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.

How To Postpone Gain

You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain.

Required statement.   You should attach a statement to your return for the year you have the gain. This statement should include all the following information.

• The date and details of the casualty, theft, or other involuntary conversion.
• The insurance or other reimbursement you received.
• How you figured the gain.

Replacement property acquired before return filed.   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items.

• The replacement property.
• The postponed gain.
• The basis adjustment that reflects the postponed gain. (Reduce the basis of the replacement property by the postponed gain.)
• Any gain you are reporting as income.

Replacement property acquired after return filed.   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period.

You should then attach another statement to your return for the year in which you buy the replacement property. This statement should contain detailed information on the replacement property. If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. Include in the statement detailed information on the replacement property bought in that year.

Amended return.   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations.

• You do not acquire replacement property within the replacement period, plus extensions. On this amended return, you must report the gain and pay any additional tax due.
• You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due.

Disaster Area Losses

Special rules apply to Presidentially declared disaster area losses. A Presidentially declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Disaster Relief and Emergency Assistance Act.

In March 2003, the IRS will issue a revenue ruling listing all of the areas declared by the President to be eligible for federal assistance during 2002 under the Act. A list of the areas warranting assistance under the Act is also available at the Federal Emergency Management Agency (FEMA) web site at www.fema.gov.

This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. For other special rules, see Publication 547.

When to deduct the loss.   If you have a deductible loss from a disaster that occurred in a Presidentially declared disaster area, you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. If you make this choice, the loss is treated as having occurred in the preceding year.

Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund.

You must make this choice to take your casualty loss for the disaster in the preceding year by the later of the following dates.

• The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred.
• The due date (with extensions) for the return for the preceding tax year.

Qualified disaster relief payments.   Qualified disaster relief payments received in tax years ending after September 10, 2001, are not included in the income of individuals. These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). No withholding applies to these payments.

Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses.

• Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a Presidentially declared disaster.
• Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a Presidentially declared disaster. (A personal residence can be a rented residence or one you own.)
• Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a Presidentially declared disaster.

Qualified disaster relief payments also include amounts paid by a federal, state, or local government in connection with a Presidentially declared disaster to those affected by the disaster.

Qualified disaster relief payments do not include:

• Insurance or other reimbursements for expenses, or
• Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation.

Postponed tax deadlines.   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. The tax deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes, and making contributions to a traditional IRA or Roth IRA.

If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB).

Who is eligible.   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement.

• Any individual whose main home is located in a covered disaster area (defined next).
• Any business entity or sole proprietor whose principal place of business is located in a covered disaster area.
• Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area.
• Any individual, business entity, or sole proprietor whose records are needed to meet a postponed deadline, provided those records are maintained in a covered disaster area. The main home or principal place of business does not have to be located in the covered disaster area.
• Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area.
• The spouse on a joint return with a taxpayer who is eligible for postponements.
• Any other person determined by the IRS to be affected by a Presidentially declared disaster.

Covered disaster area.   This is an area of a Presidentially declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year.

Abatement of interest and penalties.   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines.

Reporting Gains
and Losses

You will have to file one or more of the following forms to report your gains or losses from involuntary conversions.

Form 4684.   Use this form to report your gains and losses from casualties and thefts.

Form 4797.   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit.

Schedule A (Form 1040).   Use this form to deduct your losses from casualties and thefts of personal-use property that you reported on Form 4684.

Schedule D (Form 1040).   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. Also, carry over the following gains to Schedule D.

• Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year.
• Net gain shown on Form 4684 from the casualty or theft of personal-use property.

Schedule F (Form 1040).   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 34, if you use the cash method of accounting and have not otherwise deducted these losses.

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