Rural Tax Education

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Disaster Losses and Related Tax Rules

JC Hobbs

The dollar value of property losses due to fires, floods, tornadoes, earthquakes, lightning, freezes, etc. can be substantial. Federal income tax regulations often provide relief by allowing deductions for losses of both business-use and personal-use property. This fact sheet describes losses to property, the process used to determine if you have a deductible loss, how insurance proceeds and cost share benefits are treated, and how to reconstruct records to document a loss. Examples help explain the rules that apply to property found on the farm including buildings, machinery, livestock, feed, supplies, personal residence and the contents and personal vehicles. A list of related Internal Revenue Publications are included at the end of this fact sheet. These publications provide additional information about disaster losses.

A casualty is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Therefore, the casualty event must not be gradual or progressive deterioration, an event that is anticipated or intended to occur, or a day to day occurrence from an activity in which the taxpayer is engaged. A deductible loss can occur from a vehicle or equipment accident, earthquake, a fire that was not willfully set by the taxpayer, flood, freeze, lightning, hurricane, tornado, terrorist attack, vandalism, volcanic eruption, or government-ordered demolition or relocation.

To determine the extent of a loss, the owner of the property needs to compare the property’s condition immediately before and after the event to determine the extent of the loss and whether the amount may be deductible against taxable income. If the damaged property was insured, there may be the possibility of a taxable gain if the insurance reimbursement is greater than the amount of the deductible loss. This article addresses casualties and the information needed to determine whether or not a taxpayer will have a deductible loss or a taxable gain depending upon the type of property that was damaged or destroyed and if it was or was not insured.
Employment of Family Members

C. Robert Holcomb

The use of family labor in the farm or ranch operation can pose a number of challenges for farm managers as they try to sort through the vast quantity of regulations. While the day-to-day human-relations components of managing family members in the farm/ranch operation will differ substantially from that of non-family labor, the focus of this fact sheet will address the income tax and regulatory aspects of employing family members.

Generally, the wages that you pay to family members who are also your employees are subject to social security (FICA) and Medicare taxes, federal income tax withholding, and under certain circumstances, federal and state unemployment (FUTA/SUTA). Certain exemptions may apply for your child, spouse, or parent.1In addition, employers who pay less than $150 to one individual per year, or employers who pay less than $2,500 to all employees in one year may be exempt but there are exceptions to this rule. It is important that you understand these exceptions as noted in IRS publication 51.
Tangible Property Regulations: Using the De Minimis Safe Harbor

Guido van der Hoeven

In late 2013, the IRS issued new repair regulations that became effective as of January 1, 2014. Since the new repair regulations were issued, clarifying guidance has been and continues to be issued. The IRS issued Notice 2015–82 in late November 2015, which increased the de minimis amount from $500 to $2,500 beginning January 1, 2016. This increased amount is part of the repair regulations that were issued and found in Treas. Reg. § 1.263(a)–1(f)(1), which applies to taxpayers who do not have an applicable financial statement (AFS). Most farmers and ranchers will not have an AFS. The immediate tax benefit is that farmers and ranchers (as well as other business operators) can make the annual election to deduct as a current business expense items that prior to 2014 would have been capitalized and depreciated over the item’s tax life. Farmers and ranchers should have a written accounting policy which states that items costing $2,500 or less will be expensed. This discussion is intended to help farmers and ranchers to make an informed decision about whether or not to make the annual election to use the De Minimis Safe Harbor.
Estate and Gift Tax

JC Hobbs

Individuals may be subject to federal estate and gift taxes when large transfers of property, money, or other assets occur. Estate taxes apply to the transfer of assets (money and/or property) to one or more individuals when the owner dies. Gift taxes are imposed on the transfer of assets to another individual during the owner’s lifetime. In addition, many states also have estate and/or gift taxes.
Farm Losses versus Hobby Losses: Farmers Must Plan Ahead to Avoid Adverse Tax Consequences

JC Hobbs

The hobby loss rules which determine whether a venture is a business or a hobby, is a frequently misunderstood area of tax law that causes producers who are experiencing difficult economic times to worry, perhaps unnecessarily, that the venture will be viewed as a hobby rather than a true business venture. This article is intended to provide information to help producers reduce the likelihood that the business venture will be deemed a hobby.
How Do the At-Risk Rules Apply to a Farm Business?

JC Hobbs

The majority of farm businesses will not be subject to the at-risk rules. However, when a business is subject to these rules, the deduction of losses will be limited to the amount that the producer has at risk. The amount at risk is the amount the taxpayer could actually lose from the activity. If the at-risk limitation rules do not apply, other rules such as the passive loss rules or the hobby loss rules could still limit loss deductions. The purpose of this article is to explain the at-risk limitations as they apply to both farm and non-farm business activities. The at-risk limitations will seldom affect either small farms or small-business owners. The tax effect of the at-risk rules can be unexpected, so it is important to have a basic understanding of the rules and visit with your tax advisor about your business and the at-risk rules to avoid surprises.
Materially Participate in the Business to Avoid the Passive Activity Loss Rules

JC Hobbs

Beginning farmers and ranchers frequently start their agricultural businesses by beginning small and keeping their day jobs. These new business activities must meet certain threshold tests to be considered active rather than passive activities. The passive activity loss rules apply to businesses including farms, limited partnerships, Limited Liability Companies (LLC’s), S Corporations, and C Corporations.

A passive activity is any activity that involves the conduct of a business in which the producer does not materially participate or a rental activity (whether or not the producer materially participates or not). Should a loss occur in such a business, the passive activity loss rules limit a producer’s ability to deduct losses when the producer does not materially participate or a business which is a rental activity unless the producer is a real estate professional. Losses generated from passive activities, as a general rule, can only offset income from passive activities.

Material participation most often applies to business activities, including farming or ranching. Material participation requires a producer to be involved in the operation of a trade or business activity on a regular, continuous, and substantial basis, thereby avoiding the passive activity loss rules. The level of involvement applies to the owner of the business or an owner of an interest in a partnership or an S Corporation.
Weather-Related Sales of Livestock

JC Hobbs

There are two provisions in tax law that attempt to cushion producers from the consequences of adverse weather-related livestock sales. Under the first provision, livestock held for draft, breeding, or dairy purposes and sold due to adverse weather are provided a two-year reinvestment period. This replacement period can be extended if weather conditions persist for more than three years. The second provision, which applies to all livestock (other than poultry), allows cash basis taxpayers whose primary trade or business is farming to defer receipt from sales in excess of normal business practices due to weather-related conditions that result in a disaster declaration area. Both provisions apply only to those sales that are in excess of “normal sales” for the producer. The two tax provisions for weather-related sales of livestock have slightly different requirements, so producers should evaluate their circumstances to see which would be of greater tax benefit.
Filing Dates and Estimated Tax Payments

Gary Hoff

When managing the cash flow of the farm or ranch, it is important to preserve cash as long as possible without incurring penalties or interest for late payments. The filing date of your federal income tax return is important, as payment can be a major expense that needs to be considered as part of cash-flow planning. To understand when you must file your income tax return, you must be familiar with three areas:

1. Filing deadline,

2. Estimated tax filing requirements, and

3. Estimated tax penalty.
Self-Employment Tax

Gary Hoff

Most taxpayers working for an employer have FICA and Medicare withheld from their wages. The amount withheld is matched by their employer. Consequently, they will receive retirement and medical benefits when they reach retirement age. They are also entitled to disability and survivor benefits. The self-employed individual must pay self-employment (SE) tax to be entitled to similar benefits. This is paid when they file their federal income tax return. The SE tax rates equate to both the employer’s and employee’s share of FICA and Medicare.
The Optional Method of Paying Self-Employment Tax

Karli Salisbury

A self-employed individual must pay self-employment (SE) tax on earned income to be entitled to receive social security benefits. These benefits include retirement, disability, and survivor benefits as well as Medicare coverage, all of which are important to agricultural producers. To qualify for these benefits, a producer must have contributed by paying self-employment taxes and earning the required quarters of coverage. For additional information about self-employment taxes, refer to the fact sheet “If You Are Self-Employed” in the Related Articles section found on the RuralTax.org website.
Involuntary Conversion of Business Assets

Guido van der Hoeven

During the course of operating a farm or ranch, operators will get rid of, lose, or dispose of property used in the business in a variety of ways. Sometimes events beyond the control of the business result in disposition of property. The purpose of this discussion is to illustrate correct income tax reporting when business properties are disposed of due to an involuntary conversion or casualty that may occur suddenly and is beyond management’s control.

This discussion will focus on the involuntary conversion of tangible personal property (i.e., equipment and vehicles), which may be the result of a casualty loss event. The point of the discussion is to enhance the reader’s understanding of correct income tax reporting of sales and replacement purchases as a result of an involuntary conversion. Involuntary conversions of real estate are discussed briefly.
Related Parties for Federal Income Tax Purposes

Guido van der Hoeven

“Relationships! We all got 'em, we all want 'em. What do we do with 'em?” – Jimmy Buffett

The lyrics of the song “Fruitcakes,” sung by Jimmy Buffett, ask what to do with relationships. Taxpayers need to be aware of potential income tax consequences when dealing with related parties in business transactions. Specifically, the taxpayer must identify the potentially related party and the tax issue that may apply relative to both the taxpayer and the potentially related party. To further muddy the waters regarding this issue, related parties may be defined differently for different income tax transactions. Five common tax issues, with defined related parties, are listed below.
Start-Up Costs: Correct Reporting by Farmers for Income Tax Purposes

Guido van der Hoeven

Income tax rules apply to expenses that are incurred and paid before a business exists. These expenses are referred to as “start-up expenditures” or “start-up costs.” The IRS provides guidance relative to the deductibility of these start-up costs for any individual or entity beginning a new business, such as a farm. These rules apply regardless of the nature of the business or the organizational structure ultimately used in operating the new business. A challenge for the beginning business owner is to identify the “start date” of the business. Expenses incurred prior to the start date are generally considered start-up expenses, to which the IRS rules apply.
Introduction to Agricultural Federal Tax Issues

Ruby Ward

Essentially all farmers, ranchers and other agricultural producers must file a federal tax return and pay federal income and/or self-employment taxes on their net profit. Farm, Farming and Who's a Farmer for Tax Purposes Filing Dates and Estimated Tax Payments provides information about IRS definitions of a farm and farmer filing income tax returns. There are special rules on filing dates for those producers that qualify as a farmer (i.e., one who receives more than two-thirds of his or her net income from farming). provides more details regarding qualifications and estimated tax payments.
Keepseagle Settlement Payment and Your Form 1099 Information Returns

Ruby Ward, Trent Teegerstrom, JC Hobbs, and Guido van der Hoeven

Receiving either the Track A or Track B settlement payment was the first step in finalizing your Keepseagle settlement. All settlement recipients will need to file a federal income tax return and report this settlement as income regardless of their current income level, land status, current employment status and even if they have not filed a Federal income tax return before. Each settlement recipient will be receiving a Form 1099 MISC and/or a Form 1099-C around mid- January. Recipients must file a tax return to comply with IRS regulations. Many recipients may qualify for a tax refund and will not be able to get it unless they file a return.

This article is intended to cover the most common actions each Keepseagle award recipient will need to take once the Form 1099 has been received. Individual’s circumstances will vary and your situations may have complicating factors, such as estate or where additional debt forgiveness occurred. This information is intended for educational purposes only. Seek the advice of your tax professional regarding the application of these general principles to your individual circumstances.
Estate Planning

Tamara L. Cushing

No matter your age, as a landowner, a business person, or simply a homeowner with valuables you want to go to someone special, you should be concerned about the future of your business or the distribution of the property in question to the right individual or organization. The intent of estate planning is to plan for the successful distribution of property in accordance with the wishes of the deceased and to do so with a minimum of delay and anguish immediately after the death of an older generation. This is typically one of the most emotional times of our lives and it is best to have the estate distribution plan already in place before this emotional event happens. It helps with the stability and viability of the business to have that plan in place and it can save on federal and/or state estate taxes.

So, what if you don’t think you have enough assets to worry about an estate tax? Most professionals would argue that estate planning is not only about avoiding taxation but also about ensuring that your wishes are known to your heirs and that the assets go to those you want to have them.
2012 Federal Tax Forms Used by Beginning Farmers and Ranchers

JC Hobbs

This article provides a list of business and personal tax forms and schedules which farmers and ranchers may experience when filing their annual income tax return. This publication does NOT cover the rules that apply for each of these forms. For a more complete list of forms and publications visit the IRS Forms and Publications website at: http://www.irs.gov/formspubs/article/0,,id=232801,00.html for the most current forms and publications.
Basis

Dennis Kauppila

Basis is a short version of the term ‘Adjusted Tax Basis.’ Basis measures an owner’s investment in an asset. Usually basis decreases each year by the amount of depreciation taken on the asset. When it comes time to sell an asset, basis is just about the only thing that can lower the tax bill. Gains (which are taxable) are figured using basis, so keeping track of the adjusted tax basis of assets is important. This is how basis is used to figure a gain:

Sales Price - Basis = Gain.
What Are Deductible Business Expenses?

Dennis Kauppila

Farmers (and all business owners) pay income taxes based on profit. So, it is important to claim ALL legitimate business expenses to not overstate profits. On the other hand, it is illegal to deduct expenses that are not legitimate business expenses.
Lease vs. Purchase of Machinery

Warren Lee

Leasing or purchasing of machinery and equipment represent alternative ways for farm operators to acquire assets for agricultural production. Leasing has increased in popularity with agricultural producers. Manufacturers and financial institutions view leasing and selling equipment as alternative means to generate business. By comparing the net present value of the after-tax costs, farmers can determine the least expensive way to acquire machinery or other assets in the farmer’s specific situation. Key factors in the lease vs. purchase decision are the interest rate on loans, lease payments, the taxpayer’s marginal tax rate, and the taxpayer’s after-tax discount rate that reflects the time value of money. An important factor in this decision process is the acquisition of new technology and how rapidly that technology may become obsolete or of it is needed for a specific length of time.
Time Value of Money

Warren Lee

The outcomes of most business decisions occur over an extended period of time, often several years. Thus, most decisions should be analyzed using the concept of time value of money. The time value of money is the general universal preference for “a dollar in hand today is worth more than the prospect of receiving a dollar on some future date”.

It is generally accepted that if you were offered a choice of two alternatives, a gift of $1,000 today or a gift of $1,000 on some future date, such as one year from now, you would elect to receive the $1,000 now. However, suppose that you were offered a choice of $1,000 now or $1,100 a year from now. This decision is not as clear-cut because you have been offered a $100 compensation to forego receiving the funds now. Is this sufficient compensation? This concept of determining if a certain amount of money is worth more or less than a larger amount of money in the future is called the Time Value of Money.

There are three basic reasons for analyzing the time value of money.
W-2s for Foreign Agricultural Workers

Suzy Martin

The Internal Revenue Service (IRS) clarified reporting requirements for employers of foreign agricultural workers temporarily in the United States on H-2A visas with an announcement in September 2011. Employers of foreign agricultural workers on an H-2A visa are required to file Form W-2 Wage and Tax Statements on compensation of $600 or more for these workers. Payments made to H-2A workers are exempt from Social Security and Medicare taxes. In addition, employers are not required to withhold federal income tax from the H2-A workers. State and local taxing authorities may require withholding on H2-A labor; farm employers should check on their specific withholding requirements.
Conservation-Related Payments and Expenditures

George Patrick

Concerns about soil erosion, air and water quality, wildlife habitat and environmental protection have resulted in the rapid expansion of conservation-related programs. Generally, the benefits associated with these conservation programs accrue to society as a whole, rather than just to those specific individuals who incurred costs from the implementation of a conservation-related program. For these individuals, costs may exceed benefits. To encourage increased participation in conservation-related activities, payments may be made to producers, rural landowners, and others by federal, state, and local governments and private institutions.

This fact sheet identifies six types of conservation-related payments and expenditures and discusses how they are handled for income and self-employment tax purposes by operating farmers, share lease landowners, cash rent landowners and non-farm landowners. Many of these programs are administered by the Natural Resources Conservation Service (NRCS), formerly the Soil Conservation Service, of the U.S. Department of Agriculture (USDA). Overviews and detailed information on these programs are available at www.nrcs.usda.gov/programs.
What is Farming? Does Reporting Matter?

George Patrick

Many rural families combine a number of economic activities to generate additional family income. Farm production activities may be combined with full-time employment in farming or in the non-farm sector. Part-time employment may involve several seasonal jobs during the year or a part-time job throughout the year.

Generally, an employed individual will receive a Form W-2 reporting the wages received and taxes withheld. In other situations, the individual may be contracted to perform a specified task or provide a service and properly receive a Form 1099-MISC. The individual generally has responsibility for paying the self-employment tax as well as the income tax. Payment for agricultural work may be made in commodities to avoid the social security taxes1, but such payments are taxable for income tax purposes. The instructions and documentation received facilitates the proper reporting of these items of income.

Agricultural producers may also be involved in a variety of activities involving farming and direct marketing, such as farmers’ markets or community-supported agriculture. Farm income and expenses are reported on Schedule F, Profit or Loss from Farming. Other businesses report income and expenses on Schedule C, Profit or Loss from Business. The profit or loss from business activities is carried to the income section of the Form 1040. But where do farming activities end and non-farm activities begin? Does it matter how income and expenses are reported?