This  COBRA  premium  assistance  is 
If you use both optional methods, you must add         before April 1, 2021, and the credit for qualified    available for periods of coverage beginning on 
the net earnings figured under each method to          sick  and  family  leave  wages  under  sections      or after April 1, 2021, through periods of cover-
arrive  at  your  total  net  earnings  from  self-em- 3131, 3132, and 3133 of the Internal Revenue          age  beginning  on  or  before  September  30, 
ployment.  You  can  report  less  than  your  total   Code, as enacted under the American Rescue            2021.  A  premium  payee  is  entitled  to  the  CO-
actual  farm  and  nonfarm  net  earnings  but  not    Plan Act of 2021 (the ARP), for leave taken after     BRA premium assistance credit at the time an 
less  than  actual  nonfarm  net  earnings.  If  you   March  31,  2021,  and  before  October  1,  2021,    eligible  individual  elects  coverage.  Therefore, 
use  both  optional  methods,  you  can  report  no    have  expired.  However,  employers  that  pay        due  to  the  COBRA  notice  and  election  period 
more than $6,040 as your combined net earn-            qualified  sick  and  family  leave  wages  in  2022  requirements  (generally,  employers  have  60 
ings from self-employment.                             for  leave  taken  after  March  31,  2020,  and  be- days  to  provide  notice  and  assistance  eligible 
                                                       fore  October  1,  2021,  are  eligible  to  claim  a individuals  have  60  days  to  elect  coverage), 
                                                       credit for qualified sick and family leave wages      some  employers  may  be  eligible  to  claim  the 
Reporting                                              in 2022.                                              COBRA premium assistance credit on employ-
                                                       For  more  information  about  the  credit  for       ment tax returns for 2022. For more information 
Self-Employment Tax                                    qualified sick and family leave wages, see the        on COBRA premium assistance payments and 
                                                       Instructions  for  Form  943,  and  go  to IRS.gov/   the  credit,  see  the  Instructions  for  Form  943; 
Use Schedule SE (Form 1040) to figure and re-          PLC.                                                  Notice 2021-31, 2021-23 I.R.B. 1173, available 
port  your  SE  tax.  Then,  enter  the  SE  tax  on                                                         at IRS.gov/irb/2021-23_IRB#NOT-2021-31; and 
Schedule  2  (Form  1040),  line  4,  and  attach           An employer who receives a refund of 
Schedule SE to Form 1040 or 1040-SR.                   TIP  payroll  taxes  resulting  from  the  em-        Notice  2021-46,  2021-33  I.R.B.  303,  available 
                                                            ployee  retention  credit  reported  on          at IRS.gov/irb/2021-33_IRB#NOT-2021-46.
        If you have to pay SE tax, you must file       their  2021  Form  943  generally  won't  receive     Advance  payment  of  COVID-19  credits 
!       Form  1040  or  1040-SR  (with  Sched-         that  refund  until  the  2022  calendar  year.  Even ended. Although  you  may  pay  qualified  sick 
CAUTION ule SE attached) even if you don’t oth-        though that credit isn't received until 2022, wa-     and family leave wages in 2022 for leave taken 
erwise have to file a federal income tax return.       ges  reported  in  2021  must  be  reduced  by  the   after  March  31,  2020,  and  before  October  1, 
                                                       refundable  and  nonrefundable  portions  of  the     2021,  or  provide  COBRA  premium  assistance 
Self-employment  tax  deduction. You  can              employee  retention  credit  reported  on  their      payments in 2022, you may no longer request 
deduct half of your SE tax in figuring your AGI.       2021 Form 943. For more information, see the          an  advance  payment  of  any  credit  on  Form 
This deduction only affects your income tax. It        instructions  for  the  income  tax  return  or  the  7200,  Advance  Payment  of  Employer  Credits 
doesn’t  affect  either  your  net  earnings  from     Form 1040 schedule you file for your business.        Due to COVID-19.
self-employment or your SE tax.                                                                              Social  security  and  Medicare  tax  for  2022. 
To  deduct  the  tax,  enter  on  Schedule  1          The  COVID-19  related  employee  retention           The  rate  of  social  security  tax  on  taxable  wa-
(Form 1040), line 15, the amount from line 13 of       credit  has  expired. The  employee  retention        ges,  including  qualified  sick  leave  wages  and 
Schedule SE (Form 1040).                               credit enacted under the Coronavirus Aid, Re-         qualified  family  leave  wages  paid  in  2022  for 
                                                       lief,  and  Economic  Security  (CARES)  Act  and     leave  taken  after  March  31,  2021,  and  before 
Page 80    Chapter 13 Employment Taxes

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October 1, 2021, is 6.2% each for the employer Deferral of the employee share of social se- Aggregate Form 943 Filers, electronically. For
and employee or 12.4% for both. Qualified sick curity tax expired. The Presidential Memo- more information about a CPEO's requirement
leave wages and qualified family leave wages randum on Deferring Payroll Tax Obligations in to file electronically, see Regulations section
paid in 2022 for leave taken after March 31, Light of the Ongoing COVID 19 Disaster, issued ‐ 31.3511-1(g)(2).
2020, and before April 1, 2021, aren't subject to on August 8, 2020, directed the Secretary of the Correcting a previously filed Form 943. If
the employer share of social security tax; there- Treasury to defer the withholding, deposit, and you discover an error on a previously filed Form
fore, the tax rate on these wages is 6.2%. The payment of the employee share of social secur- 943, make the correction using Form 943-X,
social security wage base limit is $147,000. ity tax on wages paid during the period from Adjusted Employer's Annual Federal Tax Re-
The Medicare tax rate is 1.45% (0.0145) September 1, 2020, through December 31, turn for Agricultural Employees or Claim for Re-
each for the employee and employer, un- 2020. The deferral of the withholding and pay- fund. Form 943-X is filed separately from Form
changed from 2021. There is no wage base ment of the employee share of social security 943. For more information on correcting Form
limit for Medicare tax. tax was available for employees whose social 943, see the Instructions for Form 943-X or sec-
security wages paid for a biweekly pay period tion 9 of Pub. 51, or go to IRS.gov/
2022 withholding tables. The federal income were less than $4,000, or the equivalent thresh- CorrectingEmploymentTaxes.
tax withholding tables are now included in Pub. old amount for other pay periods. The
15-T, Federal Income Tax Withholding Meth- COVID-related Tax Relief Act of 2020 deferred Federal tax deposits must be made by elec-
ods. the due date for the withholding and payment of tronic funds transfer (EFT). You must use
the employee share of social security tax until EFT to make all federal tax deposits. Generally,
the period beginning on January 1, 2021, and an EFT is made using the Electronic Federal
What’s New for 2023 ending on December 31, 2021. For more infor- Tax Payment System (EFTPS). If you don't
mation about the deferral of employee social want to use EFTPS, you can arrange for your
Social security and Medicare tax for 2023. security tax, see the Instructions of the Form tax professional, financial institution, payroll
The employee and employer tax rates for social 943; Notice 2020 65, 2020 38 I.R.B. 567, avail-‐ ‐ service, or other trusted third party to make
security and the maximum amount of wages able at IRS.gov/irb/ electronic deposits on your behalf. Also, you
subject to social security tax for 2023 will be 2020-38_IRS#NOT-2020-65; and Notice may arrange for your financial institution to ini-
discussed in Pub. 51 (for use in 2023). 2021-11, 2021-06 I.R.B. 827, available at tiate a same-day wire payment on your behalf.
The Medicare tax rate for 2023 will also be IRS.gov/irb/2021-06_IRB#NOT-2021-11. EFTPS is a free service provided by the Depart-
discussed in Pub. 51 (for use in 2023). There is Qualified small business payroll tax credit ment of the Treasury. Services provided by your
no limit on the amount of wages subject to Med- for increasing research activities. For tax tax professional, financial institution, payroll
icare tax. years beginning after 2015, a qualified small service, or other third party may have a fee.
business may elect to claim up to $250,000 of Note. An exception applies to the EFT re-
its credit for increasing research activities as a quirement for making your federal tax deposits.
Reminders payroll tax credit against the employer's share If your liability is less than $2,500 (Form 943,
of social security tax. The payroll tax credit elec- line 13), you may pay in full with a check or
Additional employment tax information for tion must be made on or before the due date of money order with a timely filed return. See the
farmers. See Pub. 51 for more detailed guid- the originally filed income tax return (including Instructions of Form 943 for more information.
ance on employment taxes for employers of ag- extensions). The portion of the credit used
ricultural workers. For the latest information against the employer's share of social security For more information on making federal tax
about developments related to Pub. 51, such as tax is allowed in the first calendar quarter begin- deposits, see section 7 of Pub. 51. To get more
legislation enacted after it was published, go to ning after the date that the qualified small busi- information about EFTPS or to enroll in EFTPS,
IRS.gov/Pub51. For general tax information rel- ness filed its income tax return. For more infor- go to EFTPS.gov or call 800-555-4477 or
evant to agricultural employers, go to IRS.gov/ mation, see the Instructions for Form 943 and 800-733-4829 (TDD). Additional information
AgricultureTaxCenter. For general information go to IRS.gov/ResearchPayrollTC. about EFTPS is also available in Pub. 966.
about employment taxes, go to IRS.gov/ Certification program for professional em- Electronic filing and payment. Businesses
EmploymentTaxes. For information about em- ployer organizations (PEOs). The Stephen can enjoy the benefits of filing tax returns and
ployer responsibilities under the Affordable Beck, Jr., Achieving a Better Life Experience paying their federal taxes electronically.
Care Act, go to IRS.gov/ACA. For information Act of 2014 required the IRS to establish a vol- Whether you rely on a tax professional or han-
about COVID-19 tax relief, go to IRS.gov/ untary certification program for PEOs. PEOs dle your own taxes, the IRS offers you conven-
Coronavirus. handle various payroll administration and tax ient programs to make filing and paying easier.
You may have nonfarm employees as reporting responsibilities for their business cli- Spend less time worrying about taxes and more
ents and are typically paid a fee based on pay- time running your business. Use e-file and
! well as farm employees, for example, roll costs. To become and remain certified un- EFTPS to your benefit.
CAUTION workers at a retail farm market. See
Pub.15 for employment tax rules for wages and der the certification program, certified • For e-file, go to IRS.gov/EmploymentEfile
noncash wages paid to these employees as professional employer organizations (CPEOs) for additional information. A fee may be
they may differ from those discussed in this must meet various requirements described in charged to file electronically.
chapter. sections 3511 and 7705 and related published • For EFTPS, go to EFTPS.gov or call
guidance. Certification as a CPEO may affect EFTPS Customer Service at 800-555-4477
Deferral of the employer share of social se- the employment tax liabilities of both the CPEO or 800-733-4829 (TDD) for additional infor-
curity tax expired. The CARES Act allowed and its customers. A CPEO is generally treated mation.
employers to defer the deposit and payment of for employment tax purposes as the employer • For electronic filing of Form W-2, Wage
the employer share of social security tax. The of any individual who performs services for a and Tax Statement, go to SSA.gov/
deferred amount of the employer share of social customer of the CPEO and is covered by a con- employer. You may be required to file
security tax was only available for deposits due tract described in section 7705(e)(2) between Forms W-2 electronically. For details, see
on or after March 27, 2020, and before January the CPEO and the customer (CPEO contract), the General Instructions for Forms W-2
1, 2021, as well as deposits and payments due but only for wages and other compensation and W-3.
after January 1, 2021, that were required for paid to the individual by the CPEO. To become
wages paid on or after March 27, 2020, and be- a CPEO, the organization must apply through Work opportunity tax credit for qualified
fore January 1, 2021. One half of the employer ‐ the IRS Online Registration System. For more tax-exempt organizations hiring qualified
share of social security tax was due by Decem- information or to apply to become a CPEO, go veterans. Qualified tax-exempt organizations
ber 31, 2021, and the remainder is due by De- to IRS.gov/CPEO. Also see Revenue Proce- that hire eligible unemployed veterans may be
cember 31, 2022. For more information about dure 2017-14, 2017-3 I.R.B. 426, available at able to claim the work opportunity tax credit
the deferral of the employer share of social se- IRS.gov/irb/2017-03_IRB#RP-2017-14. against their payroll tax liability using Form
curity tax, see the Instructions for Form 943 and CPEOs must generally file Form 943 and
go to IRS.gov/ETD. Schedule R (Form 943), Allocation Schedule for
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5884-C. For more information, go to IRS.gov/ IRS, see Pub. 1220. Other Forms 1099, in- Unemployment Tax Act (FUTA). You must also
WOTC. cluding Forms 1099-MISC, Miscellaneous withhold Additional Medicare Tax from wages
Income, have different due dates. For de- you pay to an employee in excess of $200,000
tails about filing Forms 1099 and for infor- in a calendar year. This chapter includes infor-
Important Dates for 2023 mation about required electronic filing, see mation about these taxes.
the General Instructions for Certain Infor- You must also pay self-employment tax on
You should take the action indicated by the mation Returns for general information, your net earnings from farming. See chapter 12
dates listed. The dates listed here aren't and the separate, specific instructions for for information on self-employment tax.
adjusted for Saturdays, Sundays, and legal each information return you file (for exam-
holidays (see the TIP next). Pub. 509, Tax ple, the Instructions for Forms 1099-MISC Topics
Calendars (for use in 2023), adjusts the dates and 1099-NEC). This chapter discusses:
for Saturdays, Sundays, and legal holidays. • Furnish each recipient to whom you paid
Due dates for deposits of withheld federal $600 or more in nonemployee compensa-
income taxes, social security taxes, and tion with a completed Form 1099-NEC. • Farm employment;
Medicare taxes aren't listed here. Also, the due • File Form 945, Annual Return of Withheld • Family employees;
dates for forms required for health coverage Federal Income Tax, with the IRS to report • Crew leaders;
reporting aren't listed here. For these dates, see any nonpayroll income tax withheld. If you • Social security and Medicare taxes;
Pub. 509. deposited all Form 945 taxes when due, • Federal income tax withholding;
you may file Form 945 by February 10. • Required notice to employees about the
If any date shown next for filing a re- earned income credit (EIC);
TIP turn, furnishing a form, or depositing By February 15. Ask for a new Form W-4, Em- • Reporting and paying social security,
taxes falls on a Saturday, Sunday, or ployee’s Withholding Certificate, or Formulario Medicare, and withheld federal income
legal holiday, the due date is the next business W-4(SP) from each employee who claimed ex- taxes; and
day. The term “legal holiday” means any legal emption from federal income tax withholding • FUTA tax.
holiday in the District of Columbia. Legal holi- last year.
days in the District of Columbia are provided in On February 16. Any Form W-4 claiming ex- Useful Items
section 7 of Pub. 51. A statewide legal holiday emption from withholding for the previous year You may want to see:
delays a filing or furnishing due date only if the has now expired. Begin withholding for any em-
IRS office where you’re required to file a return ployee who previously claimed exemption from Publication
or furnish a form is located in that state. How- withholding but hasn't given you a new Form
ever, a statewide legal holiday doesn't delay the W-4 for the current year. If the employee 15 15 Employer's Tax Guide
due date of federal tax deposits. For any due doesn't give you a new Form W-4, withhold 15-A 15-A Employer's Supplemental Tax Guide
date, you will meet the “file” or “furnish” date re- taxes as if he or she had checked the box for 15-B 15-B Employer's Tax Guide to Fringe
quirement if the envelope containing the tax re- Single or Married filing separately in Step 1(c)
turn or form is properly addressed, contains suf- and made no entries in Step 2, Step 3, or Step Benefits
ficient postage, and is postmarked by the U.S. 4 of the 2023 Form W-4. If the employee fur- 15-T 15-T Federal Income Tax Withholding
Postal Service on or before the due date, or nishes a new Form W-4 claiming exemption Methods
sent by an IRS-designated private delivery from withholding after February 15, you may ap- 51 51 Agricultural Employer's Tax Guide
service (PDS) on or before the due date. Go to ply the exemption to future wages, but don't re-
IRS.gov/PDS for the current list of PDSs. For fund taxes withheld while the exempt status 926 926 Household Employer's Tax Guide
the IRS mailing address to use if you're using a wasn't in place.
PDS, go to IRS.gov/PDSstreetAddresses. Form (and Instructions)
By April 30, July 31, October 31, and Janu-
Fiscal year taxpayers. The due dates listed ary 31. Deposit FUTA taxes. Deposit FUTA W-2 W-2 Wage and Tax Statement
next apply whether you use a calendar or a fis- tax due if the undeposited amount is over $500. W-4 W-4 Employee's Withholding Certificate
cal year. Before December 1. Provide employees an W-9 W-9 Request for Taxpayer Identification
By January 31. opportunity to submit a new Form W-4 if their fil-
• File Form 943 with the IRS. If you depos- ing status, other income, deductions, or credits Number and Certification
ited all Form 943 taxes when due, you may have changed or will change for the next year. 940 940 Employer's Annual Federal
file Form 943 by February 10. Unemployment (FUTA) Tax Return
• File Form 940, Employer's Annual Federal If you deferred the employer share of
Unemployment (FUTA) Tax Return, with TIP social security tax under the CARES 943 943 Employer's Annual Federal Tax
the IRS. If you deposited all the FUTA tax Act, one-half was due by December Return for Agricultural Employees
when due, you may file Form 940 by Feb- 31, 2021, and the remainder is due by Decem- 943-X 943-X Adjusted Employer's Annual
ruary 10. ber 31, 2022. If you deferred the employee Federal Tax Return for Agricultural
• File Copy A of all paper and electronic share of social security taxes under Notice Employees or Claim for Refund
Forms W-2 with Form W-3, Transmittal of 2020-65 and Notice 2021-11, you must have
Wage and Tax Statements, with the Social withheld and paid the deferred taxes ratably See chapter 16 for information about getting
Security Administration (SSA). If filing elec- from wages paid between January 1, 2021, and publications and forms.
tronically, the SSA generates Form W-3 December 31, 2021. For more information and
automatically based on your Forms W-2. payment instructions, see the Instructions for
For more information on reporting Form Form 943, IRS.gov/ETD Notice 2020-65, , and Farm Employment
W-2 information to the SSA electronically, Notice 2021-11.
go to the SSA’s Employer W-2 Filing In- In general, you’re an employer of farmworkers if
structions & Information webpage at your employees do any of the following types of
SSA.gov/employer. work.
• Furnish each employee with a completed Introduction Raising or harvesting agricultural or horti-
•
Form W-2. You’re generally required to withhold federal in- cultural products on a farm, including rais-
• File Copy A of all paper and electronic come tax from the wages of your employees. ing and feeding of livestock and raising
Forms 1099-NEC, Nonemployee Compen- You may be required to withhold social security bees for pollination and the production of
sation, that report nonemployee compen- and Medicare taxes from your employees' wa- honey.
sation with Form 1096, Annual Summary ges and pay the employer's share of these • Operating, managing, conserving, improv-
and Transmittal of U.S. Information Re- taxes under the Federal Insurance Contribu- ing, or maintaining your farm and its tools
turns, with the IRS. For information on filing tions Act (FICA). You may also have to pay fed- and equipment, if the major part of such
information returns electronically with the eral unemployment tax under the Federal service is performed on a farm.
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• Services performed in salvaging timber, or You can get Form I-9 at USCIS.gov/Forms. For Payments for the services of your spouse
clearing land of brush and other debris, left more information, visit the USCIS website at employed by you in other than a trade or busi-
by a hurricane (also known as hurricane la- USCIS.gov/I-9-Central or call 800-375-5283 or ness, such as payments for household services
bor), if the major part of such service is 800-767-1833 (TTY). Employers and employ- in your home, aren't subject to social security,
performed on a farm. ees in Puerto Rico ONLY may use the Spanish Medicare, or FUTA taxes.
• Handling, processing, or packaging any version of Form I-9.
agricultural or horticultural commodity in its You may use the Social Security Number Nonexempt services of a child or spouse.
unmanufactured state if you produced Verification Service (SSNVS) at SSA.gov/ Payments for the services of your child or
more than half of the commodity (for a employer/ssnv.htm to verify that an employee spouse are subject to federal income tax with-
group of up to 20 unincorporated opera- name matches an SSN. A person may have a holding as well as social security, Medicare,
tors, all of the commodity). valid SSN but not be authorized to work in the and FUTA taxes if he or she works for any of
• Work related to cotton ginning, turpentine, United States. You may use E-Verify at E- the following entities.
gum resin products, or the operation and Verify.gov to confirm the employment eligibility • A corporation, even if it is controlled by
maintenance of irrigation facilities. of newly hired employees. Some states may re- you.
For more information, see sections 2 and 12 of quire employers to also use E-Verify; check with • A partnership, even if you’re a partner. This
Pub. 51. the appropriate agency in your state. doesn't apply to wages paid to your child if
each partner is a parent of the child.
Generally, a worker who performs services Form W-4. You should give each new em- • An estate or trust, even if it is the estate of
for you is your employee if you have the right to ployee a Form W-4 (IRS.gov/W4) as soon as a deceased parent.
control what will be done and how it will be you hire the employee. For Spanish-speaking In these situations, the child or spouse is con-
done. This is so even when you give the em- employees, you may use Formulario W-4(SP), sidered to work for the corporation, partnership,
ployee freedom of action. What matters is that which is the Spanish translation of Form W-4. or estate, not you.
you have the right to control the details of how Have the employee complete and return Form
the services are performed. You’re responsible W-4 to you before the first payday. If the em- Exemptions for your parent. Payments for
for withholding and paying employment taxes ployee doesn't return the completed form, you the services of your parent employed by you in
for your employees. You’re also required to file must withhold federal income tax as if the em- your trade or business are subject to federal in-
employment tax returns. These requirements ployee had checked the box for Single or Mar- come tax withholding and social security and
don't apply to amounts that you pay to inde- ried filing separately in Step 1(c) and made no Medicare taxes. Social security and Medicare
pendent contractors, as discussed later under entries in Step 2, Step 3, or Step 4 of Form W-4. taxes don't apply to wages paid to your parent
Nonemployee compensation. See sections 1 for services not in your trade or business, but
and 2 of Pub. 15-A for more information on how New hire reporting. You’re required to report they do apply to payments for household serv-
to determine whether an individual providing any new employee to a designated state new ices in your home if both of the following condi-
services is an independent contractor or an em- hire registry. A new employee is an employee tions are satisfied.
ployee. who hasn’t previously been employed by you or • You have a child (including an adopted
was previously employed by you but has been child or stepchild) living in your home who
If you employ a family of workers, each separated from such prior employment for at is under age 18 or has a physical or mental
worker subject to your control (not just the head least 60 consecutive days. Many states accept condition that requires care by an adult for
of the family) is an employee. a copy of Form W-4 with employer information at least 4 continuous weeks in the calendar
Special rules apply to crew leaders. See added. Visit the Office of Child Support En- quarter services were performed.
Crew Leaders, later. forcement website at acf.hhs.gov/css/ • You’re a widow or widower; or divorced
employers for more information. and not remarried; or have a spouse in the
Employer identification number (EIN). If home who, because of a physical or men-
you’re required to report employment taxes or tal condition, can't care for your child for at
give tax statements to employees, you must Family Employees least 4 continuous weeks in the calendar
have an EIN. If you don't have an EIN, you may quarter services were performed.
apply for one online by visiting IRS.gov/EIN. Generally, the wages you pay to family mem- Wages you pay to your parent aren't subject
You may also apply for an EIN by faxing or mail- bers who are your employees are subject to to FUTA tax, regardless of the type of services
ing Form SS-4 to the IRS. Be aware that you employment taxes. However, certain exemp- provided.
may already have an EIN if you have previously tions may apply to wages paid to your child,
had farm employees; previously had nonfarm spouse, or parent. Qualified joint venture. If spouses elect to be
employees in a different business; you file Form treated as a qualified joint venture instead of a
2290, Heavy Highway Vehicle Use Tax Return; Exemptions for your child. Payments for the partnership, either spouse may report and pay
or your farm business is structured as a partner- services of your child under age 18 who works the employment taxes due on the wages paid to
ship, limited liability company, S corporation, or for you in your trade or business (including a employees using the EIN of that spouse's sole
C corporation. farm) aren't subject to social security and Medi- proprietorship. For more information about
care taxes. However, see Nonexempt services qualified joint ventures, see chapter 12.
Employee's social security number (SSN). of a child or spouse, later. Payments for the
An employee who doesn't have an SSN and is services of your child under age 21 employed
legally eligible to work in the United States by you in other than a trade or business, such
should submit Form SS-5, Application for a So- as payments for household services in your Crew Leaders
cial Security Card, to the SSA. Form SS-5 is home, also aren't subject to social security or
available from any SSA office or by calling Medicare taxes. Payments for the services of If farmworkers are provided by a crew leader,
800-772-1213. It is also available from the your child under age 21 employed by you, the crew leader may be the employer of the
SSA's website at SSA.gov/online/ss-5.pdf. whether or not in your trade or business, aren't workers.
The employee must furnish evidence of age, subject to FUTA tax. Although not subject to so-
identity, and U.S. citizenship or lawful immigra- cial security, Medicare, or FUTA tax, the child's Social security and Medicare taxes. For so-
tion status permitting employment with the wages may still be subject to federal income tax cial security and Medicare tax purposes, the
Form SS-5. withholding. crew leader is the employer of the workers if
both of the following requirements are met.
Form I-9. You must verify that each new em- Exemptions for your spouse. Payments for • The crew leader pays (either on his or her
ployee is legally eligible to work in the United the services of your spouse who works for you own behalf or on behalf of the farmer) the
States. This includes completing the U.S. Citi- in your trade or business are subject to federal workers for their farm labor.
zenship and Immigration Services (USCIS) income tax withholding and social security and • The crew leader hasn't entered into a writ-
Form I-9, Employment Eligibility Verification. Medicare taxes, but not FUTA tax. ten agreement with the farmer under which

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the crew leader is designated as an em- If the $2,500 test for the group isn't met, the paid in 2022 for leave taken after March
ployee of the farmer. $150 test for an employee still applies. 31, 2021, and before October 1, 2021, is
If both requirements are met, the crew 6.2% each for the employer and employee
leader isn't considered the employee of the Exceptions. Annual cash wages of less than or 12.4% for both. Qualified sick leave wa-
farmer for services performed by the crew $150 you pay to a seasonal farmworker aren't ges and qualified family leave wages paid
leader in furnishing farmworkers and as a mem- subject to social security and Medicare taxes, in 2022 for leave taken after March 31,
ber of the crew. even if you pay $2,500 or more to all your farm- 2020, and before April 1, 2021, aren't sub-
workers. However, these wages count toward ject to the employer share of social secur-
Federal income tax withholding. If the crew the $2,500 test for determining whether other ity tax; therefore, the tax rate on these wa-
leader is the employer for social security and farmworkers' wages are subject to social secur- ges is 6.2%.
Medicare tax purposes, the crew leader is the ity and Medicare taxes. • The employer and employee each pay
employer for federal income tax withholding A seasonal farmworker is a worker who: 1.45% of cash wages for Medicare tax
purposes. • 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
Federal unemployment (FUTA) tax. For paid on this basis in the region of employ- excess of $200,000 for Additional Medi-
FUTA tax purposes, the crew leader is the em- ment, care Tax.
ployer of the workers if, in addition to the earlier • Commutes daily from his or her permanent
requirements, either of the following require- home to the farm, and Wage limit. The limit on wages subject to
ments is met. • Worked in agriculture less than 13 weeks the social security tax for 2022 is $147,000.
• The crew leader is registered under the Mi- in the preceding calendar year. There is no limit on wages subject to the Medi-
care tax. All covered wages are subject to the
grant and Seasonal Agricultural Worker See Family Employees, earlier, for certain Medicare tax. Additionally, all wages in excess
Protection Act. exemptions from social security and Medicare of $200,000 are subject to Additional Medicare
• Substantially all crew members operate or taxes that apply to your child, spouse, and pa- Tax withholding.
maintain mechanized equipment provided rent.
by the crew leader as part of the service to Paying employee's share. If you would rather
the farmer. Religious exemption. An exemption from pay the employee's share of social security and
social security and Medicare taxes is available Medicare taxes without deducting it from his or
The farmer is the employer of workers fur- to members of a recognized religious group or her wages, you may do so. It is additional in-
nished by a crew leader in all other situations. In division opposed to public insurance. This ex- come to the employee, thus it is subject to in-
addition, the farmer is the employer of workers emption is available only if both the employee come tax withholding. You must include it in
furnished by a registered crew leader if the and the employer are members of the group or box 1 of the employee's Form W-2, but don't
workers are the employees of the farmer under division. These employees are still subject to count it as social security and Medicare wages
the common-law test. For example, some farm- federal income tax. For more information, see (boxes 3 and 5 of Form W-2) or as wages for
ers employ individuals to recruit farmworkers Pub. 517. FUTA tax purposes.
exclusively for them. Although these individuals
may be required to register under the Migrant Cash wages. Only cash wages paid to farm- Example. Gavrielle operates a small family
and Seasonal Agricultural Worker Protection workers are subject to social security and Medi- fruit farm. She employs day laborers in the pick-
Act, the workers are employed directly by the care taxes. Cash wages include checks, money ing season to enable her to timely get her crop
farmer. The farmer is the employer in these ca- orders, and any kind of money or cash. to market. She doesn't deduct the employees'
ses. For information about common-law em- Only cash wages subject to social security share of social security and Medicare taxes
ployees, see section 1 of Pub. 15-A. For infor- and Medicare taxes are credited to your em- from their pay; instead, she pays it on their be-
mation about the Migrant and Seasonal ployees for social security benefit purposes. half. When she prepares her employees' Forms
Agricultural Worker Protection Act, which pro- Payments not subject to these taxes, such as W-2, she adds each employee's share of social
tects migrant and seasonal agricultural workers certain commodity wages (discussed next), security and Medicare taxes that she paid to the
by establishing employment standards related don't contribute to your employees' social se- employee's wage income (box 1 of Form W-2),
to wages, housing, transportation, and disclo- curity coverage. For information about social but doesn't include it in box 3 (social security
sures and recordkeeping, and which requires security benefits, go to SSA.gov or call the SSA wages) or box 5 (Medicare wages and tips).
farm labor contractors to register with the U.S. at 800-772-1213. For 2022, Gavrielle paid Dan $1,000 during
Department of Labor (DOL), see the DOL web-
the year. She enters $1,076.50 in box 1 of
site at dol.gov/whd/regs/compliance/ Noncash wages (including commodity wa- Dan’s Form W-2 ($1,000 wages plus $76.50 so-
whdfs49.htm. ges). Noncash wages include food, lodging, cial security and Medicare taxes paid for Dan).
clothing, transportation passes, farm products, She enters $1,000.00 in boxes 3 and 5 of Dan's
or other goods or commodities. Noncash wa- Form W-2.
Social Security and ges paid to farmworkers, including commodity
wages, aren't subject to social security and Additional Medicare Tax. In addition to with-
Medicare Taxes Medicare taxes. However, they are subject to holding Medicare tax at 1.45%, you must with-
these taxes if the substance of the transaction hold a 0.9% Additional Medicare Tax from wa-
All cash wages you pay to an employee during is a cash payment. For information on lodging ges you pay to an employee in excess of
the year for farmwork are subject to social se- provided as a condition of employment, see $200,000 in a calendar year. You’re required to
curity and Medicare taxes if you meet either of Pub. 15-B. begin withholding Additional Medicare Tax in
the following tests.
• You pay the employee $150 or more in Report the value of noncash wages in box 1 the pay period in which you pay wages in ex-
cash wages (count all wages paid on a of Form W-2 together with cash wages. Don't cess of $200,000 to an employee and continue
time, piecework, or other basis) during the show noncash wages in box 3 or in box 5 (un- to withhold it each pay period until the end of
year for farmwork (the $150 test). The less the substance of the transaction is a cash the calendar year. Additional Medicare Tax is
$150 test applies separately to each farm- payment). only imposed on the employee. There is no em-
ployer share of Additional Medicare Tax. All wa-
worker that you employ. If you employ a Tax rates and social security wage limit. ges that are subject to Medicare tax are subject
family of workers, each member is treated For 2022, the employer and the employee will to Additional Medicare Tax withholding if paid in
separately. Don't count wages paid by pay the following taxes. excess of the $200,000 threshold.
• You pay cash and noncash wages of •
other employers. The employer and employee each pay For more information on what wages are
6.2% of cash wages for social security tax subject to Medicare tax, see the chart, Special
$2,500 or more during the year to all your (old-age, survivors, and disability insur- Rules for Various Types of Services and Pay-
employees for farmwork (the $2,500 test). ance). The tax rate for qualified sick leave ments, in section 15 of Pub. 15. For more
wages and qualified family leave wages

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information on Additional Medicare Tax, go to ported as social security wages (box 3) or Medi- visa holders, see Compensation paid to H-2A
IRS.gov/ADMTfaqs. care wages (box 5) on Form W-2. On Form visa holders, earlier.
W-2, don't check box 13 (Statutory employee),
as H-2A workers aren't statutory employees. Example. You contract Sean Black to com-
Federal Income Tax An employer isn’t required to withhold fed- plete custom corn chopping on your farm. Be-
eral income tax from compensation paid to an cause Sean Black is a contracted individual and
Withholding H-2A worker for agricultural labor performed in not an employee, you will issue him a Form
connection with this visa unless the worker asks 1099-NEC to report the compensation paid for
If the cash wages you pay to farmworkers are for withholding and the employer agrees. In this the custom corn chopping services.
subject to social security and Medicare taxes, case, the worker must give the employer a com-
they are also subject to federal income tax with- pleted Form W-4. Federal income tax withheld Example. You rent a barn from Valerie
holding. Although noncash wages are subject should be reported on Form 943, line 8, and in Brown for the operation of your business. Be-
to federal income tax, withhold income tax on box 2 of Form W-.2. cause you pay more than $600 annually for the
these noncash wages only if you and the em- These reporting rules apply when the H-2A rental, you will need to issue a Form 1099-MISC
ployee agree to do so. The amount to withhold worker provides his or her taxpayer identifica- to Valerie Brown to report the rent you paid to
is figured on gross wages without taking out so- tion number (TIN) to the employer. However, if her.
cial security and Medicare taxes, union dues, an H-2A visa worker didn't provide the em-
etc. ployer with a TIN, the employee is subject to
backup withholding. The employer must report Reporting and Paying
Form W-4. Generally, the amount of federal in- the wages and backup withholding on Form
come tax you withhold is based on the employ- 1099-MISC. The employer must also report the Social Security,
ee's filing status and other information reported backup withholding on Form 945, line 2. Medicare, and Withheld
on the employee's Form W-4. Don't withhold For more information, see the Instructions
federal income tax from the wages of an em- for Forms 1099-MISC and 1099-NEC and the Federal Income Taxes
ployee who, by writing “Exempt” on Form W-4, Instructions for Form 945. For more information
certifies that he or she had no federal income on foreign agricultural workers on H-2A visas, You must withhold federal income, social secur-
tax liability last year and anticipates no liability go to IRS.gov/H2A. ity, and Medicare taxes required to be withheld
for the current year. from the salaries and wages of your employees.
You should give each new employee a Form Required notice to employees about the You’re liable for the payment of these taxes to
W-4 as soon as you hire the employee. For earned income credit (EIC). You must pro- the federal government whether or not you col-
Spanish-speaking employees, you may use vide notification about the EIC to each em- lect them from your employees. If, for example,
Formulario W-4(SP) which is the Spanish trans- ployee who worked for you at any time during you withhold less than the correct tax from an
lation of Form W-4. Have the employee com- the year and from whom you didn't withhold any employee's wages, you’re still liable for the full
plete and return Form W-4 to you before the federal income tax. However, you don't have to amount. You must also pay the employer's
first payday. If the employee doesn't return the notify employees who claim exemption from share of social security and Medicare taxes.
completed form, you must withhold federal in- federal income tax withholding on Form W-4. There is no employer share of Additional Medi-
come tax as if the employee had checked the You meet the notification requirement by giving care Tax.
box for Single or Married filing separately in each employee any of the following.
Step 1(c) and made no entries in Step 2, Step • Form W-2, which contains the EIC notifica- Form 943. Report withheld federal income tax,
3, or Step 4 of Form W-4. tion on the back of Copy B. social security tax, and Medicare tax on Form
You should make the 2023 Form W-4 avail- 943. Your 2022 Form 943 is due by February 1,
able to your employees and encourage them to • A substitute Form W-2 with the exact EIC 2023 (or February 10, 2023, if you made depos-
check their income tax withholding for 2023. wording shown on the back of Copy B of its on time in full payment of the taxes due for
Those employees who owed a large amount of Form W-2. the year).
tax or received a large refund for 2022 may • Notice 797, Possible Federal Tax Refund
want to submit a new Form W-4. You can't ac- Due to the Earned Income Credit (EIC). Deposits. Generally, you must deposit both
cept substitute Forms W-4 developed by em- • Your own written statement with the exact the employer and employee share of social se-
ployees. Advise your employees to use the IRS wording of Notice 797. For more informa- curity and Medicare taxes and federal income
Tax Withholding Estimator available at IRS.gov/ tion, see Pub. 51 and Notice 1015, Have tax withheld during the year. However, you may
W4App to determine accurate withholding. You Told Your Employees About the make payments with Form 943 instead of de-
Form W-2. By January 31, you must furnish Earned Income Credit (EIC). positing them if you accumulate less than a
$2,500 tax liability (“Total taxes after adjust-
each employee a Form W-2 showing total wa- ments and nonrefundable credits” line on Form
ges for the previous year and total federal in- How to figure withholding. You can use one
come tax, social security tax, and Medicare tax of several methods to determine the amount to 943) during the year and you pay in full with a
withheld. However, if an employee stops work- withhold. The methods are described in Pub. timely filed return. See the Instructions for Form
ing for you and asks for the form earlier, you 15-T, which contains tables showing the correct 943 for more information on making a payment
must give it to the employee within 30 days of amount of federal income tax you should with- with your return.
the later of the following dates. hold. Section 5 of Pub. 51 also contains addi- For more information on deposit rules, see
• The date the employee asks for the form. tional information about federal income tax with- section 7 of Pub. 51.
holding.
• The date you make your final payment of Electronic deposit requirement. You
must use EFT to make all federal tax deposits.
wages to the employee. Nonemployee compensation. Generally, you See Federal tax deposits must be made by
don't have to withhold federal income tax on electronic funds transfer (EFT), earlier.
Compensation paid to H-2A visa holders. payments for services to individuals who aren't
Report compensation of $600 or more paid to your employees. However, you may be required Trust fund recovery penalty. If you’re re-
foreign agricultural workers who entered the to report these payments on Form 1099-NEC sponsible for withholding, accounting for, de-
country on H-2A visas in box 1 of Form W-2. and to withhold under the backup withholding positing, or paying federal income, social secur-
Compensation paid to H-2A workers for agricul- rules. For example, persons who haven’t fur- ity, and Medicare taxes (that is, trust fund taxes)
tural labor performed in connection with this nished their TINs to you are subject to withhold- and willfully fail to do so, you can be held liable
visa isn't subject to social security and Medi- ing on payments required to be reported on for a penalty equal to the withheld tax not paid.
care taxes, and therefore shouldn't be reported Form 1099-NEC. For more information, see the The trust fund recovery penalty won't apply to
as wages subject to social security tax (line 2), Instructions for Forms 1099-MISC and any amount of trust fund taxes an employer
Medicare tax (line 4), or Additional Medicare 1099-NEC. For backup withholding on H-2A holds back in anticipation of any credits they
Tax (line 6) on Form 943, and shouldn't be re-

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are entitled to. It also won't apply to applicable Table 14-1. Fuel Excise Tax Credits and Refunds at a Glance
taxes properly deferred under Notice 2020-65
and Notice 2021-11, before December 31, Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed.
2021. Household Use or
A responsible person can be an officer of a On a Farm for Farming Off-Highway Use Other Than as
corporation, a partner, a sole proprietor, or an Fuel Used Purposes Business Use a Fuel1
employee of any form of business. A trustee or
agent with authority over the funds of the busi- Gasoline Credit only Credit or refund None
ness can also be held responsible for the pen-
alty. Willfully means voluntarily, consciously, Aviation gasoline Credit only None None
and intentionally. Paying other expenses of the Undyed diesel fuel Credit or refund Credit or refund2 Credit or refund2
business instead of the taxes due is acting will- and undyed
fully. kerosene
Consequences of treating an employee as Kerosene for use in Credit or refund None None
an independent contractor. If you classify an aviation
employee as an independent contractor and Dyed diesel fuel None None None
you have no reasonable basis for doing so, you and dyed kerosene
may be held liable for employment taxes for that
worker. See Pub. 15-A for more information. Other Fuels Credit or refund Credit or refund None
(including
alternative fuels)3
Federal Unemployment 1 For a use other than as fuel in a propulsion engine.
(FUTA) Tax 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
You must pay FUTA tax if you meet either of the definition of a blocked pump.
following tests. 3 Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. It
• You paid cash wages of $20,000 or more includes the alternative fuels: liquefied petroleum gas (LPG), “P” Series fuels, compressed natural gas
to farmworkers in any calendar quarter
during the current or preceding calendar (CNG), liquefied hydrogen, Fischer-Tropsch process liquid fuel from coal (including peat), liquid fuel
year. derived from biomass, liquefied natural gas (LNG), liquefied gas derived from biomass, and compressed
• You employed 10 or more farmworkers for gas derived from biomass.
some part of at least 1 day (whether or not
all at the same time) during any 20 or more Reporting and Paying FUTA
different calendar weeks during the current Tax
or preceding calendar year.
14.
These rules don't apply to exempt services of The FUTA tax is imposed on you as the em-
your spouse, your parents, or your children un- ployer. It must not be collected or deducted
der age 21. See Family Employees, earlier. from the wages of your employees.
Fuel Excise Tax
Alien farmworkers. Wages paid to aliens ad- Form 940. Report FUTA tax on Form 940. The
mitted on a temporary basis to the United 2022 Form 940 is due by February 1, 2023 (or
States to perform farmwork (also known as February 10, 2023, if you timely deposited the Credits and
H-2A visa workers) are exempt from FUTA tax. full amount of your 2022 FUTA tax).
However, include your employment of these Refunds
workers and the wages you paid them to deter- Deposits. If at the end of any calendar quarter
mine whether you meet either of the above you owe, but haven't yet deposited, more than
tests. $500 in FUTA tax for the year, you must make a
deposit by the end of the following month. If the Introduction
Commodity wages. Payments in kind for farm undeposited tax is $500 or less at the end of a
labor aren't cash wages. Don't count them to quarter, you don't have to deposit it. You can You may be eligible to claim a credit on your in-
figure whether you’re subject to FUTA tax or to add it to the tax for the next quarter. If the total come tax return for the federal excise tax on
figure how much tax you owe. undeposited tax is more than $500 at the end of certain fuels. You may also be eligible to claim a
the next quarter, a deposit will be required. If quarterly refund of the fuel taxes during the
Tax rate and credit. The gross FUTA tax rate the total undeposited tax at the end of the 4th year, instead of waiting to claim a credit on your
is 6.0% of the first $7,000 cash wages you pay quarter is $500 or less, you can either make a income tax return.
to each employee during the year. However, deposit or pay it with your return by the Febru- Whether you can claim a credit or refund de-
you’re given a credit of up to 5.4% of the first ary 1, 2023, due date. pends on whether the fuel was taxed and the
purpose (nontaxable use) for which you used
$7,000 cash wages you pay to each employee Electronic deposit requirement. You the fuel. The nontaxable uses of fuel for which a
for the state unemployment tax you pay. If your must use EFT to make all federal tax deposits. farmer may claim a credit or refund are gener-
state tax rate (experience rate) is less than See Federal tax deposits must be made by ally the following.
5.4%, you may still be allowed the full 5.4% electronic funds transfer (EFT), earlier. • Use on a farm for farming purposes.
credit. Off-highway business use.
•
If all of the taxable FUTA wages you paid • Uses other than as a fuel in a propulsion
were excluded from state unemployment tax, engine, such as home use.
the full 6.0% rate applies. See the Instructions
for Form 940 for additional information. Table 14-1 presents an overview of credits
and refunds that may be claimed for fuels used
More information. For more information on for the nontaxable uses listed above. See Pub.
FUTA tax, see section 10 of Pub. 51. 510, Excise Taxes, for more information.

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Topics records of the use of the truck on the farm for each can claim a credit for the tax on half the
This chapter discusses: farming purposes, and for other uses. You may fuel used.
be eligible for a credit or refund for the excise
• Fuels used in farming tax on fuel used on the farm for farming purpo- Undyed diesel fuel, undyed kerosene,
• Dyed diesel fuel and dyed kerosene ses. and other fuels (including alternative fuel).
Usually, the farmer is the only person who can
• Fuels used in off-highway business use make a claim for credit or refund for the tax on
• Fuels used for household purposes Penalty. A penalty is imposed on any person
• How to claim a credit or refund who knowingly uses, sells, or alters dyed diesel undyed diesel fuel, undyed kerosene, or other
• Including the credit or refund in income fuel or dyed kerosene for any purpose other fuels (including alternative fuel) used for farm-
than a nontaxable use. The penalty is the ing purposes. However, see Custom applica-
greater of $1,000 or $10 per gallon of the dyed tion of fertilizer and pesticide next. Also see
Useful Items diesel fuel or dyed kerosene involved. After the Dyed diesel fuel and dyed kerosene, earlier.
You may want to see: first violation, the $1,000 portion of the penalty
increases depending on the number of viola- Example. Farm owner Haleigh Blue hired
Publication tions. For more information on this penalty, see custom operator Tyler Steele to cultivate the
510 510 Excise Taxes Pub. 510. soil on her farm. Tyler used 200 gallons of
undyed diesel fuel that he purchased to perform
Form (and Instructions) Farming purposes. As the owner, tenant, or the work on Haleigh's farm. In addition, Haleigh
operator and the ultimate purchaser of fuel that hired contractor Lee Brown to pack and store
720 720 Quarterly Federal Excise Tax Return you purchased, you use the fuel on a farm for her apple crop. Lee bought 25 gallons of
farming purposes if you use it in any of the fol- undyed diesel fuel to use in packing the apples.
4136 4136 Credit for Federal Tax Paid on Fuels lowing ways. Haleigh can claim the credit for the 200 gallons
of undyed diesel fuel used by Tyler on her farm
8849 8849 Claim for Refund of Excise Taxes 1. To cultivate the soil or to raise or harvest because it qualifies as fuel used on the farm for
See chapter 16 for information about getting any agricultural or horticultural commodity. farming purposes. No one can claim a credit for
publications and forms. 2. To raise, shear, feed, care for, train, or the 25 gallons used by Lee because that fuel
manage livestock, bees, poultry, fur-bear- was not used for a farming purpose included in
ing animals, or wildlife. list item (1) or (2) above.
In the above example, both Tyler Steele and
Fuels Used in Farming 3. To operate, manage, conserve, improve, Lee Brown could have purchased dyed (un-
Owners, operators, and tenants of farms and or maintain your farm and its tools and taxed) diesel fuel for their tasks.
certain other persons may be eligible to claim a equipment.
Custom application of fertilizer and pes-
credit or refund of excise taxes on fuel used in 4. To handle, dry, pack, grade, or store any ticide. Fuel used on a farm for farming purpo-
the trade or business of farming, when used on raw agricultural or horticultural commodity. ses includes fuel used in the application (includ-
a farm in the United States for farming purpo- For this use to qualify, you must have pro- ing aerial application) of fertilizer, pesticides, or
ses. See Table 14-1 for a list of available fuel duced more than half the commodity so other substances. Generally, the applicator is
excise tax credits and refunds. Fuel is used on treated during the tax year. The treated as having used the fuel on a farm for
a farm for farming purposes only if used in car- more-than-one-half test applies separately farming purposes and therefore claims the
rying on a trade or business of farming, on a to each commodity. Commodity means a credit or refund. For applicators using highway
farm in the United States, and for farming pur- single raw product. For example, apples vehicles, only the fuel used on the farm is ex-
poses. and peaches are two separate commodi- empt. Fuel used traveling on the highway to and
ties. from the farm is taxable. Fuel used by an aerial
Farm. A farm includes livestock, dairy, fish, applicator for the direct flight between the air-
poultry, fruit, fur-bearing animals, truck farms, 5. To plant, cultivate, care for, or cut trees or
orchards, plantations, ranches, nurseries, to prepare (other than sawing logs into field and one or more farms is treated as used
ranges, and feed yards for finishing cattle. It lumber, chipping, or other milling) trees for for a farming purpose. For aviation gasoline, the
also includes structures such as greenhouses market, but only if these activities are inci- aerial applicator makes the claim as the ulti-
used primarily for raising agricultural or horticul- dental to your farming operations. Your mate purchaser. For kerosene used in aviation,
tural commodities. A fish farm is an area where tree operations are incidental only if they the ultimate purchaser may make the claim or
fish are grown or raised and not merely caught are minor in nature when compared to the waive the right to make the claim to the regis-
or harvested. total farming operations. tered ultimate vendor. A sample waiver is inclu-
ded as Model Waiver L in the appendix of Pub.
If any other person, such as a neighbor or 510.
Dyed versus undyed diesel. Diesel is custom operator (independent contractor), per-
undyed when sold for highway use vehicles and forms a service for you on your farm for any of A registered ultimate vendor is the person
excise tax is collected at the time of sale. The the purposes included in list item (1) or (2) who sells undyed diesel fuel, undyed kerosene,
diesel is dyed when the intended use is for non- above, you are considered to be the ultimate or kerosene for use in aviation to the user (ulti-
taxable purposes, such as farming, and no ex- purchaser who used the fuel on a farm for farm- mate purchaser) of the fuel for use on a farm for
cise tax is collected at the time of sale. When ing purposes. Therefore, you can still claim the farming purposes. To claim a credit or refund of
undyed diesel is used in farming or any other credit or refund for the fuel so used. However, tax, the ultimate vendor must be registered with
qualifying purpose, the taxpayer may recover see Custom application of fertilizer and pesti- the IRS at the time the claim is made. However,
the excise tax paid by claiming a credit or filing cide, later. If the other person performs any registered ultimate vendors cannot make claims
for a refund (see Table 14-1). other services for you on your farm for purposes for undyed diesel fuel and undyed kerosene
Dyed diesel fuel and dyed kerosene. If not included in list item (1) or (2) above, no one sold for use on a farm for farming purposes.
you purchase dyed diesel fuel or dyed kerosene can claim the credit or refund for fuel used on Fuel not used for farming. You do not use
for a nontaxable use, you must use it only on a your farm for those other services. fuel on a farm for farming purposes when you
farm for farming purposes or for other nontaxa- Buyer of fuel, including undyed diesel use it in any of the following ways.
ble purposes. For example, you should not use fuel or undyed kerosene. If doubt exists • Off the farm, such as on the highway or in
dyed diesel fuel in a truck that is used both on whether the owner, tenant, or operator of the noncommercial aviation, even if the fuel is
the farm for farming purposes and on the high- farm bought the fuel, determine who actually used in transporting livestock, feed, crops,
way, even though the highway use is in connec- bore the cost of the fuel. For example, if the or equipment.
tion with farm business. Excise tax applies to owner of a farm and his or her tenant equally • For personal use, such as lawn mowing.
the fuel used by the truck on the highways. In share the cost of gasoline used on the farm, • In processing, packaging, freezing, or can-
this situation, undyed (taxed) fuel should be ning operations.
purchased for the truck. You should keep fuel
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• In processing crude gum into gum spirits of Table 14-2. Claiming a Credit or Refund of Excise Taxes
turpentine or gum resin or in processing
maple sap into maple syrup or maple This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a
sugar. nontaxable use.
All-terrain vehicles (ATVs). Fuel used in Credit Refund
ATVs on a farm for farming purposes, dis- Which form to use Form 4136, Credit for Federal Form 8849, Claim for Refund of
cussed earlier, is eligible for a credit or refund of Tax Paid on Fuels Excise Taxes; and Schedule 1
excise taxes on the fuel. Fuel used in ATVs for (Form 8849), Nontaxable Use
nonfarming purposes is not eligible for a credit
or refund of the taxes. If ATVs are used both for of Fuels
farming and nonfarming purposes, only that Type of form Annual Quarterly
portion of the fuel used for farming purposes is When to file With your income tax return By the last day of the quarter
eligible for the credit or refund. following the last quarter
included in the claim
Fuels Used in Amount of tax Any amount $750 or more1
1 You may carry over an amount less than $750 to the next quarter.
Off-Highway Business
Use uses. The basic rules for claiming credits and How to claim a credit. How you claim a credit
refunds are listed in Table 14-2. depends on whether you are an individual, part-
nership, corporation, S corporation, trust, or
You may be eligible to claim a credit or refund Keep at your principal place of busi- farmers' cooperative association.
for the excise tax on fuel used in an off-highway ness all records needed to enable the
business use. RECORDS IRS to verify that you are the person Individuals. You claim the credit on the
entitled to claim a credit or refund and the “Credit for federal tax on fuels” line of your Form
Off-highway business use. This is any use of amount you claimed. You do not have to use 1040 or 1040-SR. If you would not otherwise
fuel in a trade or business or in an income-pro- any special form, but the records should estab- have to file an income tax return, you must do
ducing activity. The use must not be in a high- lish the following information. so to get a fuel tax credit.
way vehicle registered or required to be regis-
tered for use on public highways. Off-highway • The total number of gallons bought and Partnerships. Partnerships claim the credit
business use generally does not include any used during the period covered by your by including a statement on Schedule K-1
use in a recreational motorboat. claim. (Form 1065), Partner's Share of Income, De-
• The dates of the purchases. ductions, Credits, etc., showing each partner's
Examples. Off-highway business use in- • The names and addresses of suppliers share of the number of gallons of each fuel sold
cludes the use of fuels in a trade or business in and amounts bought from each during the or used for a nontaxable use, the type of use,
any of the following ways. period covered by your claim. and the applicable credit per gallon. Each part-
• In stationary machines such as generators, • The nontaxable use for which you used the ner claims the credit on his or her income tax
compressors, power saws, and similar fuel. return for the partner's share of the fuel used by
equipment. • The number of gallons used for each non- the partnership.
• For cleaning. taxable use.
• In forklift trucks, bulldozers, and earthmov- Other entities. Corporations, S corpora-
tions, farmers' cooperative associations, and
ers. It is important that your records separately show trusts make the claim on the appropriate line of
Off-highway nonbusiness (taxable) use of the number of gallons used for each nontaxable their income tax return.
fuel includes use in minibikes, snowmobiles, use that qualifies as a claim. For more informa-
power lawn mowers, chain saws, and other tion about recordkeeping, see Pub. 583, Start- When to claim a credit. You can claim a fuel
yard equipment. For more information, see Pub. ing a Business and Keeping Records. tax credit on your income tax return for the year
510. you used the fuel.
Credit or refund. A credit is an amount that re-
duces the tax on your income tax return when You may be able to make a fuel tax
you file it at the end of the year. If you meet cer- TIP claim on an amended income tax re-
Fuels Used for tain requirements, you may claim a refund dur- turn for the year you used the fuel. A
Household Purposes or ing the year instead of waiting until you file your claim for credit or refund of an overpayment
income tax return. must generally be filed within the later of:
Other Than as a Fuel for 3 years from the date the original return
Credit only. You can claim the following •
Propulsion Engines taxes only as a credit on your income tax return. was filed, or
• Tax on gasoline and aviation gasoline you • 2 years from the date the tax was paid.
You may be eligible to claim a credit or refund used on a farm for farming purposes.
for the excise tax on undyed diesel fuel or kero- • Tax on fuels (including undyed diesel fuel
sene used for home heating, lighting, and cook- or undyed kerosene) you used for nontax- Claiming a Refund
ing. This also applies to diesel fuel and kero- able uses if the total for the tax year is less
sene used in a home generator to produce than $750. If eligible, you can claim a refund of excise
electricity for home use. Home use of a fuel • Tax on fuel you did not include in any claim taxes using Schedule 1 (Form 8849); if you file
does not include use in a propulsion engine and for refund previously filed for any quarter of Form 720, you can use its Schedule C to claim
it is also not considered an off-highway busi- the tax year. a refund for the quarter; if you file Form 4136,
ness use. you can use it to claim a refund for your tax year
Claiming a Credit by attaching it to your tax return. Don't claim a
refund on any of these forms for any amount
How To Claim a Credit or You make a claim for a fuel tax credit on Form that you have filed, or will file, a claim for refund
Refund 4136 and attach it to your income tax return. Do on another form.
not claim a credit for any excise tax for which You can use Schedule 1 (Form 8849) to file
You may be able to claim a credit or refund of you have filed a refund claim. a claim for a refund for any quarter of your tax
the excise tax on fuels you use for nontaxable year for which you can claim $750 or more. This
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amount is the excise tax on all fuels used for a the $110 as other income on line 8 of her 2022
nontaxable use during that quarter or any prior Schedule F.
quarter (for which no other claim has been filed) Special Estimated Tax
during the tax year. Accrual method. If you use an accrual
If you cannot claim at least $750 at the end method, include the amount of credit or refund Rules for Qualified
of a quarter, you carry the amount over to the in gross income for the tax year in which you Farmers
next quarter of your tax year to determine if you used the fuels. It does not matter whether you
can claim at least $750 for that quarter. If you filed for a quarterly refund or claimed the entire Special rules apply to the payment of estimated
cannot claim at least $750 at the end of the amount as a credit. tax by individuals who are qualified farmers. If
you are not a qualified farmer, as defined next,
fourth quarter of your tax year, you must claim a Example. Amy Johnson, a farmer who see Pub. 505 for the estimated tax rules that ap-
credit on your income tax return using Form uses the accrual method, files her 2021 Form ply.
4136. Only one claim can be filed for a quarter. 1040 on April 15, 2022. On Schedule F, she de-
You cannot claim a refund for excise ducts the total cost of gasoline (including $155
! tax on gasoline and aviation gasoline of excise taxes) she used on the farm for farm- Qualified Farmer
CAUTION used on a farm for farming purposes. ing purposes during 2021. On Form 4136, Amy
You must claim a credit on your income tax re- claims the $155 as a credit. She reports the An individual is a qualified farmer for 2022 if at
turn for the tax. $155 as other income on line 8 of her 2021 least two-thirds of his or her gross income from
Schedule F. all sources for 2021 or 2022 was from farming.
See Gross Income next for information on how
How to file a quarterly claim. File the claim to figure your gross income from all sources,
for refund by completing Schedule 1 (Form and see Gross Income From Farming, later, for
8849) and attaching it to Form 8849. Send it to information on how to figure your gross income
the address shown in the instructions. If you file from farming. See also Percentage From Farm-
Form 720, you can use its Schedule C for your ing, later, for information on how to determine
refund claims. See the Instructions for Form the percentage of your gross income from farm-
720. 15. ing.
When to file a quarterly claim. You must file
a quarterly claim by the last day of the first quar- Gross Income
ter following the last quarter included in the Estimated Tax
claim. If you do not file a timely refund claim for Gross income is all income you receive in the
the fourth quarter of your tax year, you will have form of money, goods, property, and services
to claim a credit for that amount on your income that is not exempt from income tax. On a joint
tax return, as discussed earlier. Introduction return, you must add your spouse's gross in-
In most situations, the amount claimed Estimated tax is the method used to pay tax on come to your gross income. To decide whether
income that is not subject to withholding. See two-thirds of your gross income was from farm-
! as a credit or refund will be less than Pub. 505 for the general rules and requirements ing, use as your gross income the total of the
CAUTION the amount of fuel tax paid, because following income (not loss) amounts from your
the Leaking Underground Storage Tank (LUST) for paying estimated tax. If you are a qualified
tax of $0.001 per gallon is generally not subject farmer, defined below, you are subject to the tax return.
to credit or refund. special rules covered in this chapter for paying • Wages, salaries, tips, etc.
estimated tax. • Taxable interest.
• Ordinary dividends.
• Taxable refunds, credits, or offsets of state
Topics and local income taxes.
Including the Credit or This chapter discusses: • Gross business income from Schedule C
Refund in Income (Form 1040).
• Special estimated tax rules for qualified • Capital gains from Schedule D (Form
Include any credit or refund of excise taxes on farmers 1040). Losses are not netted against
fuels in your gross income if you claimed the to- • Estimated tax penalty gains.
tal cost of the fuel (including the excise taxes) • Gains on sales of business property from
as an expense deduction that reduced your in- Useful Items Form 4797.
come tax liability. You may want to see: • Taxable IRA distributions, pensions, annui-
ties, and social security benefits.
Which year you include a credit or refund in • Gross rental income from Schedule E
gross income depends on whether you use the Publication
(Form 1040).
cash or an accrual method of accounting. 505 505 Tax Withholding and Estimated Tax • Gross royalty income from Schedule E
(Form 1040).
Cash method. If you use the cash method and Form (and Instructions) • Taxable net income from an estate or trust
file a claim for refund, include the refund reported on Schedule E (Form 1040).
amount in gross income for the tax year in 1040 1040 U.S. Individual Income Tax Return
• Income from a Real Estate Mortgage In-
which you receive the refund. If you claim a 1040-SR 1040-SR U.S. Tax Return for Seniors vestment Conduit reported on Schedule E
credit on your income tax return, include the (Form 1040).
credit amount in gross income for the tax year in 1040-ES 1040-ES Estimated Tax for Individuals Gross farm rental income from Form 4835.
•
which you file Form 4136. If you file an amen- 2210-F 2210-F Underpayment of Estimated Tax • Gross farm income from Schedule F (Form
ded return and claim a credit, include the credit 1040).
amount in gross income for the tax year in by Farmers and Fishermen
• Your distributive share of gross income
which you receive the credit. See chapter 16 for information about getting from a partnership, or limited liability com-
publications and forms.
Example. Marucia Brown, a farmer who pany treated as a partnership, from Sched-
uses the cash method, filed her 2021 Form ule K-1 (Form 1065).
1040 on March 3, 2022. On her Schedule F, • Your pro rata share of gross income from
she deducted the total cost of gasoline (includ- an S corporation, from Schedule K-1
ing $110 of excise taxes) used on the farm for (Form 1120-S).
farming purposes. Then, on Form 4136, she • Unemployment compensation.
claimed the $110 as a credit. Marucia reports
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Figure 15-1. Estimated Tax for Farmers not netted against the gain to figure Ms. Smith's
total gross income or her gross farm income.
Start Here: Her gross farm income is 64% of her total gross
Will you owe $1,000 or income ($80,000 ÷ $125,000 = 0.64). Since Ms.
No more after subtracting Smith's gross farm income is less than
income tax withholding two-thirds of her total gross income, she is not a
and refundable credits qualified farmer and the general estimated tax
from your total tax? (Do rules apply.
not subtract any
estimated tax payments.)
Special Rules for Qualified
Yes Farmers
Yes Was at least 662⁄3% No The following special estimated tax rules apply
of all your gross Follow the general
income in 2021 or estimated tax rules. if you are a qualified farmer for 2022.
2022 from farming? • You do not have to pay estimated tax if you
file your 2022 tax return and pay all the tax
due by March 1, 2023.
Will your 2022 Will your 2022 • You do not have to pay estimated tax if
income tax income tax Will you le your You must pay your 2022 income tax withholding (includ-
withholding and No withholding and No income tax No your estimated ing any amount applied to your 2022 esti-
credits be at credits be at return and pay tax (your mated tax from your 2021 return) will be at
least 662⁄3% of least 100% of the tax in full by required annual least 66 / % (0.6667) of the total tax 2 3
the tax shown the tax shown March 1, 2023? payment) by shown on your 2022 tax return or 100% of
on your 2022 on your 2021 January 15, the total tax shown on your 2021 return.
return? return? 2023. • If you must pay estimated tax, you are re-
Yes Yes Yes quired to make only one estimated tax pay-
ment (your required annual payment) by
You do not have to January 15, 2023, using special rules to
pay estimated tax. figure the amount of the payment. See Re-
quired Annual Payment next for details.
Figure 15-1 presents an overview of the
Note. See Special Rules for Qualiﬁed Farmers, later, for a detailed description of the special special estimated tax rules that apply to quali-
estimated tax rules that apply to qualied farmers. fied farmers.

• Other income not included with any of the Farm income does not include: Example 2. Assume the same facts as in
Example 1. Ms. Smith's gross farm income is
CAUTION
items listed above. ! 64% of her total income. Therefore, based on
The calculation of farm income for soil her 2022 income, she does not qualify to use
TIP and water conservation expenses dif- • Wages you receive as a farm employee,
fers from the calculations for income • Income you receive from contract grain the special estimated tax rules for qualified
averaging and estimated tax payments. See In- harvesting and hauling with workers and farmers. However, she does qualify if at least
come Averaging for Farmers and Estimated machines you furnish, and two-thirds of her 2021 gross income was from
Tax, earlier. • Gains you receive from the sale of farm- farming.
land and depreciable farm equipment.
Example 3. Assume the same facts as in
Example 1, except that Ms. Smith's farm in-
Gross Income From Farming come from Schedule F was $90,000 instead of
Percentage From Farming
Gross income from farming is income from culti- $75,000. This made her total gross income
vating the soil or raising agricultural commodi- Figure your gross income from all sources, dis- $140,000 ($3,000 + $500 + $41,500 + $90,000
ties. It includes the following amounts. cussed earlier. Then, figure your gross income + $5,000) and her farm gross income $95,000
• Income from operating a stock, dairy, poul- from farming, discussed earlier. Divide your ($90,000 + $5,000). She qualifies to use the
try, bee, fruit, or truck farm. farm gross income by your total gross income to special estimated tax rules for qualified farmers,
• Income from a plantation, ranch, nursery, determine the percentage of gross income from because 67.9% (at least two-thirds) of her gross
range, orchard, or oyster bed. farming. income is from farming ($95,000 ÷ $140,000 =
• Crop shares for the use of your land. 0.679).
• Gains from sales of draft, breeding, dairy, Example 1. Jane Smith had the following If your farm income falls below
or sporting livestock. total gross income and farm gross income ! two-thirds for the previous year and
amounts in 2022. CAUTION current year, you may no longer meet
Gross income from farming is the total of the the Qualified Farmer Designation.
following amounts from your tax return. Gross Income
• Gross farm income from Schedule F (Form
1040). Total Farm Required Annual Payment
• Gross farm rental income from Form 4835. Taxable interest . . . . . . . . $3,000
• Gross farm income from Schedule E (Form Dividends . . . . . . . . . . . . . 500 If you are a qualified farmer and must pay esti-
1040), Parts II and III. Rental income (Sch E) . . . . 41,500 mated tax for 2022, use the worksheet on Form
• Gains from the sale of livestock used for Farm income (Sch F) . . . . . 75,000 $75,000 1040-ES to figure the amount of your required
draft, breeding, sport, or dairy purposes re- Gain (Form 4797) . . . . . . . 5,000 5,000 annual payment. Apply the following special
ported on Form 4797. Total. . . . . . . . . . . . $125,000 $80,000 rules for qualified farmers to the worksheet.
• On line 12a, multiply line 11c by 66 / % 2 3
For more information about income from Schedule D showed gain from the sale of (0.6667).
farming, see chapter 3. dairy cows carried over from Form 4797 • On line 12b, enter 100% of the tax shown
($5,000) in addition to a loss from the sale of on your 2021 tax return regardless of the
corporate stock ($2,000). However, that loss is amount of your adjusted gross income. For
this purpose, the “tax shown on your 2021
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   tax return” is the amount on line 16 of your            fillable forms. However, state tax prepara-        Getting  answers  to  your  tax  ques-
   2021 return modified by certain adjust-                 tion may not be available through Free             tions.     On  IRS.gov,  you  can  get 
   ments. For more information, see chap-                  File. Go to IRS.gov/FreeFile to see if you         up-to-date  information  on  current 
   ter 2 of Pub. 505.                                      qualify for free online federal tax prepara-     events and changes in tax law.
                                                           tion, e-filing, and direct deposit or payment 
                                                           options.                                         • IRS.gov/Help: A variety of tools to help you 
Estimated Tax Penalty                                    • VITA. The Volunteer Income Tax Assis-              get answers to some of the most common 
                                                           tance (VITA) program offers free tax help          tax questions.
for 2022                                                   to people with low-to-moderate incomes,          • IRS.gov/ITA: The Interactive Tax Assistant, 
                                                           persons with disabilities, and limited-Eng-        a tool that will ask you questions and, 
If you do not pay all your required estimated tax          lish-speaking taxpayers who need help              based on your input, provides answers on 
for 2022 by January 15, 2023, or file your 2022            preparing their own tax returns. Go to             a number of tax law topics.
return and pay any tax due by March 1, 2023,               IRS.gov/VITA, download the free IRS2Go           • IRS.gov/Forms: Find forms, instructions, 
you  may  owe  a  penalty.  Use  Form  2210-F  to          app, or call 800-906-9887 for information          and publications. You will find details on 
determine if you owe a penalty. See the Instruc-           on free tax return preparation.                    2022 tax changes and hundreds of interac-
tions  for  Form  2210-F.  Also,  see  the  Instruc-     • TCE. The Tax Counseling for the Elderly            tive links to help you find answers to your 
tions for Form 2210-F for information on how to            (TCE) program offers free tax help for all         questions.
request a waiver of the penalty.                           taxpayers, particularly those who are 60         • You may also be able to access tax law in-
                                                           years of age and older. TCE volunteers             formation in your electronic filing software.
        If you receive a penalty notice, do not            specialize in answering questions about 
                                                           pensions and retirement-related issues           Need someone to prepare your tax return? 
CAUTION You  may  get  a  penalty  notice  even 
   !    ignore it, even if you think it is in error.       unique to seniors. Go to IRS.gov/TCE,            There are various types of tax return preparers, 
though  you  filed  your  return  on  time,  attached      download the free IRS2Go app, or call            including  tax  preparers,  enrolled  agents,  certi-
Form  2210-F,  and  met  the  gross  income  from          888-227-7669 for information on free tax         fied public accountants (CPAs), attorneys, and 
farming  requirement.  If  you  receive  a  penalty        return preparation.                              many  others  who  don’t  have  professional  cre-
notice  for  underpaying  estimated  tax  and  you       • MilTax. Members of the U.S. Armed                dentials.  If  you  choose  to  have  someone  pre-
think it is in error, write to the address on the no-      Forces and qualified veterans may use Mil-       pare  your  tax  return,  choose  that  preparer 
tice  and  explain  why  you  think  the  notice  is  in   Tax, a free tax service offered by the De-       wisely. A paid tax preparer is:
error. Include a computation similar to the one            partment of Defense through Military One-        • Primarily responsible for the overall sub-
in Example 1 (earlier), showing that you met the           Source. Go to MilitaryOneSource.                   stantive accuracy of your return,
gross income from farming requirement.                          Also,  the  IRS  offers  Free  Fillable     • Required to sign the return, and
                                                           Forms, which can be completed online and         • Required to include their preparer tax iden-
                                                           then  filed  electronically  regardless  of  in-   tification number (PTIN).
                                                           come.
                                                                                                            Although the tax preparer always signs the re-
                                                         Using online tools to help prepare your re-        turn, you're ultimately responsible for providing 
                                                         turn.  Go to IRS.gov/Tools for the following.      all  the  information  required  for  the  preparer  to 
                                                         • The Earned Income Tax Credit Assistant           accurately prepare your return. Anyone paid to 
16.                                                        (IRS.gov/EITCAssistant) determines if            prepare  tax  returns  for  others  should  have  a 
                                                           you’re eligible for the earned income credit     thorough  understanding  of  tax  matters.  For 
                                                           (EIC).                                           more information on how to choose a tax pre-
                                                         • The Online EIN Application IRS.gov/EIN (    )    parer, go to Tips for Choosing a Tax Preparer 
How To Get Tax                                             helps you get an employer identification         on IRS.gov.
                                                           number (EIN) at no cost.
Help                                                     • The Tax Withholding Estimator IRS.gov/ (         Employers  can  register  to  use  Business 
                                                           W4app) makes it easier for everyone to           Services Online. The Social Security Adminis-
If  you  have  questions  about  a  tax  issue;  need      pay the correct amount of tax during the         tration (SSA) offers online service at SSA.gov/
help preparing your tax return; or want to down-           year. The tool is a convenient, online way       employer for fast, free, and secure online W-2 
load free publications, forms, or instructions, go         to check and tailor your withholding. It’s       filing  options  to  CPAs,  accountants,  enrolled 
to IRS.gov to find resources that can help you             more user-friendly for taxpayers, including      agents, and individuals who process Form W-2, 
right away.                                                retirees and self-employed individuals. The      Wage  and  Tax  Statement,  and  Form  W-2c, 
                                                           features include the following.                  Corrected Wage and Tax Statement.
Preparing  and  filing  your  tax  return.   After              -Easy to understand language.
receiving  all  your  wage  and  earnings  state-               -The ability to switch between              IRS social media. Go to IRS.gov/SocialMedia 
ments (Forms W-2, W-2G, 1099-R, 1099-MISC,                      screens, correct previous entries, and      to  see  the  various  social  media  tools  the  IRS 
1099-NEC, etc.); unemployment compensation                      skip screens that don’t apply.              uses  to  share  the  latest  information  on  tax 
statements  (by  mail  or  in  a  digital  format)  or          -Tips and links to help you determine if    changes, scam alerts, initiatives, products, and 
other  government  payment  statements  (Form                   you qualify for tax credits and deduc-      services.  At  the  IRS,  privacy  and  security  are 
1099-G); and interest, dividend, and retirement                 tions.                                      our highest priority. We use these tools to share 
statements  from  banks  and  investment  firms                 -A progress tracker.                        public information with you. Don’t post your so-
(Forms  1099),  you  have  several  options  to                 -A self-employment tax feature.             cial security number (SSN) or other confidential 
choose from to prepare and file your tax return.                -Automatic calculation of taxable so-       information  on  social  media  sites.  Always  pro-
You can prepare the tax return yourself, see if                 cial security benefits.                     tect  your  identity  when  using  any  social  net-
                                                                                                            working site.
you qualify for free tax preparation, or hire a tax      • The First-Time Homebuyer Credit Account          The  following  IRS  YouTube  channels  pro-
professional to prepare your return.                       Look-up IRS.gov/HomeBuyer (  ) tool pro-         vide short, informative videos on various tax-re-
                                                           vides information on your repayments and         lated topics in English, Spanish, and ASL.
Free  options  for  tax  preparation.   Go  to             account balance.                                 • Youtube.com/irsvideos.
IRS.gov  to  see  your  options  for  preparing  and     • The Sales Tax Deduction Calculator               • Youtube.com/irsvideosmultilingua.
filing your return online or in your local commun-         (IRS.gov/SalesTax) figures the amount you        • Youtube.com/irsvideosASL.
ity, if you qualify, which include the following.          can claim if you itemize deductions on 
•  Free File. This program lets you prepare                Schedule A (Form 1040).
   and file your federal individual income tax 
   return for free using brand-name tax-prep-
   aration-and-filing software or Free File 
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Watching IRS videos. The IRS Video portal Using direct deposit. The fastest way to re- • Debit or Credit Card: Choose an approved
(IRSVideos.gov) contains video and audio pre- ceive a tax refund is to file electronically and payment processor to pay online or by
sentations for individuals, small businesses, choose direct deposit, which securely and elec- phone.
and tax professionals. tronically transfers your refund directly into your • Electronic Funds Withdrawal: Schedule a
financial account. Direct deposit also avoids the payment when filing your federal taxes us-
Online tax information in other languages. possibility that your check could be lost, stolen, ing tax return preparation software or
You can find information on IRS.gov/ or returned undeliverable to the IRS. Eight in 10 through a tax professional.
MyLanguage if English isn’t your native lan- taxpayers use direct deposit to receive their re- • Electronic Federal Tax Payment System:
guage. funds. If you don’t have a bank account, go to Best option for businesses. Enrollment is
IRS.gov/DirectDeposit for more information on required.
Free over-the-phone interpreter (OPI) serv- where to find a bank or credit union that can • Check or Money Order: Mail your payment
ice. The IRS is committed to serving our multi- open an account online. to the address listed on the notice or in-
lingual customers by offering OPI services. OPI structions.
is a federally funded program and is available at Getting a transcript of your return. The • Cash: You may be able to pay your taxes
Taxpayer Assistance Centers (TACs), other quickest way to get a copy of your tax transcript with cash at a participating retail store.
IRS offices, and every VITA/TCE return site. is to go to IRS.gov/Transcripts. Click on either • Same-Day Wire: You may be able to do
OPI service is accessible in more than 350 lan- “Get Transcript Online” or “Get Transcript by same-day wire from your financial institu-
guages. Mail” to order a free copy of your transcript. If tion. Contact your financial institution for
you prefer, you can order your transcript by call- availability, cost, and time frames.
Accessibility Helpline available for taxpay- ing 800-908-9946.
ers with disabilities. Taxpayers who need in- Note. The IRS uses the latest encryption
formation about accessibility services can call Reporting and resolving your tax-related technology to ensure that the electronic pay-
833-690-0598. The Accessibility Helpline can identity theft issues. ments you make online, by phone, or from a
answer questions related to current and future • Tax-related identity theft happens when mobile device using the IRS2Go app are safe
accessibility products and services available in someone steals your personal information and secure. Paying electronically is quick, easy,
alternative media formats (for example, braille, to commit tax fraud. Your taxes can be af- and faster than mailing in a check or money or-
large print, audio, etc.). fected if your SSN is used to file a fraudu- der.
lent return or to claim a refund or credit.
Getting tax forms and publications. Go to What if I can’t pay now? Go to IRS.gov/
IRS.gov/Forms to view, download, or print all of • The IRS doesn’t initiate contact with tax-
the forms, instructions, and publications you payers by email, text messages, telephone Payments for more information about your op-
may need. Or, you can go to IRS.gov/ calls, or social media channels to request tions.
OrderForms to place an order. personal or financial information. This in- • Apply for an online payment agreement
cludes requests for personal identification (IRS.gov/OPA) to meet your tax obligation
Getting tax publications and instructions in numbers (PINs), passwords, or similar in- in monthly installments if you can’t pay
eBook format. You can also download and formation for credit cards, banks, or other your taxes in full today. Once you complete
view popular tax publications and instructions financial accounts. the online process, you will receive imme-
(including the Instructions for Form 1040) on • Go to IRS.gov/IdentityTheft, the IRS Iden- diate notification of whether your agree-
mobile devices as eBooks at IRS.gov/eBooks. tity Theft Central webpage, for information ment has been approved.
on identity theft and data security protec- • Use the Offer in Compromise Pre-Qualifier
Note. IRS eBooks have been tested using tion for taxpayers, tax professionals, and to see if you can settle your tax debt for
Apple's iBooks for iPad. Our eBooks haven’t businesses. If your SSN has been lost or less than the full amount you owe. For
been tested on other dedicated eBook readers, stolen or you suspect you’re a victim of more information on the Offer in Compro-
and eBook functionality may not operate as in- tax-related identity theft, you can learn mise program, go to IRS.gov/OIC.
tended. what steps you should take.
• Get an Identity Protection PIN (IP PIN). IP Filing an amended return. You can now file
Access your online account (individual tax- PINs are six-digit numbers assigned to tax- Form 1040-X electronically with tax filing soft-
payers only). Go to IRS.gov/Account to se- payers to help prevent the misuse of their ware to amend 2020 or 2021 Forms 1040 and
curely access information about your federal tax SSNs on fraudulent federal income tax re- 1040-SR. To do so, you must have e-filed your
account. turns. When you have an IP PIN, it pre- original 2020 or 2021 return. Amended returns
• View the amount you owe and a break- vents someone else from filing a tax return for all prior years must be mailed. Go to
down by tax year. with your SSN. To learn more, go to IRS.gov/Form1040X for information and up-
• See payment plan details or apply for a IRS.gov/IPPIN. dates.
new payment plan. Checking the status of your amended re-
• Make a payment or view 5 years of pay- Ways to check on the status of your refund.
ment history and any pending or sched- • Go to IRS.gov/Refunds. turn. Go to IRS.gov/WMAR to track the status
uled payments. • Download the official IRS2Go app to your of Form 1040-X amended returns.
• Access your tax records, including key mobile device to check your refund status. Note. It can take up to 3 weeks from the
data from your most recent tax return, and • Call the automated refund hotline at date you filed your amended return for it to
transcripts. 800-829-1954. show up in our system, and processing it can
• View digital copies of select notices from take up to 16 weeks.
the IRS. Note. The IRS can’t issue refunds before
• Approve or reject authorization requests mid-February 2023 for returns that claimed the Understanding an IRS notice or letter
from tax professionals. EIC or the child tax credit (CTC). This applies to you’ve received. Go to IRS.gov/Notices to
• View your address on file or manage your the entire refund, not just the portion associated find additional information about responding to
communication preferences. with these credits. an IRS notice or letter.
Tax Pro Account. This tool lets your tax pro- Making a tax payment. Go to IRS.gov/ You can use Schedule LEP, Request for
fessional submit an authorization request to ac- Payments for information on how to make a Change in Language Preference, to state a
cess your individual taxpayer IRS online payment using any of the following options. preference to receive notices, letters, or other
account. For more information, go to IRS.gov/ • IRS Direct Pay: Pay your individual tax bill written communications from the IRS in an al-
TaxProAccount. or estimated tax payment directly from ternative language, when these are available.
your checking or savings account at no Once your Schedule LEP is processed, the IRS
cost to you. will determine your translation needs and pro-
vide you translations when available. If you

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have a disability requiring notices in an accessi- How Can You Learn About Your How Else Does TAS Help
ble format, see Form 9000. Taxpayer Rights? Taxpayers?
Contacting your local IRS office. Keep in The Taxpayer Bill of Rights describes 10 basic TAS works to resolve large-scale problems that
mind, many questions can be answered on rights that all taxpayers have when dealing with affect many taxpayers. If you know of one of
IRS.gov without visiting an IRS TAC. Go to the IRS. Go to TaxpayerAdvocate.IRS.gov to these broad issues, report it to them at IRS.gov/
IRS.gov/LetUsHelp for the topics people ask help you understand what these rights mean to SAMS.
about most. If you still need help, IRS TACs you and how they apply. These are your rights.
provide tax help when a tax issue can’t be han- Know them. Use them. TAS for Tax Professionals
dled online or by phone. All TACs now provide
service by appointment, so you’ll know in ad- TAS can provide a variety of information for tax
vance that you can get the service you need What Can TAS Do for You?
professionals, including tax law updates and
without long wait times. Before you visit, go to guidance, TAS programs, and ways to let TAS
IRS.gov/TACLocator to find the nearest TAC TAS can help you resolve problems that you
and to check hours, available services, and ap- can’t resolve with the IRS. And their service is know about systemic problems you’ve seen in
pointment options. Or, on the IRS2Go app, un- free. If you qualify for their assistance, you will your practice.
der the Stay Connected tab, choose the Con- be assigned to one advocate who will work with
tact Us option and click on “Local Offices.” you throughout the process and will do every- Low Income Taxpayer
thing possible to resolve your issue. TAS can
help you if: Clinics (LITCs)
The Taxpayer Advocate • Your problem is causing financial difficulty LITCs are independent from the IRS. LITCs
for you, your family, or your business; represent individuals whose income is below a
Service (TAS) Is Here To • You face (or your business is facing) an certain level and need to resolve tax problems
immediate threat of adverse action; or with the IRS, such as audits, appeals, and tax
Help You • You’ve tried repeatedly to contact the IRS collection disputes. In addition, LITCs can pro-
but no one has responded, or the IRS vide information about taxpayer rights and re-
hasn’t responded by the date promised.
What Is TAS? sponsibilities in different languages for individu-
als who speak English as a second language.
TAS is an independent organization within the How Can You Reach TAS? Services are offered for free or a small fee for
IRS that helps taxpayers and protects taxpayer eligible taxpayers. To find an LITC near you, go
rights. Their job is to ensure that every taxpayer TAS has offices in every state, the District of to TaxpayerAdvocate.IRS.gov/about-us/Low-
is treated fairly and that you know and under- Columbia, and Puerto Rico. Your local advo- Income-Taxpayer-Clinics-LITC/ or see IRS Pub.
stand your rights under the Taxpayer Bill of cate’s number is in your local directory and at 4134, Low Income Taxpayer Clinic List.
Rights. TaxpayerAdvocate.IRS.gov/Contact-Us. You
can also call them at 877-777-4778.

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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 52                  Depletion 48                        Refund    88
A                                 Capital expenses  26               Depreciation  43
Abandonment    57                 Car expenses   24                    ADS election  46                 F
Accounting method:                Cash method of accounting     7      Conservation assets     30       Fair market value (FMV) 65
  Accrual 8                       Casualties and thefts:               Deduction   38                   Fair market value defined   32
  Cash  7                           Adjustments to basis  70           Incorrect amount deducted  40    Family member:
  Change in 9                       Casualty, defined 67               Limit for automobiles   42        Business expenses    8
  Crop  9                           Disaster area losses  74           Listed property 47                Like-kind exchange   51
  Farm inventory  8                 Leased property 70                 Raised livestock  38              Loss on sale or exchange of 
Accounting periods   6              Livestock 68                       Recapture   47 59 60, ,               property 27
Accrual method of accounting    8   Reimbursement   69                 When to file 40                   Personal-use property  68
Additional Medicare Tax             Reporting gains and losses  75   Depreciation allowable    40        Social security coverage   83
  withholding  84                   Theft, defined 68                Depreciation allowed   40          Farm:
Adjusted basis of assets   34     Certified professional employer    Disaster area losses  74            Business expenses    20
Agricultural activity codes,        organization (CPEO)    4 81,     Disaster payments   13              Business, defined   29
  Schedule F   3                  Change in accounting method     9  Disaster relief grants 74           Defined   29 87, 
Agricultural program              Chickens, purchased     25         Disaster relief payments  74        Income averaging    19
  payments   12                   Christmas trees  27 55,            Disposition of installment          Rental    29
Agricultural structure,           Club dues  27                        obligation  64                    Sale of   56
  defined  41                     Commodity:                         Dispositions  31 32 58, ,          Farmer 77
Alternative Depreciation System     Wages  84                        Drainage tile 30                   Federal unemployment tax 
  (ADS) 44 46,                    Commodity Credit Corporation       Dyed diesel fuel 87                 (FUTA)    86
Amortization:                       (CCC):                           Dyed kerosene   87                 Fertilizer 15 23, 
  Going into business 49            Loans  12                                                           Figuring installment sale income:
  Reforestation expenses   49       Market gain  12                  E                                   Adjusted basis   62
  Section 197 intangibles  49     Community property    77 78,                                           Adjusted basis and installment 
Assessments:                      Computer, software   39            Easement  18 34, 
  By conservation district 30     Condemnation   67 71,              Election:                               sale income (gain on 
  Depreciable property  31        Conservation:                        ADS depreciation  44 46,              sale) 62
Assistance (See Tax help)           Cost-sharing exclusion   30        Amortization:                     Adjusted basis for installment 
                                                                                                             sale purposes  62
Automobiles, depreciation    42     District assessments  30           Business start-up costs    49     Amount to report as installment 
                                    Expenses  30                       Reforestation costs     49            sale income   62
B                                   Plans  30                          Crop method   26                  Cancellation   62
Bankruptcy  17                    Conservation Reserve                 Cutting of timber 55              Contract price   62
                                    Program   78                       Deducting conservation            Depreciation recapture 62
Barter income  18                 Conservation Reserve Program         expenses      31                  Disposition of installment 
Basis:                              (CRP)  13                          Not excluding cost-sharing            obligation   62
  Involuntary conversion  35      Constructing assets  33              payments      14                  Figuring adjusted basis and 
  Like-kind exchange  36          Constructive receipt of income   7   Out of installment method  62         gross profit percentage for 
  Partner's basis 37              Contamination  72                    Postponing casualty gain   72         installment sale purposes  62
  Replacement property    73      Converted wetland   54               Postponing reporting crop         Form 6252   62
                                                                       insurance proceeds      13        Gross profit 62
  Shareholder's basis 37          Cooperatives, income from     15     Section 179 expense               Gross profit percentage  62
Basis of assets:                  Cost-sharing exclusion  13           deduction     43                  Interest income   62
  Adjusted basis  34              Credits:                           Embryo transplants    33            Sale of depreciable property  62
  Allocating to several assets 33   Employment   22                  Employer identification             Selling expenses   62
  Changed to business use    35     Fuel tax 19 88,                    number  3
  Constructing assets 33            Social security and Medicare 76  Employer identification number      Selling price 62
  Cost  32                          Social security coverage 76        (EIN)  83                         Selling price reduced 62
  Decreases   34                    State unemployment tax   86      Endangered species recovery         Transfer due to death 62
  Depreciation 44                 Crew leaders 83                      expenses    30                   Foreclosure  57
  Exchanges:                      Crop:                              Environmental contamination     72 Forestation costs   27
     Like-kind 35                   Destroyed 72                     Estimated tax:                     Form:
     Nontaxable   35                Insurance proceeds    13           Farm gross income    90           1099-A    12 57, 
     Partially nontaxable  36       Method of accounting  9            Gross income   89                 1099-C    16 57, 
     Taxable  35                    Shares 11                          Penalties 91                      1099-G    12 15, 
  Gifts 36                          Unharvested  27 58 78, ,         Exchanges:                          1099-MISC    5
  Increases 34                    Cropland, highly erodible  55        Basis:                            1099-NEC    85
  Real property  32                                                    Like-kind    35                   1099-PATR     15
  Received for services 35        D                                    Nontaxable      35                1128  6
  Uniform capitalization rules 33                                      Partially nontaxable    36        2210-F    91
Below-market loans   18           Damage:                              Taxable      35                   3115  9
Books and records   5               Casualties and thefts 67           Like-kind 50                      4136  88
Breeding fees  23                   Crop insurance  13                 Nontaxable   50                   4562  40
Business income limit, section      Tree seedlings  72               Excise taxes:                       4797  10 14 51, , 
  179 expense deduction      42   Debt:                                Credit  88                        4835  11
Business use of home    24          Canceled  16 34 57, ,              Diesel fuel 87                    5213  29
                                    Nonbusiness bad   52               Farming purposes    87            8822  3
C                                   Nonrecourse  57                    Home use of fuels   88            8824  51
                                    Qualified farm 18                  Off-highway uses  88              8849  88
Canceled debt  16                   Recourse  57                                                         8886  4
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  940  86                             Installment obligation 61         Theft 67                          Prepaid expense:
  943  85                             Related parties   61            Lost income payments    78           Advance premiums      23
  982  18                             Unstated interest  65           Lost property 68                     Extends useful life 7
  I-9 83                            Insurance   23                                                         Farm supplies  21
  SS-4  3 83,                       Intangible property   49          M                                    Livestock feed  21
  SS-5  76                          Interest:                         MACRS property:                     Prizes 19
  T (Timber)  49                      Expense    22                     Involuntary conversion 47         Produce  10
  W-4  83 85,                       Inventory:                          Like-kind exchange   47           Property:
  W-4V  12 13,                        Items included   8                Nontaxable transfer  47            Changed to business use     35
  W-7  76                             Methods of valuation   9        Market gain, reporting 12            Received for services    35
Fuel tax credit or refund  19 88,   Involuntary conversions    47 67, Marketing quota penalties    25      Repairs and improvements    40
                                    Irrigation:                       Material participation 78            Section 1231   58
G                                     Illegal subsidy  19             Meals 25                             Section 1245   59
Gains:                                Project   71                    Membership fees    27                Section 1250   60
  Section 1231 gains   66                                             Methods of accounting    7           Section 1252   61
Gains and losses:                   L                                 Modified ACRS (MACRS):               Section 1255   61
  Basis of assets  32               Labor hired  21                     ADS election 46                    Tangible personal   40
  Capital assets, defined  52       Landlord participation   78         Conventions  45                   Property used as a payment:
  Casualty 68 71,                   Lease or purchase    24             Depreciation methods   45          Examples   65
  Installment sales    61           Life tenant (See Term interests)    Exchange  47                       Exception  65
  Livestock  54                     Like-kind exchanges    35 50,       Figuring the deduction 46         Publications (See Tax help)
  Long- or short-term  52           Lime  23                            Involuntary conversion 47
  Ordinary or capital  52           Limited liability company           Nontaxable transfer  47           Q
  Sale of farm 56                     (LLC)   5                         Percentage tables  46             Qualified disaster relief 
  Section 1231   58                 Limits:                             Property classes 44                payments     74
  Theft 68 71,                        At-risk 28                        Recovery periods  45              Qualified farm debt  18
  Timber 55                           Business use of home   24                                           Qualified joint venture  77
General asset accounts    47          Capital losses   53             N                                   Qualified small business payroll 
Gifts 12 27 36 52, , ,                Conservation expenses    31                                          tax credit for increasing 
Going into business    49             Depreciation:                   National Center for Missing &        research activities   4 81, 
                                                                        Exploited Children   5
Grants, disaster relief   74             Business-use    48           Net operating losses:               R
                                      Excluded farm debt   18           Net operating loss (NOL)   71
H                                     Farm losses    28               New hire reporting 83               Recapture:
                                      Loss of personal-use 
Health insurance deduction    23         property    70               Noncapital asset  53                 Amortization 60
Highway use tax    23                 Not-for-profit farming 28       Nontaxable exchanges     50          Basis reductions 17
Holding period   52                   Passive activity  28            Nontaxable transfer of MACRS         Certain depreciation  19
                                                                        property  47                       Cost-sharing payments    14
Home  66                              Percentage depletion   49       Not-for-profit farming 28            Depreciation   47 59, 
Horticultural structure   41          Prepaid farm supplies  21                                            Section 1245 property    59
                                      Reforestation costs  49
I                                     Section 179 expense deduction:  O                                    Section 1250 property    60
                                                                                                           Section 179 expense 
Illegal irrigation subsidy 19            Automobile    42             Organizational costs  26             deduction      43
Important dates  82                      Business income     42                                            Section 179 GO Zone 
Improvements    13                       Dollar  41                   P                                    property     43
Income:                               Time to keep records   6        Partners, limited 77                 Special depreciation 
                                                                                                           allowance      44
  Accounting for 7                  Listed property:                  Partners, retired 78                Recordkeeping   5 25, 
  Accrual method of accounting    8   Defined   47                    Partners, spouses  77               Records on depreciable 
  Canceled debt excluded     16       Passenger automobile   47       Partnership 77                       property   59
  From farming   10 31 90, ,          Rules   47                      Passenger automobile   47           Reforestation costs  27 49, 
  Gross  89                         Livestock   58                    Pasture income  11                  Refund:
  Not-for-profit farming  28          Casualty and theft losses 68    Patronage dividends   15             Deduction taken  19
  Pasture 11                          Crop shares    12               Payments considered received:        Fuel tax 19 89, 
  Schedule F   10                     Depreciation   38                 Bond  64                          Reimbursements:
  Withholding of tax   85             Diseased   71                     Buyer assumes mortgage     64      Casualties and thefts   34 67 69, , 
Income averaging (See Farm:           Feed assistance   13              Buyer assumes other debts   64     Deduction taken  19
  Income averaging)                   Immature   39                     Buyer pays seller’s expenses   64  Expenses   21
Incorrect amount of depreciation      Losses    27 54,                  Buyer’s note 64                    Feed assistance  13
  deducted    40                      Purchased    54                   Debt not payable on demand     64  Real estate taxes  32
Individual taxpayer identification    Raised    54                      Mortgage less than basis   64      Reforestation expenses    49
  number (ITIN)    76                 Sale of   10 54,                  Mortgage more than basis   64      To employees    25
Inherited property     37             Unit-livestock-price, inventory   Property used as a payment     64 Related parties 62
Insolvency 17                            valuation   9
Installment method:                   Used in a farm business   54      Sale to a related person 64       Related persons  8 27 35 51 72, , , , 
  Electing out of the installment     Weather-related sales  11 71,     Third-party note 64               Rental income 11
      method  62                    Loans 12 26,                        Trading property for like-kind    Rented property, 
                                                                        property    64                     improvements     40
  Inventory (See More information)  Losses:                           Payments received  64               Repairs 22
  Revoking the election (See More     At-risk limits 28               Penalties:                          Repairs and improvements     40
      information)                    Casualty   67                     Estimated tax 91                  Repayment of income     7
  Sale at a loss 62                   Disaster areas   74               Returns  91                       Replacement:
  When to elect out    62             Farming    68                     Trust fund recovery  85            Period  73
Installment sales:                    Growing crops    27             Per-unit retain certificates 16      Property  72
  Electing out 62                     Hobby farming    28             Personal expenses  27               Reportable transactions.   4
  Example  65                         Livestock  54 71,               Placed in service 39 44,            Repossessions   57
  Farm, sale of  61                   Nondeductible    27             Postponing casualty gain   72
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Right-of-way income   18       Optional method 79                                                  Timber 26 48 55, , 
                               Regular method  79               T                                  Trade-in 36
S                              Rental income 78                 Tangible personal property    40   Travel expenses    25
Sale of home 56                Reporting 80                     Tax help 91                        Truck expenses  24
Section 179 expense            Self-employment tax rate  75     Tax preparation fees    26         Trust fund recovery penalty  85
  deduction  40                Share farming 77                 Tax shelter:
  How to elect 43              Who must pay  76                   At-risk limits 28                U
  Listed property 47           Selling price reduced 63           Defined  8                       Uniform capitalization rules:
  Qualifying property 40       Settlement costs (fees) 32       Tax-free exchanges      50          Basis of assets   33
  Recapture  43                Social security and Medicare:    Taxes:                              Inventory  9
Self-employed health           Credits of coverage   76           Credits and Refunds   86
  insurance  23                Withholding of tax 84              Federal use    23                W
Self-employed health insurance Social security number (SSN)  76   General  23                      Wages and salaries   78
  deduction  78                Software, computer 39              Self-employment   75             Water conservation   30
Self-employment (SE) tax:      Soil:                              State and federal 23             Water well 30 45, 
  Community property     78    Conservation 30                    State and local general sales 23 Weather-related sales, 
  Deduction 80                 Contamination 72                   Withholding    84 85,             livestock  11 71, 
  How to pay 76                Special depreciation allowance:  Telephone expense   24             Withholding:
  Landlord participation 78    How to elect not to claim 44     Tenant house expenses      25       Income tax  85
  Material participation 78    Recapture 44                     Term interests   39                 Social security and Medicare 
  Maximum net earnings   2 75, Standard mileage rate 24         Theft losses 67                     tax     84
  Methods for figuring net     Start-up costs for businesses 26 Third-party note 65
  earnings     78

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