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Pub. 225, Farmer's Tax Guide 2004 Tax Year

Introductory Material

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Acknowledgment:

Table of Contents

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

Introduction

You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. A farm includes stock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards.

This publication explains how the federal tax laws apply to farming. Use this publication as a guide to figure your taxes and complete your farm tax return. If you need more information on a subject, get the specific IRS tax publication covering that subject. We refer to many of these free publications throughout this publication. See chapter 16 for information on ordering these publications.

The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. However, the information given does not cover every situation and is not intended to replace the law or change its meaning. This publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will continue to present the interpretation of the Service.

The IRS Mission.   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

  You can write to us at the following address:


Internal Revenue Service
Business Forms and Publications Branch
SE:W:CAR:MP:T:B
1111 Constitution Ave. NW
Washington, DC 20224

  We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

  You can email us at *taxforms@irs.gov. Please put “Publications Comment” on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

Tax questions.   If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

Ordering forms and publications.   Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the three addresses shown under How To Get Tax Help in the back of this publication.

Comments on IRS enforcement actions.   The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about federal agency enforcement actions. The Ombudsman will annually evaluate the enforcement activities of each agency and rate its responsiveness to small business. If you wish to comment on the enforcement actions of the IRS, you can:

  • Call 1-888-734-3247,

  • Fax your comments to 202-481-5719,

  • Write to
    Office of the National Ombudsman
    U.S. Small Business Administration
    409 3rd Street, S.W.
    Washington, DC 20416

  • Send an email to ombudsman@sba.gov, or

  • Download the appraisal form at www.sba.gov/ombudsman.

Treasury Inspector General for Tax Administration.   If you want to report, confidentially, misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). You can remain anonymous.

Farm tax classes.   Many state Cooperative Extension Services conduct farm tax workshops in conjunction with the IRS. Please contact your county extension office for more information.

What's New for 2004

The following items highlight a number of administrative and tax law changes for 2004. They are discussed in more detail throughout the publication. More information on these and other changes can be found in Publication 553, Highlights of 2004 Tax Changes.

Addition to small watershed programs.  The Forest Land Enhancement Program has been added to the list of small watershed programs. You may be able to exclude cost-share payments you receive from this program. See chapter 3.

Alternative Minimum Tax (AMT).  When figuring AMT, income averaging is no longer used to compute your regular tax liability. See chapter 3.

Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2004 is 37.5 cents a mile for all business miles driven. See chapter 4.

Standard mileage method.  Beginning in 2004, you can use the standard mileage rate to figure the deductible costs of operating up to four vehicles (at the same time) that you own or lease for business. In earlier years, you could not use the standard mileage rate if you used two or more vehicles at the same time. See chapter 4.

Reforestation costs. You can elect to deduct a limited amount of reforestation costs that are paid or incurred after October 22, 2004. The remaining costs can be amortized over an 84-month period. See chapter 4 and chapter 7. The reforestation credit is no longer available for costs paid or incurred after October 22, 2004.

Start-up costs. You can elect to deduct up to $5,000 of business start-up costs paid or incurred after October 22, 2004. The remaining costs can be amortized over a 180-month period. See chapter 4 and chapter 7.

Increased section 179 deduction dollar limits. The maximum amount you can elect to deduct for most section 179 property you placed in service during 2004 is $102,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $410,000. See chapter 7.

Making and revoking section 179 deduction elections on amended returns. You can make or revoke an election (or specifications made in an election) to deduct section 179 property by filing an amended return. This applies to elections made for section 179 property placed in service after 2002. The amended return must be filed within the time prescribed for the applicable tax year. See chapter 7.

Depreciation limits for business cars. The total amount of depreciation (including the section 179 deduction and the special depreciation allowance) you can take for a passenger automobile (that is not an electric vehicle or a truck or van) you use in your business and first place in service in 2004 is generally $10,610. Special rules apply to electric vehicles and trucks and vans. See chapter 7.

Depreciation deduction for MACRS property acquired in a nontaxable exchange. New guidance has been issued for depreciating MACRS property acquired after February 27, 2004, in a like-kind exchange or involuntary conversion. See chapter 7.

Section 179 deduction limit for sport utility vehicles. . The maximum section 179 expense deduction for certain sport utility vehicles placed in service after October 22, 2004, is $25,000. See chapter 7.

Bonus depreciation for aircraft. . Certain non-commercial aircraft are eligible for the special depreciation allowances. See chapter 7.

Bond or other debt received as payment. For sales on or after October 22, 2004, any bond or other evidence of debt you receive from the buyer that has interest coupons attached or that can be readily traded on an established securities market is treated as a payment in the year you receive it. See chapter 10.

Postponing gain on weather-related sales of livestock. The following new rules apply to postponing gain on the sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes because of weather-related conditions. These rules are effective for tax years for which the return due date (excluding extensions) is after 2002.

  1. If it is not practical for you to invest the sales proceeds in other livestock, other property (except real property) used for farming qualifies as replacement property.

  2. The replacement period is at least 4 years if the weather-related conditions occur in an area eligible for federal assistance. See chapter 11.

If you don't replace the livestock, the due date for making the election to postpone reporting income from sales or exchanges because of weather-related conditions described in 2 above is also extended. See chapter 3.

Tax rates and maximum net earnings. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $87,900 for 2004. There is no maximum limit on earnings subject to the Medicare part (2.9%). See chapter 12.

What's New for 2005

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2005 will be published in Publications 533 and 553. There is no maximum limit on earnings subject to the Medicare part.

Increase to FUTA tax deposit threshold. The Treasury Department recently amended Regulations section 31.6302(c)-3 to increase the accumulated FUTA tax deposit threshold from $100 to $500. The $500 threshold applies to FUTA tax deposits required for taxes reported on Forms 940, 940-EZ, and 940-PR, Employer's Annual Federal Unemployment (FUTA) Tax Return, for tax periods beginning after December 31, 2004.

Wage limit for social security tax. The limit on wages subject to the social security tax for 2005 will be published in Publication 51 (Circular A), Agricultural Employer's Tax Guide. There is no limit on wages subject to the Medicare tax.

Reminders

The following reminders and other items may help you file your tax return.

Principal agricultural activity codes. You must enter on line B of Schedule F (Form 1040) a code that identifies your principal agricultural activity. It is important to use the correct code because this information will identify market segments of the public for IRS Taxpayer Education programs. The U.S. Census Bureau also uses this information for its economic census. See the list of Principal Agricultural Activity Codes on page 2 of Schedule F.

Additional special depreciation allowances. The additional special depreciation allowances will not apply to most property placed in service after December 31, 2004. For more information, see chapter 7.

Postponed tax deadlines in disaster areas. The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster.

Reportable transactions. You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. You may have to pay a penalty if you are required to file Form 8886 but do not do so. Reportable transactions include (1) transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, (2) transactions offered to you under conditions of confidentiality and for which you paid an advisor a minimum fee, (3) transactions for which you have or a related party has a right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained, (4) transactions that result in losses of at least $2 million in any single year or $4 million in any combination of years, (5) transactions resulting in book-tax differences of more than $10 million, and (6) transactions with asset holding periods of 45 days in one year or less and that result in a tax credit of more than $250,000. For more information, see the Instructions for Form 8886.

Change of address. If you change your home or business address, you should use Form 8822, Change of Address, to notify the IRS. Be sure to include your suite, room, or other unit number.

Electronic deposits of taxes. You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur in 2005 and thereafter if you deposited more than $200,000 in federal depository taxes in 2003 or you had to use EFTPS in 2004. See chapter 13.

Publication on employer identification numbers (EIN). Publication 1635, Understanding Your EIN, provides general information on employer identification numbers. Topics include how to apply for an EIN and how to complete Form SS-4.

Form W-4 for 2005. You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2005. Those employees who owed a large amount of tax or received a large refund for 2004 may need to file a new Form W-4. See Publication 919, How Do I Adjust My Tax Withholding.

Earned income credit. You, as an employer, must notify employees who worked for you and from whom you did not withhold income tax about the earned income credit. See chapter 13.

Electronic Form 1099. Form 1099 can be issued electronically if the recipient consents to receive it that way.

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.

Farmers and crew leaders must withhold income tax. Farmers and crew leaders must withhold federal income tax from farm workers who are subject to social security and Medicare taxes. See chapter 13.

Social security tests for seasonal farm workers. If you pay seasonal farm workers less than $150 in annual cash wages, the wages are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farm workers. The seasonal farm worker must meet certain tests. See chapter 13.

Dyed diesel fuel and dyed kerosene. Dyed diesel fuel and dyed kerosene used for a nontaxable use (such as use on a farm for farming purposes) are not taxed. However, the tax applies if these fuels are used for a taxable use (such as in operating a highway vehicle on the highway). In addition, a penalty is imposed on a person who uses dyed diesel fuel or dyed kerosene for a taxable use and knows or has reason to know the fuel was dyed. For more information, see chapter 14.

Undyed diesel fuel and undyed kerosene. A registered ultimate vendor that sells undyed diesel fuel or undyed kerosene for use on a farm for farming purposes is allowed to claim a credit or refund of the excise tax on that fuel. Farmers cannot claim a credit or refund for the excise tax paid on that fuel. See chapter 14.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843- 5678) if you recognize a child.

Important Dates

You should take the action indicated on or before the dates listed. Saturdays, Sundays, and legal holidays have been taken into account, but statewide holidays have not. A statewide legal holiday delays a due date only if the IRS office where you are required to file is located in that state.

Due dates for deposits of withheld income taxes, social security taxes, and Medicare taxes are not listed here. For these dates, see Publication 509, Tax Calendars for 2005.

Fiscal year taxpayers. Generally, the due dates listed apply whether you use a calendar or a fiscal year. However, if you have a fiscal year, refer to Publication 509 for certain exceptions that may apply to you.

2005 Calendar Year

During January

Farm employers. Give your employees their copies of Form W-2 for 2004 by January 31, 2005.

January 18

Farmers. Pay your estimated tax for 2004 using Form 1040-ES. You have until April 15 to file your 2004 income tax return (Form 1040). If you do not pay your estimated tax by January 18, you must file your 2004 return and pay any tax due by March 1, 2005, to avoid an estimated tax penalty.

January 31

Farm employers. Give your employees their copies of Form W-2 for 2004. If an employee agreed to receive Form W-2 electronically, have it posted on a website and notify the employee of the posting.

Social security, Medicare, and withheld income tax. File Form 943 to report social security and Medicare taxes and withheld income tax for 2004. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return. Do not report wages for nonagricultural services on Form 943. For more information, see chapter 13.

All farm businesses. Give annual information statements to recipients of certain payments you made during 2004. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. For more information, see the 2004 General Instructions for Forms 1099, 1098, 5498, and W-2G. (See Chapter 16 for information about getting forms, instructions, and publications.)

Federal unemployment (FUTA) tax. File Form 940 (or 940-EZ) for 2004. If your undeposited tax is $100 or less, you can either pay it with your return or deposit it. If it is more than $100, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return. For more information on FUTA tax, see chapter 13.

February 10

Social security, Medicare, and withheld income tax. File Form 943 to report social security, Medicare, and withheld income tax for 2004. This due date applies only if you deposited the tax for the year in full and on time.

Federal unemployment (FUTA) tax. File Form 940 (or 940-EZ) for 2004. This due date applies only if you deposited the tax for the year in full and on time.

February 28

All farm businesses. File information returns (Form 1099) for certain payments you made during 2004. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for different types of payments. If you file Forms 1099 electronically (not by magnetic media), your due date for filing them with the IRS is extended to March 31. The due date for giving the recipient these forms remains January 31.

Farm employers. File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2004. If you file Forms W-2 electronically (not by magnetic media), your due date for filing them with the Social Security Administration (SSA) is extended to March 31. The due date for giving the recipient these forms remains January 31. For more information, see the 2004 Instructions for Forms W-2 and W-3.

March 1

Farmers. File your 2004 individual income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2004 estimated tax by January 18, 2005.

March 15

Corporations. File a 2004 calendar year corporate income tax return (Form 1120 or 1120-A) and pay any tax due by March 15. For more information, see Paying and Filing Income Taxes in Publication 542, Corporations.

March 31

Electronic filing of Forms 1099 and W-2. File Forms 1099 with the IRS and Forms W-2 with the SSA. This due date applies only if you file electronically (not by magnetic media). Otherwise, the due date is February 28. The due date for giving these forms to the recipient remains January 31. For information about filing Forms 1099 electronically, see Publication 1220, Specifications for Filing Forms 1098, 1099, 5498, and W-2G Electronically or Magnetically. For information about filing Forms W-2 electronically with the SSA, call 1-800-772-6270 or visit www.ssa.gov/employer.

April 15

Farmers. File an individual income tax return (Form 1040) for 2004 and pay any tax due if you did not file by March 1.

Partnerships. File a 2004 calendar year return (Form 1065). For more information, see Partnership Return (Form 1065) in Publication 541, Partnerships.

May 2

Federal unemployment (FUTA) tax. If you are liable for FUTA tax, deposit the tax owed through March if more than $500.

August 1

Federal unemployment (FUTA) tax. If you are liable for FUTA tax, deposit the tax owed through June if more than $500.

October 31

Federal unemployment (FUTA) tax. If you are liable for FUTA tax, deposit the tax owed through September if more than $500.

IRS e-file (Electronic Filing)

e-file

You can file your tax returns electronically using an IRS e-file option. The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. You can use one of the following IRS e-file options.

  • Use an authorized IRS e-file provider.

  • Use a personal computer.

  • Use a telephone if you receive a Telefile Tax Package.

  • Visit a VITA or TCE site.

For details on these fast filing methods, see your income tax package.

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