us internal revenue service: p225--2000

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ContentsIntroduction ........................................ 1

Important Changes for 2000 ............. 2

Important Changes for 2001 ............. 2

Important Reminders ......................... 2

Important Dates .................................. 3

Chapter

1. Importance of Good Records .... 4

2. Filing Requirements and ReturnForms ........................................... 5

3. Accounting Periods andMethods ........................................ 10

4. Farm Income ................................ 14

5. Farm Business Expenses .......... 23

6. Soil and Water ConservationExpenses ...................................... 32

7. Basis of Assets ........................... 34

8. Depreciation, Depletion, andAmortization ................................ 39

9. General Business Credit ............ 52

10. Gains and Losses ....................... 54

11. Dispositions of Property Used inFarming ........................................ 63

12. Installment Sales ......................... 67

13. Casualties, Thefts, andCondemnations ........................... 71

14. Alternative Minimum Tax ........... 76

15. Self-Employment Tax .................. 77

16. Employment Taxes ..................... 82

17. Retirement Plans ......................... 86

18. Excise Taxes ................................ 91

19. Your Rights as a Taxpayer ........ 95

20. Sample Return ............................. 96

21. How To Get Tax Help .................. 115

Index .................................................... 116

IntroductionYou are in the business of farming if you cul-tivate, operate, or manage a farm for profit,either as owner or tenant. A farm includesstock, dairy, poultry, fish, fruit, and truckfarms. It also includes plantations, ranches,ranges, and orchards.

This publication explains how the federaltax laws apply to farming. Use this publicationas a guide to figure your taxes and completeyour farm tax return. If you need more infor-mation on a subject, get the specific IRS taxpublication covering that subject. We refer tomany of these free publications throughoutthis publication. See chapter 21 for informa-tion on ordering these publications.

Departmentof theTreasury

InternalRevenueService

Publica tion 225Cat. No. 11049L

Farmer'sTax Guide

For use in preparing

2000 Returns

Acknowledgment The valuable advice and assistance given useach year by the National Farm Income Tax Extension Committee isgratefully acknowledged.

CAUTION

!At the time this publication was being prepared for print, Con-gress was considering legislation containing provisions thatcould affect farmers. See Publication 553, Highlights of 2000

Tax Changes, for information on whether the legislation was enactedand, if so, the specific items of interest to farmers. Publication 553 willbe available on the IRS web site at www.irs.gov in January 2001.


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The explanations and examples in thispublication reflect the Internal Revenue Ser-vice's interpretation of tax laws enacted byCongress, Treasury regulations, and courtdecisions. However, the information givendoes not cover every situation and is not in-tended to replace the law or change itsmeaning. This publication covers subjectson which a court may have made a decisionmore favorable to taxpayers than the inter-pretation of the Service. Until these differinginterpretations are resolved by higher courtdecisions, or in some other way, this publi-cation will continue to present the interpreta-tion of the Service.

IRS Mission. Provide America's taxpayerstop quality service by helping them under-stand and meet their tax responsibilities andby applying the tax law with integrity andfairness to all.

Comments and suggestions. We welcomeyour comments about this publication andyour suggestions for future editions.

You can e-mail us while visiting our website at www.irs.gov/help/email2.html.

You can write to us at the following ad-dress:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone.Therefore, it would be helpful if you wouldinclude your daytime phone number, includ-ing the area code, in your correspondence.

Farm tax classes. Many state CooperativeExtension Services conduct farm tax work-shops in conjunction with the IRS. Pleasecontact your county extension office for moreinformation.

Important Changesfor 2000The following items highlight a number ofadministrative and tax law changes for 2000.They are discussed in more detail throughoutthe publication. More information on theseand other changes can be found in Publica-tion 553, Highlights of 2000 Tax Changes.

Depreciation limits on business cars. Thetotal section 179 deduction and depreciationyou can take on a car you use in your busi-ness and first place in service in 2000 is$3,060. Special rules apply to certain clean-fuel vehicles. See chapter 8.

Earned income credit. The maximumearned income credit has been increased for2000. To claim the credit, you must haveearned income (including net earnings fromself-employment) and modified adjustedgross income of less than $31,152 and meetcertain other requirements. For more infor-mation, including what counts as earned in-come, see Publication 596, Earned IncomeCredit (EIC).

Farm income averaging. You may be ableto use a negative taxable income amount fora base year when figuring your tax onSchedule J (Form 1040). See chapter 4.

Paid preparer authorization. Beginning withyour return for 2000, you can check a box andauthorize the IRS to discuss your tax returnwith the paid preparer who signed it. If youcheck the Yes box in the signature area ofyour return, the IRS can call your paidpreparer to answer any questions that mayarise during the processing of your return.Also, you are authorizing your paid preparerto perform certain actions. See your incometax package for details.

Section 179 deduction. For 2000, the totalcost you can elect to deduct under section179 of the Internal Revenue Code is in-creased to $20,000. See chapter 8.

Self-employed health insurance de-duction. The part of your self-employedhealth insurance premiums you can deductas an adjustment to income is 60% for 2000.See chapter 5.

Standard mileage rate. The standard mile-age rate for the cost of operating your car,van, pickup, or panel truck in 2000 is 321/2cents a mile for all business miles. Seechapter 5.

Tax rates and maximum net earnings for

self-employment tax. The maximum netself-employment earnings subject to the so-cial security part (12.4%) of the self-employ-ment tax increased to $76,200 for 2000.There is no maximum limit on earnings sub-

ject to the Medicare part (2.9%). See chapter15.

Marginal production of oil and gas. Thesuspension of the taxable income limit onpercentage depletion from the marginal pro-duction of oil and natural gas that wasscheduled to expire for tax years beginningafter 1999 has been extended to tax yearsbeginning before 2002. For more informationon marginal production, see section 613A(c)of the Internal Revenue Code.

Photographs of missing children. TheInternal Revenue Service is a proud partnerwith the National Center for Missing and Ex-ploited Children. Photographs of missingchildren selected by the Center may appearin this publication on pages that would other-wise be blank. You can help bring thesechildren home by looking at the photographsand calling 1800THELOST (18008435678) if you recognize a child.

Important Changesfor 2001The following items highlight a number ofadministrative and tax law changes for 2001.More information on these and other changescan be found in Publication 553, Highlightsof 2000 Tax Changes.

Electronic deposits of taxes. You must usethe Electronic Federal Tax Payment System(EFTPS) to make electronic deposits of alldepository tax liabilities you incur after 2000if you meet either of the following conditions.

You had to make electronic deposits in2000.

You deposited more than $200,000 infederal depository taxes in 1999.

If you do not meet these conditions, electronicdeposits are voluntary. See chapter 16.

Section 179 deduction. For 2001, the totalcost you can elect to deduct under section179 of the Internal Revenue Code is in-creased to $24,000. See chapter 8.

Maximum net earnings for self-employ-ment tax. The maximum net self-employ-ment earnings subject to the social securitypart of the self-employment tax for 2001 will

be published in Publications 533 and 553.There is no maximum limit on earnings sub-

ject to the Medicare part.

Wage limits for social security and Medi-care taxes. The maximum wages subject tothe social security tax for 2001 will be pub-lished in Publication 51, Circular A, Agricul-tural Employer's Tax Guide. There is no limiton wages subject to the Medicare tax.

Important RemindersThe following reminders and other items mayhelp you file your tax return.

Principal agricultural activity codes. Youmust enter on line B of Schedule F (Form1040) a code that identifies your principalagricultural activity. It is important to use thecorrect code, since this information will iden-tify market segments of the public for IRSTaxpayer Education programs. The U.S.Census Bureau also uses this information forits economic census. See the list of PrincipalAgricultural Activity Codes on page 2 ofSchedule F.

Business use of your home. You may beable to deduct expenses for your home officeeven if it is not where you perform your mostimportant business activities or spend most

of your business time. See chapter 5.

Child tax credit. You may be able to claima tax credit for each of your qualifying childrenunder the age of 17. The credit can be asmuch as $500 for each qualifying child. Seeyour income tax package for details.

Estimated tax. When you figure your esti-mated tax, you must include any alternativeminimum tax you expect to owe. See chapter14 and Publication 505.

Averaging of farm income. Individualfarmers can choose to average all or part oftheir taxable farm income. See chapter 4.

Voluntary withholding. You can requestincome tax withholding from the followingpayments on Form W4V, Voluntary With-holding Request.

1) Commodity Credit Corporation (CCC)loans.

2) Certain crop disaster payments receivedunder the Agricultural Act of 1949 or titleII of the Disaster Assistance Act of 1988.

3) Social security benefits.

4) Unemployment compensation.

5) Certain other government payments.

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See chapter 4 for information on CCCloans and disaster relief payments.

Direct deposit of refund. If you are due arefund on your tax return, you can have itdeposited directly into your account at a bankor other financial institution. See your incometax package for details.

Change of address. If you change yourhome or business address, you should useForm 8822, Change of Address, to notify the

IRS. Be sure to include your suite, room, orother unit number.

Written tax questions. You can send writtentax questions to the IRS. You should get ananswer in about 30 days. Call 18008291040 if you need the address.

IRS e-file (electronic filing). You can fileyour tax returns electronically using an IRSe-fileoption. The benefits of IRS e-file includefaster refunds, increased accuracy, and ac-knowledgment of IRS receipt of your return.You can use one of the following IRS e-fileoptions.

1) Use an authorized IRS e-fileprovider.

2) Use a personal computer.

3) Use a telephone if you receive a TelefileTax Package.

4) Visit a VITA or TCE site.

5) Use an employer or financial institution.

For details on these fast filing methods, seeyour income tax package.

Overdue tax bill. If you receive a bill foroverdue taxes, do not ignore the tax bill. If youowe the tax shown on the bill, you shouldmake arrangements to pay it. If you believeit is incorrect, contact the IRS immediately to

suspend action until the mistake is corrected.See Publication 594, The IRS CollectionProcess, for more information.

Comments on IRS enforcement actions.The Small Business and Agricultural Regula-tory Enforcement Ombudsman and 10 Re-gional Fairness Boards were established toreceive comments from small business aboutfederal agency enforcement actions. TheOmbudsman will annually evaluate theenforcement activities and rate each agency'sresponsiveness to small business. If you wishto comment on the enforcement actions of theIRS, call 18887343247.

Treasury Inspector General for Tax Ad-

ministration. If you want to confidentiallyreport misconduct, waste, fraud, or abuse byan IRS employee, you can call 18003664484 (18008778339 for TTY/TDD users).You can remain anonymous.

Publication on employer identificationnumbers (EIN). Publication 1635, Under-standing Your EIN, provides general infor-mation on employer identification numbers.Topics include how to apply for an EIN andhow to complete Form SS4.

Form W4 for 2001. You should make newForms W4 available to your employees andencourage them to check their income tax

withholding for 2001. Those employees whoowed a large amount of tax or received alarge refund for 2000 may need to file a newForm W4. See chapter 16.

Earned income credit. You, as an em-ployer, must notify employees who worked foryou and from whom you did not withhold in-come tax about the earned income credit.See chapter 16.

Form 1099MISC. File Form 1099MISC if

you pay at least $600 in rents, services, andother income payments in your farming busi-ness to an individual (for example, an ac-countant, an attorney, or a veterinarian) whois not your employee.

Children employed by parents. Wages youpay to your children age 18 and older forservices in your trade or business are subjectto social security and Medicare taxes. Seechapter 16.

Farmers and crew leaders must withholdincome tax. Farmers and crew leaders mustwithhold federal income tax from farm work-ers who are subject to social security andMedicare taxes. See chapter 16.

Social security tests for seasonal farmworkers. If you pay seasonal farm workersless than $150 in annual cash wages, thewages are not subject to social security andMedicare taxes, even if you pay $2,500 ormore to all your farm workers. The seasonalfarm worker must meet certain tests. Seechapter 16.

Medical savings accounts (MSAs). If youare covered only under a high deductiblehealth plan, you may be able to participate inan MSA program. You can deduct contribu-tions to your MSA even if you do not itemizeyour deductions. See Publication 969, Med-ical Savings Accounts (MSAs).

Important DatesYou should take the action indicated on orbefore the dates listed. Saturdays, Sundays,and legal holidays have been taken into ac-count, but statewide holidays have not. Astatewide legal holiday delays a due date onlyif the IRS office where you are required to fileis located in that state.

Due dates for deposits of withheld incometaxes, social security taxes, and Medicaretaxes are not listed here. For these dates,see Publication 509, Tax Calendars for 2001.

Fiscal year taxpayers. Generally, the duedates listed apply, whether you use a calen-dar or a fiscal year. However, if you have afiscal year, refer to Publication 509 for certainexceptions that may apply to you.

2001 Calendar YearDuring JanuaryFarm employers. Give your employees their

copies of Form W2 for 2000 as soon aspossible. The due date is January 31,2001.

January 16Farmers. Pay your estimated tax for 2000

using Form 1040ES. You have until April16 to file your 2000 income tax return(Form 1040). If you do not pay your esti-mated tax by January 16, you must fileyour 2000 return and pay any tax due byMarch 1, 2001.

January 31Farm employers. Give your employees their

copies of Form W2 for 2000.

Social security, Medicare, and withheldincome tax. File Form 943 to report so-cial security and Medicare taxes andwithheld income tax for 2000. Deposit anyundeposited tax. (If the total is less than$1,000 and not a shortfall, you can pay itwith the return.) If you deposited the taxfor the year in full and on time, you haveuntil February 12 to file the return. (Do notreport wages for nonagricultural serviceson Form 943.)

All farm businesses. Give annual informa-tion statements to recipients of certainpayments you made during 2000. You canuse the appropriate version of Form 1099

or other information return. For more in-formation, see Information Returns inchapter 2.

Federal unemployment (FUTA) tax. FileForm 940 (or 940EZ) for 2000. If yourundeposited tax is $100 or less, you caneither pay it with your return or deposit it.If it is more than $100, you must depositit. However, if you deposited the tax for theyear in full and on time, you have untilFebruary 12 to file the return. For moreinformation on FUTA tax, see chapter 16.

February 12Social security, Medicare, and withheld

income tax. File Form 943 to report so-

cial security, Medicare, and withheld in-come tax for 2000. This due date appliesonly if you deposited the tax for the yearin full and on time.

Federal unemployment (FUTA) tax. FileForm 940 (or 940EZ) for 2000. This duedate applies only if you deposited the taxfor the year in full and on time.

February 28All farm businesses. File information re-

turns (Form 1099) for certain paymentsyou made during 2000. There are differentforms for different types of payments. Usea separate Form 1096 to summarize andtransmit the forms for different types of

payments.If you file Forms 1099 electronically

(not by magnetic media), your due date forfiling them with the IRS is extended toApril 2. The due date for giving the recipi-ent these forms is still January 31.

Farm employers. File Form W3, Transmit-tal of Wage and Tax Statements, alongwith Copy A of all the Forms W2 you is-sued for 2000.

If you file Forms W2 electronically(not by magnetic media), your due date forfiling them with the Social Security Ad-ministration (SSA) is extended to April 2.The due date for giving the recipient theseforms is still January 31.

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For more information, see Form W2under Information Returnsin chapter 2.

March 1

Farmers. File your 2000 income tax return(Form 1040) and pay any tax due. How-ever, you have until April 16 to file if youpaid your 2000 estimated tax by January16, 2001.

March 15

Corporations. File a 2000 calendar year in-come tax return (Form 1120 or 1120A)and pay any tax due. For more informa-tion, see Paying and Filing Income Taxesin Publication 542, Corporations.

April 2

Electronic filing of Forms 1099 and W2.File Forms 1099 with the IRS and FormsW2 with the SSA. This due date appliesonly if you file electronically (not by mag-netic media). Otherwise, the due date isFebruary 28.

The due date for giving the recipientthese forms is still January 31.

For information about filing Forms1099 electronically, see Publication 1220,Specifications for Filing Forms 1098,1099, 5498, and W2 Magnetically orElectronically. For information about filingForms W2 electronically with the SocialSecurity Administration, call 18007726270.

April 16

Farmers. File an income tax return (Form1040) for 2000 and pay any tax due if youdid not file by March 1.

Partnerships. File a 2000 calendar year re-turn (Form 1065). For more information,

see Partnership Return (Form 1065) inPublication 541, Partnerships.

April 30

Federal unemployment (FUTA) tax. If youare liable for FUTA tax, deposit the taxowed through March, if more than $100.

July 31

Federal unemployment (FUTA) tax. If youare liable for FUTA tax, deposit the taxowed through June. No deposit is neces-sary if the liability for the quarter plus un-deposited FUTA tax for the 1st quarterdoes not exceed $100.

October 31

Federal unemployment (FUTA) tax. If youare liable for FUTA tax, deposit the taxowed through September. No deposit isnecessary if the liability for the quarterplus undeposited FUTA tax for previousquarters does not exceed $100.

1.

Im portance ofGood Rec ords

IntroductionA farmer, like other taxpayers, must keeprecords to prepare an accurate income taxreturn and determine the correct amount oftax. This chapter explains why you must keeprecords, what kinds of records you must keep,and how long you must keep them for federaltax purposes.

Tax records are not the only type of rec-ords you need to keep for your farming busi-ness. You should also keep records thatmeasure your farm's financial performance.This publication only discusses tax records.

For information on financialrecordkeeping, you may want to geta copy of Financial Guidelines For

Agricultural Producers. You can order it fromCountryside Marketing, Inc., by calling16306370199 or you can write to:

Farm Financial Standards CouncilPMB 3161212 S. Naper Blvd., #119Naperville, IL 60540

You can also download the publica-tion at www.ffsc.org.

TopicsThis chapter discusses:

Why you should keep records

What records to keep

How long to keep records

Useful ItemsYou may want to see:

Publication

51 Circular A, Agricultural Employer'sTax Guide

463 Travel, Entertainment, Gift, andCar Expenses

See chapter 21 for information about get-ting publications.

Why Keep Records?Everyone in business, including farmers,must keep records. Good records will helpyou do the following.

Monitor the progress of your farmingbusiness. You need good records to monitorthe progress of your farming business. Rec-ords can show whether your business is im-proving, which items are selling, or whatchanges you need to make. Good records

can increase the likelihood of business suc-cess.

Prepare your financial statements. Youneed good records to prepare accurate fi-nancial statements. These include income(profit and loss) statements and balancesheets. These statements can help you indealing with your bank or creditors.

Identify source of receipts. You will receivemoney or property from many sources. Your

records can identify the source of your re-ceipts. You need this information to separatefarm from nonfarm receipts and taxable fromnontaxable income.

Keep track of deductible expenses. Youmay forget expenses when you prepare yourtax return unless you record them when theyoccur.

Prepare your tax returns. You need goodrecords to prepare your tax return. Theserecords must support the income, expenses,and credits you report. Generally, these arethe same records you use to monitor yourfarming business and prepare your financialstatements.

Support items reported on tax returns.You must keep your business records avail-able at all times for inspection by the IRS. Ifthe IRS examines any of your tax returns, youmay be asked to explain the items reported.A complete set of records will speed up theexamination.

Kinds of RecordsTo KeepExcept in a few cases, the law does not re-quire any special kind of records. You may

choose any recordkeeping system suited toyour farming business that clearly shows yourincome and expenses.

You should set up your recordkeepingsystem using an accounting method thatclearly shows your income for your tax year.See chapter 3. If you are in more than onebusiness, you should keep a complete andseparate set of records for each business.A corporation should keep minutes of boardof directors' meetings.

Your recordkeeping system should includea summary of your business transactions.This summary is ordinarily made in account-ing journals and ledgers. They must showyour gross income, as well as your de-ductions and credits. In addition, you mustkeep supporting documents. Purchases,

sales, payroll, and other transactions youhave in your business generate supportingdocuments such as invoices and receipts.These documents contain the information youneed to record in your journals and ledgers.

It is important to keep these documentsbecause they support the entries in your

journals and ledgers and on your tax return.Keep them in an orderly fashion and in a safeplace. For instance, organize them by yearand type of income or expense.

Travel, transportation, entertainment, andgift expenses. Special recordkeeping rulesapply to these expenses. For more informa-tion, see Publication 463.

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Employment taxes. There are specific em-ployment tax records you must keep. For alist, see Publication 51 (Circular A).

Excise taxes. See How To Claim a Creditor Refund in chapter 18 for the specific rec-ords you must keep to verify your claim forcredit or refund of excise taxes on certain fu-els.

Assets. Assets are the property, such asmachinery and equipment, you own and use

in your business. You must keep records toverify certain information about your businessassets. You need records to figure your an-nual depreciation deduction and the gain orloss when you sell the assets. Your recordsshould show all the following.

When and how you acquired the asset.

Purchase price.

Cost of any improvements.

Section 179 deduction taken.

Deductions taken for depreciation.

Deductions taken for casualty losses,such as losses resulting from fires or

storms. How you used the asset.

When and how you disposed of the asset.

Selling price.

Expenses of sale.

The following are examples of records thatmay show this information.

Purchase and sales invoices.

Real estate closing statements.

Canceled checks.

Financial account statements as proof ofpayment. If you do not have a canceledcheck, you may be able to prove paymentwith certain financial account statementsprepared by financial institutions. These in-clude account statements prepared for the fi-nancial institution by a third party. These ac-count statements must be highly legible. Thefollowing table lists acceptable accountstatements.

CAUTION

!Proof of payment of an amount alonedoes not establish you are entitled toa tax deduction. You should also keep

other documents, such as credit card salesslips and invoices.

How Long To KeepRecordsYou must keep your records as long as theymay be needed for the administration of anyprovision of the Internal Revenue Code.Generally, this means you must keep recordsthat support an item of income or deductionon a return until the period of limitations forthat return runs out.

The period of limitations is the period oftime in which you can amend your return toclaim a credit or refund or the IRS can assessadditional tax. The following table containsthe periods of limitations that apply to incometax returns. Unless otherwise stated, theyears refer to the period beginning after thereturn was filed. Returns filed before the duedate are treated as being filed on the duedate.

TIPKeep copies of your filed tax returns.They help in preparing future tax re-turns and making computations if you

later file an amended return.

Employment taxes. If you have employees,you must keep all employment tax records forat least 4 years after the date the tax be-comes due or is paid, whichever is later.

Assets. Keep records relating to propertyuntil the period of limitations expires for theyear in which you dispose of the property ina taxable disposition. You must keep theserecords to figure any depreciation, amorti-zation, or depletion deduction and to figureyour basis for computing gain or loss whenyou sell or otherwise dispose of the property.

Generally, if you receive property in anontaxable exchange, your basis in thatproperty is the same as the basis of theproperty you gave up, increased by anymoney you paid. You must keep the recordson the old property, as well as on the newproperty, until the period of limitations expiresfor the year in which you dispose of the newproperty in a taxable disposition.

Records for nontax purposes. When yourrecords are no longer needed for tax pur-poses, do not discard them until you check tosee if you have to keep them longer for otherpurposes. For example, your insurance com-pany or creditors may require you to keepthem longer than the IRS does.

2.FilingRequirementsand ReturnForms

Important Reminders

Form 1099MISC. File Form 1099MISC ifyou pay at least $600 in rents, services, andother income payments in your farming busi-ness to an individual (for example, an ac-countant, an attorney, or a veterinarian) whois not your employee.

Estimated tax. When you figure your esti-mated tax, you must include any alternativeminimum tax you expect to owe. See chapter14 and Publication 505.

IntroductionIf you are a citizen or resident of the UnitedStates, and your gross income for the tax year

is at least the amount shown for your statusunder Filing Requirements, later, you must filea 2000 federal income tax return. This is trueeven if no tax is due. Gross income is ex-plained later.

If you do not meet the gross income re-quirement, you may still need to file a tax re-turn if any of the following apply.

You have self-employment income.

You are entitled to certain credits.

You are entitled to a complete refund oftax withheld.

If you are a qualified farmer, you aresubject to the special rules covered in thischapter for paying estimated tax and filing

your tax return. This chapter also includesinformation about various forms and returnsyou may need to file.


Filing requirements

Taxpayer identification number

Estimated tax and return due dates

Main tax forms used by farmers

Partnership return

Corporation return

S corporation return

IF you...THEN theperiod is...

1 Owe additional tax and(2), (3), and (4) do notapply to you 3 years

2 Do not report incomethat you should and it ismore than 25% of thegross income shown onyour return 6 years

3 Fi le a fraudulent return No l imi t

4 Do not file a return No limit

5 File a claim for creditor refund after you filedyour return

Later of 3 yearsor 2 years aftertax was paid.

6 File a claim for a lossfrom worthless securities 7 years

IF payment is by...THEN the statementmust show the...

Check Check number

Amount

Payee's name

Date the checkamount was postedto the account bythe financial institu-tion

Electronic funds transfer Amount transferred

Payee's name

Date the transferwas posted to theaccount by the fi-nancial institution

Credit card Amount charged

Payee's name

Transaction date

Chapter 2 Filing Requirements and Return Forms Page 5


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Figure 2-A. Estimated Tax for Farmers

Start Here:

Do you expect to owe$1,000 or more aftersubtracting yourwithholding and credits?

Do you expectyour income taxwithholding andcredits to be atleast 100% ofthe tax shownon your 1999return?

You do not have topay estimated tax.

Do you expectyour income taxwithholding andcredits to be atleast 6623% ofthe tax shownon your 2000return?

Will you fileyour incometax return andpay the tax infull byMarch 1?

You must payyour estimatedtax (yourrequired annualpayment) byJanuary 16.

Was at least 6623%

of all your grossincome in 1999 or2000 from farming?

Follow the generalestimated tax rules.

Yes

NoYes

No

No

No

Yes

Yes

Yes

No

TaxpayerIdentification NumberYou must enter your taxpayer identificationnumber (generally your social security oremployer identification number) on all returns,statements, or documents you must file. Forexample, you must enter it on your federalincome tax return, your estimated tax pay-ment voucher, and all information returns,

such as Forms 1096 and 1099. You may besubject to a penalty of $50 for each failure toenter the number.

Schedule F. Enter your social securitynumber (SSN) in the space provided on thefirst line of Schedule F. You need an em-ployer identification number (EIN) if you havea Keogh plan or must file an employment,excise, estate, trust, partnership, or alcohol,tobacco, and firearms tax return. Enter thatEIN on line D of Schedule F.

Other forms and schedules. On your indi-vidual income tax return (Form 1040),schedule of self-employment tax (ScheduleSE), and estimated tax payment voucher

(Form 1040ES), you should enter your SSN,regardless of which number you entered onyour business returns.

If you are married, enter the SSNs for youand your spouse on your Form 1040, whetheryou file jointly or separately. If you are filinga joint return, list the SSNs in the same orderas the names are shown on your label. Alsoenter both SSNs on your Form 1040ES ifyou make joint estimated tax payments. En-ter them in the same order as they appearon the joint return.

Applying for a social securitynumber. To apply for a social secu-rity number (SSN), use Form SS5.

You can get the form from any social securityoffice or by calling 18007721213. If you

are under 18 years of age, you must furnishevidence of age, identity, and U.S. citizenship(or lawful alien status) with your Form SS5.If you are 18 or older, you must appear inperson with this evidence at a social securityoffice. It usually takes about 2 weeks to getan SSN.

Applying for an employer identifi-cation number. To apply for an em-ployer identification number, use

Form SS4. See chapter 21 for informationabout ordering this form.

Estimated TaxPayment and ReturnDue DatesWhen you must pay estimated tax and fileyour tax return depend on how much of yourgross income comes from farming. Grossincome is discussed next. If you receive atleast two-thirds of your total gross incomefrom farming in the current or prior year,


Publication

505 Tax Withholding and EstimatedTax

541 Partnerships

542 Corporations

Form (and Instructions)

We have not listed the various forms youmay have to file with the IRS because theyare discussed later in this chapter.

See chapter 21 for information about get-ting publications and forms.

Filing RequirementsCheck the following table to determinewhether you must file a tax return, based onyour age at the end of your tax year, grossincome, and filing status.

Dependent's return. If you can claimsomeone as a dependent on your tax return(for example, your son or daughter), that

person must generally also file his or her owntax return if any of the following apply.

Your dependent had only earned income,such as salary or wages, and the totalwas more than $4,400.

Your dependent had only unearned in-come, such as interest and dividends,and the total was more than $700.

Your dependent had both earned andunearned income, and the total was morethan $700.

Self-employed. You must file an income taxreturn if you are self-employed and you hadnet earnings of $400 or more from self-employment, even if you do not otherwise

have to file a return. See chapter 15.

Certain credits. You must also file a returnif you received any advance earned incomecredit payments from your employer. In addi-tion, you should file a return if you are eligiblefor the earned income credit or the additionalchild tax credit.

Refund. Even if you do not otherwise haveto file a return, you should file one to get arefund of any income tax withheld.

More information. See the Form 1040 in-structions for more information on who mustfile a return for 2000.

Head of householdUnder 65 ............................................ 9,25065 or older .......................................... 10,350

Qualifying widow(er) withdependent child

Under 65 ............................................ 10,15065 or older .......................................... 11,000

Who Must File

FilingIncomeWas

Status Is: At Least:

SingleUnder 65 ............................................ $7,20065 or older .......................................... 8,300

Married, filing jointlyBoth under 65 .................................... 12,950One spouse 65 or older ..................... 13,800Both 65 or older ................................. 14,650Not living with spouse at end of year(or on date spouse died) ................... 2,800

Married, filing separatelyAll (any age) ....................................... 2,800

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special estimated tax and return due datesapply to you. See the discussion under DueDates for Qualified Farmers, later.

Figure 2A presents an overview of thespecial estimated tax rules that apply tofarmers.

CAUTION

!Gross income is not the same as totalincome shown on line 22 of Form1040.

Gross Income

Your gross income is all income you receivein the form of money, goods, property, andservices that is not exempt from tax. On a

joint return, you must add your spouse's grossincome to your gross income. To decidewhether two-thirds of your gross income for2000 was from farming, use as your grossincome the total of the following income(notloss) amounts from your tax return.

Wages, salaries, tips, etc.

Taxable interest.

Ordinary dividends.

Taxable refunds of state and local taxes.

Alimony received.

Gross business income from ScheduleC (Form 1040), line 7.

Gross business receipts from ScheduleCEZ (Form 1040), line 1.

Capital gains from Form 1040, line 13,including gains from Schedule D (Form1040). Losses cannot be netted againstgains.

Gains on sales of business property fromForm 4797 and shown on Schedule D.

Taxable IRA distributions, pensions, an-nuities, and social security benefits.

Gross rental income from Schedule E(Form 1040), line 3.

Gross royalty income from Schedule E

(Form 1040), line 4. Taxable net income from an estate or

trust, Schedule E (Form 1040), line 36.

Income from a REMIC reported onSchedule E (Form 1040), line 38.

Gross farm rental income from Form4835, line 7.

Gross farm income from Schedule F(Form 1040), line 11.

Your distributive share of gross incomefrom a partnership or limited liabilitycompany treated as a partnership fromSchedule K1 (Form 1065).

Your pro rata share of gross income froman S corporation from Schedule K1

(Form 1120S).

Unemployment compensation as re-ported on Form 1099G.

Other income reported on Form 1040,line 21, not reported with any of the itemslisted above.

Gross IncomeFrom FarmingGross income from farming includes the fol-lowing.

Gross farm income from Schedule F(Form 1040), line 11.

Gross farm rental income from Form4835, line 7.

Gross farm income from Schedule E(Form 1040), Parts II and III. See theinstructions for line 41.

Gains from the sale of livestock used fordraft, breeding, sport, or dairy purposesreported on Form 4797.

For more information about income fromfarming, see chapter 4.

CAUTION

!Wages you receive as a farm em-ployee are not farm income. This in-cludes wages you receive from a farm

corporation even if you are a stockholder inthe corporation. Income you receive fromcontract grain harvesting and hauling withworkers and machines that you furnish is alsonot farm income.

Percentage From FarmingFigure your gross income from all sources asshown earlier. Then figure your gross incomefrom farming. Divide your farm gross incomeby your total gross income to determine thepercentage of gross income from farming.

Example 1. James Smith had the follow-ing total gross income and farm gross incomein 2000.

Schedule D showed gain from the sale ofdairy cows carried over from Form 4797($5,000) in addition to a loss from the sale ofcorporate stock ($2,000). However, that lossis not netted against the gain to figure Mr.

Smith's total gross income or his gross farmincome. His gross farm income is 64% of histotal gross income ($80,000 $125,000 =.64). Therefore, based on his 2000 income,he does not qualify to use the special esti-mated tax payment and return due dates for2000, discussed next. However, he doesqualify if at least two-thirds of his 1999 grossincome was from farming.

Example 2. Assume the same facts asin Example 1 except that Mr. Smith also re-ceived gross farm rental income (Form 4835)of $15,000. This made his total gross income$140,000 and his farm gross income $95,000.He qualifies to use the special estimated taxpayment and return due dates, discussed

next, since 67.9% (at least two-thirds) of hisgross income is from farming ($95,000 $140,000 = .679).

Due Dates forQualified FarmersIf at least two-thirds of your gross income for1999 or 2000 was from farming, you are aqualified farmer and can choose either of thefollowing options for your 2000 tax.

1) Make your required annual payment,discussed next, by January 16, 2001,and file your Form 1040 by April 16,2001.

2) File your Form 1040 by March 1, 2001,and pay all the tax due. You are not re-quired to make the annual payment. Ifyou pay all the tax due, you will not bepenalized for failure to pay estimatedtax.

Required annual payment. If at least two-thirds of your gross income for 1999 or 2000was from farming, the required annual pay-ment due January 16, 2001, is the smallerof the following amounts.

662/3% (.6667) of your total tax for 2000. 100% of the total tax shown on your 1999

return. (The return must cover all 12months.)

TIP2001 tax. If at least two-thirds of yourgross income for 2000 or 2001 is fromfarming, for your 2001 tax you can

choose either of the following options.

1) Make your required annual payment byJanuary 15, 2002, and file your Form1040 by April 15, 2002.

2) File your Form 1040 by March 1, 2002,and pay all the tax due.

Fiscal year farmers. If you qualify to usethese special rules but your tax year does notstart on January 1, you can file your returnand pay the tax by the first day of the 3rdmonth after the close of your tax year. Or youcan make your required annual paymentwithin 15 days after the end of your tax year.Then file your return and pay any balance dueby the 15th day of the 4th month after the endof your tax year.

Due Dates forNonqualified FarmersIf less than two-thirds of your gross incomefor 1999 and 2000 was from farming, youcannot use these special estimated tax pay-ment and return due dates for your 2000 taxyear. Instead, you should have made quar-terly estimated tax payments on April 17,June 15, and September 15, 2000, and onJanuary 16, 2001. You must file your returnby April 16, 2001.

If less than two-thirds of your gross in-come for 2000 and 2001 is from farming, youcannot use these special estimated tax pay-ment and return due dates for your 2001 taxyear. You generally must make quarterly es-timated tax payments on April 16, June 15,and September 17, 2001, and on January 15,2002. You must file your return by April 15,2002.

For more information on estimated taxes,

see Publication 505.

Estimated TaxPenalty for 2000If you did not pay all your required estimatedtax for 2000 by January 16, 2001, or file your2000 return and pay the tax by March 1,2001, you should have used Form 2210F,Underpayment of Estimated Tax by Farmersand Fishermen, to determine if you owed apenalty. If you owed a penalty but did not fileForm 2210F with your return and pay thepenalty, you will get a notice from the IRS.You should pay the penalty as instructed bythe notice.

Gross Income

Total Farm

Taxable interest ......................... $43,000Dividends ................................... 500Rental income (Sch E) .............. 1,500Farm income (Sch F) ................ 75,000 $75,000Gain (Form 4797) ...................... 5,000 5,000

Total .......................................... $125,000 $80,000



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If you file your return by April 16 and paythe bill within 21 calendar days (10 businessdays if the bill is $100,000 or more) after thenotice date, the IRS will not charge you in-terest on the penalty.

CAUTION

!Do not ignore a penalty notice,even if you think it is in error. Oc-casionally, you may get a penalty no-

tice even though you filed your return on time,attached Form 2210F, and met the grossincome from farming test. If you receive apenalty notice for underpaying estimated tax

that you think is in error, write to the addresson the notice and explain why you think thenotice is in error. Include a computation simi-lar to the one inExample 1 (earlier), showingthat you met the gross income from farmingtest.

Extension of Time To FileForm 1040If you do not file your 2000 return by March1, 2001, the due date for your return will beApril 16, 2001. However, you generally canget an automatic 4-month extension of timeto file your return. Your Form 1040 would thenbe due by August 15, 2001.

You can get this extension in either of thefollowing ways.

File Form 4868, Application for AutomaticExtension of Time To File U.S. IndividualIncome Tax Return, by April 16, 2001,showing an accurate estimate of your2000 tax liability. (The filing of Form 4868does not extend the time to pay the tax.)

Call the IRS by April 16, 2001, and usea credit card to pay part or all of yourestimate of income tax due.

For more information, see the instructions forForm 4868.

CAUTION

!This extension does not extend theMarch 1, 2001, filing date for qualifiedfarmers who did not make the re-

quired annual payment and want to avoid anestimated tax penalty. Therefore, if you didnot make your required annual payment byJanuary 16, 2001, and you file your tax returnafter March 1, 2001, you will be subject to apenalty for underpaying your estimated tax,even if you file Form 4868.

Forms You May Need

To FileWhen filing your income tax return, arrangeyour forms and schedules in the correct orderusing the sequence number located in theupper right corner of each form. Attach allother statements or attachments last, ar-ranged in the same order as the forms orschedules they support.

Farmers can use the following forms andschedules. Some of them are illustrated inchapter 20.

Form 1040. This form is the income tax re-turn. List taxable income from all sources onForm 1040, including profit or loss fromfarming operations as figured on Schedule F

(Form 1040). Figure the tax on this form,also.

Schedule A, Itemized Deductions. Listnonbusiness itemized deductions on thisschedule.

Schedule B, Interest and Ordinary Divi-dends. Report interest or dividend income ofmore than $400 on this schedule.

Schedule C, Profit or Loss From Busi-ness. List income and deductions and deter-mine the net profit or loss from a nonfarmbusiness on this schedule.

Schedule CEZ, Net Profit From Busi-ness. Use this schedule in place of ScheduleC if nonfarm business expenses are $2,500or less and other requirements are met.

Schedule D, Capital Gains and Losses.Report gains and losses from sales of capitalassets on this schedule.

Schedule E, Supplemental Income andLoss. Report income or losses from rents,royalties, partnerships, estates, trusts, and Scorporations on this schedule.

Schedule F, Profit or Loss From Farming.Use this schedule to list all farm income anddeductions and determine your net farm profitor loss.

Schedule SE, Self-Employment Tax. Fig-ure self-employment tax on this schedule.See chapter 15.

Form 2210. Figure any underpayment ofestimated tax and the penalty on Form 2210,Underpayment of Estimated Tax by Individ-uals, Estates, and Trusts.

Form 2210F. Figure any underpayment ofestimated tax and the penalty on Form2210F, Underpayment of Estimated Tax byFarmers and Fishermen, if you are a qualifiedfarmer.

Form 3468. Figure the investment credit onForm 3468, Investment Credit. See chapter9.

Form 3800. Figure the general business

credit on Form 3800, General BusinessCredit. See chapter 9.

Form 4136. Figure the credit for federal ex-cise tax on gasoline and special fuels onForm 4136, Credit for Federal Tax Paid onFuels. See chapter 18.

Form 4255. Figure the increase in tax fromthe recapture of investment credit on Form4255, Recapture of Investment Credit. Seechapter 9.

Form 4562. Claim deductions for depreci-ation and amortization and elect the section179 deduction on Form 4562, Depreciationand Amortization. See chapter 8.

Form 4684. Report gains and losses frombusiness and nonbusiness casualties andthefts on Form 4684, Casualties and Thefts.See chapter 13.

Form 4797. Report gains and losses fromthe sale or exchange of business propertyand from certain involuntary conversions onForm 4797, Sales of Business Property. Seechapter 11.

Form 4835. Report farm rental income onForm 4835, Farm Rental Income and Ex-penses, if you received it as a share of cropsor livestock produced by a tenant and you, the

landlord, did not materially participate in theoperation or management of the farm. Seechapter 4.

Form 6251. Figure the alternative minimumtax on Form 6251, Alternative MinimumTaxIndividuals. See chapter 14.

Form 8824. Report the exchange of busi-ness or investment property for like-kindproperty on Form 8824, Like-Kind Ex-changes. If you have any taxable gain, youmust also file Schedule D (Form 1040) orForm 4797. See chapter 10.

Other FormsYou may have to file the forms below in cer-tain situations.

TIPIf the last day for filing your form fallson a Saturday, Sunday, or legal holi-day, your form will be on time if it is

filed on the next business day.

Form 940. If you paid wages subject toFUTA tax during a calendar year, file Form940, Employer's Annual Federal Unemploy-ment (FUTA) Tax Return, by January 31 ofthe following year. If all the tax due was de-

posited by January 31, you can file Form 940as late as February 10. See chapter 16.Form 940EZ. Form 940EZ is a simpli-

fied version of Form 940. See chapter 16.

Form 943. If you paid wages for farm laborduring a calendar year that were subject tosocial security and Medicare taxes or incometax withholding, file Form 943, Employer'sAnnual Tax Return for Agricultural Employ-ees, by January 31 of the following year. Ifyou deposited all the tax due by January 31,you can file Form 943 as late as February 10.

Form 1040ES. Figure and pay estimated taxon Form 1040ES, Estimated Tax for Indi-viduals. See Estimated Tax Payment and

Return Due Dates, earlier.

Form 1065. A farm partnership files Form1065, U.S. Return of Partnership Income, bythe 15th day of the 4th month following thedate the partnership tax year ended, asshown at the top of Form 1065. For calendaryear partnerships, the due date is April 15.See Partnership, later.

Form 1120. A corporation files Form 1120,U.S. Corporation Income Tax Return, by the15th day of the 3rd month following the datethe corporation tax year ended, as shown atthe top of Form 1120. For calendar year cor-porations, the due date is March 15. SeeCorporation, later.

Form 1120A. Many small corporationscan use Form 1120A, U.S. CorporationShort-Form Income Tax Return, instead ofForm 1120.

Form 1120S. An S corporation files Form1120S, U.S. Income Tax Return for an SCorporation, by the 15th day of the 3rd monthfollowing the date the S corporation tax yearended, as shown at the top of Form 1120S.For calendar year S corporations, the duedate is March 15. See S Corporation, later.

Form 2290. If you use certain vehicles onpublic highways, such as a truck or trucktractor, registered or required to be registeredin your name, file Form 2290, Heavy Highway

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Vehicle Use Tax Return, for the followingpurposes.

To figure and pay the tax due on heavyhighway vehicles (taxable gross weight55,000 pounds or more) used during theperiod from July 1 to June 30.

To claim an exemption from the tax whenthe vehicle is expected to be used 5,000miles or less (7,500 for agricultural vehi-cles) during the period.

See the instructions for Form 2290.

Form 4868. Apply for an extension of timeto file your tax return on Form 4868, Applica-tion for Automatic Extension of Time To FileU.S. Individual Income Tax Return. Filing thisform does not, however, extend the time topay any tax due.

Form 8109. Employment taxes not depositedelectronically are deposited with Form 8109,Federal Tax Deposit Coupon. In general, in-come tax withheld plus the employer andemployee's share of social security andMedicare taxes that total $1,000 or more forthe year must be deposited. The IRS will sendyou a coupon book for making deposits 5 to6 weeks after you receive an employer iden-tification number (EIN).

CAUTION

!Under certain circumstances youmust deposit taxes electronically.See chapter 16.

Form 8822. Notify the IRS of a change inyour home or business address with Form8822, Change of Address. Be sure to includeyour suite, room, or other unit number.

Ordering forms. See chapter 21 for infor-mation about getting any of the forms listedin this section.

Information ReturnsThese returns provide information the IRSrequires, other than taxes due. There aremany different information returns. This dis-cussion, however, is limited to Form W2,Form 1099INT, Form 1099MISC, and Form1096.

TIPIf the last day for filing your informa-tion return falls on a Saturday, Sun-day, or legal holiday, your form will

be on time if it is filed on the next businessday.

Form W2. If you are in a trade or businesssuch as farming and you employ paid work-ers, prepare Form W2, Wage and TaxStatement, for each employee, including anypayment that was not in cash. You mustshow, in the space marked Wages, tips, othercompensation, the total paid to the employee.Give copies B, C, and 2 of Form W2 to theemployee generally by the last day of Janu-ary. Send Copy A of each Form W2 to theSocial Security Administration with a com-pleted Form W3, Transmittal of Wage andTax Statements, by the last day of February.See chapter 16.

Form 1099INT. Report interest of $600 ormore paid during the calendar year in thecourse of your farm business, including inter-est on installment sale contracts, on Form1099INT, Interest Income.

Form 1099MISC. If you make total pay-ments of $600 or more during the calendaryear to another person, other than a corpo-ration, in the course of your farm business,you must file information returns to reportthese payments. Report on Form1099MISC, Miscellaneous Income, pay-ments of $600 or more made for customharvesting, crop spraying, services of aveterinarian, rents, commissions, fees, prizes,awards, and services provided by nonem-ployees. Payments of $10 or more for royal-ties are also reported on Form 1099MISC.

Form 1099MISC is also used to report tothe payee, and to the IRS, payments youmade that were subject to backup withholdingand the amounts you withheld, regardless ofthe amount of the payment.

Report payments for compensation toemployees on Form W2, not on Form1099MISC. See chapter 16.

Preparation of returns. If you are requiredto file Forms 1099INT or Forms 1099MISC,you must prepare a separate form for eachpayee. File one copy of each form with theIRS by February 28 of the year following thecalendar year the payments were made. Givethe payee a statement (or copy of the form)by January 31 of the following year. These

forms are read by machine and there are veryspecific instructions for their preparation andsubmission. See the Instructions for Forms1099, 1098, 5498, and W2G.

Form 1096. When sending copies to theIRS, use a separate transmittal, Form 1096,Annual Summary and Transmittal of U.S. In-formation Returns, for each different type ofform.

Penalties. If you file information returns late,without all information required to be on thereturn, or with incorrect information, you maybe subject to a penalty. See the Instructionsfor Forms 1099, 1098, 5498, and W2G forinformation on Form 1099 penalties.

Backup withholding. In certain cases, thelaw requires you to withhold income tax at arate of 31% (backup withholding) on pay-ments reportable on information returns, in-cluding commissions, nonemployee compen-sation, and other payments you make forservices in your farm business or other busi-ness activities. The backup withholding rulesdo not apply to wages, pensions, or annuities.

See the Instructions for Forms 1099,1098, 5498, and W2Gfor more information.

PartnershipA partnership is the relationship between twoor more persons who join to carry on a tradeor business, including farming. Each personcontributes money, property, labor, or skill,and expects to share in the profits and losses.

For federal income tax purposes, the termpartnership includes a syndicate, group,pool, joint venture, or similar organizationcarrying on a trade or business and not clas-sified as a trust, estate, or corporation.

Family partnership. Members of a familycan be partners. For instance, a husband andwife or parents and children can conduct afarming enterprise through a partnership. Tobe recognized as a partnership for federal taxpurposes, a partner relationship must be es-tablished and certain requirements must be

met. For information on these requirements,see Family Partnership in Publication 541.Merely doing chores, helping with the harvest,or keeping house and cooking for the familyand hired help does not establish a partner-ship.

If a husband and wife are partners in afarm operation or other business, they shouldreport their partnership income or loss onForm 1065. See Form 1065, later.

Co-ownership and sharing expenses.Mere co-ownership of property that is main-tained and leased does not constitute a part-nership. For example, if an individual owneror tenants-in-common of farm property leasethat property for a cash rental or a share ofthe crops, a partnership is not necessarilycreated by the leasing. However, tenants-in-common may be partners if they actively carryon a farm or other business operation andshare its profits and losses. A joint undertak-ing merely to share expenses is not a part-nership.

Partner's distributive share. Each partner'sdistributive share of partnership income, gain,loss, etc., must be included on that partner'stax return, even if the items were not distrib-uted.

Self-employment tax. Unless you are alimited partner, your distributive share of in-come from a partnership is self-employmentincome. If you and your spouse are partners,each should report his or her share of part-nership income or loss on a separate Sched-ule SE (Form 1040), Self-Employment Tax.This will give each of you credit for socialsecurity earnings on which retirement benefitsare based. The self-employment tax of amember of a partnership engaged in farmingis discussed in chapter 15.

Selling or exchanging a partnership.When you create a partnership, you generallydo not recognize gain or loss on contributions

of money or property you make to the part-nership. However, you generally recognizegain or loss when you sell or exchange yourinterest in the partnership.

You may be able to avoid recognizing gainor loss when ending a partnership if you buyout your partners or change to a corporationstatus.

Form 1065. Partnerships file a return onForm 1065, U.S. Return of Partnership In-come. This is an information return showingthe income and deductions of the partnership,the name and address of each partner, andeach partner's distributive share of income,gain, loss, deductions, credits, etc. No tax isdue on Form 1065.

Form 1065 is not required until the first taxyear the partnership has income or de-ductions. In addition, it is not required for anytax year a partnership has no income andexpenses.

Schedule F (Form 1040). Use ScheduleF (Form 1040) to report a farm partnershipprofit or loss. This schedule should be filedwith Form 1065. The profit or loss shown onSchedule F, adjusted for amounts to be re-ported on Schedule K-1 and Schedule K ofForm 1065, is entered on line 5 of Form 1065.

Other schedules. Each partner's distrib-utive share of partnership items, such as or-dinary income or loss, capital gain or loss, netearnings from self-employment, etc., is en-tered on Schedule K1 of Form 1065. Fill in



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all other schedules listed on Form 1065 thatapply to the partnership.

Filing penalty. A penalty is assessedagainst a partnership that is required to file apartnership return in the following situations.

The return is not filed on time, includingextensions.

The return does not show all the infor-mation required.

The penalty is $50 times the total numberof partners for each month (or part of amonth) the return is late or incomplete, up to5 months.

Exception to filing penalty. A partner-ship does not have to pay the penalty if it canshow reasonable cause for failure to file areturn. A small farm partnership with 10 orfewer partners is generally considered tomeet this requirement if the following infor-mation can be shown.

All partners have reported their entireshare of all partnership items on timelyfiled income tax returns.

All partners are individuals (other thannonresident aliens), deceased partners'

estates, or C corporations.

The partnership has not elected to besubject to the rules for consolidated auditprocedures.

Consolidated audit procedures. In aconsolidated audit proceeding, the tax treat-ment of any partnership item is generally de-termined at the partnership level, rather thanat the individual partner's level. After theproper tax treatment is determined at thepartnership level, the IRS can automaticallymake related adjustments to the tax returnsof the partners, based on their share of theadjusted items.

More information. For more information onpartnerships, see Publication 541.

Limited LiabilityCompany (LLC)An LLC is an entity formed under state lawby filing articles of organization as an LLC.None of the members of an LLC are per-sonally liable for its debts.

An LLC can be classified as either a part-nership or a corporation for federal incometax purposes. See Corporation, later, for therules you must use to determine whether anLLC is treated as a corporation. If an LLC isnot treated as a corporation and has 2 ormore members, it is treated as a partnership.

Depending on its classification, an LLCwould file either Form 1065 or Form 1120.However, if an LLC has a single owner, itwould be disregarded as an entity separatefrom its owner, and the owner would fileSchedule C or CEZ (Form 1040) or Sched-ule F (Form 1040) to report business or farmincome and expenses.

If an LLC is treated as a partnership, seePublication 541 for information on partner-ships. If it is treated as a corporation, seePublication 542 for information on corpo-rations.

CorporationThe rules you must use to determine whetheryour business is taxed as a corporationchanged for businesses formed after 1996.However, if your business was formed before1997 and taxed as a corporation under theold rules, it will generally continue to be taxedas a corporation.

Businesses formed after 1996. The follow-ing businesses formed after 1996 are taxedas corporations.

A business formed under a federal orstate law that refers to it as a corporation,body corporate, or body politic.

A business formed under a state law thatrefers to it as a joint-stock company or

joint-stock association.

An insurance company.

Certain banks.

A business wholly owned by a state orlocal government.

A business specifically required to betaxed as a corporation by the InternalRevenue Code (for example, certainpublicly traded partnerships).

Certain foreign businesses.

Any other business that elects to be taxedas a corporation by filing Form 8832.

For more information, see the instructions forForm 8832,Entity Classification Election.

Forming a corporation. A corporation isformed by a transfer of money, property, orboth by prospective shareholders in ex-change for capital stock in the corporation.

If money is exchanged for stock, no gainor loss is realized by the shareholder or cor-poration. The stock received by the share-holder has a basis equal to the money trans-ferred to the corporation by the shareholder.

If property is exchanged for stock, it maybe either a taxable or nontaxable exchange.

Corporate tax. Corporate profits arenormally taxed to the corporation. When theprofits are distributed as dividends, the divi-dends are taxed to the shareholders.

In figuring its taxable income, a farm cor-poration generally takes the same deductionsthat a noncorporate farmer would claim onSchedule F (Form 1040). Corporations are

also entitled to special deductions.

Form 1120 and Form 1120A. Unless ex-empt under section 501 of the Internal Reve-nue Code, all domestic corporations (includ-ing corporations in bankruptcy) must file anincome tax return whether or not they havetaxable income. A corporation must generallyfile Form 1120 to report its income, gains,losses, deductions, credits, and to figure itsincome tax liability. However, a corporationmay file Form 1120A if its gross receipts,total income, and total assets are each under$500,000 and it meets certain other require-ments. For more information, see the in-structions for Forms 1120 and 1120A.

More information. For more information oncorporations, see Publication 542.

S CorporationAn S corporation is a qualifying corporationthat elects to have its income taxed to theshareholders rather than to the corporationitself, except as noted next under Taxes. Itsshareholders include in income their share ofthe corporation's nonseparately stated in-

come or loss and separately stated items ofincome, deduction, loss, and credit.

To make this election, a corporation, inaddition to other requirements, must not havemore than 75 shareholders. Each of itsshareholders must also consent to theelection.

Taxes. Although it is generally not liable forfederal income tax itself, an S corporationmay have to pay the following taxes.

1) A tax on the items listed below.

a) Excess net passive income.

b) Certain capital gains or built-ingains.

2) The tax from the recapture of a prioryear's investment credit.

3) LIFO recapture tax.

An S corporation may have to makequarterly estimated tax payments for thesetaxes.

Form 1120S. An S corporation files its returnon Form 1120S.

More information. For more information onS corporations, see the instructions for Form1120S.

3.

AccountingPeriods andMethods

IntroductionYou must figure your taxable income and filean income tax return for an annual accountingperiod called a tax year. Also, you mustconsistently use an accounting method thatclearly shows your income and expenses forthe tax year.


Calendar tax year

Fiscal tax year

Cash method of accounting

Accrual method of accounting

Page 10 Chapter 3 Accounting Periods and Methods


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Publication

538 Accounting Periods and Methods

Form (and Instructions)

1128 Application To Adopt, Change, orRetain a Tax Year

3115 Application for Change in Ac-counting Method

See chapter 21 for information about get-ting publications and forms.

Accounting PeriodsWhen preparing a statement of income andexpenses (generally your farm income taxreturn), you must use your books and recordsfor a specific interval of time called an ac-counting period. The annual accounting pe-riod for your tax return is called a tax year.You can generally use one of the following taxyears.

A calendar tax year. A fiscal tax year.

However, special restrictions apply to part-nerships, S corporations, and personal ser-vice corporations. See Publication 538.

You adopt a tax year when you file yourfirst income tax return. You must adopt yourfirst tax year by the due date (not includingextensions) for filing a return for that year.

Calendar tax year. A calendar tax year is12 consecutive months beginning January 1and ending December 31.

You must adopt the calendar tax year ifany of the following apply.

You do not keep adequate records. You have no annual accounting period.

Your present tax year does not qualifyas a fiscal year.

If you filed your first income tax returnusing the calendar tax year and you later be-gin business as a farmer, you must continueto use the calendar tax year unless you getIRS approval to change it. See Change in taxyear, later.

If you adopt the calendar tax year, youmust maintain your books and records andreport your income and expenses for the pe-riod from January 1 through December 31 ofeach year.

Fiscal tax year. A fiscal tax year is 12 con-secutive months ending on the last day of anymonth except December. A 5253 week taxyear is a fiscal tax year that varies from 52 to53 weeks.

If you adopt a fiscal tax year, you mustmaintain your books and records and reportyour income and expenses using the sametax year.

For more information on a fiscal tax year,including a 5253 week tax year, see Publi-cation 538.

Change in tax year. Once you have chosenyour tax year, you must, with certain ex-ceptions, get IRS approval to change it. To

get approval, you must file Form 1128. Youmay have to pay a fee. For more information,see the form instructions.

Accounting MethodsAn accounting method is a set of rules usedto determine when and how income and ex-penses are reported. Your accounting methodincludes not only the overall method of ac-counting you use, but also the accountingtreatment you use for any material item.

You choose an accounting method foryour farm business when you file your firstincome tax return that includes a ScheduleF. However, you cannot use the crop methodfor any tax return, including your first tax re-turn, unless you get IRS approval. The cropmethod is discussed under Special Methodsof Accounting, later. Getting IRS approval tochange an accounting method is discussedlater under Change in Accounting Method.

Kinds of methods. Generally, you can useany of the following accounting methods.

Cash method.

An accrual method. Special methods of accounting for certain

items of income and expenses.

Combination (hybrid) method using ele-ments of two or more of the above.

However, certain farm corporations and part-nerships, and all tax shelters, must use anaccrual method of accounting. See Accrualmethod required, later.

Business and personal items. You canaccount for business and personal items un-der different accounting methods. For exam-ple, you can figure your business income un-der an accrual method, even if you use the

cash method to figure personal items.

Two or more businesses. If you have twoor more separate and distinct trades or busi-nesses, you can use a different accountingmethod for each if the method clearly reflectsthe income of each business. They are sep-arate and distinct only if you maintain com-plete and separable books and records foreach business.

Accrual method required. The followingbusinesses engaged in farming must use anaccrual method of accounting.

1) A corporation (other than a family cor-poration) that had gross receipts of more

than $1,000,000 for any tax year begin-ning after 1975.

2) A family corporation that had gross re-ceipts of more than $25,000,000 for anytax year beginning after 1985.

3) A farming partnership with a corporationas a partner.

4) Any tax shelter.

For this purpose, an S corporation is nottreated as a corporation. Also, items (1), (2),and (3) do not apply to a business engagedin operating a nursery or sod farm or in raisingor harvesting trees (other than fruit and nuttrees).

Family corporation. A family corporationis generally a corporation that meets one ofthe following ownership requirements.

1) Members of the same family own at least50% of the total combined voting powerof all classes of stock entitled to vote andat least 50% of the total shares of allother classes of stock of the corporation.

2) Members of two families owned, directlyor indirectly, on October 4, 1976, andsince then, at least 65% of the total

combined voting power of all classes ofstock entitled to vote and at least 65%of the total shares of all other classes ofstock of the corporation.

3) Members of three families owned, di-rectly or indirectly, on October 4, 1976,and since then, at least 50% of the totalcombined voting power of all classes ofstock entitled to vote and at least 50%of the total shares of all other classes ofstock of the corporation.

For more information on family corporations,see section 447 of the Internal RevenueCode.

Tax shelter. A tax shelter is a partner-ship, noncorporate enterprise, or S corpo-

ration that meets either of the following tests.

1) Its principal purpose is the avoidance orevasion of federal income tax.

2) It is a farming syndicate. A farming syn-dicate is an entity that meets either of thefollowing tests.

a) Interests in the activity have everbeen offered for sale in any offeringrequired to be registered with anyfederal or state agency with theauthority to regulate the offering ofsecurities for sale, or

b) More than 35% of the losses duringthe tax year are allocable to limitedpartners or limited entrepreneurs.

i) A limited partner is onewhose personal liability forpartnership debts is limited tothe money or other propertythe partner contributed or isrequired to contribute to thepartnership.

ii) A limited entrepreneur is aperson who has an interest inan enterprise other than as alimited partner and does notactively participate in themanagement of the enterprise.

Cash MethodMost farmers use the cash method becausethey find it easier to keep cash method rec-ords. However, certain farm corporations andpartnerships and all tax shelters must use anaccrual method of accounting. See Accrualmethod required, earlier.

IncomeUnder the cash method, you include in yourgross income all items of income you actuallyor constructively receive during your tax year.If you receive property or services, you mustinclude their fair market value in income. Seechapter 4 for information on how to reportfarm income on your income tax return.

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Constructive receipt. You generally haveconstructive receipt of income when anamount is credited to your account or madeavailable to you without restriction. You donot need to have possession of it. If you au-thorize someone to be your agent and receiveincome for you, you are treated as havingreceived it when your agent received it.

Example. Interest is credited to your ac-count at a grain elevator in December 2000.You do not withdraw it until 2001. You mustinclude it in your gross income for 2000.

Production flexibility contract pay-ments. If you receive production flexibilitypayments under the Federal Agriculture Im-provement and Reform Act of 1996, you arenot considered to constructively receive apayment merely because you have the optionto receive it in the year before it is requiredto be paid. You disregard that option in de-termining when to include the payment in yourincome. This rule applies to any farm pro-duction flexibility payment made under the1996 Act as in effect on December 17, 1999.

Delaying receipt of income. You cannothold checks or postpone taking possessionof similar property from one tax year to an-other to avoid paying tax on the income. You

must report the income in the year the prop-erty is received or made available to youwithout restriction.

Example. Frances Jones, a farmer, wasentitled to receive a $10,000 payment on acontract in December 2000. The contract wasnot a production flexibility contract. She wastold in December that her payment wasavailable. At her request, she was not paiduntil January 2001. She must include thispayment in her 2000 income because it wasconstructively received in 2000.

Checks. Receipt of a valid check by theend of the tax year is constructive receipt ofincome in that year, even if you cannot cash

or deposit the check until the following year.

Example. Mrs. Redd received a check for$500 on December 31, 2000, from a neighborwho was buying some of her corn. She couldnot deposit the check in her farm businessaccount until January 2, 2001. She must in-clude this amount in her income for 2000.

Debts paid by another person or can-celed. If your debts are paid by anotherperson or are canceled by your creditors, youmay have to report part or all of this debt reliefas income. If you receive income in this way,you constructively receive the income whenthe debt is canceled or paid. See Cancellationof Debtin chapter 4.

Installment sale. If you sell an item undera deferred payment contract that calls forpayment the following year, there is no con-structive receipt in the year of sale. However,see the following example for an exception tothis rule.

Example. You are a farmer who uses thecash method and a calendar tax year. Yousell grain in December 2000 under a bonafide arm's-length contract that calls for pay-ment in 2001. You include the sale proceedsin your 2001 gross income since that is theyear payment is received. However, if thecontract says that you have the right to theproceeds from the buyer at any time after thegrain is delivered, you must include the sale

price in your 2000 income, regardless ofwhen you actually receive payment.

Repayment of income. If you include anamount in income and in a later year youhave to repay all or part of it, you can usuallydeduct the repayment in the year in which youmake it. If the amount you repay is over$3,000, a special rule applies. For detailsabout the special rule, see Repayments inchapter 13 of Publication 535, Business Ex-penses.

ExpensesUnder the cash method, you must generallydeduct expenses in the tax year in which youactually pay them. This includes businessexpenses for which you contest liability.However, you may not be able to deduct anexpense paid in advance or you may be re-quired to capitalize certain costs, as explainedunder Uniform Capitalization Rulesin chapter7. See chapter 5 for information on how todeduct farm business expenses on your in-come tax return.

Expenses paid in advance. You can deductan expense you pay in advance only in theyear to which it applies.

Example. You are a calendar year tax-payer and you pay $1,000 in 2000 for a farminsurance policy effective for one year, be-ginning July 1. You can deduct $500 in 2000and $500 in 2001.

Accrual MethodUnder an accrual method of accounting, yougenerally report income in the year earnedand deduct or capitalize expenses in the yearincurred. The purpose of an accrual methodof accounting is to match income and ex-penses in the correct year.

IncomeUnder an accrual method, you generally in-clude an amount in your gross income for thetax year in which all events that fix your rightto receive the income have occurred, and youcan determine the amount with reasonableaccuracy.

If you use an accrual method of account-ing, you will use Part III of Schedule F to re-port your farm income.

Inventory. If you use an accrual method ofaccounting, you must use an inventory todetermine your gross income. See Farm In-ventory, later.

ExpensesUnder an accrual method of accounting, yougenerally deduct or capitalize a business ex-pense when the following apply.

1) The all-events test has been met:

a) All events have occurred that fix thefact of liability, and

b) The liability can be determined withreasonable accuracy.

2) Economic performance has occurred.

Economic performance. You generallycannot deduct or capitalize a business ex-pense until economic performance occurs. If

your expense is for property or services pro-vided to you, or for your use of property,economic performance occurs as the propertyor services are provided or as the property isused. If your expense is for property or ser-vices you provide to others, economic per-formance occurs as you provide the propertyor services. An exception allows certain re-curring items to be treated as incurred duringa tax year even though economic perform-ance has not occurred. For more informationon economic performance, see Publication538.

Example 1. John is a farmer who usesa calendar tax year and an accrual methodof accounting. In December 2000 John buyssupplies for $200 that are not acquired forresale and that do not become a physical partof any items held for sale. He receives thesupplies and the bill in December 2000, andhe pays the bill in January 2001.

John can deduct the expense in 2000 be-cause all events occurred to fix the liability(the supplies were received but not paid for),the liability can be determined (the unpaid billwas for $200), and economic performanceoccurred in 2000 (the supplies were providedto John in December 2000).

Example 2. Jane is a farmer who usesa calendar tax year and an accrual methodof accounting. She enters into a turnkey con-tract with Waterworks in 2000. The contractstates that Jane must pay Waterworks$200,000 in December 2000 and that theywill install a complete irrigation system, in-cluding a new well, by the close of the year2002. She pays Waterworks $200,000 in De-cember 2000, they start the installation in May2002, and they complete the irrigation systemin December 2002.

Economic performance for Jane's liabilityin the contract occurs as the property andservices are provided. Jane incurs the$200,000 cost in the year 2002.

Special rule for related persons. You can-not deduct business expenses and interestowed to a related person who uses the cashmethod of accounting until you make thepayment and the corresponding amount isincludible in the related person's gross in-come. Determine the relationship, for thisrule, as of the end of the tax year for whichthe expense or interest would otherwise bedeductible. If a deduction is not allowed underthis rule, the rule will continue to apply evenif your relationship with the person ends be-fore the expense or interest is includible in thegross income of that person.

Related persons include members of yourimmediate family, including only brothers and

sisters (either whole or half), your spouse,ancestors, and lineal descendants. For a listof other related persons, see Publication 538.

Contested liability. If you use an accrualmethod of accounting and contest an as-serted liability for a farm business expense,you can deduct the expense either in the yearyou pay the contested liability (or transfermoney or other property in satisfaction of it)or in the year you finally settle the contest.However, to be able to take the deduction inthe year of payment or transfer, you mustmeet certain conditions. For more informa-tion, see Contested Liability under AccrualMethodin Publication 538.

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Farm InventoryIf you use an accrual method of accounting,you must use an inventory to determine yourgross income. You should keep a completerecord of your inventory as part of your farmrecords. This record should show the actualcount or measurement of the inventory. Itshould also show all factors that enter into itsvaluation, including quality and weight if theyare required.

Items to include in inventory. Your inven-

tory should include all items held for sale oruse as feed, seed, etc., whether raised orpurchased, that are unsold at the end of theyear.

Hatchery business. If you are in thehatchery business, you must include eggs inthe process of incubation.

Products held for sale. All harvestedand purchased farm products held for saleor for feed or seed, such as grain, hay, silage,concentrates, cotton, tobacco, etc., must beincluded.

Supplies. You must inventory suppliesacquired for sale or that become a physicalpart of items held for sale. Do not includeother supplies in inventory. Deduct the costof the other supplies in the year used or

consumed in operations. You can also deductincidental supplies in the year of purchase.Fur-bearing animals. If you are in the

business of breeding and raising chinchillas,mink, foxes, or other fur-bearing animals, youare a farmer and these animals are livestock.You can use any of the inventory and ac-counting methods discussed in this chapter.

Growing crops. You are generally notrequired to inventory growing crops. How-ever, if the crop has a preproductive periodof more than 2 years, you may have to capi-talize (or include in inventory) costs associ-ated with the crop. You cannot take a currentdeduction for costs incurred during the pre-productive period. See Uniform CapitalizationRulesin chapter 7.

Required to use accrual method. If you arerequired to use an accrual method of ac-counting:

1) The uniform capitalization rules apply toall costs of raising a plant, even if thepreproductive period of raising a plant is2 years or less.

2) All animals are subject to the uniformcapitalization rules.

Inventory valuation methods. You cangenerally use the following methods to valueyour inventory:

1) Cost.

2) Lower of cost or market.3) Farm-price method.

4) Unit-livestock-price method for livestock.

Cost and lower of cost or marketmethods. See Publication 538 for informa-tion on these valuation methods.

TIPIf you value your livestock inventoryat cost or the lower of cost or market,you do not need IRS approval to

change to the unit-livestock-price method.

Farm-price method. Under this method,each item, whether raised or purchased, isvalued at its market price less the direct cost

of disposition. Market price is the currentprice at the nearest market in the quantitiesyou usually sell. Cost of disposition includesany broker's commission, freight, hauling tomarket, and other marketing costs.

If you use this method, you must use it foryour entire inventory, except that livestockcan be inventoried on the unit-livestock-pricemethod.

Unit-livestock-price method. Thismethod recognizes the difficulty of establish-ing the exact costs of producing and raisingeach animal. You group or classify livestockaccording to type and age and use a standardunit price for each animal within a class orgroup. The unit price you assign should rea-sonably approximate the normal costs in-curred in producing the animals in suchclasses. Unit prices and classifications aresubject to approval by the IRS on examinationof your return. You must annually reevaluateyour unit livestock prices and adjust the pricesupward to reflect increases in the costs ofraising livestock. IRS approval is not requiredfor these adjustments. Any other changes inunit prices or classifications require IRS ap-proval.

If you use this method, you must includeall raised livestock in inventory, regardless ofwhether they are held for sale or for draft,

us internal revenue service: p225--2000

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