He fills in all applicable items of farm expense deductions.

He uses his trucks 100% for his farming business and the actual cost (not including depreciation) of operating the trucks in 2003 was $2,659. He uses his family car 60% for business (determined by records at year end). It cost $2,307 to operate the car in 2003. He can deduct $1,384 for the car ($2,307 × .60). He enters a total of $4,043 ($2,659 + $1,384) on line 12. (Depreciation is reported on line 16.)

The $2,701 on this line is the amount he paid for pesticides and herbicides purchased during the year.

He deducts the $1,040 spent on diversion channels in 2003. The amount listed here includes the full cost of the government cost-sharing project, which he has reported as income on line 6a. He continues the policy elected in previous years of deducting annual soil and water conservation expenses. The expenses are consistent with a conservation plan approved by the Natural Resources Conservation Service of the USDA. The amount was not more than 25% of Mr. Brown's gross income from farming, so the entire amount is deductible. See chapter 6 for more information on soil and water conservation expenses.

The $1,575 on this line is the amount he paid a company for spraying his crops. He made the payment to a corporation, so he does not file a Form 1099–MISC to report the payment.

He enters the $129,499 depreciation from Form 4562, discussed later.

He enters the $18,019 cost of feed bought for consumption by his livestock in 2003. He did not include the cost of feed bought for livestock he and his family intend to consume. He also did not include the value of feed grown on his farm.

He enters $6,544. This is the amount paid for fertilizer and lime.

He deducts the $5,105 he paid for trucking and milk marketing expenses. He chose to itemize the $807 government milk assessment and lists it separately on line 34a.

He deducts the $3,521 cost of gasoline, fuel, and oil bought for farm use, other than amounts he included on line 12 for car and truck expenses. He did not deduct the cost of fuel used for heating, lighting, or cooking in his home.

He deducts the $1,070 cost of insurance on his farm buildings (but not on his home), equipment, livestock, and crops. He did not deduct the entire premiums on 3-year and 5-year insurance policies in the year of payment, but deducts each year only the part that applies to that year. For more information, see Insurance in chapter 5.

He deducts on line 23a the $3,175 interest paid on the farm mortgage for the land and buildings used in farming. He deducts on line 23b the $1,043 interest paid on obligations incurred to buy livestock and other personal property used in farming or held for sale. He deducts his home mortgage interest on Schedule A (Form 1040), which is not shown.

He enters the $16,416 in wages he paid during the year for labor hired to operate his farm, including wages paid to his wife and children. He did not include amounts paid to himself. He has no employment credits that would reduce the amount of wages entered. For those wages paid that were subject to social security and Medicare taxes, he included the full amount of the wages before reduction for the employee's share of those taxes, or other amounts withheld. His share of the social security and Medicare taxes is included in the total taxes deducted on line 31. See chapter 16 for information on employment taxes.

He enters only the $2,400 cash rent paid for the use of land he rented from a neighbor, Mr. Green. He did not deduct rent paid in crop shares. He completed a Form 1099–MISC for the rent paid to Mr. Green and sent Copy A to the IRS with Form 1096. He gave Mr. Green copy B of the Form 1099–MISC.

The $5,424 he enters includes $4,902 for repairs to farm machinery and $522 for repairs to farm buildings. He did not include the value of his own labor or the cost of repairs on his home. He prepared Form 1099–MISC for the farm machinery repairs because the repair shop is a limited liability company (LLC) that is not classified as a corporation. He sent Copy A to the IRS with Form 1096 and gave copy B to the owner of the repair shop. If the repair shop had been a corporation, Mr. Brown would not have had to file a Form 1099–MISC. He does not have to file a Form 1099–MISC for the building repair because he paid less than $600.

He enters the $2,132 cost of seeds and plants used in farming. He deducts these costs each year. He did not include the cost of plants and seeds purchased for the family garden.

He enters the $2,807 paid for livestock supplies and other supplies, including bedding.

He enters $3,201 for taxes paid during 2003, including state and local taxes on the real estate and personal property used in farming. He did not include the sales tax paid on farm supplies because this tax was included in the cost for supplies he deducted on line 30. He also did not include the gasoline tax on the gasoline bought for farm use, including the gasoline used in his trucks and family car for farm business, because these taxes were included in the costs for gasoline he deducted on lines 21 and 12. He included his share of social security and Medicare taxes paid for agricultural employees. He filed Form 943 (not shown) in January 2004, reporting these taxes for calendar year 2003.

He does not deduct, on Schedule F, his state income tax or the taxes on his home and the part of his land not used for farming. He deducts these taxes on Schedule A (Form 1040), which is not shown. He does not deduct any federal income tax paid during the year.

He enters $3,997 for the cost of water, electricity, gas, and telephone service used only in farming. He cannot deduct personal utilities. He also cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line to his home.

He enters $3,217, the total paid during 2003 for veterinary fees ($1,821), livestock medicines ($650), and breeding fees ($746). He does not prepare Form 1099–MISC for the veterinarian and the supplier of breeding services because both are incorporated.

He enters other farm business expenses. These include: an $807 government milk assessment; $347 for commissions, dues, and fees; $287 for financial records and office supplies; and $534 for farm business travel and meals. Farm business travel includes expenses for the State Forage Tour and for attending the farm management conference at State University. He included only 50% of the cost of meals in the deduction.

To arrive at his net farm profit, he subtracts the amount on line 35 ($218,904) from the amount on line 11 ($286,648). His net farm profit, entered on line 36, is $67,744. He also enters that amount on line 18 of Form 1040, and on line 1 of Section A, Schedule SE (Form 1040). Because he shows a net profit on line 36, he skips line 37.

He records information on his depreciable property in a book that he can use to figure his depreciation allowance for several years. He uses the Depreciation Worksheet from the Form 4562 instructions to figure his 2003 deduction.

He bought his farm on January 8, 1978. Timber on the farm was immature and had no fair market value (FMV). He immediately allocated the total purchase price of the farm among the land, house, barn, and fences (no other capital improvements were included in the price of the farm). He made the allocation on the purchase date in proportion to (but not in excess of) the FMVs of the assets and in the required asset order. See Trade or Business Acquired in Publication 551 for more information.

He entered in his depreciation record the part of the purchase price for the depreciable barn and fences, giving him the basis for figuring his depreciation allowance. The fences were fully depreciated in 1987. Because he cannot depreciate the house (no office claimed) and land, he keeps a separate record showing their bases.

He depreciates all his property placed in service before 1981 using the straight line method. He chose the alternate Accelerated Cost Recovery System (ACRS) method for his machine shed placed in service in 1986. He chose the following systems for all of his assets placed in service in the year indicated using the Modified Accelerated Cost Recovery System (MACRS) and the half-year convention.

One of his purchased dairy cows (#42) was killed by lightning in July 2003. Two other purchased cows (#52 and #60) were sold in 2003. The cows were depreciated under MACRS (ADS), using a half-year convention. Therefore, he can claim a half-year's depreciation for each cow in 2003.

He has other breeding and dairy cows he raised. He did not claim depreciation on them since his basis in the cows is zero for income tax purposes.

During 2003 the Browns owned two family cars. One of them was not used for farm business. Mr. Brown cannot deduct depreciation on it. Based on his written records, he determined at the end of the year that his other car was used 60% for his farm business and 40% for personal driving.

The Depreciation Worksheet contains an itemized list of Mr. Brown's assets for which he is deducting depreciation in 2003. He must list each item separately to keep track of its basis. The pickup truck and car purchased in 2000 are listed property in the 5-year property class.

Mr. Brown added three assets to his farming business in 2003.

Form 4562 is completed by referring to the Depreciation Worksheet.

Mr. Brown enters $162,229 on line 2. This is the total cost of all section 179 property placed in service in 2003. In figuring his cost, he does not include the portion of the new basis in the acquired tractor that was carried over from the traded tractor ($1,378). The dairy facility and equipment qualify as section 179 property. However, the machine shed improvement does not qualify. It is not a single purpose agricultural (livestock) structure.

He enters the description of the property (tractor and dairy equipment) he is electing to expense under section 179. His cost basis for the section 179 deduction is limited to the cash he paid for the tractor and the dairy equipment. He enters his cost basis of $33,729 for the tractor and $72,000 for the dairy equipment, in column (b). He then enters the tentative deduction, $28,000 for the tractor and $72,000 for the dairy equipment, in column (c). However, this amount is subject to the business income limit on line 11. (The total cost of his section 179 property ($162,229) did not exceed the investment limit, $400,000, and he is therefore subject to the maximum dollar limit, $100,000.)

His taxable income from his farming business (without including the section 179 deduction and the self-employment tax deduction) exceeds the maximum dollar limit on line 5. He enters $100,000 on lines 11 and 12. See chapter 8 for information on the section 179 deduction.

He enters $20,894 for the special depreciation allowance for the properties that qualify. For qualified property acquired before May 6, 2003, the special depreciation allowance is an additional 30% of the property's cost or basis (after subtracting the section 179 deduction).

For qualified property acquired after May 5, 2003, the special depreciation allowance is an additional 50% of the property's cost or basis (after subtracting the section 179 deduction). However, instead of claiming the 50% allowance, taxpayers may elect to claim the 30% allowance or elect not to claim any special allowance.

He enters $312 for his other depreciation. The $312 is for the asset placed in service before 1981 and the asset depreciated under ACRS (alternate method).

He enters $2,742. This is his MACRS depreciation for assets placed in service from 1999 through 2001.

All property placed in service in 2003 in each class is combined and entered in Part III, line 19. The abbreviation HY used in column (e) stands for the half-year convention. The 150 DB in column (f) stands for the 150% declining balance method under MACRS.

He enters his depreciation deduction for listed property, $2,244, on line 21. This is the total shown on line 28, Part V, page 2 of the form. He has two depreciable assets that are listed property—the car used 60% for business and the pickup truck purchased in 2000. His deduction for the car cannot be more than 60% of the limit for passenger automobiles for the year he placed the car in service. The other truck, which he sold this year, was fully depreciated.

He enters the total depreciation on line 22 and carries the total, $129,499 to line 16 of Schedule F.

He completes Sections A and B of Part V to provide the information required for listed property. He does not complete Section C because he does not provide vehicles for his employees' use.

He follows the practice of writing down the odometer readings on his vehicles at the end of each year and when he places the vehicles in service and disposes of them. In addition, because he uses his car only partly for business, he writes down the number of business miles it is driven any day that it is used for business. He uses these records to answer the questions on lines 24a and 24b of Section A and lines 30 through 36 of Section B.

He has no amortization, so he does not use Part VI of Form 4562.

He figures his self-employment tax on the following lines.

He enters his net farm profit, $67,744. All the income, losses, and deductions listed on Schedule F are included in determining net earnings from farm self-employment (see the types of self-employment income listed in chapter 15). Consequently, he did not have to adjust his net profit to determine his self-employment net earnings from farming.

If he were engaged in one or more other businesses in addition to farming, he would combine his net profits from all his trades or businesses on line 3 of this schedule. However, because farming was his only business, he enters his net profit from farming (the amount shown on line 1).

He multiplies line 3 by .9235 to get his net earnings from self-employment and enters $62,562 on line 4.

He multiplies line 4 by 15.3% and enters $9,572 on line 5. This is his self-employment tax for 2003. He also enters $9,572 on line 55 of Form 1040. He enters $4,786 on line 6 and also on line 28 of Form 1040 (deduction for one-half of his self-employment tax).

He prints the kind of property, “Dairy cow #42,” its location, and the date acquired on line 19. He enters his adjusted basis in the cow, $257, on line 20 and the $109 insurance payment he received for the cow on line 21. Line 20 is more than line 21, so he skips line 22. On lines 23 and 24, he enters the FMVs before and after the casualty ($500 and $0, respectively), and he shows the difference, $500, on line 25. He enters the amount from line 20 on line 26, subtracts line 21 from line 26, and enters $148 on lines 27 and 28.

He owned the cow for more than one year, so he identifies the casualty on line 34 and enters $148 on lines 34(b)(i), 35(b)(i), 37, and 38a, and on Form 4797, Part II, line 14.

Mr. Brown sold three depreciable assets in 2003 at a gain. They consisted of a truck, a mower, and a purchased dairy cow, #60. He has information about their cost and depreciation in his records. Only the dairy cow appears on the Depreciation Worksheet. The truck and mower were fully depreciated.

He sold the truck on July 9, the mower on August 12, and the cow on October 28. Since the gains on these items were gains from dispositions of depreciable personal property, as explained in chapter 11, he must determine the part of the gain for each item that was ordinary income.

He enters the description of each item on lines 19A through 19C and relates the corresponding property columns to the properties on those lines. He completes lines 20 through 25(b) for each disposition.

The gain on each item is shown on line 24. His gain on the sale of the truck is $700 (Property A). His gain on the sale of the mower is $70 (Property B). His gain on the sale of the cow is $82 (Property C). The gain on each item is entered in the appropriate property column on line 25(b).

On line 30, he enters $852, the total of property columns A through C, line 24. On line 31, he enters $852, the total of property columns A through C, line 25(b). This amount is the gain that is ordinary income. He also enters this amount on line 13, Part II.

He subtracts line 31 from line 30 and enters -0- on line 32. He has no long-term capital gain on the dispositions. All his gain is ordinary income.

All the animals in Part I met the required holding period.

Mr. Brown sold at a gain several cows he had raised and used for dairy purposes. His selling expense was $325 for these cows, which he shows on line 2(f). He enters the gain from the sale on line 2(g). He also shows on line 2(f), a selling expense of $20 for a raised dairy heifer and enters on line 2(g) the gain from the sale of the heifer. He also enters the gain on line 2(h). He also enters on line 2(g) the loss from the sale of purchased dairy cow #52. Because he sold purchased dairy cow #52 at a loss, he entered it in Part I instead of Part III. See Table 11–1 in chapter 11 for where to report items on Form 4797.

He combines the gains and loss on line 2(g) and enters $14,770 on line 7(g). He enters on line 7(h) the $1,080 post-May 5 gain. He has no nonrecaptured net section 1231 losses from prior years, so he does not fill in lines 8, 9, and 12. If he had nonrecaptured section 1231 losses, part or all of the gain on line 7 would be ordinary income and entered on line 12. Based on the instructions for line 7, he enters $14,770 as a long-term capital gain on line 11(f) of Schedule D and $1,080 on line 11(g) of Schedule D.

Mr. Brown enters on line 10 the $250 gain from the sale of a raised dairy heifer held less than 24 months for breeding purposes. He had previously entered the $852 gain from line 31, Part III, on line 13 and the $148 loss from Form 4684 on line 14. He totals lines 10 through 17 and enters $954 on line 18. He carries the gain from line 18 to line 18b(2) and shows it as ordinary income on line 14 of Form 1040.

He enters the required information in the appropriate columns.

He reports as a short-term loss on line 1 his $50 loss on the 2003 sale of H. T. Corporation stock held one year or less. He includes the gross sales price of the stock in column (d) on lines 1 and 3.

He completes Part I of Schedule D by entering on line 7b the loss in column (f) on line 1.

He enters in column (f) on line 8 his $745 long-term gain on the sale of Circle Corporation stock held more than one year. He includes the gross sales price in column (d) on lines 8 and 10.

Mr. Brown had previously entered on line 11 the gain from line 7(g) and 7(h) of Form 4797.

He combines the column (g) amounts on lines 8 and 11 and enters the result on Line 15.

He combines the column (f) amounts on lines 8 and 11 and enters the result on line 16.

In Part III, he combines lines 7b and 16 and enters his total capital gain on line 17a. He also enters this amount on Form 1040, line 13a.

In part III, he combines lines 7a and 15 and enters his total post-May 5 gain on line 17b.

After he completes his Form 1040 through line 40, he will use Part IV to figure his tax without regard to farm income averaging. See Schedule J (Form 1040), Farm Income Averaging, later.

Although Mr. Brown must complete Schedule D (Form 1040) and attach it to his return, certain other taxpayers may be able to complete the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions instead. See the instructions for line 13a of the 2003 Form 1040.

He fills in all applicable items on page 1 of Form 1040.

He prints the name and social security number of each dependent child he claims. He also checks the boxes in column (4) because all of his children are qualifying children for the child tax credit.

Mrs. Brown worked part time as a substitute teacher for the county school system during 2003. She also worked for Mr. Brown on the farm during 2003. He enters on line 7 her total wages, $8,950 ($7,750 from the school system and $1,200 from the farm), as shown on the Forms W–2 that he and the school system gave her.

He did not actually receive cash payment for the interest he listed on line 8a ($375). It was credited to his account so that he could have withdrawn it in 2003. Therefore, he constructively received it and correctly included it in his income for 2003. He enters the $220 in ordinary dividends he received from the Circle Real Estate Investment Trust on line 9a. They are not qualified dividends so he made no entry on line 9(b).

He received patronage dividends from farmers' cooperatives based on business done with these cooperatives. He does not list these dividends here, but properly included them on lines 5a and 5b, Part I of Schedule F.

He did not receive more than $1,500 in interest or $1,500 in dividends and none of the other conditions listed at the beginning of the Schedule B instructions applied, so he is not required to complete Schedule B.

He previously entered the following items.

He adds the amounts on lines 7 through 21 and enters the total, $93,708.

He has already entered one-half of his self-employment tax, $4,786, which he figured on Schedule SE.

He paid premiums of $7,200 during 2003 for health insurance coverage for himself and his family and qualifies for the self-employed health insurance deduction. He figures the part of his insurance payment that he can deduct by completing the Self-Employed Health Insurance Deduction Worksheet (not shown) in the instructions for Form 1040. He enters the result, $7,200, on line 29.

He adds the amounts on lines 23 through 32a and enters the total, $11,986, on line 33.

He subtracts line 33 from line 22 to get his adjusted gross income and enters the result, $81,722, on line 34 and also on line 35 of page 2.

He enters $15,000 from his Schedule A (Form 1040), which is not shown, because the total of his itemized deductions is larger than the $9,500 standard deduction for his filing status (married filing jointly).

He subtracts the $15,000 on line 37 from the $81,722 on line 35 and enters the result, $66,722 on line 38. He enters $15,250 (5 × $3,050) on line 39 and subtracts this amount from the amount on line 38 to get a taxable income of $51,472 on line 40.

He enters $5,994 from Schedule J, line 22. For information on how he figured his tax using farm income averaging, see Schedule J (Form 1040), later.

Mr. Brown determined that they do not owe alternative minimum tax (line 42). Therefore, he enters on line 43 the tax shown on line 41.

The Browns qualify for the child tax credit. He figures his credit by completing the Child Tax Credit Worksheet (not shown) in the instructions for Form 1040. He enters his credit, $1,800, on line 49.The credit figured reflects an advance child tax credit payment of $1,200 received by the Browns.

He adds the amounts on lines 44 through 52 and enters the total, $1,800, on line 53. He subtracts that amount from the tax on line 43 and enters $4,194 on line 54.

He has already entered the $9,572 self-employment tax he figured on Schedule SE.

He adds the amounts on lines 54 through 59 and enters $13,766, which is the total tax for 2003.

He enters the income tax withheld from Mrs. Brown's wages, $1,435, as shown on the Forms W–2 she received. He attaches a copy of her Forms W–2 to the front of Form 1040.

He did not make 2003 estimated tax payments since two-thirds of his gross income for 2002 was from farming. He was sure that at least two-thirds of his gross income for 2003 would again be from farming. Farmers who meet either of these conditions do not have to make 2003 estimated tax payments. If he files his Form 1040 and pays the tax due no later than March 1, 2004, he will not be penalized for failure to pay estimated taxes. He makes no entry on line 62.

The Browns are not entitled to claim the earned income credit on line 63, because their adjusted gross income is more than $34,692.

The Browns are not entitled to claim the additional child tax credit because they received the maximum amount of child tax credit they were entitled to on line 49.

Mr. Brown enters his credit for $350 of federal excise tax on gasoline used in 2003. He checks box “b” and attaches Form 4136 (not shown) to his return, showing how he figured the credit. He must report the credit as other income on his Schedule F for 2004, because his deduction for the total cost of gasoline (including the $350 of excise taxes) as a farm business expense on Schedule F reduced his 2003 taxes.

He adds the amounts on lines 61 through 67 and enters the total, $1,785, on line 68. He subtracts that figure from the amount on line 60. The balance, $11,981, is entered on line 72.

He fills in the lines on Schedule J.

He enters $51,472, his taxable income from line 40 of Form 1040.

He enters the part of his farm income he is electing to average, $28,472. He elects to treat this elected farm income as all coming out of his $67,744 of ordinary farm income from Schedule F. He could have elected to treat up to $14,770 of it as coming out of his gain from the sale of farm assets (other than land) that are reported in Part I of Form 4797. Reducing his ordinary income by this amount allows him to take advantage of the lowest tax brackets for this year and the 3 previous years.

He subtracts the amount on line 2 from the amount on line 1 and enters $23,000 on line 3.

Because he has capital gains and losses this year, he computes the tax on $23,000 using Part IV of Schedule D (not shown) and enters the result, $2,208, on line 4. In this example, he decided to treat the elected farm income as all coming from his ordinary income. However, he could have made a different election to use some or all of the capital gains for 2003. In that case, the calculation for this line would have been made by reducing his capital gains for 2003 by the amount included in elected farm income and, unless all of the capital gains for 2003 were included in elected farm income, using Schedule D to compute the tax on line 4.

He enters his taxable income from 2000, 2001, and 2002 on lines 5, 9, and 13, respectively.

He divides the amount on line 2 by 3.0 and enters the result, $9,491, on lines 6, 10, and 14.

He figures his adjusted taxable income for the 3 previous years by adding the amounts on lines 6, 10, and 14 to the amounts on lines 5, 9, and 13, respectively.

He figures the tax on the amounts on lines 7, 11, and 15 using the appropriate Tax Rate Schedules for the appropriate year and enters the results on lines 8, 12, and 16, respectively. In this example, he decided to treat the elected farm income as all coming from his ordinary income for 2003 and he added one-third of the elected farm income to the ordinary income of each of the previous 3 years. His income is taxed at the 15% rate for each year. However, if he had made a different election to use some or all of the capital gains for 2003, one-third of that amount would be treated as capital gains for each of the previous 3 years and the tax on lines 8, 12, and 16 would be calculated using the appropriate Schedule D. The gains would be taxed at the appropriate capital gains rate for the previous years.

He adds the amounts on lines 4, 8, 12, and 16 and enters the total, $6,511, on line 17.

He enters his tax from his 2000, 2001, and 2002 returns on lines 18, 19, and 20, respectively.

He adds the amounts on lines 18, 19, and 20 and enters the total, $517, on line 21.

He subtracts the amount on line 21 from the amount on line 17 and enters $5,994 on line 22. The tax on this line is less than the $6,159 of tax he figured using Schedule D. Therefore, he enters on line 41 of his Form 1040 the amount from this line.