9/8/2015

FarmExpenses

KristyMaitre
TaxSpecialist
CenterforAgriculturalLawandTaxation
September10,2015

26CFR1.16212 ExpensesofFarmers
Farmsengagedinforprofit
Afarmerwhooperatesafarmforprofitisentitledto
deductfromgrossincomeasnecessaryexpensesall
amountsactuallyexpendedinthecarryingonofthe
businessoffarming
Thecostofordinarytoolsofshortlifeorsmallcost,such
ashandtools,includingshovels,rakes,etc.,maybe
deducted
Thepurchaseoffeedandothercostsconnectedwith
raisinglivestockmaybetreatedasexpensedeductions
insofarassuchcostsrepresentactualoutlay,butnot
includingthevalueoffarmproducegrownuponthefarm
orthelaborofthetaxpayer

OrdinaryandNecessary
Theordinaryandnecessarycostsofoperating
afarmforprofitaredeductiblebusiness
expenses
Anordinaryexpenseisanexpensethatis
commonandacceptedinthebusiness
Anecessaryexpenseisonethatis
appropriateforthebusiness

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BusinessExpenses
Ingeneralmanyoftheexpenseswewilladdresstodaywill
beallowedinotherbusinessentities
162 Tradeorbusinessexpenses
(a)Ingeneral
Thereshallbeallowedasadeductionalltheordinaryand
necessaryexpensespaidorincurredduringthetaxableyearin
carryingonanytradeorbusiness,including
(1)areasonableallowanceforsalariesorothercompensationfor
personalservicesactuallyrendered;
(2)travelingexpenses(includingamountsexpendedformealsand
lodgingotherthanamountswhicharelavishorextravagantunderthe
circumstances)whileawayfromhomeinthepursuitofatradeor
business;and
(3)rentalsorotherpaymentsrequiredtobemadeasaconditionto
thecontinueduseorpossession,forpurposesofthetradeor
business,ofpropertytowhichthetaxpayerhasnottakenorisnot
takingtitleorinwhichhehasnoequity.

Form1040ScheduleF

Expenses
Someexpensespaidduringthetaxyearmay
bepartlypersonalandpartlybusiness
Examplesincludegasoline,oil,fuel,water,
rent,electricity,telephone,automobile
upkeep,repairs,insurance,interestandtaxes.
Farmersmustallocatetheseexpenses
betweentheirbusinessandpersonalparts
Generally,thepersonalpartofthese
expensesisnotdeductible

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PrepaidFarmSupplies
464limitstheallowabledeductionforprepaidexpenses
Iftheprepaidfarmsupplieshaveactuallybeenusedor
consumed,theamountisfullydeductible
Prepaidfarmsuppliesincludethefollowingitemsifpaid
forduringtheyear
Feed
Seed
Fertilizer,and
Similarfarmsuppliesnotusedorconsumedduringtheyear,but
notincludingfarmsuppliesthat wouldhavebeenconsumed
duringtheyearifnotforafire,storm,flood,othercasualty,
disease,ordrought

PrepaidFarmSupplies
Poultry(includingegglayinghensandbaby
chicks)boughtforuse(orforbothuseand
resale)inthefarmbusiness
However,includeonlytheamountthatwouldbe
deductibleinthefollowingyearifyouhad
capitalizedthecostanddeducteditratablyoverthe
lesserof12monthsortheusefullifeofthepoultry
Poultryboughtforresaleandnotresoldduring
theyear

PrepaidFarmSupplies
DeductionLimit
Ifthecashmethodofaccountingisusedto
reportincomeandexpenses,thededuction
forprepaidfarmsuppliesintheyearpaid
forthemmaybelimitedto50%ofthe
otherdeductiblefarmexpensesfortheyear
(allScheduleFdeductionsexceptprepaid
farmsupplies)
Thislimitdoesnotapplyifanexceptionis
met,coveredlater:

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PrepaidFarmSupplies
DeductionLimit
Ifthelimitapplies,deducttheexcesscostof
farmsuppliesotherthanpoultryintheyearused
orconsumed
Theexcesscostofpoultryboughtforuse(or
forbothuseandresale)inthefarmbusiness
isdeductibleintheyearfollowingtheyearit
waspaidfor
Theexcesscostofpoultryboughtforresaleis
deductibleintheyearsoldorotherwisedispose
ofthepoultry

Example
During2015,thefarmerboughtfertilizer($4,000),feed
($1,000),andseed($500)foruseonthefarminthe
followingyear
Thetotalprepaidfarmsuppliesexpensefor2015is
$5,500
Theother deductiblefarmexpensestotaled$10,000for
2015
Therefore,thedeductionforprepaidfarmsupplies
cannotbemorethan$5,000(50%of$10,000)for2015
Theexcessprepaidfarmsuppliesexpenseof$500($5,500
$5,000)isdeductibleinalatertaxyearwhenusedor
consumed

Exceptions
1.Theprepaidfarmsuppliesexpensearemorethan50%ofthe
otherdeductiblefarmexpensesbecauseofachangeinbusiness
operationscausedbyunusualcircumstances
2.Thetotalprepaidfarmsuppliesexpenseforthepreceding3tax
yearsislessthan50%ofthetotalotherdeductiblefarmexpenses
forthose3taxyears
Theclientisafarm relatedtaxpayerifanyofthefollowingtests
apply
1.Themainhomeisonafarm
2.Theprincipalbusinessisfarming
3.Amemberofthefamilymeets(1)or(2)
Forthispurpose,thefamilyincludesyourbrothersandsisters,half
brothersandhalfsisters,spouse,parents,grandparents,children,
grandchildren,andauntsandunclesandtheirchildren

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Rev.Proc.79229
Rev.Rul.79229,19792C.B.210,setsoutthreeteststhatmustbemetin
ordertodeductthecostofasupplypurchasedinthecurrenttaxableyear
whichwillbeusedinthesubsequenttaxableyear
Theexpensemustbeapaymentforthepurchaseofsupplies,notadeposit
Theamountisconsideredapaymentifitwasmadeunderabindingcommitmentto
acceptdeliveryofaspecificquantityatafixedprice,andthefarmerisnotentitledto
arefundorrepurchase
Theprepaymentisnotmerelyfortaxavoidance,buthasaspecificbusinesspurpose
Examplesofbusinessbenefitsare:
Fixingmaximumprices
Securinganassuredfeedsupply
Securingpreferentialtreatmentinanticipationofshortages
Thedeductiondoesnotresultinamaterialdistortionofincome.Somefactors
toconsiderindeterminingwhetherthereisamaterialdistortionofincomeare:
Thefarmerscustomarybusinesspracticesinconductingthefarmingoperation
Thematerialityoftheexpenditureinrelationtothetaxpayersincomefortheyear
Thetimeoftheyearthepurchaseismade
Theamountoftheexpenditureinrelationtopastpurchases

Rev.Proc.79229
RememberRev.Rul.79229waswritten
beforethepassiveactivityrulesofIRC 469
wereenacted
ConsiderationofIRC 469couldfurtherlimit
farmingexpenses

PrepaidLivestockFeed
Iftheclientreportsincomeandexpensesunderthe
cashmethodofaccounting,theycannotdeductinthe
yearpaidthecostoffeedyourlivestockwillconsume
inalateryearunlesstheymeetallthefollowing
tests
1.Thepaymentisforthepurchaseoffeedratherthana
deposit
2.Theprepaymenthasabusinesspurposeandisnot
merelyfortaxavoidance
3.Deductingtheprepaymentdoesnotresultinamaterial
distortionofyourincome
Ifyourclientmeetallthreetests,youcandeducttheprepaidfeed,
subjecttothelimitonprepaidfarmsupplies
Ifyourclientfailsanyofthesetests,yourclientcandeductthe
prepaidfeedonlyintheyearitisconsumed

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PaymentforthePurchaseofFeed
Whetherapaymentisforthepurchaseoffeedoradeposit
dependsonthefactsandcircumstancesineachcase
Itisforthepurchaseoffeedifyourclientcanshowtheymadeit
underabindingcommitmenttoacceptdeliveryofaspecific
quantityoffeedatafixedpriceandtheyarenotentitled,by
contractorbusinesscustom,toarefundorrepurchase
Thefollowingaresomefactorsthatshowapaymentisadeposit
ratherthanforthepurchaseoffeed
Theabsenceofspecificquantityterms
Therighttoarefundofanyunappliedpaymentcreditattheendof
thecontract
Theseller'streatmentofthepaymentasadeposit
Therighttosubstituteothergoodsorproductsforthosespecifiedin
thecontract

PaymentforthePurchaseofFeed
Aprovisionpermittingsubstitutionofingredi
entstovarytheparticularfeedmixtomeet
yourlivestock'scurrentdietrequirementswill
not suggestadeposit
Further,apriceadjustmenttoreflectmarket
valueatthedateofdeliveryisnot,byitself,
proofofadeposit

CommodityWages
TaxPlacehastwopresentationscovering
commoditywages
Inrespectingthetimelimitsoftodays
presentationtheissuewillnotbediscussed
AsamemberofTaxPlaceyoucanviewthose
webinarsatanytime
Theissueinitselfcouldextendourwebinar
by3040minutes

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LaborHired
Yourclientcandeductreasonablewagespaidforregular
farmlabor,piecework,contractlabor,andotherformsof
laborhiredtoworkinthefarmingoperations
Yourclientcanpaywagesincashorinnoncashitems
suchasinventory,capitalassets,orassetsusedinthe
farmingbusiness
Thecostofboardingfarmlaborisadeductiblelabor
cost
Otherdeductiblecostsincurredforfarmlaborinclude
healthinsurance,workers'compensationinsurance,and
otherbenefits

Farmlabor
Ifafarmerpayshischildtodofarmworkanda
trueemployeremployeerelationshipexists,
reasonablewagesorothercompensationpaidto
thechildisdeductible
Thewagesareincludedinthechildsincome,
andthechildmayhavetofileanincometax
return
Thesewagesmayalsobesubjecttosocial
securityandMedicaretaxesifthechildisage18
orolder

RepairsandMaintenance
Youcandeductmostexpensesfortherepairand
maintenanceofyourfarmproperty
Commonitemsofrepairandmaintenancearere
painting,replacingshinglesandsupportsonfarm
buildings,andperiodicorroutinemaintenanceoftrucks,
tractors,andotherfarmmachinery
However,repairsto,oroverhaulsof,depreciable
propertythatsubstantiallyprolongthelifeofthe
property,increaseitsvalue,oradaptittoadifferentuse
arecapitalexpenses
Forexample,ifyourepairthebarnroof,thecostis
deductiblebutifyoureplacetheroof,itisacapital
expense

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Capitalvs.ReoccurringCosts
Acapitalcostispaidorincurredforthe
acquisition,improvement,orrestorationof
anassethavingausefullifeofmorethanone
year
Capitalexpensesaregenerallynotdeductible,
buttheymaybedepreciable(IRC 263)
Uniformcapitalizationrulesalsorequireyou
tocapitalizeorincludeininventorycertain
expenses(IRC 263A)

WhatPropertyCannotBe
Depreciated?
Certainpropertycannotbedepreciated
Land
Youcanneverdepreciatethecostoflandbecauselanddoesnotwear
out,be comeobsolete,orgetusedup.Thecostoflandgenerally
includesthecostofclearing,grading,planting,andlandscaping
Althoughyoucannotdepreciateland,youcandepreciatecertaincosts
incurredinpreparinglandforbusinessuse
Propertyplacedinserviceanddisposedofinthesameyear
Equipmentusedtobuildcapitalimprovements.Youmustadd
otherwiseallowabledepreciationontheequipmentduringthe
periodofconstructiontothebasisofyourimprovements
Intangiblepropertysuchassection197intangibles
Thispropertydoesnothaveadeterminableusefullifeandgenerally
cannotbedepreciated
Certainterminterests

WhatPropertyDoesNot
Qualifyfor179?
Landandlandimprovements,donotqualifyas
section179property
Landimprovementsincludenonagricultural
fences,swimmingpools,pavedparkingareas,
wharves,docks,bridges,andfences
However,agriculturalfencesdo qualifyassection
179property
Similarly,fielddrainagetilealsoqualifiesas
section179property

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179
Farmerscannotelectthesection179expense
deductionforthefollowingproperty:
Certainpropertyyouleasetoothers(ifyouarea
noncorporatelessor)
Certainpropertyusedpredominantlytofurnish
lodgingorinconnectionwiththefurnishingof
lodging
Propertyusedbyataxexemptorganization
(otherthanataxexemptfarmers'cooperative)
unlessthepropertyisusedmainlyinataxable
unrelatedtradeorbusiness

NewRepairRegulations
Unitofproperty
Economicusefullife
ApplicableFinancialStatement
Coordinationwithotherprovisions
WrittenCapitalizationpolicy
MaterialandSupply
RotableandTemporarySpareParts
Smallbusinesstaxpayers

UnitofProperty
Startingpointforimplementingthenewrepairregulations
Theunitofpropertymustbeidentifiedbeforetheclientcan
determinewhethertheexpenditurecanbedeductedormustbe
capitalized
Oncetheunitofpropertyhasbeendetermined,theclientapplies
theimprovementstandardsundertheregulationstodetermineif
theexpenditureimprovesthepropertyandrequirescapitalization
Ingeneral,aunitofpropertyincludesallcomponentsthatare
functionallyinterdependent(i.e.,theplacinginserviceofone
componentdependsupontheplacinginserviceofanother
component
Anadditionalruleprovidesthatifthetaxpayerbreaksdownthe
unitofpropertyintosmallercomponentswithdifferent
depreciationlives,thenthesmallercomponentsaretheunitsof
property

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UnitofProperty
Ingeneral,aunitofpropertyincludesallcomponentsthatare
functionallyinterdependent(i.e.,theplacinginserviceofone
componentdependsupontheplacinginserviceofanothercomponent)

Anexample:aclientgenerallycannotplaceantractorintoservice
withouttires;therefore,thetractorandtiresmaybeaunitofproperty

Anadditionalruleprovidesthatifthetaxpayerbreaksdowntheunitof
propertyintosmallercomponentswithdifferentdepreciationlives,then
thesmallercomponentsaretheunitsofproperty
Anexample:ifthetaxpayertreatsthetractortiresunderadifferent
modifiedacceleratedcostrecoverysystem(MACRS)classthanthe
tractor,thetiresareaseparateunitofpropertyfromthetractor

Wheretostart?
Startwiththeconceptthatalltangibleproperty
thatisnotinventorymustbecapitalizedand
depreciatedunlessthereisanexception
Theregulationsprovideanexceptionforitems
thatqualifyasmaterialsandsupplies

ImprovementCosts
Thenewregulationsproviderulesfor
distinguishingbetweencoststhancanbe
expensedandcoststhatmustbecapitalized
Reviewthetreatmentofitemsexpensedinprior
years
Thenewrulesforimprovementcostsare
referredtoastheBAR(Betterment,Adaptation
andRestoration)test
AmountspaidthatmeetanyportionoftheBAR
testmustbecapitalized

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Materials&Supplies
ThenewrulesalsodefinewhattheIRSconsiders
materialsandsupplies
Materialsandsuppliesareassetsdefinedbythe
newrulesasfollows:
Assetcosting$200orless
Assetwithaneconomicusefullifeof12monthsor
less
Componenttomaintain,repairorimproveanasset,
includingrotable,temporaryandstandbyemergency
spareparts
Fuel,lubricants,water,etc.reasonablyexpectedtobe
consumedin12monthsorless

RoutineMaintenanceSafeHarbor
Thenewregulationsallowforimmediateexpensingofitemspaid
tokeepanassetinordinaryandefficientworkingcondition
ThefollowingitemsmaybeexpensedasrepairsundertheRoutine
MaintenanceSafeHarbor:
Buildingproperty(structuralcomponentsorbuildingsystems)
expendituresformaintenanceactivitiesthatyoureasonablyexpectto
performmorethanonceduringa10yearperiod
Replacementofdamagedorwornpartswithcomparableparts,suchas
replacing2windowsinabuildingthathas10windowsorreplacing1ACunitin
abuildingthathas3ACunits.
Nonbuildingproperty expendituresformaintenanceactivities
thatyoureasonablyexpecttoperformmorethanonceduringthe
assetsdepreciableclasslife,whichistypicallylongerthanan
assetsdepreciablelifefortaxpurposes.

DeMinimisSafeHarborElection
Thisisanannualelectiontoexpenseamountspaidor
incurredtoacquireanasset,produceanassetor
purchasematerialsandsupplies
Theamountthatmaybeexpensedfortaxpurposesis
limitedto$500peritemunlessyouhaveanapplicable
financialstatementthentheamountis$5,000
Policiesinexcessof$500arepermissibleifthe
increasedthresholdaccuratelyreflectsyourincome
andcanbesupporteduponIRSexam
Anapplicablefinancialstatementisdefinedasan
annualindependentauditreportorafinancial
statementsubmittedtoagovernmentalagency

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SafeHarborElectionforSmall
TaxpayerswithBuildings
Thisisanannualelectiontoexpense
improvementsthatwouldotherwisebe
capitalized
Toqualifyforthissafeharboryoumustmeetall
ofthefollowingcriteria:
Taxpayerownedorleasedbuildingmusthavean
unadjustedcostbasisof$1millionorless
Taxpayermusthaveaveragegrossreceiptsoflessthan
$10millionfor3previoustaxyears
Totalamountforrepairs,maintenanceand
improvementsmustnotexceedthelessorof$10,000
or2%oftheunadjustedbasisinthebuilding

FlowChartstoAssistonTaxPlace
MaterialsandSuppliesChart
HandlingDeMinimus AmountsChart
RepairRegulationsClientChecklist

Interest
Youcandeductasafarmbusinessexpenseinterestpaidonfarm
mortgagesandotherobligationsyouincurinyourfarmbusiness
Cashmethod
Ifyouusethecashmethodofaccounting,youcangenerallydeduct
interestpaidduringthetaxyear
Youcannotdeductinterestpaidwithfundsreceivedfromtheoriginallender
throughanotherloan,advance,orotherarrangementsimilartoaloan
Youcan,however,deducttheinterestwhenyoustartmakingpaymentson
thenewloan
Prepaidinterest
Underthecashmethod,yougenerallycannotdeductanyinterestpaid
beforetheyearitisdue
Interestpaidinadvancemaybedeductedonlyinthetaxyearinwhichitis
due

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Interest
Accrualmethod
Ifyouuseanaccrualmethodofaccounting,
youcandeductonlyinterestthathasaccrued
duringthetaxyear
However,youcannotdeductinterestowedto
arelatedpersonwhousesthecashmethod
untilpaymentismadeandtheinterestis
includibleinthegrossincomeofthat
person

AllocationofInterest
Ifyouusetheproceedsofaloanformorethan
onepurpose,youmustallocatetheintereston
thatloantoeachuse
Allocatetheinteresttothefollowingcategories:
Tradeorbusinessinterest
Passiveactivityinterest
Investmentinterest
Portfoliointerest
Personalinterest

BreedingFees
Youcandeductbreedingfeesasafarmbusiness
expense
However,ifyouuseanaccrualmethodof
accounting,youmustcapitalizebreedingfees
andallocatethemtothecostbasisofthecalf,
foal,etc

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FertilizerandLime
Youcandeductintheyearpaidorincurredthe
costoffertilizer,lime,andothermaterials
appliedtofarmlandtoenrich,neutralize,or
conditionitifthebenefitslastayearorless
Youcanalsodeductthecostofapplyingthese
materialsintheyearyoupayorincurit
However

DoNotForgetthePrepaidFarm
SuppliesRule
Thatrulemaylimitthedeductionforthesematerials
Ifthebenefitsofthefertilizer,lime,orothermaterialslast
substantiallymorethanoneyear,yougenerallycapitalize
theircostanddeductaparteachyearthebenefitslast
However,youcanelecttodeducttheseexpensesinthe
yearpaidorincurred
Ifyoumakethischoice,youwillneedIRSapprovalifyoulater
decidetocapitalizethecostofpreviouslydeducteditems
Ifyousellfarmlandonwhichfertilizerorlimehas
beenappliedandifthesellingpriceofthelandincludes
partorallofthecostofthefertilizerorlime,youreport
thesaleamountattributabletothefertilizerorlimeas
ordinaryincome

FertilizerandLime
Farmland,forthesepurposes,islandusedfor
producingcrops,fruits,orotheragricultural
productsorforsustaininglivestock
Itdoesnotincludelandyouhaveneverused
previouslyforproducingcropsorsustaining
livestock
Youcannotdeductinitiallandpreparation
costs
Includegovernmentpaymentsyoureceivefor
limeorfertilizerinincome

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Taxes
Youcandeductasafarmbusinessexpense
therealestateandpersonalpropertytaxeson
farmbusinessassets,suchasfarmequipment,
animals,farmland,andfarmbuildings
Youalsocandeductthesocialsecurityand
Medicaretaxesyoupaytomatch the
amountwithheldfromthewagesoffarm
employeesandanyfederalunemploymenttax
youpay

AllocationofTaxes
Thetaxesonthepartofyourfarmyouuseasyourhome
(includingthe
furnishingsandsurroundinglandnotusedforfarming)
arenonbusinesstaxes
Youmaybeabletodeductthesenonbusinesstaxesas
itemizeddeductionsonScheduleA(Form1040)
Todeterminethenonbusinesspart,allocatethetaxes
betweenthefarmassetsandnonbusinessassets
Theallocationcanbedonefromtheassessed
valuations.
Ifyourtaxstatementdoesnotshowtheassessed
valuations,youcanusuallygetthemfromthetaxassessor

StateandLocalGeneralSalesTaxes
Stateandlocalgeneralsalestaxeson
nondepreciable farmbusinessexpenseitemsare
deductibleaspartofthecostofthoseitems
Includestateandlocalgeneralsalestaxes
imposedonthepurchaseofassetsforusein
yourfarmbusinessaspartofthecostyou
depreciate
Alsotreatthetaxesaspartofyourcostifthey
areimposedonthesellerandpassedontoyou

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StateandFederalIncomeTaxes
Individualscannotdeductstateandfederal
incometaxesasfarmbusinessexpenses
Individualscandeductstateandlocal
incometaxesonlyasanitemizeddeduction
onScheduleA(Form1040) expiredin2014
However,youcannotdeductfederal
incometax

HighwayUseTax
Youcandeductthefederalusetaxon
highwaymotorvehiclespaidonatruckor
trucktractorusedinyourfarmbusiness
Form2290,HeavyHighwayVehicleUseTax
Return

SelfemploymentTaxDeduction
Youcandeductasanadjustmentto
incomeonForm1040onehalfofyourself
employmenttaxinfiguringyouradjusted
grossincome

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Insurance
Yougenerallycandeducttheordinaryandnecessarycost
ofinsuranceforyourfarmbusinessasabusinessexpense
Thisincludespremiumsyoupayforthefollowingtypesof
insurance
Fire,storm,crop,theft,liability,andotherinsuranceonfarm
businessassets
Healthandaccidentinsuranceonyourfarmemployees
Workers'compensationinsurancesetbystatelawthatcovers
anyclaimsforjob relatedbodilyinjuriesordiseasessufferedby
employeesonyourfarm,regardlessoffault
Businessinterruptioninsurance
Stateunemploymentinsuranceonyourfarmemployees
(deductibleastaxesiftheyareconsideredtaxesunderstate
law)

InsurancetoSecureaLoan
Ifyoutakeoutapolicyonyourlifeoronthe
lifeofanotherpersonwithafinancialinterest
inyourfarmbusinesstogetorprotecta
businessloan,youcannotdeductthe
premiumsasabusinessexpense
Intheeventofdeath,theproceedsofthe
policyarenottaxedasincomeevenifthey
areusedtoliquidatethedebt

AdvancePremiums
Deductadvancepaymentsofinsurancepremiumsonlyinthe
yeartowhichtheyapply,regardlessofyouraccounting
method
Example
OnJune28,2015,youpaidapremiumof$3,000forfire
insuranceonthebarn
Thepolicywillcoveraperiodof3yearsbeginningonJuly1,2015
Onlythecostforthe6monthsin2015isdeductibleasan
insuranceexpenseonyour2015calendaryeartaxreturn
Deduct$500,whichisthepremiumfor6monthsofthe36
monthpremiumperiod
Inboth2016and2017,deduct$1,000
Deducttheremaining$500in2018
HadthepolicybeeneffectiveonJanuary1,2015,thedeductible
expensewouldhavebeen$1,000foreachoftheyears2015,2016,
and2017,basedononethirdofthepremiumusedeachyear

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BusinessInterruptionInsurance
Useandoccupancyandbusiness
interruptioninsurancepremiumsare
deductibleasabusinessexpense
Thisinsurancepaysforlostprofitsifyour
businessisshutdownduetoafireorother
Cause
ReportanyproceedsinfullonScheduleF
Part1

SelfEmployedHealthInsurance
Deduction
Ifyouareselfemployed,youcandeductasan
adjustmenttoincomeonForm1040thepayments
formedical,dental,andqualifiedlongterm care
insurancecoverageforyourself,yourspouse,and
yourdependentswhenfiguringyouradjustedgross
incomeonyourForm1040
EffectiveMarch30,2010,theinsurancecanalso
coveranychildofyoursunderage27attheendof
2015,evenifthechildwasnotyourdependent
Generally,thisdeductioncannotbemorethanthe
netprofitfromthebusinessunderwhichtheplan
wasestablished

RentandLeasing
Ifyouleasepropertyforuseinyourfarmbusi
ness,youcangenerallydeducttherentyou
payonScheduleF
However,youcannotdeductrentyoupay
incropsharesifyoudeductthecostof
raisingthecropsasfarmexpenses

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AdvancePayments
Deductadvancepaymentsofrentonlyin
theyeartowhichtheyapply,regardlessof
youraccountingmethod

FarmHome
Ifyourentafarm,donotdeductthepartof
therentalexpensethatrepresentsthefair
rentalvalueofthefarmhomeinwhichyou
live

LeaseorPurchase
Ifyouleaseafarmbuildingorequipment,youmust
determinewhetherornottheagreementmustbe
treatedasaconditionalsalescontractratherthana
lease
Iftheagreementistreatedasaconditionalsales
contract,thepaymentsundertheagreement(sofar
astheydonotrepresentinterestorothercharges)are
paymentsforthepurchaseoftheproperty
Donotdeductthesepaymentsasrent,butcapitalize
thecostofthepropertyandrecoverthiscost
throughdepreciation

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ConditionalSalesContract
Whetheranagreementisaconditionalsales
contractdependsontheintentoftheparties
Determineintentbasedontheprovisionsofthe
agreementandthefactsandcircumstances
thatexistwhenyoumaketheagreement
Nosingletest,orspecialcombinationoftests,
alwaysapplies
However,ingeneral,anagreementmaybe
consideredaconditionalsalescontractrather
thanaleaseifanyofthefollowingistrue

Conditions
Theagreementappliespartofeachpaymenttowardanequityinterest
youwillreceive
Yougettitletothepropertyafteryoumakeastatedamountofrequired
payments
Theamountyoumustpaytousethepropertyforashorttimeisalarge
partoftheamountyouwouldpaytogettitletotheproperty
Youpaymuchmorethanthecurrentfairrentalvalueoftheproperty
Youhaveanoptiontobuythepropertyatanominalpricecomparedto
thevalueofthepropertywhenyoumayexercisetheoption
Determinethisvaluewhenyoumaketheagreement
Youhaveanoptiontobuythepropertyatanominalpricecomparedto
thetotalamountyouhavetopayundertheagreement
Theagreementdesignatespartofthepaymentsasinterest,orpartof
thepaymentscanbeeasilyrecognizedasinterest

Example
Youleasenewfarmequipmentfromadealerwhobothsells
andleases
Theagreementincludesanoptiontopurchasetheequipmentfor
aspecifiedprice
Theleasepaymentsandthespecifiedoptionpriceequalthesales
priceoftheequipmentplusinterest
Undertheagreement,youareresponsibleformaintenance,
repairs,andtheriskofloss
Forfederalincometaxpurposes,theagreementisaconditional
salescontract
Youcannotdeductanyoftheleasepaymentsasrent
Youcandeductinterest,repairs,insurance,depreciation,
andotherexpensesrelatedtotheequipment

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MotorVehicleLeases
Specialrulesapplytoleaseagreementsthat
haveaterminalrentaladjustmentclause
Ingeneral,thisisaclausethatprovidesfora
rentalpriceadjustmentbasedontheamount
thelessorisabletosellthevehicleforattheend
ofthelease
Ifyourrentalagreementcontainsaterminal
rental adjustmentclause,treattheagreement
asaleaseiftheagreementotherwisequalifiesas
alease
7701(h).

LeveragedLeases
Specialrulesapplytoleveragedleasesof
equipment(arrangementsinwhichthe
equipmentisfinancedbyanonrecourseloan
fromathirdparty)
RevenueProcedure200128

BusinessUseofYourHome
Youcandeductexpensesforthebusinessuseofyourhomeifyou
usepartofyourhomeexclusivelyandregularly:
Astheprincipalplaceofbusinessforanytradeorbusinessinwhich
youengage,
Asaplacetomeetordealwithpatients,clients,orcustomersinthe
normalcourseofyourtradeorbusiness,orInconnectionwithyour
tradeorbusiness,ifyouareusingaseparatestructurethatisnot
attachedtoyourhome.
Yourhomeofficewillqualifyasyourprincipalplaceofbusiness
fordeductingexpensesforitsuseifyoumeetbothofthe
followingrequirements
Youuseitexclusivelyandregularlyfortheadministrativeor
managementactivitiesofyourtradeorbusiness
Youhavenootherfixedlocationwhereyouconductsubstantial
administrativeormanagementactivitiesofyourtradeorbusiness

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 9/8/2015

BusinessUseofYourHome
Ifyouusepartofyourhomefor
business,youmustdividetheexpensesof
operatingyourhomebetweenpersonaland
businessuse
TheIRSnowprovidesasimplifiedmethod
todetermineyourexpensesforbusinessuse
ofyourhome

DeductionLimit
Ifyourgrossincomefromfarmingequalsorexceedsyour
totalfarmexpenses(includingexpensesforthebusinessuseof
yourhome),youcandeductallyourfarmexpenses.
Butifyourgrossincomefromfarmingislessthanyourtotalfarm
expenses,yourdeductionforcertainexpensesfortheuseof
yourhomeinyourfarmingbusinessislimited
Yourdeductionforotherwisenondeductibleexpenses,suchas
utilities,insurance,anddepreciation(withdepreciationtakenlast),
cannotbemorethanthegrossincomefromfarmingminusthe
followingexpenses
Thebusinesspartofexpensesyoucoulddeductevenifyoudidnot
useyourhomeforbusiness(suchasdeductiblemortgageinterest,
realestatetaxes,andcasualtyandtheftlosses)

DeductionLimit
Ifyouareselfemployed,donotincludeyour
deductionforhalfofyourselfemployment
tax
Deductionsoverthecurrentyear'slimitcan
becarriedovertoyournexttaxyearunder
thehistoricalmethodnotthesimplified
method
Theyaresubjecttothedeductionlimitfor
thenexttaxyear

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 9/8/2015

TelephoneExpense
Youcannotdeductthecostofbasiclocaltelephone
service(includinganytaxes)forthefirsttelephone
lineyouhaveinyourhome,evenifyouhaveanoffice
inyourhome
However,chargesforbusinesslong distancephone
callsonthatline,aswellasthecostofasecond
lineintoyourhomeused exclusivelyforyourfarm
business,aredeductiblebusinessexpenses
Cellphonechargesforcallsrelatingtoyourfarm
businessaredeductible
Ifthecellphoneyouuseforyourfarmbusinessis
partofafamilycellphoneplan,youmustallocate
anddeductonlytheportionofthecharges
attributabletofarmbusinesscalls

TruckandCarExpenses
Youcandeducttheactualcostofoperatinga
truckorcarinyourfarmbusiness
Onlyexpensesforbusinessusearedeductible
Theseincludesuchitemsasgasoline,oil,
repairs,licensetags,insurance,and
depreciation(subjecttocertainlimits)

StandardMileageRate
Insteadofusingactualcosts,undercertainconditions
youcanusethestandardmileagerate
Thestandardmileagerateforeachmileofbusiness
useis57.5centsin2015
Youcanusethestandardmileagerateforacaroralight
truck,suchasavan,pickup,orpaneltruck,youownor
lease
Youcannotusethestandardmileagerateifyouoperate
fiveormorecarsorlighttrucksatthesametime
Youarenotusingfiveormorevehiclesatthesametimeif
youalternateusingthevehicles(youusethemat
differenttimes)forbusiness
Notice201479

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 9/8/2015

BusinessUsePercentage
Youcanclaim75%oftheuseofacarorlighttruckasbusiness
usewithoutanyrecordsifyouusedthevehicleduringmostof
thenormalbusinessdaydirectlyinconnectionwiththebusiness
offarming
Youchoosethismethodofsubstantiatingbusinessusethefirst
yearthevehicleisplacedinservice
Onceyoumakethischoice,youmaynotchangetoanother
methodlater
Thefollowingareusesdirectlyconnectedwiththebusinessof
farming
Cultivatingland
Raisingorharvestinganyagriculturalorhorticulturalcommodity
Raising,shearing,feeding,caringfor,training,andmanaginganimals
Drivingtothefeedorsupplystore

TruckandCarExpenses
Ifyoukeeprecordsandtheyshowthatthe
businessusewasmorethan75%,youmaybe
abletoclaimmore
Beginningandendingodometerreadingis
needed

TravelExpenses
Youcandeductordinaryandnecessaryexpensesyou
incurwhiletravelingawayfromhomeforyourfarm
business
Youcannotdeductlavishorextravagantexpenses
Usually,thelocationofyourfarmbusinessis
consideredyour
homefortaxpurposes
Youaretravelingawayfromhomeif:
Yourdutiesrequireyoutobeabsentfromyourfarm
substantiallylongerthananordinaryworkday,and
Youneedtogetsleeporresttomeetthedemandsofyour
workwhileawayfromhome

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 9/8/2015

TravelExpenses
Ifyoumeettheserequirementsandcanprovethe
time,place,andbusinesspurposeofyourtravel,you
candeductyourordinaryandnecessarytravel
expenses
Thefollowingaresometypesofdeductibletravel
expenses
Air,rail,bus,andcartransportation;
Mealsandlodging;
Drycleaningandlaundry;
Telephoneandfax;
Transportationbetweenyourhotelandyourtemporary
workorbusinessmeetinglocation;and
Tipsforanyoftheaboveexpenses

Meals
Youordinarilycandeductonly50%ofyourbusiness
relatedmealsexpenses
Youcandeductthecostofyourmealswhiletravelingon
businessonlyifyourbusinesstripisovernightorlong
enoughtorequireyoutostopforsleeporresttoproperly
performyourduties
Youcannotdeductanyofthecostofmealsifitisnot
necessaryforyoutorest,unlessyoumeettherulesfor
businessentertainment
Theexpenseofamealincludesamountsyouspendfor
yourfood,beverages,taxes,andtipsrelatingtothemeal
Youcandeducteither50%oftheactualcostor50%of
astandardmealallowancethatcoversyourdailymeal
andincidentalexpenses

RecordkeepingRequirements
Youmustbeabletoproveyourdeductionsfortravelbyadequate
recordsorotherevidencethatwillsupportyourownstatement
Estimatesorapproximationsdonotqualifyasproofofan
expense
Youshouldkeepanaccountbookorsimilarrecord,supportedby
adequatedocumentaryevidence,suchasreceipts,thattogether
supporteachelementofanexpense
Generally,itisbesttorecordtheexpenseandgetdocumentation
ofitatthetimeyoupayit
Ifyouchoosetodeductastandardmealallowanceratherthanthe
actualexpense,youdonothavetokeeprecordstoprove
amountsspentformealsandincidentalitems
However,youmuststillkeeprecordstoprovetheactualamount
ofothertravelexpenses,andthetime,place,andbusiness
purposeofyourtravel

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 9/8/2015

ReimbursementstoEmployees
Yougenerallycandeductreimbursementsyoupaytoyour
employeesfortravelandtransportationexpensesthey
incurintheconductofyourbusiness
Employeesmaybereimbursedunderanaccountable
ornonaccountableplan
Underanaccountableplan,theemployeemust
provideevidenceofexpenses
Underanonaccountableplan,noevidenceofexpenses
isrequired.
Ifyoureimburseexpensesunderanaccountableplan,
deductthemastravelandtransportationexpenses
Ifyoureimburseexpensesunderanonaccountableplan,
youmustreportthereimbursementsaswagesonForm
W2anddeductthemaswages

MarketingQuotaPenalties
YoucandeductasOtherexpensesonSched
uleFpenaltiesyoupayformarketingcropsin
excessoffarmmarketingquotas
However,ifyoudonotpaythepenalty,but
insteadthepurchaserofyourcropdeductsit
fromthepaymenttoyou,includeingross
incomeonlytheamountyoureceived
Donottakeaseparatedeductionforthe
penalty

TenantHouseExpenses
Youcandeductthecostsofmaintaininghouses
andtheirfurnishingsfortenantsorhiredhelpas
farmbusinessexpenses
Thesecostsincluderepairs,utilities,insurance,
anddepreciation
Thevalueofadwellingyoufurnishtoatenant
undertheusualtenantfarmerarrangementis
nottaxableincometothetenant

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 9/8/2015

OtherExpenses
Thefollowinglist,whilenotall inclusive,showssomeexpensesyoucan
deductasotherfarm
expensesonScheduleF,PartII.
Theseexpensesmustbeforbusinesspurposesand(1)paid,ifyouuse
thecashmethodofaccounting,or(2)incurred,ifyouuseanaccrual
methodofaccounting.
Accountingfees
Advertising
Businesstravelandmeals
Commissions
Consultantfees
Cropscoutingexpenses
Duestocooperatives
Educationalexpenses(tomaintainandimprovefarmingskills)
Farmrelatedattorneyfees
Farmmagazines
Ginning

OtherExpenses
Insectspraysanddusts
Litterandbedding
Livestockfees
Marketingfees
Milkassessment
Recordkeepingexpenses
Servicecharges
Smalltoolsexpectedtolastoneyearorless
Stampsandstationery
Subscriptionstoprofessional,technical,andtrade
journalsthatdealwithfarming
Tyingmaterialandcontainers

LoanExpenses
Youprorateanddeductloanexpenses,such
aslegalfeesandcommissions,youpaytoget
afarmloanoverthetermoftheloan

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 9/8/2015

TaxPreparationFees
Youcandeductasafarmbusinessexpense
onScheduleFthecostofpreparingthatpart
ofyourtaxreturnrelatingtoyourfarm
business
Youmaybeabletodeducttheremainingcost
onScheduleA(Form1040)ifyouitemize
yourdeductions
YoualsocandeductonScheduleFthe
amountyoupayorincurinresolvingtax
issuesrelatingtoyourfarmbusiness

Advertising
Yougenerallycandeductreasonable
advertisingexpensesthataredirectlyrelated
toyourbusinessactivities
Generally,youcannotdeductamountspaid
toinfluencelegislation(i.e.,lobbying
Youcanusuallydeductasabusinessexpense
thecostofinstitutionalorgoodwill
advertisingtokeepyournamebeforethe
publicifitrelatestobusinessyoureasonably
expecttogaininthefuture

Advertising
Thecostofordinaryadvertisingofyourgoodsor
services businesscards,yellowpageads,and
soon isdeductibleasacurrentexpense
Promotionalcoststhatcreatebusinessgoodwill
forexample,sponsoringapeeweefootball
team arealsodeductibleaslongasthereisa
clearconnectionbetweenthesponsorshipand
yourbusiness
Forexample,namingtheteamthe"Southwest
AutoPartsBlues"orlistingthebusinessnamein
theprogramisevidenceofthepromotioneffort

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 9/8/2015

ScoopDatesforPostFilingSeason
September23,2015
October21,2015
October28,2015

IowaTaxpayerAdvocateTownHall
Meeting
JoinusforourAnnualTownHallAdvocate
meeting
September25,2015
Noon 1:00
Yourchancetoairyourconcerns

SeptemberWebinars
September15 SCorpK1Preparation TheproperpreparationofanSCorporationK1isessential
totheclientandreportingtheflowthroughincome.ThisclasswillreviewthekeyareasofFormK1
andtheflowthroughprocess.

September22 HealthSavingsAccounts Ahealthsavingsaccount(HSA)isataxadvantaged

medicalsavingsaccountavailabletotaxpayersintheUnitedStateswhoareenrolledinahigh
deductiblehealthplan(HDHP).Thefundscontributedtoanaccountarenotsubjecttofederal
incometaxatthetimeofdeposit.Howcanthishelpyourclientwithmedicalexpensesandsave
themtax.

September23 FarmIncomeAZ FarmentitiesenjoymanyuniquebenefitsundertheInternal

RevenueCode.Theseadvantagesprovidenumerousopportunitiesforvalidincomedeferral.This
classwillexaminesomeoftherelevantincomeissuesuniquetofarmingentities.

September24 CharitableContributionsRecordkeepingPitfalls WhatisFMV,doyouneed

appraisals,andwhatmustyouhaveinyourrecordkeepingtosubstantiateyourdonation.IRSis
auditingcharitablecontributionsandyouandyourclientneedtobeprepared.

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 9/8/2015

ACAWeek2015
Getreadyforthe2016filingseasonandACA
ACAWeekOctober19,2015 October23,2015
TheMarketplaceandAffordability:October19,2015
Noonto1pm(CST) 1hourofCPE
ExemptionsandSharedResponsibilityPayment:October
20,2015 Noonto1pm(CST) 1hourofCPE
PremiumTaxCredit:October21,2015 Noonto1pm(CST)
1hourofCPE
SharedAllocations:October22,2015 Noonto2pm(CST)
2hoursofCPE
EmployerIssuesandCadillacTax:October23,2015 Noon
to2pm(CST) 2hoursofCPE

ACAWeek2015
Registration:
Toregister:https://goo.gl/RnW5nG
SpecialDiscount!!(mustbepreregisteredforall5classes):$200
(7hoursofCPE)
TheMarketplaceandAffordability:October19,2015 Noonto1
pm(CST) 1hourofCPE $35
ExemptionsandSharedResponsibilityPayment:October20,
2015 Noonto1pm(CST) 1hourofCPE $35
PremiumTaxCredit:October21,2015 Noonto1pm(CST) 1
hourofCPE $35
SharedAllocations:October22,2015 Noonto2pm(CST) 2
hoursofCPE $70
EmployerIssuesandCadillacTax:October23,2015 Noonto2
pm(CST) 2hoursofCPE $70

Webinars:RepairRegulationWeekatCALT
October26,2015toOctober30,2015
October26,2015Buildings:Betterments~Noonto1pmCST

WhatisanImprovement?Animprovementoccursiftheunitofproperty(UOP)undergoes,other
thanthroughroutinemaintenance:(1)betterment,(2)restoration,or(3)adaptationtoanother
use.Thissessionwillcoverthenewregulationsandprovideexamplesthatwill,assistintheof
whenthatUnitofProperty(1)amelioratesamaterialconditionordefectthatpredatesthe
taxpayersownershipoftheproperty,(2)isforamaterialimprovementtothepropertyscapacity,
or(3)isexpectedtomateriallyimprovethepropertysproductivity,efficiency,strength,qualityor
output.Discussiononhowtoidentifyandexampleswillbeshared.Alsoadiscussiononthesafe
harborwillbedemonstrated.

October27,2015Buildings:Restoration~Noonto1pmCST

WhatisanImprovement?Doesthatimprovement:(1)itreturnsanonfunctionalunitofproperty
tooperatingcondition;(2)itreplacesamajorcomponentorsubstantialstructuralpartorsetof
parts,or(3)itrestorespropertyaftertheendofitsclasslifetoalikenewcondition(asdefinedin
eitherafederalregulatoryguidelineorthemanufacturersspecifications.Discussiononhowto
identifyandexampleswillbeshared.

30
 9/8/2015

Webinars:RepairRegulationWeekatCALT
October26,2015toOctober30,2015
October28,2015Buildings:Adaptation~Noonto1pmCST

Doesthatimprovementadaptthepropertytonewuses?Areimprovementssubjectto
capitalizationorcantheybeexpensedunderthesafeharbor.Exampleswillbedemonstrated.The
treatmentunderthenewruleappliestoalldirectcostsoftheimprovementplusallindirectcosts
thateitherdirectlybenefitfrom,orareincurredbyreasonof,theimprovement.Discussiononhow
toidentifyandexampleswillbeshared.

October29,2015Dispositions~Noonto1pmCST

Whathappenswhenthepropertyisdisposedoforsold,howisthathandledunderthenewrepair
regulations?Whatarethenewprocedures?Discussiononhowtoapplythenewregulationsand
exampleswillbeshared.

October30,2015OtherRemainingIssuesofImportance~Noonto1pmCST

TheNEWrepairregulationscoveravarietyofaspects.Thissessionwillcoverapotpourriofissues
toroundoutthepreviousfiveclasses.Wewilltrytoaddresscommonquestionsandreiterated
someofthekeydefinitionsnecessarytofullyunderstandthenewregulations.Wewillalsocover
astimeallowedtopicswewereunabletofullyaddressinothersessions.

2015FarmTaxSchools
November9,2015toDecember15,2015
8LocationsinIowa
RegistrationandtheFallBrochurewillbeoutin
August
Theprogramisintendedfortaxprofessionalsand
isdesignedtoprovideuptodatetrainingon
currenttaxlawandregulations.
Theprogramstressespracticalinformationto
facilitatethefilingofindividualandsmall
businessreturns,inadditiontofarmreturns.

2015FarmTaxSchools Datesand
Locations
Waterloo: Nov910
Sheldon:Nov.1011
RedOak:Nov.1112
Ottumwa:Nov.1213
MasonCity:Nov.1617
Maquoketa: Nov.2324
Denison:Dec.78
Ames:Dec.1415 liveaswellasattendancevia
webinaravailable

31
 9/8/2015

CALTWebsite

http://www.calt.iastate.edu/

TouroftheCALTWebsite

CALTStaff
RogerA.McEowen
CALTDirectorandisaLeonard
Dolezal ProfessorinAgricultural
Law
Email:mceowen@iastate.edu
Phone:(515)2944076
Fax:(515)2940700

KristineA.Tidgren
StaffAttorney
Email:ktidgren@iastate.edu
Phone:(515)2946365
Fax:(515)2940700

32
 9/8/2015

CALTStaff
KristyS.Maitre
TaxSpecialist
Email:ksmaitre@iastate.edu
Phone:(515)2963810
Fax:(515)2940700

TiffanyKayser
ProgramAdministrator
Email:tlkayser@iastate.edu
Phone:(515)2945217
Fax:(515)2940700

33