What activities qualify a business as a ‘farming business’ for tax purposes?
- Crop production
- Animal production
- Forestry and logging
- Cultivating, operating, or managing a farm for profit
What form must a sole proprietorship involved in farming use to report income and losses?
Schedule F, Profit or Loss from Farming
Which businesses are not classified as farming businesses for tax purposes?
- Veterinary businesses
- Businesses supplying farm labor, equipment, or supplies
- Pet breeders
- Agricultural service providers
- Agricultural processing companies
What income types are not considered farm income?
- Wages as a farm employee
- Income from a grain harvesting contract
- Gains from the sale of farmland and depreciable equipment
- Gains from the sale of securities
- Passive rental income from farmland
What are patronage dividends from farming cooperatives, and how are they reported?
They are distributions from a cooperative to its members based on the amount of business they do with the coop. For farmers, they are taxable income and reported on Schedule F using information from Form 1099-PATR.
How should rental income from farmland be reported if the owner does not materially participate?
On Schedule E as passive rental income, not farming income.
What are the special estimated tax payment rules for qualified self-employed farmers?
- They are not required to make quarterly estimated tax payments if they file and pay their return in full by March 1.
- If they do make an estimated payment, only one annual payment is due by January 15.
What accounting methods are available to farmers?
- Cash Method
- Accrual Method
- Combination (Hybrid) Method
- Special Methods, including the Crop Method
Which farming businesses are required to use the accrual method of accounting?
- Farming corporations with over $31 million in gross receipts
- Partnerships with a corporate partner exceeding the gross receipt threshold
- Tax shelters
What items are included in farm inventory?
- Eggs in the process of hatching
- Harvested farm products for sale
- Supplies for sale items
- Livestock for resale
- Purchased products for seed or feed
What is the farm-price method of inventory valuation?
Each item, whether raised or purchased, is valued at its market price minus the costs of disposition.
Costs of disposition include broker’s commissions, freight, hauling to market, and other marketing costs.
Which inventory method allows farmers to group livestock together rather than track the costs of each individual animal?
The unit-livestock-price method.
This method classifies livestock according to type and age and uses a unit price for each animal within a class.
Are small and mid-sized farming businesses required to apply UNICAP rules?
No, they are generally exempt from UNICAP rules.
Large farming businesses with a prior three-year average of gross receipts exceeding $31 million are still required to capitalize inventory costs under UNICAP.
Under what conditions can a farming business use the cash method of accounting?
If the entity’s average annual gross receipts for the three preceding tax years is $31 million or less.
This includes farming businesses that produce or maintain an inventory.
What percentage of gross income must come from farming to qualify for special farm tax provisions?
At least two-thirds (⅔) of gross income must be from farming.
What is the tax treatment for gain on the sale of livestock inventory raised on a farm?
The gross sales price is reduced by any expenses of the sale, such as commissions or freight charges.
The basis of any animals sold is zero if the costs of raising it were deducted during the years the animal was being raised.
What types of property qualify for Section 179 and bonus depreciation in farming?
- Business equipment, farming machinery and equipment
- Tangible property with a MACRS recovery period of 20 years or less
- Livestock held for draft, breeding or dairy purposes
- Single-purpose agricultural or horticultural structures
- Qualified improvement property
- Fruit and nut-bearing plants and trees
Section 179 property must be acquired from an unrelated party unless new.
How should a farming business report the sale of depreciable farm equipment?
The sale is reported on Form 4797, Sales of Business Property.
Gains or losses from the sale may result in ordinary or capital gains or losses.
What farm-related transactions are subject to §1231 treatment?
- Sale or exchange of cattle or horses held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer
- Sale of other livestock (held for draft, breeding, sport or dairy) if held at least 12 months.
- Sale of depreciable property used in farming (e.g., equipment, barns) held for longer than a year.
- Sale of farmland or real estate used in the farming business held for longer than a year.
- Sale of unharvested crops sold with the land.
- Property involuntarily converted (e.g., condemnation, casualty).
Section 1231 assets receive special tax treatment, with net losses treated as ordinary loss and net gains generally treated as capital gain.
What is the tax treatment for Section 1245 recapture?
Treated as ordinary income
Under what conditions can a farmer postpone income from the sale of livestock due to weather-related conditions?
- The principal trade or business must be farming.
- The farmer must use the cash method of accounting.
- The farmer must show that the sale was due to weather-related conditions.
- The area must be designated as eligible for federal disaster assistance.
What is the replacement period for livestock involuntarily converted due to weather-related conditions?
Four years
True or False:
Crop insurance proceeds are generally taxable in the year they are received.
True
What is required for a farmer to elect to postpone reporting crop insurance proceeds?
- The farming business must use the cash method of accounting.
- Crop insurance proceeds were received in the same tax year the crops were damaged.
- Under normal business practices, income would be reported in the following year.
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Essential Tax Law Figures for Businesses34
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Unit 1: Business Entities and Requirements72
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Unit 2: Accounting Periods and Methods65
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Unit 3: Business Income46
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Unit 4: Business Expenses64
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Unit 5: Employee Compensation and Fringe Benefits78
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Unit 6: Other Business Deductions and Credits72
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Unit 7: Basis of Business Assets31
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Unit 8: Depreciation and Amortization58
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Unit 9: Disposition of Business Assets58
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Unit 10: Partnerships in General43
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Unit 11: Partnership Distributions and Liquidations26
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Unit 12: C Corporations in General46
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Unit 13: Corporate Transactions29
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Unit 14: Corporate Distributions and Liquidations30
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Unit 15: S Corporations48
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Unit 16: Farming Business35
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Unit 17: Tax-Exempt Organizations39
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Unit 18: Retirement Plans for Businesses93
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Unit 19: Trusts and Estates47
