Publication 225
Farmer's Tax Guide

For use in preparing 2002 Returns

Acknowledgment:

The valuable advice and assistance given us each year by the National Farm Income Tax Extension Committee is gratefully acknowledged.

2. Filing Requirements and Return Forms

Important Changes
for 2002

Electronic Form 1099.   For taxable years ending after March 9, 2002, Form 1099 can be issued electronically if the recipient consents to receive it that way.

Backup withholding.   The backup withholding rate is 30% for amounts paid in 2002 and 2003. See Backup withholding under Information Returns.

Important Reminder

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 Form 1099 under Information Returns.

Introduction

If you are a citizen or resident of the United States and your gross income for the tax year is at least the amount shown for your filing status under Filing Requirements, later, you must file a 2002 federal income tax return. This is true even if no tax is due. Gross income is explained later.

If you do not meet the gross income requirement, you may still need to file a tax return if any of the following apply.

• You have net earnings of $400 or more from self-employment.
• You are entitled to certain credits.
• You are entitled to a complete refund of tax withheld.

If you are a qualified farmer, defined later, you are subject to the special rules covered in this chapter for paying estimated tax and filing your tax return. This chapter also includes information about various forms and returns you may need to file.

Topics

This chapter discusses:

• Filing requirements
• Taxpayer identification number
• Estimated tax payment and return due dates
• Forms you may need to file
• Partnership
• Limited liability company (LLC)
• Corporation
• S corporation

Useful Items

You may want to see:

Publication

• 501   Exemptions, Standard Deduction, and Filing Information
• 505   Tax Withholding and Estimated Tax
• 541   Partnerships
• 542   Corporations

We have not listed the various forms you may have to file with the IRS because they are discussed later in this chapter under Forms You May Need To File.

See chapter 21 for information about getting publications and forms.

Filing Requirements

The following table will help you determine whether you must file a tax return, based on your:

• Age at the end of the tax year,
• Gross income, and
• Filing status.

Dependent's return.   If you can claim someone as a dependent on your tax return (for example, your child or parent), that person generally also must file his or her own tax return if any of the following apply.

• Your dependent had only earned income, such as salary or wages, and the total was more than $4,700 ($5,850 if 65 or older or blind).
• Your dependent had only unearned income, such as interest and dividends, and the total was more than $750.
• Your dependent had both earned and unearned income, and the total was more than $750.

Self-employed.   You must file an income tax return if you are self-employed and you had net 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 also must file a return if you received any advance earned income credit payments from your employer. In addition, you should file a return if you are eligible for the earned income credit or the additional child tax credit.

Refund.   Even if you do not otherwise have to file a return, you should file one if you are due a refund of any income tax withheld or paid.

More information.   See the Form 1040 instructions or Publication 501 for more information on who must file a return.

Taxpayer
Identification Number

You must enter your taxpayer identification number (generally your social security or employer identification number) on all returns, statements, or documents you file. For example, you must enter it on your federal income tax return, your estimated tax payment voucher, and all information returns, such as Forms 1096 and 1099. You may be subject to a penalty of $50 for each failure to enter the number.

Schedule F.   Enter your social security number (SSN) in the space provided on the first line of Schedule F. You need an employer identification number (EIN) if you have a qualified retirement plan or must file an employment, excise, estate, trust, partnership, or alcohol, tobacco, and firearms tax return. Enter that EIN on line D of Schedule F.

Other forms and schedules.   Enter your SSN on your individual income tax return (Form 1040), schedule of self-employment tax (Schedule SE), and estimated tax payment voucher (Form 1040-ES), regardless of which identification number you entered on your business returns.

If you are married, enter the SSNs for you and your spouse on your Form 1040, whether filing jointly or separately. If you are filing a joint return, list the SSNs in the same order as the names are shown on your label. Also enter both SSNs on your Form 1040-ES if you make joint estimated tax payments. Enter them in the same order as they appear on the joint return.

Applying for a social security number. To apply for a social security number (SSN), use Form SS-5. You can get the form from any social security office by calling 1-800-772-1213, or on the web at www.ssa.gov. If you are under 18 years of age, you must furnish evidence of age, identity, and U.S. citizenship (or lawful alien status) with your Form SS-5. If you are 18 or older, you must appear in person with this evidence at a social security office. It usually takes about 2 weeks to get an SSN.

Applying for an employer identification number. To apply for an employer identification number, use Form SS-4. See chapter 21 for information about ordering this form.

Estimated Tax Payment and Return Due Dates

When you must pay estimated tax and file your tax return depends on how much of your gross income comes from farming. If you receive at least two-thirds of your total gross income from farming in the current or prior year, special estimated tax and return due dates apply to you. See the discussion under Due Dates for Qualified Farmers, later.

Figure 2-A presents an overview of the special estimated tax rules that apply to farmers.

Figure 2–A

Gross Income

Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. On a joint return, you must add your spouse's gross income to your gross income. To decide whether two-thirds of your gross income for 2002 was from farming, use as your gross income the total of the following income (not loss) amounts from your tax return.

• Wages, salaries, tips, etc. from Form 1040, line 7.
• Taxable interest from Form 1040, line 8a.
• Ordinary dividends from Form 1040, line 9.
• Taxable refunds of state and local taxes from Form 1040, line 10.
• Alimony from Form 1040, line 11.
• Gross business income from Schedule C (Form 1040), line 7.
• Gross business receipts from Schedule C-EZ (Form 1040), line 1.
• Capital gains from Form 1040, line 13, including gains from Schedule D (Form 1040). Losses are not netted against gains.
• Gains on sales of business property from Form 1040, line 14.
• Taxable IRA distributions, pensions, annuities, 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 reported on Schedule E (Form 1040), line 36.
• Income from a REMIC reported on Schedule E (Form 1040), line 38.
• Gross farm rental income from Form 4835, line 7.
• Gross farm income from Schedule F (Form 1040), line 11.
• Your distributive share of gross income from a partnership, or limited liability company treated as a partnership, from Schedule K-1 (Form 1065).
• Your pro rata share of gross income from an S corporation, from Schedule K-1 (Form 1120S).
• Unemployment compensation from Form 1040, line 19.
• Other income reported on Form 1040, line 21, not included with any of the items listed above.

Gross income is not the same as total income shown on line 22 of Form 1040.

Gross Income From Farming

Gross income from farming includes the following.

• Gross farm income from Schedule F (Form 1040), line 11.
• Gross farm rental income from Form 4835, line 7.
• Gross farm income from Schedule E (Form 1040), Parts II and III. See the instructions for line 41.
• Gains from the sale of livestock used for draft, breeding, sport, or dairy purposes reported on Form 4797.

For more information about income from farming, see chapter 4.

Wages you receive as a farm employee are not farm income. Income you receive from contract grain harvesting and hauling with workers and machines you furnish also is not farm income.

Percentage From Farming

Figure your gross income from all sources. Then figure your gross income from farming. Divide your farm gross income by your total gross income to determine the percentage of gross income from farming.

Example 1.   Jane Smith had the following total gross income and farm gross income in 2002.

Schedule D showed gain from the sale of dairy cows carried over from Form 4797 ($5,000) in addition to a loss from the sale of corporate stock ($2,000). However, that loss is not netted against the gain to figure Ms. Smith's total gross income or her gross farm income. Her gross farm income is 64% of her total gross income ($80,000 ÷ $125,000 = 0.64). Therefore, based on her 2002 income, she does not qualify to use the special estimated tax payment and return due dates for 2002, discussed next. However, she does qualify if at least two-thirds of her 2001 gross income was from farming.

Example 2.   Assume the same facts as in Example 1 except that Ms. Smith's farm income was $90,000. This made her total gross income $140,000 and her farm gross income $95,000. She qualifies to use the special estimated tax payment and return due dates, discussed next, since 67.9% (at least two-thirds) of her gross income is from farming ($95,000 ÷ $140,000 = .679).

Due Dates for
Qualified Farmers

If at least two-thirds of your gross income for 2001 or 2002 was from farming, you are a qualified farmer and can choose either of the following options for your 2002 tax.

• Make your required annual payment, discussed next, by January 15, 2003, and file your Form 1040 by April 15, 2003.
• File your Form 1040 by March 3, 2003, and pay all the tax due. You are not required to make the annual payment. If you pay all the tax due, you will not be penalized for failure to pay estimated tax.

You can still make an IRA contribution by April 15, 2003, even though you filed your tax return by March 3, 2003.

Required annual payment.   If at least two-thirds of your gross income for 2001 or 2002 was from farming, only one estimated tax payment is due. The required annual payment is the smaller of the following amounts.

• 662/3% (.6667) of your total tax for 2002.
• 100% of the total tax shown on your 2001 return. (The return must cover all 12 months.)

2003 tax. If at least two-thirds of your gross income for 2002 or 2003 is from farming, you can choose either of the following options.

1. Make your required annual payment by January 15, 2004, and file your Form 1040 by April 15, 2004.
2. File your Form 1040 by March 1, 2004, and pay all the tax due.

Fiscal year farmers.   If you qualify to use these special rules but your tax year does not start on January 1, you can file your return and pay the tax by the first day of the 3rd month after the close of your tax year. Or you can make your required annual payment within 15 days after the end of your tax year. Then file your return and pay any balance due by the 15th day of the 4th month after the end of your tax year.

Due Dates for
Nonqualified Farmers

If less than two-thirds of your gross income for 2001 and 2002 was from farming, you cannot use these special estimated tax payment and return due dates for your 2002 tax year. Instead, you should have made quarterly estimated tax payments on April 15, June 17, and September 16, 2002, and on January 15, 2003. You must file your return by April 15, 2003.

If less than two-thirds of your gross income for 2002 and 2003 is from farming, you cannot use these special estimated tax payment and return due dates for your 2003 tax year. You generally must make quarterly estimated tax payments on April 15, June 16, and September 15, 2003, and on January 15, 2004. You must file your return by April 15, 2004.

For more information on estimated taxes, see Publication 505.

Estimated Tax Penalty
for 2002

If you do not pay all your required estimated tax for 2002 by January 15, 2003, or file your 2002 return and pay the tax by March 3, 2003, you should use Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, to determine if you owe a penalty. If you owe a penalty but do not file Form 2210-F with your return and pay the penalty, you will get a notice from the IRS. You should pay the penalty as instructed by the notice.

If you file your return by April 15 and pay the bill within 21 calendar days (10 business days if the bill is $100,000 or more) after the notice date, the IRS will not charge you interest on the penalty.

Do not ignore a penalty notice, even if you think it is in error. You may get a penalty notice even though you filed your return on time, attached Form 2210-F, and met the gross income from farming test. If you receive a penalty notice for underpaying estimated tax and you think it is in error, write to the address on the notice and explain why you think the notice is in error. Include a computation similar to the one in Example 1 (earlier), showing that you met the gross income from farming test.

Extension of Time To File Form 1040

If you do not file your 2002 return by March 3, 2003, the due date for your return will be April 15, 2003. However, you generally can get an automatic 4-month extension of time to file your return. Your Form 1040 would then be due by August 15, 2003.

You get this extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by April 15, 2003. You can also get an extension by using IRS e-file. Form 4868 does not extend the time for paying the tax. For more information, see the instructions for Form 4868.

This extension does not extend the March 3, 2003 due date for qualified farmers who did not make the required annual payment and who want to avoid an estimated tax penalty. Therefore, if you did not make your required annual payment by January 15, 2003, and you file your tax return after March 3, 2003, you will be subject to a penalty for underpaying your estimated tax, even if you file Form 4868.

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