10/24/2017 Center for Agricultural Law & Taxation Farm Expenses - - PDF document

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Center for Agricultural Law & Taxation

Farm Expenses

Kristy Maitre Tax Specialist Center for Agricultural Law and Taxation October 24, 2017

Center for Agricultural Law & Taxation

26 CFR 1.162‐12 ‐ Expenses of Farmers

• Farms engaged in for profit activities
• A farmer who operates a farm for profit is entitled

to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming

Center for Agricultural Law & Taxation

Ordinary and Necessary

• The ordinary and necessary costs of operating a

farm for profit are deductible business expenses

• An ordinary expense is an expense that is common

and accepted in the business

• A necessary expense is one that is appropriate for

the business

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Business Expenses

• In general many of the expenses we will address today

will be allowed in other business entities

• In agriculture, these ordinary and necessary expenses

include car and truck expenses, fertilizer, seed, rent, insurance, fuel, and other costs of operating a farm

• Schedule F itemizes many of these expenses in Part II
• Those properly deductible expenses not separately

listed on the Form are reported on line 32

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Form 1040 Schedule F

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Form 1040 Schedule F

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Expenses

• Some expenses paid during the tax year may be partly

personal and partly business

• Examples include gasoline, oil, fuel, water, rent,

electricity, telephone/cell, vehicle, repairs, insurance, interest and taxes

• Farmers must allocate expenses between their business

and personal

• Generally, the personal part of these expenses is not

deductible

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Car and Truck Expenses

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Car and Truck Expenses

• Farmers, like other business owners, have the option to either:
• (1) deduct the actual cost of operating a truck or car in their

business or

• (2) deduct the standard mileage rate for each mile of business

use

• Those taxpayers who choose the actual cost method may deduct

those expenses related to the business use of the vehicle

• These include gasoline, oil, repairs, license tags, insurance, and

depreciation (subject to certain limits)

• Farmers choosing this method must keep good records of these

expenses

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Standard Mileage Rate

• Instead of using actual costs, under certain conditions taxpayers

can use the standard mileage rate

• The standard mileage rate for each mile of business use is

53.5 cents in 2017

• They can use the standard mile age rate for a car or a light truck,

such as a van, pickup, or panel truck, they own or lease

• They cannot use the standard mileage rate if they operate five or

more cars or light trucks at the same time

• The taxpayer is not using five or more vehicles at the same time if

they alternate using the vehicles (they use them at different times) for business, Notice 2014‐79

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Standard Mileage Rate

• The standard mileage rate cannot be used if the owner has

taken a § 179 or other depreciation deduction for the vehicle

• When vehicles are used for both personal and business

purposes, the taxpayer may take deductions only for the percentage of use attributable to the business

• This requires detailed recordkeeping
• Farmers, however, have a special rule under which they can

claim 75% of the use of a car or light truck as business use without any allocation records: Treas. Reg. § 1.274‐6T(b)

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75% Rule

• The rule applies if the taxpayer used the vehicle during most
• f the normal business day directly in connection with the

business of farming

• A farmer chooses this method of substantiating business use

the first year the vehicle is placed in service

• Once that choice is made, it cannot be changed.
• A farmer who uses his vehicle more than 75% for business

purposes should keep records of business use vs. personal use

• They may then deduct the actual percentage of expenses

applicable to the business use

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Directly in Connection with the Business

• f Farming
• 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

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Vehicles

• The PATH Act allows $8,000 in additional first‐year

depreciation for passenger automobiles placed in service in 2016 or 2017

• This amount is reduced to $6,400 in 2018 and

$4,800 in 2019

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Depreciation of Vehicles

• §280F(a) imposes dollar limitations on the depreciation

deductions that can be taken on passenger vehicles

• Passenger vehicles, by definition, weigh 6,000 lbs. gross

vehicle weight or less

• IRS Rev. Proc. 2017‐29 set the 2017 limits as follows:

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IRS Rev. Proc. 2017‐29

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SUV

• SUVs with a gross vehicle weight rating above 6,000 lbs. are

not subject to depreciation limits

• They are, however, limited to a $25,000 §179 deduction
• No depreciation or §179 limits apply to SUVs with a GVW

more than 14,000 lbs.

• Trucks and vans with a GVW rating above 6,000 lbs. but not

more than 14,000 lbs. generally have the same limits: no depreciation limitation, but a $25,000 §179 deduction

• These vehicles, however, are not subject to the §179

$25,000 limit if any of the following exceptions apply:

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SUV

• The vehicle is designed to have a seating capacity of more

than nine persons behind the driver's seat

• The vehicle is equipped with a cargo area at least 6 feet in

interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment or

• The vehicle has an integral enclosure, fully enclosing the

driver compartment and load‐carrying device, does not have seating behind the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield

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Example

• John purchased an SUV in February of 2017 for $45,000 as

his primary farming vehicle

• He is able to document 100 percent business use through

travel logs

• The SUV has a GVW of 8,000 lbs.
• John can expense the SUV as follows in the table
• John can expense all but $8,500 of the $45,000 purchase in

the first year

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Example

Cost ‐ SUV $ 45,000 (§179) – $25,000 Result = $20,000 Bonus Depreciation ‐ $10,000 Result = $10,000 MACRS Depreciation (five‐year, 150% DB) ‐ $1,500 Adjusted Basis = $8,500

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Center for Agricultural Law & Taxation

Example Two

• Instead of purchasing an SUV, John purchased a

long‐bed pickup truck with a GVW more than 6,000 lbs.

• Now, John is subject to no §179 deduction

limitation, and can immediately expense the entire purchase (assuming he has not used the $510,000 §179 deduction for other purchases)

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Example Three and Four

• John decides to purchase a light‐duty pickup truck

instead

• In this case, his entire deduction first year deduction will

be limited to $11,160 if he also elects to use bonus depreciation

• Now suppose John purchases a used light‐duty pickup

truck

• In this case, because bonus depreciation applies only to

new purchases, John’s first year deductions are limited to $3,560

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Conservation Issues

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Conservation

• Active farmers may be able to deduct the cost of

conservation practices implemented as part of an NRCS‐ approved (or comparable state approved) plan

• Farmers can elect the § 175 soil and water conservation

deduction (which is taken in the year the improvements are made) for conservation expenditures in an amount up to 25 % of the farmer’s gross income from farming

• The deduction can only be taken for improvements

made on “land used for farming”

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Conservation

• Excess amounts may be carried forward to future

tax years

• Once the farmer makes this expense election, it is

the only method available to claim soil and conservation expenses

• If the farmer stops farming or dies before the full

cost has been deducted, any unused deduction is lost

• It cannot be capitalized to reduce any gain upon the

sale of the farm

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Center for Agricultural Law & Taxation

Conservation

• Landowners who are not eligible for the deduction must

capitalize the expenses (add them to the basis of the property)

• The § 175 deduction is only available to taxpayers

“engaged in the business of farming ” § 175(a)

• A taxpayer is engaged in the business of farming if he

“cultivates, operates, or manages a farm for gain or profit, either as owner or tenant ” Treas. Reg. § § 1.175–3

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Center for Agricultural Law & Taxation

Conservation

• A taxpayer who receives a rental (either in cash or in kind)

which is based upon farm production is engaged in the business of farming for purposes of the conservation deduction

• However, a taxpayer who receives a fixed rental (without

reference to production) is engaged in the business of farming only if they participate to a material extent in the

• peration or management of the farm
• A taxpayer engaged in forestry or the growing of timber is

not engaged in the business of farming; nor is a person cultivating or operating a farm for recreation or pleasure rather than a profit

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Prepaid Farm Expenses

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Prepaid Farm Expenses

• Cash‐method taxpayers generally can deduct their

expenses for the year in which they pay them

• § 461(a); Treas. Reg. § 1.461‐1(a)(1)
• Some limits to deductions, however, occur with

respect to the prepayment of expenses

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Center for Agricultural Law & Taxation

Prepaid Farm Expenses ‐ 50% Limit

• Cash basis farmers are generally allowed to prepay the

cost of farm supplies such as feed, seed, and fertilizer by purchasing them in one year, even though they will not use the supplies until the following year

• This allows farmers to shift deductions to an earlier tax

year

• The amount of the allowable deduction for prepaid

expenses is limited by § 464

• The prepaid farm expenses may not exceed 50% of other

deductible farm expenses (including depreciation), unless

• ne of the following exceptions is met:

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Prepaid Farm Expenses ‐ 50% Limit

• The prepaid farm supplies expense is more than 50% of the
• ther deductible farm expenses because of a change in

business operations caused by unusual circumstances

• The total prepaid farm supplies expense for the preceding 3 tax

years is less than 50% of the total other deductible farm expenses for those 3 tax years

• To qualify for an exception, the taxpayer must also be “farm‐

related,” meaning that one of the following must apply:

• Taxpayer’s principal residence is on a farm
• Taxpayer’s principal occupation of farming, or
• Taxpayer is a member of the family of a taxpayer who meets
• ne of the above requirements

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Prepaid Farm Expenses – 50% Limit

• Note: In Agro‐Jal Farming Enterprises, Inc. et al. v.

Comm., 145 T.C. No. 5 (2015), the Tax Court stated that the 50% limitation applies narrowly to “feed, seed, fertilizer, or other similar farm supplies”

• In other words, prepayments for farm supplies

falling outside of that category (in the case of Agro‐ Jal, packing materials) may not be subject to that limitation

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Center for Agricultural Law & Taxation

Prepaid Farm Expenses

• If the prepaid farm supply expenses exceed 50 % of all other

expenses (and an exception does not apply), the amount of the expense deduction in excess of 50 percent must be deduced in the later tax year

• In other words, the excess must be deducted when the

supplies are actually used or consumed

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Prepaid Farm Expenses

• Note: “Farm syndicates” are not allowed to deduct seed, feed, fertilizer or
• ther similar farm supplies until actually used or consumed
• § 464(c)(1) defines “farm syndicate” as:
• A partnership or any other enterprise other than a corporation which

is not an S corporation engaged in the trade or business of farming, if at any time interests in such partnership or enterprise have been

• ffered for sale in any offering required to be registered with any

Federal or State agency having authority to regulate the offering of securities for sale, or

• A partnership or any other enterprise other than a corporation which

is not an S corporation engaged in the trade or business of farming, if more than 35 percent of the losses during any period are allocable to limited partners or limited entrepreneurs

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Prepaid Farm Expenses

• The term “farming” for purposes of § 464 means

“the cultivation of land or the raising or harvesting

• f any agricultural or horticultural commodity

including the raising, shearing, feeding, caring for, training, and management of animals”

• Farming does not include timber

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Example

• During 2017, the farmer bought fertilizer ($4,000), feed

($1,000), and seed ($500) for use on the farm in the follow‐ ing year

• The total prepaid farm supplies expense for 2017 is $5,500
• The other deductible farm expenses totaled $10,000 for

2017

• Therefore, the deduction for prepaid farm supplies cannot

be more than $5,000 (50% of $10,000) for 2017

• The excess prepaid farm supplies expense of $500 ($5,500 −

$5,000) is deductible in a later tax year when used or consumed

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• Rev. Proc. 79‐229 – Some Audit Issues to

Think About

• Rev. Rul. 79‐229, 1979‐2 C.B. 210, sets out three tests that must be met

in order to deduct the cost of a supply purchased in the current taxable year which will be used in the subsequent taxable year

• The expense must be a payment for the purchase of supplies, not a

deposit

• The amount is considered a payment if it was made under a binding

commitment to accept delivery of a specific quantity at a fixed price, and the farmer is not entitled to a refund or repurchase

• The prepayment is not merely for tax avoidance, but has a specific

business purpose

• Examples of business benefits are:

Fixing maximum prices Securing an assured feed supply Securing preferential treatment in anticipation of shortages

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• Rev. Proc. 79‐229 ‐ Some Audit Issues to

Think About

• The deduction does not result in a material distortion of

income

• Some factors to consider in determining whether there is a

material distortion of income are:

• The farmer’s customary business practices in conducting

the farming operation

• The materiality of the expenditure in relation to the

taxpayer’s income for the year

• The time of the year the purchase is made
• The amount of the expenditure in relation to past

purchases

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• Rev. Proc. 79‐229
• Remember Rev. Rul. 79‐229 was written before the

passive activity rules of IRC § 469 were enacted

• Consideration of IRC § 469 could further limit

farming expenses

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Payment for the Purchase of Feed

• Whether a payment is for the purchase of feed or a

deposit depends on the facts and circumstances in each case

• It is for the purchase of feed if the client can show they

made it under a binding commitment to accept delivery

• f a specific quantity of feed at a fixed price and they

are not entitled, by contract or business custom, to a refund or repurchase

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Payment for the Purchase of Feed

• 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

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Payment for the Purchase of Feed

• A provision permitting substitution of ingredients to vary

the particular feed mix to meet the 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

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Labor Issues

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Commodity Wages

• TaxPlace has a presentation covering commodity wages
• In respecting the time limits of today’s presentation the

issue will not be discussed

• As a member of TaxPlace you can view those webinars

at any time

• The issue in itself could extend our webinar by 30‐40

minutes

• I attached the presentation as a bonus to you material

for your review

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Labor Hired

• Your client can deduct reasonable wages paid for regular

farm labor, piecework, contract labor, and other forms of labor hired to work in the farming operations

• Your client can pay wages in cash or in noncash items such

as inventory, capital assets, or assets used in the farming business

• The cost of boarding farm labor is a deductible labor cost
• Other deductible costs incurred for farm labor include

health insurance, workers' compensation insurance, and

• ther benefits

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Farm Labor

• If a farmer pays his child to do farm work and a true

employer‐employee relationship exists, reasonable wages or other compensation paid to the child is deductible

• The wages are included in the child’s income, and the

child may have to file an income tax return

• These wages may also be subject to social security and

Medicare taxes if the child is age 18 or older

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Depreciation Issues

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Depreciation and Cost Recovery

• Farmers are allowed to depreciate assets over a period of

years, based upon a recovery period for each type of asset

• The Modified Accelerated Cost Recovery System (MACRS) is

used to recover the basis of most business and investment property placed in service after 1986

• MACRS consists of the General Depreciation System (GDS)

and the Alternative Depreciation System (ADS)

• Farming taxpayers use GDS unless they are required to use

ADS, most typically because they’ve opted out of the uniform capitalization rules

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Depreciation and Cost Recovery

• Farming and ranching property is generally depreciated

using the 150 % declining balance method with half‐year convention (if qualified)

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Depreciation and Cost Recovery

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Depreciation and Cost Recovery

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Depreciation and Cost Recovery § 179

• The PATH Act permanently extended and enhanced the “§ 179”

deduction for 2015 and beyond

• For 2017, farmers and small businesses can deduct up to

$510,000 of the tax basis of certain business property or equipment placed into service that year

• Once qualifying purchases reach a threshold of $2,030,000 in

2017, the amount of the deduction is reduced, dollar‐for‐dollar for each dollar above the threshold

• The § 179 deduction, as well as the threshold, are indexed for

inflation

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Depreciation and Cost Recovery

• The § 179 deduction applies to both new and used

business equipment

• Because it applies to 15‐year property or less, it does

not apply to farm buildings, but can be used for single purpose agricultural structures, such as a hog barn

• In addition to setting a higher deduction amount, the

PATH Act also made permanent a provision allowing revocation of the § 179 election without IRS consent

• Once the election is revoked, it cannot again be

elected again

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Additional First Year Depreciation (Bonus Depreciation)

• The PATH Act also extended 50 % additional first‐year

depreciation, also called bonus depreciation, but only for a time

• Congress chose to phase‐out this benefit over a five‐

year period

• Under this provision, producers can claim an additional

first‐year tax deduction equal to 50 % of the value of qualifying property placed into service during tax years 2015, 2016, and 2017

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Additional First Year Depreciation (Bonus Depreciation)

• Congress then reduced the depreciation amount to:
• 40 % in 2018 and
• 30 % in 2019
• Bonus depreciation is slated to disappear altogether

for property placed into service in 2020 or later

• The bonus depreciation deduction, which is available
• nly for new property, applies to farm buildings, in

addition to equipment

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Additional First Year Depreciation (Bonus Depreciation)

• Unlike the §179 expense allowance, there is no limit on

the overall amount of bonus depreciation that a producer may claim

• If an item of property qualifies for both §179 expensing

and bonus depreciation, the §179 expensing amount is computed first, and then bonus depreciation is taken based on the item’s remaining income tax basis

• It is also important to note that §179 expensing is

based on when the taxpayer’s tax year begins, whereas bonus depreciation is tied to the calendar year

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Additional First Year Depreciation (Bonus Depreciation) ‐ Trees and Vines

• The PATH Act also provided a special election to farmers who

plant trees or vines that bear fruits or nuts

• They may choose to deduct 50 % of the cost of planting

those trees or vines in the year of planting

• This rule applies to both farmers who have elected out of the

Uniform Capitalization Rules (UNICAP) and those who have not

• Without this special provision, bonus depreciation was not

available to farmers who have elected out of UNICAP

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Additional First Year Depreciation (Bonus Depreciation) ‐ Trees and Vines

• Likewise, without this special provision, all tree and vine

farmers are required to capitalize planting costs, rather than deduct them

• This special provision is only in place through 2019
• Like other bonus depreciation provisions, it is phased‐
• ut for property placed into service after 2017

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Other Expenses

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Fertilizer and Lime

• Under § 180, taxpayers engaged in the business of farming

may elect to immediately expense the cost of fertilizer and lime (where the benefits last substantially more than one year), rather than to capitalize the expense and depreciate it

• ver the term of its useful life
• The election is for one year only, but once such an election is

made, it may not be revoked without the consent of the IRS

• This provision applies both to tenants and landlords if the rent

is based upon production

• Cash rent landlords who do not materially participate in the

farming operation may not take advantage of this tax benefit

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Fertilizer and Lime

• It is also important to note that this deduction applies only

to “land used in farming,” which is defined as land used “by the taxpayer or his tenant for the production of crops, fruits,

• r other agricultural products or for the sustenance of

livestock”

• Initial land preparation costs cannot be deducted
• Note that the amount of the fertilizer and lime deduction

may be limited by the rule that restricts deductions for prepaid farm supplies to 50 percent of all other deductible farm expenses for the year

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Fertilizer and Lime

• If the farmer later sells the farmland for which the

cost of the fertilizer or lime has been deducted, they must report the amount of the sales price attributable to the unused fertilizer or lime as

• rdinary income

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Interest

• Taxpayers can deduct as a farm business expense interest paid on farm

mortgages and other obligations incurred in the farm business

• Cash method
• If they use the cash method of accounting, they can generally deduct

interest paid during the tax year

• They cannot deduct interest paid with funds received from the original

lender through another loan, advance, or other arrangement similar to a loan

• They can, however, deduct the interest when they start making payments on

the new loan

• Prepaid interest
• Under the cash method, they generally cannot deduct any interest paid

before the year it is due

• Interest paid in advance may be deducted only in the tax year in which it is

due

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Interest

• Accrual method
• If the client uses the accrual method of accounting,

they can deduct only interest that has accrued during the tax year

• However, they 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

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Allocation of Interest

• If the client uses the proceeds of a loan for more

than one purpose, they must allocate the interest

• n 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

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Breeding Fees

• The client can deduct breeding fees as a farm business

expense

• However, if they use an accrual method of accounting, they

must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc.

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Taxes

• The client 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

• They also can deduct the social security and Medicare

taxes they pay to match the amount withheld from the wages of farm employees and any federal unemployment tax they pay

Center for Agricultural Law & Taxation

Allocation of Taxes

• The taxes on the part of the farm used as a home (including the
• furnishings and surrounding land not used for farming) are

nonbusiness taxes

• They may be able to deduct these nonbusiness taxes as itemized

deductions on Schedule A (Form 1040)

• To determine the nonbusiness part, allocate the taxes between

the farm assets and nonbusiness assets

• The allocation can be done from the assessed valuations
• If the tax statement does not show the assessed valuations,

check with the tax assessor office

Center for Agricultural Law & Taxation

State and Local General Sales Taxes

• State and local general sales taxes on non‐depreciable

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 the farm business as part of the cost the client can depreciate

• Also treat the taxes as part of the cost if they are

imposed on the seller and passed on to the farmer

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State and Federal Income Taxes

• Individuals cannot deduct state and federal income

taxes as farm business expenses

• Individuals can deduct state and local income taxes
• nly as an itemized deduction on Schedule A (Form

1040)

• However, they cannot deduct federal income tax

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Highway Use Tax

• The client can deduct the federal use tax on

highway motor vehicles paid on a truck or truck tractor used in the farm business

• Form 2290, Heavy Highway Vehicle Use Tax Return

Center for Agricultural Law & Taxation

Insurance

• Generally a client can deduct the ordinary and necessary cost
• f insurance for the farm business as a business expense
• This includes premiums paid for the following types of

insurance

• Fire, storm, crop, theft, liability, and other insurance on

farm business assets

• Health and accident insurance on farm employees
• Workers' compensation insurance set by state law that

covers any claims for job related bodily injuries or diseases suffered by employees on the farm, regardless of fault

• Business interruption insurance
• State unemployment insurance on farm employees

(deductible as taxes if they are considered taxes under state law)

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Insurance to Secure a Loan

• If the client takes out a policy on their life or on the life
• f another person with a financial interest in the farm

business to get or protect a business loan, the premium cannot be deducted 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

Center for Agricultural Law & Taxation

Business Interruption Insurance

• Use and occupancy and business interruption

insurance premiums are deductible as a business expense

• This insurance pays for lost profits if the business is

shut down due to a fire or other cause

• Report any proceeds in full on Schedule F Part 1 as

income

Center for Agricultural Law & Taxation

Self‐Employed Health Insurance Deduction

• If the client is self‐employed, they can deduct as an

adjustment to income on Form 1040 the payments for medical, dental, and qualified long‐term care insurance coverage for themselves, their spouse, and dependents when figuring the adjusted gross income on the Form 1040

• Effective March 30, 2010, the insurance can also cover any

child of yours under age 27 at the end of 2017, even if the child was not a dependent

• Generally, this deduction cannot be more than the net

profit from the business under which the plan was established

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Rent and Leasing

• If the client leases property for use in the farm

business, they can generally deduct the rent paid on Schedule F

• However, they cannot deduct rent paid in crop shares

if they deduct the cost of raising the crops as farm expenses

Center for Agricultural Law & Taxation

Advance Payments

• Deduct advance payments of rent only in the year to

which they apply, regardless of the accounting method

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Farm Home

• If the client rents a farm, do not deduct the part of

the rental expense that represents the fair rental value of the farm home in which they live

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Other Expenses

• The following list, while not all inclusive, shows some expenses

that can be deducted as other farm expenses on Schedule F, Part II

• These expenses must be for business purposes and
• (1) Paid, if the taxpayer uses the cash method of accounting or
• (2) Incurred, if using the accrual method of accounting

Center for Agricultural Law & Taxation

Other Expenses

• 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

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Other Expenses

• Farm magazines
• Ginning
• Insect sprays and dusts
• Litter and bedding
• Livestock fees
• Marketing fees
• Milk assessment

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Center for Agricultural Law & Taxation

Other Expenses

• 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

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Center for Agricultural Law & Taxation

Tax Preparation Fees

• The client can deduct as a farm business expense on

Schedule F the cost of preparing that part of the tax return relating to the farm business

• They may be able to deduct the remaining cost on

Schedule A (Form 1040) if they itemize their deductions

• They also can deduct on Schedule F the amount they

pay or incur in resolving tax issues relating to the farm business

Center for Agricultural Law & Taxation

Supplies / Repairs and Maintenance

• Farmers may generally deduct the cost of materials and

supplies in the year in which they are purchased

• Treas. Reg. § 1.162‐3; Treas. Reg. § § 1.162‐12
• This would include deducting the cost of fuel, tools, and feed
• Farmers may also generally deduct most expenses incurred

for the repair and maintenance of their farm property

• This would include deducting expenses for activities such as

repairing the roof of a farm building or painting a fence

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Center for Agricultural Law & Taxation

Supplies / Repairs and Maintenance

• Expenditures that substantially prolong the life of

property, increase its value, or adapt it to a different use, however, must generally be capitalized, not deducted

• Distinguishing capital expenditures from supplies,

repairs, maintenance, and other deductible business expenses is sometimes a difficult process

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Center for Agricultural Law & Taxation

Seeds and Plants

• Farmers may generally deduct the cost of seeds and

plants used to produce a crop for sale

• This deduction is taken on line 26 of Schedule F
• This rule does not apply to plants with a pre‐productive

period of more than two years (i.e. trees and vines)

• Costs for these types of plants must generally be

capitalized, not deducted as an ordinary business expense

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Center for Agricultural Law & Taxation

Lease Issues

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Center for Agricultural Law & Taxation

Lease or Purchase

• If the client leases a farm building or equipment, they

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

Center for Agricultural Law & Taxation

Conditional Sales Contract

• Whether an agreement is a conditional sales contract

depends on the intent of the parties

• Determine intent based on the provisions of the

agreement and the facts and circumstances that exist when the agreement is made

• 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

Center for Agricultural Law & Taxation

Conditions

• The agreement applies part of each payment toward an

equity interest the client will receive

• They get title to the property after they make a stated

amount of required payments

• The amount they must pay to use the property for a

short time is a large part of the amount they would pay to get title to the property

• They pay much more than the current fair rental value
• f the property

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Center for Agricultural Law & Taxation

Conditions

• The client has the option to buy the property at a

nominal price compared to the value of the property when they may exercise the option

• Determine this value when they make the agreement
• They have an option to buy the property at a nominal

price compared to the total amount they 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

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Center for Agricultural Law & Taxation

Example

• The client leases 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

Center for Agricultural Law & Taxation

Example

• Under the agreement, the client is responsible for

maintenance, repairs, and the risk of loss

• For federal income tax purposes, the agreement is a

conditional sales contract

• They cannot deduct any of the lease payments as rent
• They can deduct interest, repairs, insurance,

depreciation, and other expenses related to the equipment

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Center for Agricultural Law & Taxation

Motor Vehicle Leases

• Special rules apply to lease agreements that have a

terminal rental adjustment clause

• In general, this is a clause that provides for a rental

price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease

• If the rental agreement contains a terminal rental

adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease

• §7701(h)

Center for Agricultural Law & Taxation

Leveraged Leases

• Special rules apply to leveraged leases of equipment

(arrangements in which the equipment is financed by a nonrecourse loan from a third party)

• Revenue Procedure 2001‐28

Center for Agricultural Law & Taxation

Telephone, Travel, Meals and Recordkeeping

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Center for Agricultural Law & Taxation

Telephone Expense

• The client cannot deduct the cost of basic local telephone

service (including any taxes) for the first telephone line they have in the home, even if they have an office in the home

• However, charges for business long distance phone calls on

that line, as well as the cost of a second line into the home used exclusively for the farm business, are deductible business expenses

• Cell phone charges for calls relating to the farm business are

deductible

• If the cell phone they use for the farm business is part of a

family cell phone plan, an allocation must be made to deduct

• nly the portion of the charges attributable to farm business

Center for Agricultural Law & Taxation

Travel Expenses

• Farmers can deduct ordinary and necessary expenses they

incur while traveling away from home for the farm business

• They cannot deduct lavish or extravagant expenses
• Usually, the location of the farm business is considered the

home for tax purposes

• A farmer is traveling away from home if:
• Their duties require them to be absent from the farm

substantially longer than an ordinary work day, and

• They need to get sleep or rest to meet the demands of

work while away from home

Center for Agricultural Law & Taxation

Travel Expenses

• If the taxpayer meets these requirements and can prove the

time, place, and business purpose of the travel, they can deduct

• rdinary 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
• r business meeting location and
• Tips for any of the above expenses

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Center for Agricultural Law & Taxation

Meals

• A taxpayer ordinarily can deduct only 50% of their

business related meals expenses

• They can deduct the cost of their meals while traveling
• n business only if the business trip is overnight or long

enough to require them to stop for sleep or rest to properly perform their duties

• They cannot deduct any of the cost of meals if it is not

necessary for them to rest, unless you meet the rules for business entertainment

Center for Agricultural Law & Taxation

Meals

• The expense of a meal includes amounts spent for their

food, beverages, taxes, and tips related to the meal

• They can deduct either 50% of the actual cost or 50% of

a standard meal allowance that covers they daily meal and incidental expenses

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Center for Agricultural Law & Taxation

Recordkeeping Requirements

• The client must be able to prove their deductions

for travel by adequate records or other evidence that will support their own statement

• Estimates or approximations do not qualify as proof
• f an expense
• They should keep an account book or similar

record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense

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Center for Agricultural Law & Taxation

Recordkeeping Requirements

• Generally, it is best to record the expense and get

documentation of it at the time it is paid

• If they elect to deduct a standard meal allowance

rather than the actual expense, they do not have to keep records to prove amounts spent for meals and incidental items

• However, they must still keep records to prove the

actual amount of other travel expenses, and the time, place, and business purpose of the travel

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Center for Agricultural Law & Taxation

Reimbursements to Employees

• The client can generally deduct reimbursements paid to

employees for travel and transportation expenses they incur in the conduct of the business

• Employees may be reimbursed under an accountable or

non‐accountable plan

• Under an accountable plan, the employee must provide

evidence of expenses

• Under a non‐accountable plan, no evidence of expenses is

required

• If the client reimburses expenses under an accountable plan,

deduct them as travel and transportation expenses

• If they reimburse expenses under a non‐accountable plan,

they must report the reimbursements as wages on Form W2 and deduct them as wages

Center for Agricultural Law & Taxation

Tenant House Expenses

• The client 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 furnished to a tenant under the

usual tenant farmer arrangement is not taxable income to the tenant

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Center for Agricultural Law & Taxation

The Scoop – Upcoming Dates

• November 1, 2017
• December 13, 2017
• Held at 8:00 am and 12:00 pm Central time

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Center for Agricultural Law & Taxation

Up Coming Webinars http://www.calt.iastate.edu/calendar‐node‐field‐seminar‐ date/month

• Farm Income ‐ October 26, 2017
• Ethics Part 1 and Part 2 ‐ November 13
• Ethics Part 1 and Part 2 ‐ November 13, 2017
• Ethics Part 1 and Part 2 ‐ November 14, 2017
• Ethics Part 1 and Part 2 ‐ December 15, 2017
• Ethics Part 1 and Part 2 ‐ December 18, 2017
• Ethics Part 1 and Part 2 ‐ December 19, 2017

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Center for Agricultural Law & Taxation

The Schedule is Finalized for the 44th Annual Federal Income Tax Schools

• November 2‐3, 2017 – Maquoketa, Iowa – Centerstone Inn and Suites
• November 6‐7, 2017 – Le Mars, Iowa – Le Mars Convention Center
• November 8‐9, 2017 – Atlantic, Iowa – Cass County Community Center
• November 9‐10, 2017 – Mason City, Iowa – North Iowa Area Community

College

• November 16‐17, 2017 – Ottumwa, Iowa – Indian Hills Community College
• November 20‐21, 2017 – Waterloo, Iowa – Hawkeye Community College
• December 11‐12, 2017 – Ames, Iowa and Live Webinar – Quality Inn and

Suites

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Center for Agricultural Law & Taxation

The CALT Staff

William Edwards Interim Director for the Beginning Farmer Center Interim Director for the Center for Agricultural Law and Taxation wedwards@iastate.edu 515‐294‐6161 473 Heady 518 Farm House Ln

• Ames. Iowa 50011

Kristine A. Tidgren Assistant Director E‐mail: ktidgren@iastate.edu Phone: (515) 294‐6365 Fax: (515) 294‐0700

Center for Agricultural Law & Taxation

The CALT Staff

Kristy S. Maitre Tax Specialist E‐mail: ksmaitre@iastate.edu Phone: (515) 296‐3810 Fax: (515) 294‐0700 Tiffany L. Kayser Program Administrator E‐mail: tlkayser@iastate.edu Phone: (515) 294‐5217 Fax: (515) 294‐0700

Center for Agricultural Law & Taxation

Backemeyer v. Commissioner, 147 T.C.

• No. 17 (Dec. 8, 2016),
• The tax court explored the interplay between prepaid

expenses and the step‐up in basis

• A farmer prepaid input expenses for the following crop year

before he passed away

• His wife inherited his property, including the seed, fertilizer,

and herbicides, with a stepped‐up basis

• The IRS argued that the wife could not again deduct the cost
• f those inputs when she used them to plant a crop
• The IRS argued that the tax benefit rule would require

recapture of the earlier deduction

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Center for Agricultural Law & Taxation

Backemeyer v. Commissioner, 147 T.C.

• No. 17 (Dec. 8, 2016),
• The Tax Court disagreed, finding that the estate tax

effectively “recaptures” § 162 deductions by way of its normal operation, obviating any need to separately apply the tax benefit rule

• Even though this farmer’s estate did not owe any

estate tax, the fair market value of the inputs was considered for purposes of determining whether such liability existed

• Recapturing the deduction could effectively result in a

“double taxation” of the value of the farm input

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Center for Agricultural Law & Taxation

De Minimis Safe Harbor under Tangible Property Regulations

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Center for Agricultural Law & Taxation

De Minimis Safe Harbor under Tangible Property Regulations

• IRS issued the Tangible Property Regulations (T.D. 9636),

effective January 1, 2014, to distinguish capital expenditures from supplies, repairs, maintenance, and other deductible business expenses

• Treas. Reg.§ 1.263(a)‐1 also provides taxpayers with an option

to elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property

• If this election is made, the taxpayer need not determine

whether every small dollar expenditure for the acquisition of property is properly deductible or capitalized under the complex acquisition and improvement rules of the regulations

• .

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Center for Agricultural Law & Taxation

De Minimis Safe Harbor under Tangible Property Regulations

• Instead, the taxpayer must deduct every purchase up to

the amount of the safe harbor elected

• For taxpayers without an applicable financial statement,

the safe harbor amount in 2017 is $2,500

• If the taxpayer has an accounting procedure in place to

expense such amounts, he or she can make the annual election

• This election is not an accounting method change, but is

made by attaching a statement to a timely filed original return

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Center for Agricultural Law & Taxation

De Minimis Safe Harbor under Tangible Property Regulations

• Once made for a particular tax year, every purchase of

tangible property falling within the range of the election must be expensed

• A taxpayer cannot choose to apply the safe harbor to some

items and not to other

• When a taxpayer elects the de minimis safe harbor, the

amount paid is not treated as a capital expenditure, as a repair, or as materials and supplies

• Instead, the taxpayer deducts the amount of the purchase

under Treas. Reg. §1.162‐1, provided that the expense

• therwise constitutes an “ordinary and necessary” business

expense

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Center for Agricultural Law & Taxation

De Minimis Safe Harbor under Tangible Property Regulations

• If the items to be deducted don’t fit into an expense

category included on Schedule F, they can be listed on line 32 as “other expenses”

• Generally, a taxpayer may not file an amended return to

either make or revoke the election for the de minimis safe harbor

• It is important to note that if a taxpayer later sells

property expensed under the safe harbor at a gain, the taxpayer must pay ordinary income tax on the entire sale price

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Center for Agricultural Law & Taxation

De Minimis Safe Harbor under Tangible Property Regulations

• This is not considered IRC § 1221 or § 1231property
• These sales would be reported on Form 4797 (Part

II) (Sales of Business Property)

• If the property was not held for sale in the ordinary

course or inventory, the gain should not be subject to self‐employment tax

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