Introduction
You are in the business of farming if you cultivate, operate, or manage a farm for
profit, either as owner or tenant. A farm includes stock, dairy, poultry, fish, fruit, and
truck farms. It also includes plantations, ranches, ranges, and orchards.
This publication explains how the federal tax laws apply to farming. Use this
publication as a guide to figure your taxes and complete your farm tax return. If you need
more information on a subject, get the specific IRS tax publication covering that subject.
We refer to many of these free publications throughout this publication. See chapter 21
for information on ordering these publications.
The explanations and examples in this publication reflect the Internal Revenue
Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court
decisions. However, the information given does not cover every situation and is not
intended to replace the law or change its meaning. This publication covers subjects on
which a court may have made a decision more favorable to taxpayers than the interpretation
of the Service. Until these differing interpretations are resolved by higher court
decisions, or in some other way, this publication will continue to present the
interpretation of the Service.
IRS Mission. Provide America's taxpayers top quality service by
helping them understand and meet their tax responsibilities and by applying the tax law
with integrity and fairness to all.
Comments and suggestions. We
welcome your comments about this publication and your suggestions for future editions.
You can e-mail us while visiting our web site at www.irs.gov.
You can write to us at the following address:
Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would
include your daytime phone number, including the area code, in your correspondence.
Farm tax classes. Many state Cooperative Extension Services conduct
farm tax workshops in conjunction with the IRS. Please contact your county extension
office for more information.
Important Changes
for 2002
The following items highlight a number of administrative and tax law changes for 2002.
They are discussed in more detail throughout the publication. More information on these
and other changes can be found in Publication 553, Highlights of 2002 Tax Changes.
Special depreciation allowance. You can take a special depreciation
allowance for qualified property you place in service during 2002. See chapter 8.
Depreciation limits on business cars. The total section 179 deduction and depreciation (including the special
depreciation allowance) you can take on a car you use in your business and first
place in service in 2002 is generally $7,660. Special rules apply to electric vehicles.
See chapter 8.
Additions to the general business credit. Several credits have been
added to the general business credit. For a complete list, see chapter 9.
Renewable electricity production credit extended. The renewable electricity production credit is extended to include electricity
produced by facilities placed in service before 2004.
Work opportunity credit extended. The
work opportunity credit has been extended to include wages paid to qualified individuals
who begin work for you in 2002 or 2003. For more information about the work
opportunity credit, see Publication 954, Tax Incentives for Empowerment Zones and
Other Distressed Communities.
Welfare-to-work credit extended. The
welfare-to-work credit has been extended to include wages paid to qualified individuals
who begin work for you in 2002 or 2003. For more information on the welfare-to-work
credit, see Publication 954.
Changing your method of accounting for Commodity Credit Corporation (CCC) loans.
You can obtain automatic consent to change your method of accounting for loans received
from the CCC, from including the loan amount in gross income for the tax year in which the
loan is received to treating the loan amount as a loan. For more information, see Automatic
Change Procedures under Change in Accounting Method in Publication 538, Accounting
Periods and Methods.
Production flexibility contracts eliminated. After May 13, 2002, no
payments are to be made under a production flexibility contract, unless requested by the
producer that is a party to the contract. For more information, see chapter 4.
Direct and counter-cyclical payments. The USDA can make two new
types of payments - direct and counter-cyclical payments. These payments are included in
taxable income. For more information, see chapter 4.
Peanut quota buyout program payments. The marketing quota program for peanuts was repealed effective May 13, 2002.
The USDA will pay eligible peanut quota holders for the loss in value of peanut quotas
resulting from the repeal. The payments received by quota holders are subject to federal
income tax. For more information, see chapter 4.
Earned income credit. The maximum
earned income credit has increased. To claim the credit, you must have earned
income (including net earnings from self-employment) and adjusted gross income of less
than $33,178 ($34,178 for married filing jointly) and meet certain other requirements. For
more information, including what counts as earned income, see Publication 596, Earned
Income Credit (EIC).
Self-employed health insurance deduction. The part of your
self-employed health insurance premiums you can deduct as an adjustment to income
increased to 70%. See chapter 5.
Standard mileage rate. The standard mileage rate for the cost of
operating your car, van, pickup, or panel truck increased to 36½ cents a mile for all
business miles driven. See chapter 5.
Tax rates and maximum net earnings for self-employment tax. The maximum net self-employment earnings subject to the
social security part (12.4%) of the self-employment tax increased to $84,900. There
is no maximum limit on earnings subject to the Medicare part (2.9%). See chapter 15.
Marginal production of oil and gas. The suspension of the taxable
income limit on percentage depletion from the marginal production of oil and natural gas
that was scheduled to expire for tax years beginning after 2001 has been extended to tax
years beginning before 2004. For more information on marginal production, see section
613A(c) of the Internal Revenue Code.
Retirement plans. Many changes to the tax laws for retirement plans
take effect in 2002. For information, see chapter 17.
Backup withholding. For amounts paid in 2002 and 2003, the backup
withholding rate is decreased to 30%. See chapter 2.
Electronic Form 1099. Form 1099 can be issued electronically if the
recipient consents to receive it that way.
Important Changes
for 2003
The following items highlight a number of administrative and tax law changes for 2003.
More information on these and other changes can be found in Publication 553, Highlights
of 2002 Tax Changes.
Section 179 deduction. Beginning in 2003, the total cost you can
elect to deduct under section 179 of the Internal Revenue Code is increased to $25,000.
For information on the section 179 deduction, see chapter 8.
Maximum net earnings for self-employment tax. The maximum net
self-employment earnings subject to the social security part of the self-employment tax
for 2003 will be published in Publications 533 and 553. There is no maximum limit on
earnings subject to the Medicare part.
Wage limits for social security and Medicare taxes. The maximum
wages subject to the social security tax for 2003 will be published in Publication 51, Circular
A, Agricultural Employer's Tax Guide. There is no limit on wages subject to the
Medicare tax.
Reportable transactions. You may
have to disclose information about certain transactions (called reportable
transactions) in which you participated, directly or indirectly. This
disclosure requirement applies to reportable transactions entered into after 2002.
Reportable transactions include transactions that are the same or substantially similar to
tax avoidance transactions identified by the IRS, transactions that are offered under
conditions of confidentiality, and transactions that result in large losses. You must
disclose information about reportable transactions on Form 8886, Reportable
Transaction Disclosure Statement. For more information, see the instructions for Form
8886.
Self-employed health insurance deduction. The part of your
self-employed health insurance premiums you can deduct as an adjustment to income
increases to 100%. See chapter 5.
Important Reminders
The following reminders and other items may help you file your tax return.
Principal agricultural activity codes. You must enter on line B of Schedule F (Form 1040) a code that identifies your
principal agricultural activity. It is important to use the correct code because
this information will identify market segments of the public for IRS Taxpayer Education
programs. The U.S. Census Bureau also uses this information for its economic census. See
the list of Principal Agricultural Activity Codes on page 2 of Schedule F.
Postponed tax deadlines in disaster areas. The IRS may postpone for
up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially
declared disaster. See chapter 13.
Business use of your home. You may be able to deduct expenses for
your home office even if it is not where you perform your most important business
activities or spend most of your business time. See chapter 5.
Child tax credit. You may be able to claim a tax credit for each of
your qualifying children under age 17 at the end of the year. The credit can be as much as
$600 for each qualifying child.
Estimated tax. When you figure your estimated tax, you must include
any alternative minimum tax you expect to owe. See chapter 14 and Publication 505.
Averaging of farm income. You, as an individual farmer, can choose
to average all or part of your taxable farm income when you figure your income tax. If you
average your income, you may be able to use a negative taxable income amount for a base
year when figuring your tax on Schedule J (Form 1040). See chapter 4.
Voluntary withholding. You can
request income tax withholding from the following payments on Form W-4V, Voluntary
Withholding Request.
- Commodity Credit Corporation (CCC) loans.
- Certain crop disaster payments received under the Agricultural Act of 1949 or title II
of the Disaster Assistance Act of 1988.
- Social security benefits.
- Unemployment compensation.
- Certain other government payments.
See chapter 4 for information on CCC loans and disaster relief payments.
Direct deposit of refund. If you are due a refund on your tax
return, you can have it deposited directly into your account at a bank or other financial
institution. See your income tax package for details.
Change of address. If you change
your home or business address, you should use Form 8822, Change of Address, to
notify the IRS. Be sure to include your suite, room, or other unit number.
Third party designee. You can
check the Yes box in the Third Party Designee area of your return to
authorize the IRS to discuss your return with a friend, family member, or any other
person you choose. This allows the IRS to call the person you identified as your designee
to ask any questions that may arise during the processing of your return. It also allows
your designee to perform certain actions. See your income tax package for details.
Electronic deposits of taxes. You
must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of
all depository tax liabilities you incur in 2003 and thereafter if you deposited
more than $200,000 in federal depository taxes in 2001 or you had to use EFTPS in 2002.
See chapter 16.
Overdue tax bill. If you receive
a bill for overdue taxes, do not ignore it. If you owe the tax shown on the bill,
you should make arrangements to pay it. If you believe it is incorrect, contact the IRS
immediately to suspend action until the mistake is corrected. See Publication 594, The
IRS Collection Process, for more information.
Comments on IRS enforcement actions. The Small Business and
Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were
established to receive comments from small business about federal agency enforcement
actions. The Ombudsman will annually evaluate the enforcement activities of each agency
and rate its responsiveness to small business. If you wish to comment on the enforcement
actions of the IRS, you can:
- Call 1-888-734-3247,
- Send an e-mail to ombudsman@sba.gov, or
- Download the appraisal form at www.sba.gov/ombudsman.
Treasury Inspector General for Tax Administration. If you want to
report confidentially misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484
(1-800-877-8339 for TTY/TDD users). You can remain anonymous.
Publication on employer identification numbers (EIN).
Publication 1635, Understanding Your EIN, provides general
information on employer identification numbers. Topics include how to apply for an
EIN and how to complete Form SS-4.
Form W-4 for 2003. You should
make new Forms W-4 available to your employees and encourage them to check their income
tax withholding for 2003. Those employees who owed a large amount of tax or
received a large refund for 2002 may need to file a new Form W-4. See Publication 919, How
Do I Adjust My Tax Withholding.
Earned income credit. You, as an employer, must notify employees who
worked for you and from whom you did not withhold income tax about the earned income
credit. See chapter 16.
Form 1099-MISC. File Form
1099-MISC if you pay at least $600 in rents, services, and other miscellaneous payments in
your farming business to an individual (for example, an accountant, an attorney, or
a veterinarian) who is not your employee and is not incorporated. See chapter 2.
Children employed by parents. Wages you pay to your children age 18
and older for services in your trade or business are subject to social security and
Medicare taxes. See chapter 16.
Farmers and crew leaders must withhold income tax. Farmers and crew
leaders must withhold federal income tax from farm workers who are subject to social
security and Medicare taxes. See chapter 16.
Social security tests for seasonal farm workers. If you pay seasonal
farm workers less than $150 in annual cash wages, the wages are not subject to social
security and Medicare taxes, even if you pay $2,500 or more to all your farm workers. The
seasonal farm worker must meet certain tests. See chapter 16.
Medical savings accounts (MSAs). If you are covered only under a
high deductible health plan, you may be able to participate in an Archer MSA program. You
can deduct contributions to your Archer MSA even if you do not itemize your deductions.
See Publication 969, Medical Savings Accounts (MSAs).
Accrual basis taxpayers. For
sales occurring after December 16, 1999, accrual basis taxpayers were required to report
installment sales under an accrual method of accounting. The Installment Tax
Correction Act of December 28, 2000, repealed that requirement.
If you entered into an installment sale after December 16, 1999, and reported it under
an accrual method on your income tax return filed by April 16, 2001, you can revoke your
effective election not to use the installment method. To revoke the election, you must
file an amended return for the year of the installment sale (and any other year affected
by the sale) reporting the gain on the installment method. See chapter 12 for information
on installment sales.
Photographs of missing children. The Internal Revenue Service is a
proud partner with the National Center for Missing and Exploited Children. Photographs of
missing children selected by the Center may appear in this publication on pages that would
otherwise be blank. You can help bring these children home by looking at the photographs
and calling 1-800-THE-LOST (1-800-843- 5678) if you recognize a child.
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