Publication 225
taxmap/pubs/p225-013.htm#en_us_publink1000217872taxmap/pubs/p225-013.htm#en_us_publink1000217874Standard mileage rate.(p19)
The standard mileage rate for the cost of operating your car,
van, pickup, or panel truck in 2010 is 50 cents per mile for all business miles
driven. See
Truck and Car Expenses, later.
Increase in deduction for start-up costs.(p19)
For tax years beginning in 2010, you can elect to deduct up to $10,000 of your
business start-up costs paid or incurred after October 22, 2004. See
Capital Expenses, later.
Limitation on excess farm losses.(p19)
For tax years beginning after 2009, your farm losses may be reduced
if you received certain subsidies. See
Excess Farm Loss Limit, later.
You can generally deduct the current costs of operating your
farm. Current costs are expenses you do not have to capitalize or include in
inventory costs. However, your deduction for the cost of livestock feed and
certain other supplies may be limited. If you have an operating loss, you may
not be able to deduct all of it.
taxmap/pubs/p225-013.htm#TXMP04a2ded2Useful items
You may want to see:
Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040):
Itemized
Deductions Sch F (Form 1040):
Profit or Loss From Farming 1045:
Application for Tentative Refund 5213:
Election To Postpone
Determination as To Whether the Presumption Applies That an
Activity Is Engaged in for Profit 8903:
Domestic Production Activities Deduction See
chapter 16 for information about getting publications and forms.
The ordinary and necessary costs of operating a farm for profit
are deductible business expenses. Part II of Schedule F lists some common farm
expenses that are typically deductible. This chapter discusses many of these
expenses, as well as others not listed on Schedule F.
taxmap/pubs/p225-013.htm#en_us_publink1000217876If the reimbursement is received in the same year that the expense
is claimed, reduce the expense by the amount of the reimbursement. If the
reimbursement is received in a year after the expense is claimed, include the
reimbursement amount in income. See
Refund or reimbursement under
Income From Other Sources in
chapter 3.
Some expenses you pay during the tax year may be part personal
and part business. These may include expenses for gasoline, oil, fuel, water,
rent, electricity, telephone, automobile upkeep, repairs, insurance, interest,
and taxes.
You must allocate these mixed expenses between their business
and personal parts. Generally, the personal part of these expenses is not
deductible. The business portion of the expenses would be deductible on Schedule
F.
taxmap/pubs/p225-013.htm#en_us_publink1000217878You paid $1,500 for electricity during the tax year. You used
1/3 of the electricity for personal purposes and
2/3 for farming. Under these circumstances, you can deduct $1,000
(2/3 of $1,500) of your electricity expense as a farm business expense.
taxmap/pubs/p225-013.htm#en_us_publink1000217879It is not always easy to determine the business and nonbusiness
parts of an expense. There is no method of allocation that applies to all mixed
expenses. Any reasonable allocation is acceptable. What is reasonable depends on
the circumstances in each case.
taxmap/pubs/p225-013.htm#en_us_publink1000217880Prepaid farm supplies are amounts paid during the tax year for
the following items.
- Feed, seed, fertilizer, and similar farm supplies not used
or consumed during the year. However, do not include amounts paid for farm
supplies that you would have consumed if not for a fire, storm, flood, other
casualty, disease, or drought.
- Poultry (including egg-laying hens and baby chicks) bought
for use (or for both use and resale) in your farm business. However, include
only the amount that would be deductible in the following year if you had
capitalized the cost and deducted it ratably over the lesser of 12 months or the
useful life of the poultry.
- Poultry bought for resale and not resold during the year.
If you use the cash method of accounting to report your income
and expenses, your deduction for prepaid farm supplies in the year you pay for
them may be limited to 50% of your other deductible farm expenses for the year
(all Schedule F deductions except prepaid farm supplies). This limit does not
apply if you meet one of the exceptions described later.
If the limit applies, you can deduct the excess cost of farm
supplies other than poultry in the year you use or consume the supplies. The
excess cost of poultry bought for use (or for both use and resale) in your farm
business is deductible in the year following the year you pay for it. The excess
cost of poultry bought for resale is deductible in the year you sell or
otherwise dispose of that poultry.
taxmap/pubs/p225-013.htm#en_us_publink1000217882During 2010, you bought fertilizer ($4,000), feed ($1,000), and
seed ($500) for use on your farm in the following year. Your total prepaid farm
supplies expense for 2010 is $5,500. Your other deductible farm expenses totaled
$10,000 for 2010. Therefore, your deduction for prepaid farm supplies cannot be
more than $5,000 (50% of $10,000) for 2010. The excess prepaid farm supplies
expense of $500 ($5,500 − $5,000) is deductible in a later tax year when
you use or consume the supplies.
taxmap/pubs/p225-013.htm#en_us_publink1000217883This limit on the deduction for prepaid farm supplies expense
does not apply if you are a farm-related taxpayer and either of the following
apply.
- Your prepaid farm supplies expense is more than 50% of your
other deductible farm expenses because of a change in business operations caused
by unusual circumstances.
- Your total prepaid farm supplies expense for the preceding
3 tax years is less than 50% of your total other deductible farm expenses for
those 3 tax years.
You are a farm-related taxpayer if any of the following tests
apply.
- Your main home is on a farm.
- Your principal business is farming.
- A member of your family meets (1) or (2).
For this purpose, your family includes your brothers and sisters,
half-brothers and half-sisters, spouse, parents, grandparents, children,
grandchildren, and aunts and uncles and their children.
 | Whether or not the deduction limit for prepaid farm supplies
applies, your expenses for prepaid livestock feed may be subject to the rules
for advance payment of livestock feed, discussed next. |
taxmap/pubs/p225-013.htm#en_us_publink1000217885If you report your income and expenses under the cash method
of accounting, you cannot deduct in the year paid the cost of feed your
livestock will consume in a later year unless you meet all the following tests.
- The payment is for the purchase of feed rather than a deposit.
- The prepayment has a business purpose and is not merely for
tax avoidance.
- Deducting the prepayment does not result in a material distortion
of your income.
If you meet all three tests, you can deduct the prepaid feed,
subject to the limit on prepaid farm supplies discussed earlier.
If you fail any of these tests, you can deduct the prepaid feed
only in the year it is consumed.
| This rule does not apply to the purchase of commodity futures
contracts. |
taxmap/pubs/p225-013.htm#en_us_publink1000217887Whether a payment is for the purchase of feed or a deposit depends
on the facts and circumstances in each case. It is for the purchase of feed if
you can show you made it under a binding commitment to accept delivery of a
specific quantity of feed at a fixed price and you are not entitled, by contract
or business custom, to a refund or repurchase.
The following are some factors that show a payment is a deposit
rather than for the purchase of feed.
- The absence of specific quantity terms.
- The right to a refund of any unapplied payment credit at the
end of the contract.
- The seller's treatment of the payment as a deposit.
- The right to substitute other goods or products for those
specified in the contract.
A provision permitting substitution of ingredients to vary the
particular feed mix to meet your livestock's current diet requirements will not
suggest a deposit. Further, a price adjustment to reflect market value at the
date of delivery is not, by itself, proof of a deposit.
taxmap/pubs/p225-013.htm#en_us_publink1000217888The prepayment has a business purpose only if you have a reasonable
expectation of receiving some business benefit from prepaying the cost of
livestock feed. The following are some examples of business benefits.
- Fixing maximum prices and securing an assured feed supply.
- Securing preferential treatment in anticipation of a feed
shortage.
Other factors considered in determining the existence of a business
purpose are whether the prepayment was a condition imposed by the seller and
whether that condition was meaningful.
taxmap/pubs/p225-013.htm#en_us_publink1000217889The following are some factors considered in determining whether
deducting prepaid livestock feed materially distorts income.
- Your customary business practice in conducting your livestock
operations.
- The expense in relation to past purchases.
- The time of year you made the purchase.
- The expense in relation to your income for the year.
You can deduct reasonable wages paid for regular farm labor,
piecework, contract labor, and other forms of labor hired to perform your
farming operations. You can pay wages in cash or in noncash items such as
inventory, capital assets, or assets used in your business. The cost of boarding
farm labor is a deductible labor cost. Other deductible costs you incur for farm
labor include health insurance, workers' compensation insurance, and other
benefits.
If you must withhold social security, Medicare, and income taxes
from your employees' cash wages, you can still deduct the full amount of wages
before withholding. See
chapter 13
for more information on employment taxes. Also, deduct the employer's share of
the social security and Medicare taxes you must pay on your employees' wages as
a farm business expense on the
Taxes line of Schedule F (line 31). See
Taxes, later.
If you transfer property to an employee in payment for services,
you can deduct as wages paid the fair market value of the property on the date
of transfer. If the employee pays you anything for the property, deduct as wages
the fair market value of the property minus the payment by the employee for the
property.
Treat the wages deducted as an amount received for the property.
You may have a gain or loss to report if the property's adjusted basis on the
date of transfer is different from its fair market value. Any gain or loss has
the same character the exchanged property had in your hands. For more
information, see
chapter 8.
You can deduct reasonable wages or other compensation you pay
to your child for doing farmwork if a true employer-employee relationship exists
between you and your child. Include these wages in the child's income. The child
may have to file an income tax return. These wages may also be subject to social
security and Medicare taxes if your child is age 18 or older. For more
information, see
Family Employees in
chapter 13.
 | A Form W-2 should be issued to the child employee. |
The fact that your child spends the wages to buy clothes or other
necessities you normally furnish does not prevent you from deducting your
child's wages as a farm expense.
| The amount of wages paid to the child could cause a loss
of the dependency exemption depending on how the child uses the money. |
taxmap/pubs/p225-013.htm#en_us_publink1000217895You can deduct reasonable wages or other compensation you pay
to your spouse if a true employer-employee relationship exists between you and
your spouse. Wages you pay to your spouse are subject to social security and
Medicare taxes. For more information, see
Family Employees in
chapter 13.
You cannot deduct wages paid for certain household work, construction
work, and maintenance of your home. However, those wages may be subject to the
employment taxes discussed in
chapter 13.
Do not deduct amounts paid to persons engaged in household work,
except to the extent their services are used in boarding or otherwise caring for
farm laborers.
taxmap/pubs/p225-013.htm#en_us_publink1000217898Do not deduct wages paid to hired help for the construction of
new buildings or other improvements. These wages are part of the cost of the
building or other improvement. You must capitalize them.
taxmap/pubs/p225-013.htm#en_us_publink1000217899If your farm employee spends time maintaining or repairing your
home, the wages and employment taxes you pay for that work are nondeductible
personal expenses. For example, assume you have a farm employee for the entire
tax year and the employee spends 5% of the time maintaining your home. The
employee devotes the remaining time to work on your farm. You cannot deduct 5%
of the wages and employment taxes you pay for that employee.
taxmap/pubs/p225-013.htm#en_us_publink1000217900Reduce your deduction for wages by the amount of any employment
credits you claim. The following are employment credits and their related forms.
- Credit for affected Midwestern disaster area employers (Form
5884-A).
- Credit for employer differential wage payments (Form 8932).
- Empowerment zone and renewal community employment credit (Form
8844).
- Indian employment credit (Form 8845).
- Work opportunity credit (Form 5884).
For more information, see the forms and their instructions.
taxmap/pubs/p225-013.htm#en_us_publink1000217901You can deduct most expenses for the repair and maintenance of
your farm property. Common items of repair and maintenance are repainting,
replacing shingles and supports on farm buildings, and periodic or routine
maintenance of trucks, tractors, and other farm machinery. However, repairs to,
or overhauls of, depreciable property that substantially prolong the life of the
property, increase its value, or adapt it to a different use are capital
expenses. For example, if you repair the barn roof, the cost is deductible. But
if you replace the roof, it is a capital expense. For more information, see
Capital Expenses, later.
You can deduct as a farm business expense interest paid on farm
mortgages and other obligations you incur in your farm business.
taxmap/pubs/p225-013.htm#en_us_publink1000217903If you use the cash method of accounting, you can generally deduct
interest paid during the tax year. You cannot deduct interest paid with funds
received from the original lender through another loan, advance, or other
arrangement similar to a loan. You can, however, deduct the interest when you
start making payments on the new loan.
taxmap/pubs/p225-013.htm#en_us_publink1000217904Under the cash method, you generally cannot deduct any interest
paid before the year it is due. Interest paid in advance may be deducted only in
the tax year in which it is due.
taxmap/pubs/p225-013.htm#en_us_publink1000217905If you use an accrual method of accounting, you can deduct only
interest that has accrued during the tax year. However, you cannot deduct
interest owed to a related person who uses the cash method until payment is made
and the interest is includible in the gross income of that person. For more
information, see
Accrual Method in
chapter 2.
If you use the proceeds of a loan for more than one purpose,
you must allocate the interest on that loan to each use. Allocate the interest
to the following categories.
- Trade or business interest.
- Passive activity interest.
- Investment interest.
- Portfolio interest.
- Personal interest.
You generally allocate interest on a loan the same way you allocate
the loan proceeds. You allocate loan proceeds by tracing disbursements to
specific uses.
| The easiest way to trace disbursements to specific uses is
to keep the proceeds of a particular loan separate from any other funds.
|
taxmap/pubs/p225-013.htm#en_us_publink1000217908The allocation of loan proceeds and the related interest is generally
not affected by the use of property that secures the loan.
taxmap/pubs/p225-013.htm#en_us_publink1000217909You secure a loan with property used in your farming business.
You use the loan proceeds to buy a car for personal use. You must allocate
interest expense on the loan to personal use (purchase of the car) even though
the loan is secured by farm business property.
| If the property that secures the loan is your home, you generally
do not allocate the loan proceeds or the related interest. The interest is
usually deductible as qualified home mortgage interest, regardless of how the
loan proceeds are used. However, you can choose to treat the loan as not secured
by your home. For more information, see Publication 936.
|
taxmap/pubs/p225-013.htm#en_us_publink1000217911The period for which a loan is allocated to a particular use
begins on the date the proceeds are used and ends on the earlier of the
following dates.
- The date the loan is repaid.
- The date the loan is reallocated to another use.
For more information on interest, see chapter 4 in Publication
535.
taxmap/pubs/p225-013.htm#en_us_publink1000217913You can deduct breeding fees as a farm business expense. However,
if you use an accrual method of accounting, you must capitalize breeding fees
and allocate them to the cost basis of the calf, foal, etc. For more information
on who must use an accrual method of accounting, see
Accrual Method Required under
Accounting Methods in
chapter 2.
You can deduct in the year paid or incurred the cost of fertilizer,
lime, and other materials applied to farmland to enrich, neutralize, or
condition it if the benefits last a year or less. You can also deduct the cost
of applying these materials in the year you pay or incur it. However, see
Prepaid Farm Supplies, earlier, for a rule that may limit your deduction for these
materials.
If the benefits of the fertilizer, lime, or other materials last
substantially more than one year, you generally must capitalize their cost and
deduct a part each year the benefits last. However, you can choose to deduct
these expenses in the year paid or incurred. If you make this choice, you will
need IRS approval if you later decide to capitalize the cost of previously
deducted items.
Farmland, for these purposes, is land used for producing crops,
fruits, or other agricultural products or for sustaining livestock. It does not
include land you have never used previously for producing crops or sustaining
livestock. You cannot deduct initial land preparation costs. (See
Capital Expenses, later.)
You can deduct as a farm business expense the real estate and
personal property taxes on farm business assets, such as farm equipment,
animals, farmland, and farm buildings. You also can deduct the social security
and Medicare taxes you pay to match the amount withheld from the wages of farm
employees and any federal unemployment tax you pay. For information on
employment taxes, see
chapter 13.
The taxes on the part of your farm you use as your home (including
the furnishings and surrounding land not used for farming) are nonbusiness
taxes. You may be able to deduct these nonbusiness taxes as itemized deductions
on Schedule A (Form 1040). You may be able to take a deduction for nonbusiness
real estate taxes you paid even if you do not itemize deductions on your income
tax return. See the Instructions for Form 1040 for additional information. To
determine the nonbusiness part, allocate the taxes between the farm assets and
nonbusiness assets. The allocation can be done from the assessed valuations. If
your tax statement does not show the assessed valuations, you can usually get
them from the tax assessor.
taxmap/pubs/p225-013.htm#en_us_publink1000217917State and local general sales taxes on nondepreciable farm business
expense items are deductible as part of the cost of those items. Include state
and local general sales taxes imposed on the purchase of assets for use in your
farm business as part of the cost you depreciate. Also treat the taxes as part
of your cost if they are imposed on the seller and passed on to you.
taxmap/pubs/p225-013.htm#en_us_publink1000217918Individuals cannot deduct state and federal income taxes as farm
business expenses. Individuals can deduct state and local income taxes only as
an itemized deduction on Schedule A (Form 1040). However, you cannot deduct
federal income tax.
taxmap/pubs/p225-013.htm#en_us_publink1000217919You can deduct the federal use tax on highway motor vehicles
paid on a truck or truck tractor used in your farm business. For information on
the tax itself, including information on vehicles subject to the tax, see the
Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return.
taxmap/pubs/p225-013.htm#en_us_publink1000217920You can deduct one-half of your self-employment tax in figuring
your adjusted gross income on Form 1040. For more information, see
chapter 12.
You generally can deduct the ordinary and necessary cost of insurance
for your farm business as a business expense. This includes premiums you pay for
the following types of insurance.
- Fire, storm, crop, theft, liability, and other insurance on
farm business assets.
- Health and accident insurance on your farm employees.
- Workers' compensation insurance set by state law that covers
any claims for job-related bodily injuries or diseases suffered by employees on
your farm, regardless of fault.
- Business interruption insurance.
- State unemployment insurance on your farm employees (deductible
as taxes if they are considered taxes under state law).
If you take out a policy on your life or on the life of another
person with a financial interest in your farm business to get or protect a
business loan, you cannot deduct the premiums as a business expense. In the
event of death, the proceeds of the policy are not taxed as income even if they
are used to liquidate the debt.
taxmap/pubs/p225-013.htm#en_us_publink1000217923Deduct advance payments of insurance premiums only in the year
to which they apply, regardless of your accounting method.
taxmap/pubs/p225-013.htm#en_us_publink1000217924On June 28, 2010, you paid a premium of $3,000 for fire insurance
on your barn. The policy will cover a period of 3 years beginning on July 1,
2010. Only the cost for the 6 months in 2010 is deductible as an insurance
expense on your 2010 calendar year tax return. Deduct $500, which is the premium
for 6 months of the 36-month premium period, or
6/36 of $3,000. In both 2011 and 2012, deduct $1,000 (12/36
of $3,000). Deduct the remaining $500 in 2013. Had the policy been effective on
January 1, 2010, the deductible expense would have been $1,000 for each of the
years 2010, 2011, and 2012, based on one-third of the premium used each year.
taxmap/pubs/p225-013.htm#en_us_publink1000217925Use and occupancy and business interruption insurance premiums
are deductible as a business expense. This insurance pays for lost profits if
your business is shut down due to a fire or other cause. Report any proceeds in
full in Part I of Schedule F.
taxmap/pubs/p225-013.htm#en_us_publink1000217926If you are self-employed, you can deduct your payments for medical,
dental, and qualified long-term care insurance coverage for yourself, your
spouse, and your dependents when figuring your adjusted gross income on your
Form 1040. Effective March 30, 2010, the insurance can also cover any child of
yours under age 27 at the end of 2010, even if the child was not your dependent.
Generally, this deduction cannot be more than the net profit from the business
under which the plan was established.
If you or your spouse is also an employee of another person,
you cannot take the deduction for any month in which you are eligible to
participate in a subsidized health plan maintained by your employer or your
spouse's employer.
Generally, use the
Self-Employed Health Insurance Deduction Worksheet
in the Form 1040 instructions to figure your deduction. Include the remaining
part of the insurance payment in your medical expenses on Schedule A (Form 1040)
if you itemize your deductions.
For more information, see
Deductible Premiums in chapter 6 of Publication 535.
taxmap/pubs/p225-013.htm#en_us_publink1000217927If you lease property for use in your farm business, you can
generally deduct the rent you pay on Schedule F. However, you cannot deduct rent
you pay in crop shares if you deduct the cost of raising the crops as farm
expenses.
taxmap/pubs/p225-013.htm#en_us_publink1000217928Deduct advance payments of rent only in the year to which they
apply, regardless of your accounting method.
taxmap/pubs/p225-013.htm#en_us_publink1000217929If you rent a farm, do not deduct the part of the rental expense
that represents the fair rental value of the farm home in which you live.
taxmap/pubs/p225-013.htm#en_us_publink1000217930If you lease a farm building or equipment, you must determine
whether or not the agreement must be treated as a conditional sales contract
rather than a lease. If the agreement is treated as a conditional sales
contract, the payments under the agreement (so far as they do not represent
interest or other charges) are payments for the purchase of the property. Do not
deduct these payments as rent, but capitalize the cost of the property and
recover this cost through depreciation.
taxmap/pubs/p225-013.htm#en_us_publink1000217931You lease new farm equipment from a dealer who both sells and
leases. The agreement includes an option to purchase the equipment for a
specified price. The lease payments and the specified option price equal the
sales price of the equipment plus interest. Under the agreement, you are
responsible for maintenance, repairs, and the risk of loss. For federal income
tax purposes, the agreement is a conditional sales contract. You cannot deduct
any of the lease payments as rent. You can deduct interest, repairs, insurance,
depreciation, and other expenses related to the equipment.
taxmap/pubs/p225-013.htm#en_us_publink1000217932Whether an agreement is a conditional sales contract depends
on the
intent
of the parties. Determine intent based on the provisions of the agreement and
the facts and circumstances that exist when you make the agreement. No single
test, or special combination of tests, always applies. However, in general, an
agreement may be considered a conditional sales contract rather than a lease if
any of the following is true.
- The agreement applies part of each payment toward an equity
interest you will receive.
- You get title to the property after you make a stated amount
of required payments.
- The amount you must pay to use the property for a short time
is a large part of the amount you would pay to get title to the property.
- You pay much more than the current fair rental value of the
property.
- You have an option to buy the property at a nominal price
compared to the value of the property when you may exercise the option.
Determine this value when you make the agreement.
- You have an option to buy the property at a nominal price
compared to the total amount you have to pay under the agreement.
- The agreement designates part of the payments as interest,
or part of the payments can be easily recognized as interest.
Special rules apply to lease agreements that have a terminal
rental adjustment clause. In general, this is a clause that provides for a
rental price adjustment based on the amount the lessor is able to sell the
vehicle for at the end of the lease. If your rental agreement contains a
terminal rental adjustment clause, treat the agreement as a lease if the
agreement otherwise qualifies as a lease. For more information, see section
7701(h) of the Internal Revenue Code.
taxmap/pubs/p225-013.htm#en_us_publink1000217934Special rules apply to leveraged leases of equipment (arrangements
in which the equipment is financed by a nonrecourse loan from a third party).
For more information, see chapter 3 of Publication 535 and the following revenue
procedures.
- Revenue Procedure 2001-28 in Internal Revenue Bulletin 2001-19.
- Revenue Procedure 2001-29 in Internal Revenue Bulletin 2001-19.
You can find Revenue Procedure 2001-28 on page 1156 and Revenue
Procedure 2001-29 on page 1160 of Internal Revenue Bulletin 2001-19 at
www.irs.gov/pub/irs-irbs/irb01-19.pdf.
If property you acquire to use in your farm business is expected
to last more than one year, you generally cannot deduct the entire cost in the
year you acquire it. You must recover the cost over more than one year and
deduct part of it each year on Schedule F as depreciation or amortization.
However, you can choose to deduct part or all of the cost of certain qualifying
property, up to a limit, as a section 179 deduction in the year you place it in
service.
Depreciation, amortization, and the section 179 deduction are
discussed in
chapter 7.
You can deduct expenses for the business use of your home if
you use part of your home exclusively and regularly:
- As the principal place of business for any trade or business
in which you engage,
- As a place to meet or deal with patients, clients, or customers
in the normal course of your trade or business, or
- In connection with your trade or business, if you are using
a separate structure that is not attached to your home.
Your home office will qualify as your principal place of business
for deducting expenses for its use if you meet both of the following
requirements.
- You use it exclusively and regularly for the administrative
or management activities of your trade or business.
- You have no other fixed location where you conduct substantial
administrative or management activities of your trade or business.
If you use part of your home for business, you must divide the
expenses of operating your home between personal and business use.
taxmap/pubs/p225-013.htm#en_us_publink1000217937If your gross income from farming equals or exceeds your total
farm expenses (including expenses for the business use of your home), you can
deduct all your farm expenses. But if your gross income from farming is less
than your total farm expenses, your deduction for certain expenses for the use
of your home in your farming business is limited.
Your deduction for otherwise nondeductible expenses, such as
utilities, insurance, and depreciation (with depreciation taken last), cannot be
more than the gross income from farming minus the following expenses.
- The business part of expenses you could deduct even if you
did not use your home for business (such as deductible mortgage interest, real
estate taxes, and casualty and theft losses).
- Farm expenses other than expenses that relate to the use of
your home. If you are self-employed, do not include your deduction for half of
your self-employment tax.
Deductions over the current year's limit can be carried over
to your next tax year. They are subject to the deduction limit for the next tax
year.
taxmap/pubs/p225-013.htm#en_us_publink1000217938See Publication 587 for more information on deducting expenses
for the business use of your home.
taxmap/pubs/p225-013.htm#en_us_publink1000217939You cannot deduct the cost of basic local telephone service (including
any taxes) for the first telephone line you have in your home, even if you have
an office in your home. However, charges for business long-distance phone calls
on that line, as well as the cost of a second line into your home used
exclusively for your farm business, are deductible business expenses.
taxmap/pubs/p225-013.htm#en_us_publink1000217940You can deduct the actual cost of operating a truck or car in
your farm business. Only expenses for business use are deductible. These include
such items as gasoline, oil, repairs, license tags, insurance, and depreciation
(subject to certain limits).
taxmap/pubs/p225-013.htm#en_us_publink1000217941Instead of using actual costs, under certain conditions you can
use the standard mileage rate. For 2010, the standard mileage rate for each mile
of business use is 50 cents per mile. You can use the standard mileage rate for
a car or a light truck, such as a van, pickup, or panel truck, you own or lease.
You cannot use the standard mileage rate if you operate five
or more cars or light trucks at the same time. You are not using five or more
vehicles at the same time if you alternate using the vehicles (you use them at
different times) for business.
taxmap/pubs/p225-013.htm#en_us_publink1000217942Maureen owns a car and four pickup trucks that are used in her
farm business. Her farm employees use the trucks and she uses the car for
business. Maureen cannot use the standard mileage rate for the car or the
trucks. This is because all five vehicles are used in Maureen's farm business at
the same time. She must use actual expenses for all vehicles.
taxmap/pubs/p225-013.htm#en_us_publink1000217943You can claim 75% of the use of a car or light truck as business
use without any records if you used the vehicle during most of the normal
business day directly in connection with the business of farming. You choose
this method of substantiating business use the first year the vehicle is placed
in service. Once you make this choice, you may not change to another method
later. The following are uses directly connected with the business of farming.
- Cultivating land.
- Raising or harvesting any agricultural or horticultural commodity.
- Raising, shearing, feeding, caring for, training, and managing
animals.
- Driving to the feed or supply store.
For more information on deductible truck and car expenses, see
chapter 4 of Publication 463. If you pay your employees for the use of their
truck or car in your farm business, see
Reimbursements to employees under
Travel Expenses next.
You can deduct ordinary and necessary expenses you incur while
traveling away from home for your farm business. You cannot deduct lavish or
extravagant expenses. Usually, the location of your farm business is considered
your home for tax purposes. You are traveling away from home if:
- Your duties require you to be absent from your farm substantially
longer than an ordinary work day, and
- You need to get sleep or rest to meet the demands of your
work while away from home.
If you meet these requirements and can prove the time, place,
and business purpose of your travel, you can deduct your ordinary and necessary
travel expenses.
The following are some types of deductible travel expenses.
- Air, rail, bus, and car transportation.
- Meals and lodging.
- Dry cleaning and laundry.
- Telephone and fax.
- Transportation between your hotel and your temporary work
or business meeting location.
- Tips for any of the above expenses.
You ordinarily can deduct only 50% of your business-related meals
expenses. You can deduct the cost of your meals while traveling on business only
if your business trip is overnight or long enough to require you to stop for
sleep or rest to properly perform your duties. You cannot deduct any of the cost
of meals if it is not necessary for you to rest, unless you meet the rules for
business entertainment. For information on entertainment expenses, see chapter 2
of Publication 463.
The expense of a meal includes amounts you spend for your food,
beverages, taxes, and tips relating to the meal. You can deduct either 50% of
the actual cost or 50% of a standard meal allowance that covers your daily meal
and incidental expenses.
 | Recordkeeping requirements.
You must be able to prove your deductions for travel by adequate records or
other evidence that will support your own statement. Estimates or approximations
do not qualify as proof of an expense.
|
You should keep an account book or similar record, supported
by adequate documentary evidence, such as receipts, that together support each
element of an expense. Generally, it is best to record the expense and get
documentation of it at the time you pay it.
If you choose to deduct a standard meal allowance rather than
the actual expense, you do not have to keep records to prove amounts spent for
meals and incidental items. However, you must still keep records to prove the
actual amount of other travel expenses, and the time, place, and business
purpose of your travel.
taxmap/pubs/p225-013.htm#en_us_publink1000217948For detailed information on travel, recordkeeping, and the standard
meal allowance, see Publication 463.
taxmap/pubs/p225-013.htm#en_us_publink1000217949You generally can deduct reimbursements you pay to your employees
for travel and transportation expenses they incur in the conduct of your
business. Employees may be reimbursed under an accountable or nonaccountable
plan. Under an accountable plan, the employee must provide evidence of expenses.
Under a nonaccountable plan, no evidence of expenses is required. If you
reimburse expenses under an accountable plan, deduct them as travel and
transportation expenses. If you reimburse expenses under a nonaccountable plan,
you must report the reimbursements as wages on Form W-2 and deduct them as
wages. For more information, see chapter 11 of Publication 535.
taxmap/pubs/p225-013.htm#en_us_publink1000217950You can deduct as
Other expenses
on Schedule F penalties you pay for marketing crops in excess of farm marketing
quotas. However, if you do not pay the penalty, but instead the purchaser of
your crop deducts it from the payment to you, include in gross income only the
amount you received. Do not take a separate deduction for the penalty.
taxmap/pubs/p225-013.htm#en_us_publink1000217951You can deduct the costs of maintaining houses and their furnishings
for tenants or hired help as farm business expenses. These costs include
repairs, utilities, insurance, and depreciation.
The value of a dwelling you furnish to a tenant under the usual
tenant-farmer arrangement is not taxable income to the tenant.
taxmap/pubs/p225-013.htm#en_us_publink1000217952If you use the cash method of accounting, you ordinarily deduct
the cost of livestock and other items purchased for resale only in the year of
sale. You deduct this cost, including freight charges for transporting the
livestock to the farm, in Part I of Schedule F. However, see
Chickens, seeds, and young plants below.
You use the cash method of accounting. In 2010, you buy 50 steers
you will sell in 2011. You cannot deduct the cost of the steers on your 2010 tax
return. You deduct their cost in Part I of your 2011 Schedule F.
taxmap/pubs/p225-013.htm#en_us_publink1000217954If you are a cash method farmer, you can deduct the cost of hens
and baby chicks bought for commercial egg production, or for raising and resale,
as an expense in Part II of Schedule F in the year paid if you do it
consistently and it does not distort income. You also can deduct the cost of
seeds and young plants bought for further development and cultivation before
sale as an expense in Part II of Schedule F when paid if you do this
consistently and you do not figure your income on the crop method. However, see
Prepaid Farm Supplies, earlier, for a rule that may limit your deduction for these
items.
If you deduct the cost of chickens, seeds, and young plants as
an expense, report their entire selling price as income. You cannot also deduct
the cost from the selling price.
You cannot deduct the cost of seeds and young plants for Christmas
trees and timber as an expense. Deduct the cost of these seeds and plants
through depletion allowances. For more information, see
Depletion in
chapter 7.
The cost of chickens and plants used as food for your family
is never deductible.
Capitalize the cost of plants with a preproductive period of
more than 2 years, unless you can elect out of the uniform capitalization rules.
These rules are discussed in
chapter 6.
You use the cash method of accounting. In 2010, you buy 500 baby
chicks to raise for resale in 2011. You also buy 50 bushels of winter wheat seed
in 2010 that you sow in the fall. Unless you previously adopted the method of
deducting these costs in the year you sell the chickens or the harvested crops,
you can deduct the cost of both the baby chicks and the seed wheat in 2010.
taxmap/pubs/p225-013.htm#en_us_publink1000217956If you use the crop method, you can delay deducting the cost
of seeds and young plants until you sell them. You must get IRS approval to use
the crop method. If you follow this method, deduct the cost from the selling
price to determine your profit in Part I of Schedule F. For more information,
see
Crop method under
Special Methods of Accounting in
chapter 2.
You can adopt either the crop method or the cash method for deducting
the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds
and young plants.
Although you must use the same method for egg-laying hens, pullets,
and chicks, you can use a different method for seeds and young plants. Once you
use a particular method for any of these items, use it for those items until you
get IRS approval to change your method. For more information, see
Change in Accounting Method in
chapter 2.
The following list, while not all-inclusive, shows some expenses
you can deduct as other farm expenses in Part II of Schedule F. These expenses
must be for business purposes and
(1) paid, if you use the cash method of accounting, or (2) incurred,
if you use an accrual method of accounting.
- Accounting fees.
- Advertising.
- Business travel and meals.
- Commissions.
- Consultant fees.
- Crop scouting expenses.
- Dues to cooperatives.
- Educational expenses (to maintain and improve farming skills).
- Farm-related attorney fees.
- Farm magazines.
- Ginning.
- Insect sprays and dusts.
- Litter and bedding.
- Livestock fees.
- Marketing fees.
- Milk assessment.
- Recordkeeping expenses.
- Service charges.
- Small tools expected to last one year or less.
- Stamps and stationery.
- Subscriptions to professional, technical, and trade journals
that deal with farming.
- Tying material and containers.
You prorate and deduct loan expenses, such as legal fees and
commissions, you pay to get a farm loan over the term of the loan.
taxmap/pubs/p225-013.htm#en_us_publink1000217960You can deduct as a farm business expense on Schedule F the cost
of preparing that part of your tax return relating to your farm business. You
may be able to deduct the remaining cost on Schedule A (Form 1040) if you
itemize your deductions.
You also can deduct on Schedule F the amount you pay or incur
in resolving tax issues relating to your farm business.
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