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taxmap/pubs/p225-073.htm#TXMP54480741 Chapter 16 Sample Return

This sample return uses actual forms to show you how to prepare your income tax return. However, the information shown on the filled-in forms is not from any actual farming operation.

Walter Brown is a dairy farmer filing jointly with his wife, Jane. Their return has been prepared using the cash method of accounting. See chapter 2 for an explanation of the cash method and other methods of accounting.

taxmap/pubs/p225-073.htm#TXMP7c77be02 Rounding off to whole dollars.

You may round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

taxmap/pubs/p225-073.htm#TXMP1bb0f6ab Losses from operating a farm.

The sample return shows a profit from the operation of the farm. However, if your deductible farm expenses are more than your farm income for the year, you have a loss from the operation of your farm. If your loss is more than your other income for the year, you may have a net operating loss (NOL). You may also have an NOL if you had a personal or business-related casualty or theft loss that was more than your income.

If you have an NOL this year, you may be able to reduce your income (and tax) in other years by carrying the NOL to those years and deducting it from income.

To determine if you have an NOL, complete your tax return for the year. You may have an NOL if a negative figure appears on Form 1040, U.S. Individual Income Tax Return, line 41. If this is the case, see Losses From Operating a Farm in chapter 4.

taxmap/pubs/p225-073.htm#TXMP6cb8183e Preparing the Return

taxmap/pubs/p225-073.htm#TXMP76093b7c Schedule F (Form 1040), Profit or Loss From Farming

Schedule F (Form 1040), Profit or Loss From Farming

The first step in preparing Mr. Brown's income tax return is to determine his net farm profit or loss on Schedule F (1040). The income and expenses shown on this Schedule F (1040) are taken from his farm receipt and expense records. Data for the depreciation and section 179 deductions are taken from Form 4562, Depreciation and Amortization, and the illustrated Depreciation Worksheet that follows Form 4562. Mr. Brown has filed all required Form 1099 information returns.

On line B, he writes the number "112120" from the list of Principal Agricultural Activity Codes on page 2 of Schedule F (1040)(not shown). This indicates that his principal source of farm income is from dairy farming.

taxmap/pubs/p225-073.htm#TXMP6a6471da Schedule F (1040) - Part I (Income)

Schedule F (1040) - Part I (Income)

Mr. Brown keeps records of the various types of farm income he receives during the year. (Farm income is discussed in chapter 3.) He uses this information to complete Part I of Schedule F (1040).

taxmap/pubs/p225-073.htm#TXMP22a51d61 Line items.

He fills in all applicable items of farm income.

taxmap/pubs/p225-073.htm#TXMP5ad8a4f2 Line 1.

In 2006, he sold steers he had bought for resale. He enters sales of $13,596.

taxmap/pubs/p225-073.htm#TXMP16ac2e85 Line 2.

He enters the cost of the steers, $6,523. He has kept a record of the cost of the livestock he bought and is careful to deduct the cost of an animal in the year of its sale.

taxmap/pubs/p225-073.htm#TXMP3e163849 Line 3.

He subtracts his cost on line 2 from the sales on line 1 and reports the difference, $7,073, as his profit on line 3. Had he sold any other items he bought for resale, he would combine the sales and costs of these items with the sales and costs of the steers and report only the totals on lines 1, 2, and 3. He does not report here sales of livestock held for draft, breeding, sport, or dairy purposes. He reports those sales on Form 4797, Sales of Business Property.

taxmap/pubs/p225-073.htm#TXMP146e9723 Line 4.

He enters the income he received during 2006 from sales of items he raised or produced on his farm. His principal source of farm income is dairy farming. The amount reported on this line, $263,018, includes sales of all of the following.

Milk	$233,874
Steers and calves he raised *	2,914
Vegetables he grew	1,457
Corn ($7,286), hay ($8,944), and wheat ($8,543) he raised	24,773
Total reported on line 4	$263,018

* Raised other than for draft, breeding, sport, or dairy purposes.

taxmap/pubs/p225-073.htm#TXMP3b59a985 Lines 5a and 5b.

He reports the $1,145 he received from cooperatives on line 5a. Since this is the dollar amount of a qualified written notice of allocation paid as part of a patronage dividend, he enters $1,145 as the taxable amount on line 5b.

taxmap/pubs/p225-073.htm#TXMP2dd75321 Lines 6a and 6b.

He received Farm Service Agency (FSA) cost-sharing payments of $6,781 on a soil conservation project (diversion channels) completed in 2006. He received the income as materials and services paid for by the government and reports it on both line 6a and line 6b. The Department of Agriculture (USDA) generally reports such payments to the recipient on Form 1099-G. The entire $6,781 has been included on Schedule F (1040), line 14, as a conservation expense. He did not receive any cost-sharing payments this year that he could exclude from his farm income.

taxmap/pubs/p225-073.htm#TXMP196d0e8a Line 7a.

He reports the $665 loan he received from the Commodity Credit Corporation (CCC) because he elected in a previous year to treat these loans as income in the year received. If he had elected not to report his CCC loan as income in the year received and forfeited the loan in a later year, he would report the loan as income on lines 7b and 7c in the year of forfeiture.

taxmap/pubs/p225-073.htm#TXMP771bdfd5 Line 9.

He reports his $1,258 of income from custom harvesting.

taxmap/pubs/p225-073.htm#TXMP210251dd Line 10.

On his 2005 income tax return, he claimed a credit of $142 for excise taxes on gasoline used on his farm. He includes the entire $142 in his 2006 income on line 10 because he deducted the total cost of gasoline (including the $142 of excise taxes) as a farm business expense in 2005.

taxmap/pubs/p225-073.htm#TXMP172166f7 Schedule F (1040)- Part II (Expenses)

Schedule F (1040)- Part II (Expenses)

Mr. Brown records his farm expenses during the year for tax purposes and summarizes these expenses at the end of the year. (Farm business expenses are discussed in chapter 4.) This gives him his deductible expenses, which he enters in Part II of Schedule F (1040).

taxmap/pubs/p225-073.htm#TXMP1cdbcc27 Line items.

He fills in all applicable items of farm expense deductions.

taxmap/pubs/p225-073.htm#TXMP73898353 Line 12.

He uses his trucks 100% for his farming business and the actual cost (not including depreciation) of operating the trucks in 2006 was $1,090, which he enters on line 12. (Depreciation is reported on line 16.)

taxmap/pubs/p225-073.htm#TXMP6a92b212 Line 13.

The $3,879 on this line is the amount he paid for all chemicals purchased during the year.

taxmap/pubs/p225-073.htm#TXMP25d324d5 Line 14.

He deducts the $6,781 spent on diversion channels in 2006. The amount listed here includes the full cost of the government cost-sharing project, which he has reported as income on line 6b. 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 5 for more information on soil and water conservation expenses.

taxmap/pubs/p225-073.htm#TXMP3a3c8029 Line 15.

The $8,055 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.

taxmap/pubs/p225-073.htm#TXMP18e3fa04 Line 16.

He enters the $33,837 depreciation from Form 4562, discussed later.

taxmap/pubs/p225-073.htm#TXMP76999427 Line 18.

He enters the $50,814 cost of feed bought for consumption by his livestock in 2006. 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.

taxmap/pubs/p225-073.htm#TXMP6382d143 Line 19.

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

taxmap/pubs/p225-073.htm#TXMP43f95f88 Line 20.

He deducts the $2,906 he paid for trucking and milk marketing expenses. He chose to itemize the $807 government milk assessment and lists it separately on line 34a.

taxmap/pubs/p225-073.htm#TXMP087fcc40 Line 21.

He deducts the $6,216 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.

taxmap/pubs/p225-073.htm#TXMP6f2278b1 Line 22.

He deducts the $3,362 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 4.

taxmap/pubs/p225-073.htm#TXMP0949adec Lines 23a and 23b.

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 $7,738 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 (1040), Itemized Deductions, which is not shown.

taxmap/pubs/p225-073.htm#TXMP27959a8c Line 24.

He enters the $26,368 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 employee 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 the 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 13 for information on employment taxes.

taxmap/pubs/p225-073.htm#TXMP4a4a934c Line 26b.

He enters only the $9,660 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.

taxmap/pubs/p225-073.htm#TXMP32326a74 Line 27.

The $13,504 he enters includes $12,982 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 not 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.

taxmap/pubs/p225-073.htm#TXMP74df2a80 Line 28.

He enters the $5,875 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.

taxmap/pubs/p225-073.htm#TXMP423b35bf Line 30.

He enters the $7,433 paid for livestock supplies and other supplies, including bedding.

taxmap/pubs/p225-073.htm#TXMP5b2004fe Line 31.

He enters $3,201 for taxes paid during 2006, 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 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, Employer's Annual Federal Tax Return for Agricultural Employees (not shown), in January 2007, reporting these taxes for calendar year 2006.

He does not deduct, on Schedule F (1040), 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 (1040), which is not shown. He does not deduct any federal income tax paid during the year.

taxmap/pubs/p225-073.htm#TXMP700d573d Line 32.

He enters $5,504 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.

taxmap/pubs/p225-073.htm#TXMP6916667c Line 33.

He enters $8,508, the total paid during 2006 for veterinary fees ($3,607), livestock medicines ($2,402), and breeding fees ($2,499). He does not prepare Form 1099-MISC for the veterinarian and the supplier of breeding services because both are incorporated.

taxmap/pubs/p225-073.htm#TXMP2657f0bb Line 34.

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.

taxmap/pubs/p225-073.htm#TXMP681d6ce5 Line 36 - Net farm profit.

To arrive at his net farm profit, he subtracts the amount on line 35 ($216,425) from the amount on line 11 ($280,082). His net farm profit, entered on line 36, is $63,657. He also enters that amount on Form 1040, line 18, and on Schedule SE (1040), Section A, line 1. Because he shows a net profit on line 36, he skips line 37.

taxmap/pubs/p225-073.htm#TXMP29a48044 Form 4562   Depreciation and Amortization

Form 4562 Depreciation and Amortization

Mr. Brown follows the instructions and lists the information called for in Parts I through IV. He also completes Part V on page 2 to provide information on listed property used in his farming business. The two vehicles used in his business are listed property. The truck, sold in July and shown on Form 4797, was placed in service in 1996 and fully depreciated in 2001. No depreciation is allowed for 2006.

taxmap/pubs/p225-073.htm#TXMP5a9e4721 Depreciation record.

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 2006 deduction.

taxmap/pubs/p225-073.htm#TXMP0d3ae54c Basis for depreciation.

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.

taxmap/pubs/p225-073.htm#TXMP7efa6a5c Methods of depreciation.

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.

• 2002 - straight line Alternative Depreciation System (ADS).
• 2003, 2004, and 2006 -150% declining balance General Depreciation System (GDS).

taxmap/pubs/p225-073.htm#TXMP068c3370 Depreciable property.

One of his purchased dairy cows (#42) was killed by lightning in July 2006. Two other purchased cows (#52 and #60) were sold in 2006. 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 2006.

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.

The Depreciation Worksheet contains an itemized list of Mr. Brown's assets for which he is deducting depreciation in 2006. He must list each item separately to keep track of its basis. The pickup truck is listed property in the 5-year property class.

taxmap/pubs/p225-073.htm#TXMP34694471 New assets.

Mr. Brown added three assets to his farming business in 2006.

1. In January, he completed and placed in service a dairy facility designed specifically for the production of milk and to house, feed, and care for dairy cattle (single purpose livestock structure). The construction of the dairy facility began in 2005. The building is depreciated separately from the milking equipment it houses. The cost of the building is $28,250 and it is 10-year property under MACRS. The cost of the equipment is $72,000 and it is 7-year property under MACRS.
2. In February, he made improvements to his machine shed for a total cost of $650. The improvements are depreciated as if they were a separate building with a 20-year recovery period.

taxmap/pubs/p225-073.htm#TXMP49722206 Line items.

Form 4562 is completed by referring to the Depreciation Worksheet.

taxmap/pubs/p225-073.htm#TXMP4c0af91d Line 2.

Mr. Brown enters $100,250 on line 2. This is the total cost of all section 179 property placed in service in 2006. The dairy facility and equipment qualify as section 179 property. However, the machine shed improvement does not qualify because it is not a single purpose agricultural or horticultural structure.

taxmap/pubs/p225-073.htm#TXMP01bf6a07 Line 6.

He enters the description of the property (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 dairy equipment. He enters his cost basis of $72,000 for the dairy equipment in column (b). He then enters the tentative deduction of only $22,635 (it is not always advantageous to claim the maximum section 179 deduction allowed) 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 ($100,250) did not exceed the investment limit, $430,000, and he is therefore subject to the maximum dollar limit, $108,000. The remaining balance, $49,365, is depreciated on line 19.

taxmap/pubs/p225-073.htm#TXMP02ad42ff Lines 11 and 12.

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 $108,000 on line 11 and he enters $22,635 on line 12. See chapter 7 for information on the section 179 deduction.

taxmap/pubs/p225-073.htm#TXMP69174904 Line 17.

He enters $2,593. This is his MACRS depreciation for assets placed in service from 2002 through 2004.

taxmap/pubs/p225-073.htm#TXMP511d4dec Line 19.

All property placed in service in 2006 in each class is combined and entered in Part III. 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.

taxmap/pubs/p225-073.htm#TXMP4880b61e Line 21.

He enters his depreciation deduction for listed property, $1,179, on line 21. This is the total shown on line 28 of the form. He has one depreciable asset (the pickup truck purchased in 2003) that is listed property. The other truck, which he sold this year, was fully depreciated.

taxmap/pubs/p225-073.htm#TXMP7bbd1a8f Line 22.

He enters the total depreciation on line 22 and carries the total, $33,837, to Schedule F (1040), line 16.

taxmap/pubs/p225-073.htm#TXMP7153c651 Other items.

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. 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.

taxmap/pubs/p225-073.htm#TXMP196734bb Form 8903   Domestic Production Activities Deduction

Form 8903 Domestic Production Activities Deduction

The following example of Form 8903 was prepared using the small business simplified overall method. See the instructions for Form 8903 for more information.

The domestic production activities deduction (DPAD) is generally 3% of the lesser of a taxpayer's qualified production activities income for the tax year or an individual taxpayer's adjusted gross income (also adjusted gross income for an estate or trust; taxable income for all other taxpayers) for the tax year. However, the DPAD generally cannot be more than 50% of the Form W-2 wages paid to employees of the taxpayer.

taxmap/pubs/p225-073.htm#TXMP7302042a Entries.

Mr. Brown prints his name, his wife's name, and his identifying number at the top of Form 8903.

taxmap/pubs/p225-073.htm#TXMP32daa9bb Lines 1 through 4.

On line 1, Mr. Brown enters $301,763, his total gross receipts comprised of the following:

• $280,082 from line 11 of his Schedule F.
• Plus his cost or other basis, $6,523 from line 2 of his Schedule F.
• Plus $15,158 ($13,160 + 303 + 255 + 700 + 70 + 670) from Form 4797 (total gross sales price).

Because he is using the small business simplified overall method, he skips lines 2 and 3.

All of Mr. Brown's gross receipts are treated as domestic production gross receipts since he has determined that less than 5% of his gross receipts are non-domestic production gross receipts.

This means that, using the small business simplified overall method, all of his costs of goods sold and deductions can be apportioned to his domestic production gross receipts. Therefore, on line 4 he enters $224,264, his total allocable costs comprised of the following:

• His total expenses of $216,425, from line 35 of his Schedule F.
• Plus his total cost or other basis of items bought for resale, $6,523, from line 2 of his Schedule F.
• Plus his total adjusted basis of other items sold, $1,316 ($325 + (912–514) + 5 + 588), from Form 4797.

taxmap/pubs/p225-073.htm#TXMP1508f0c8 Lines 6 through 8.

He subtracts line 5 from line 1 and enters the result, $77,499, on lines 6 and 8. He skips line 7 because he is not a shareholder, partner, or beneficiary of an entity which passed qualified production activity income through to him.

taxmap/pubs/p225-073.htm#TXMP0a493f7d Line 9.

He figures adjusted gross income without the domestic production activities deduction by completing lines 1 through 38 (skipping line 35) of Form 1040 and enters $61,357 on line 9.

taxmap/pubs/p225-073.htm#TXMP29ea63bf Line 10.

He enters $61,357, the smaller of line 8 or line 9.

taxmap/pubs/p225-073.htm#TXMP6081bf41 Line 11.

He enters $1,841 (3% of $61,357).

taxmap/pubs/p225-073.htm#TXMP1fc6f8e9 Lines 12 through 14.

He enters $26,368, his total Form W-2 wages from Schedule F (1040), line 24. He skips line 13 because he is not a shareholder, partner, or beneficiary of an entity which passed wages through to him. Therefore, line 14 is the same as line 12.

taxmap/pubs/p225-073.htm#TXMP5dfc3a18 Line 15.

On line 15, he enters $13,184, one-half of the wages shown on line 14.

taxmap/pubs/p225-073.htm#TXMP6ad1ec34 Lines 16 through 19.

On line 16, he enters $1,841, the smaller of line 11 or line 15. He skips lines 17 and 18 because he did not have a cooperative pass the deduction through to him, nor did he have an expanded affiliated group allocation. Thus, line 19 is also $1,841 and represents his domestic production activities deduction to be entered on Form 1040, line 35.

taxmap/pubs/p225-073.htm#TXMP5925e3be Schedule SE (Form 1040)   Self-Employment Tax

Form 1040 (Schedule SE)

After figuring his net farm profit on page 1 of Schedule F (1040), Mr. Brown figures his self-employment tax. To do this, he figures his net earnings from farm self-employment on Short Schedule SE (1040), Section A. He is not required to use Long Schedule SE (1040), Section B. First he prints his name (as shown on his Form 1040) and his social security number at the top of Schedule SE (1040). Only his name and social security number go on Schedule SE (1040). His wife does not have self-employment income. If she had self-employment income, she would file her own Schedule SE (1040).

taxmap/pubs/p225-073.htm#TXMP7f972947 Line items.

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

taxmap/pubs/p225-073.htm#TXMP06a13f09 Line 1.

He enters his net farm profit, $63,657. All the income, losses, and deductions listed on Schedule F (1040) are included in determining net earnings from farm self-employment (see the types of self-employment income listed in chapter 12). Consequently, he did not have to adjust his net profit to determine his self-employment net earnings from farming.

taxmap/pubs/p225-073.htm#TXMP5de09463 Line 3.

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).

taxmap/pubs/p225-073.htm#TXMP1e5b5094 Line 4.

He multiplies line 3 by .9235 to get his net earnings from self-employment and enters $58,787 on line 4.

taxmap/pubs/p225-073.htm#TXMP7b8c7720 Lines 5 and 6.

He completes the calculations on line 5 and enters $8,994 on line 5. This is his self-employment tax for 2006. He also enters $8,994 on line 58 of Form 1040. He enters $4,497 on line 6 and also on Form 1040, line 27 (the deduction for one-half of his self-employment tax).

taxmap/pubs/p225-073.htm#TXMP3ece0eaf Form 4684   Casualties and Thefts

Form 4684 Casualties and Thefts

Mr. Brown's only business casualty occurred on July 7 when a dairy cow he purchased 4 years ago was killed by lightning. He shows the loss from the casualty on page 2 of Form 4684. Only page 2 is shown, because page 1 is for nonbusiness casualties.

He prints his name, his wife's name, and his identifying number at the top of page 2.

taxmap/pubs/p225-073.htm#TXMP3a7837a9 Part I.

He prints the kind of property, "Dairy cow #42," its location, and the date acquired on line 22. He enters his adjusted basis in the cow, $257, on line 23 and the $109 insurance payment he received for the cow on line 24. Line 23 is more than line 24, so he skips line 25. On lines 26 and 27, he enters the FMVs before and after the casualty ($500 and $0, respectively), and he shows the difference, $500, on line 28. He enters the amount from line 23 on line 29, subtracts line 24 from line 29, and enters $148 on lines 30 and 31.

taxmap/pubs/p225-073.htm#TXMP19593e89 Part II.

He owned the cow for more than 1 year, so he identifies the casualty on line 37 and enters $148 on lines 37(b)(i), 38(b)(i), 40, and 41a, and on Form 4797, Part II, line 14.

taxmap/pubs/p225-073.htm#TXMP1d1b4869 Form 4797   Sales of Business Property

Form 4797 Sales of Business Property

After completing Schedule F (1040) and Section B of Form 4684, Mr. Brown fills in Form 4797 to report the sales of business property. See Table 9-1 in chapter 9 for the types of property reported on Form 4797.

He prints his name, his wife's name, and his identifying number at the top of Form 4797.

Before he can complete Parts I and II, he must complete Part III to report the sale of certain depreciable property.

taxmap/pubs/p225-073.htm#TXMP2e4ceb87 Part III.

Mr. Brown sold three depreciable assets in 2006 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 9, 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.

taxmap/pubs/p225-073.htm#TXMP24caeb84 Gain from dispositions.

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).

taxmap/pubs/p225-073.htm#TXMP1ab55e90 Summary of Part III gains.

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 Part II, line 13.

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.

taxmap/pubs/p225-073.htm#TXMP2f0f4e33 Part I.

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 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 9-1 in chapter 9 for where to report items on Form 4797.

He combines the gains and loss on line 2(g) and enters $12,740 on line 7(g). 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 $12,740 as a long-term capital gain on Schedule D (1040), line 11(f).

taxmap/pubs/p225-073.htm#TXMP77daa366 Part II.

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 Part III, line 31, on line 13 and the $148 loss from Form 4684 on line 14. He totals lines 10 through 16 and enters $954 on line 17. He carries the gain from line 17 to line 18b and shows it as ordinary income on Form 1040, line 14.

taxmap/pubs/p225-073.htm#TXMP415e394c Schedule D (Form 1040)   Capital Gains and Losses

Capital Gains and Losses

After completing Form 4797, Mr. Brown fills in Schedule D (1040) to report gains and losses on capital assets. He prints his name, his wife's name, and his social security number at the top of Schedule D (1040).

taxmap/pubs/p225-073.htm#TXMP46cfcaaa Entries.

He enters the required information in the appropriate columns.

taxmap/pubs/p225-073.htm#TXMP7d4e725f Lines 1 and 3.

He has no short-term transactions to report so he skips Part I of Schedule D (1040).

taxmap/pubs/p225-073.htm#TXMP71e44241 Lines 8 and 10.

He enters in column (f) on line 8 his $14,000 long-term loss (using brackets to indicate the loss) on the sale of Circle Corporation stock held more than 1 year. He includes the gross sales price in column (d) on lines 8 and 10.

taxmap/pubs/p225-073.htm#TXMP62558d3a Line 11.

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

taxmap/pubs/p225-073.htm#TXMP2615d566 Line 15.

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

taxmap/pubs/p225-073.htm#TXMP2073a88e Line 16.

In Part III, he combines lines 7 and 15 and enters his total capital loss on lines 16 and 21. He also enters this amount on Form 1040, line 13. The loss amounts are always written in brackets to distinguish the loss.

After he completes his Form 1040 through line 43, he will use the Schedule J (1040), Income Averaging for Farmers and Fishermen, to determine if it yields the lowest tax.

taxmap/pubs/p225-073.htm#TXMP10f7371e Form 1040, Page 1

Mr. Brown is filing a joint return with his wife.

taxmap/pubs/p225-073.htm#TXMP70e7a479 Line items.

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

taxmap/pubs/p225-073.htm#TXMP18a45b46 Line 7.

Mrs. Brown worked for Mr. Brown on the farm during 2006. He enters on line 7 her total wages, $8,950, as shown on the Form W-2 that he gave her.

taxmap/pubs/p225-073.htm#TXMP136f776c Lines 8a and 9a.

He did not actually receive cash payment for the interest he listed on line 8a ($595). It was credited to his account so that he could have withdrawn it in 2006. Therefore, he constructively received it and correctly included it in his income for 2006.

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 Schedule F (1040), Part I, lines 5a and 5b.

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 (1040) instructions applied, so he is not required to complete Schedule B (1040).

taxmap/pubs/p225-073.htm#TXMP35ad5e32 Lines 13, 14, and 18.

He previously entered the following items.

• His capital loss on line 13 from Schedule D (1040), line 21.
• His other gain on line 14 from Form 4797, line 18b.
• His net farm profit on line 18 from Schedule F (1040), line 36.

taxmap/pubs/p225-073.htm#TXMP6f79720a Line 22.

He adds the amounts on lines 7 through 21 and enters the total, $72,896.

taxmap/pubs/p225-073.htm#TXMP38d898f7 Line 27.

He has already entered one-half of his self-employment tax, $4,497, which he figured on Schedule SE (1040).

taxmap/pubs/p225-073.htm#TXMP6dc41b3f Line 29.

He paid premiums of $7,042 during 2006 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, $7,042, on line 29.

taxmap/pubs/p225-073.htm#TXMP3f4cc1fa Line 35.

He enters $1,841 on line 35 from Form 8903, line 19.

taxmap/pubs/p225-073.htm#TXMP14619239 Line 36.

He adds the amounts on lines 23 through 31(a) and 32 through 35 and enters the total, $13,380, on line 36.

taxmap/pubs/p225-073.htm#TXMP73d62854 Lines 37 and 38.

He subtracts line 36 from line 22 to get his adjusted gross income and enters the result, $59,516, on line 37 and also on line 38 of page 2.

taxmap/pubs/p225-073.htm#TXMP7601995c Form 1040, Page 2

Mr. Brown fills in the following lines on page 2 of Form 1040.

taxmap/pubs/p225-073.htm#TXMP4774233a Line 40.

He enters $15,000 from his Schedule A (1040), which is not shown, because the total of his itemized deductions is larger than the $10,300 standard deduction for his filing status (married filing jointly).

taxmap/pubs/p225-073.htm#TXMP7e32e331 Lines 41, 42, and 43.

He subtracts the $15,000 on line 40 from the $59,516 on line 38 and enters the result, $44,516, on line 41. He enters $6,600 (2 × $3,300) on line 42 and subtracts this amount from the amount on line 41 to get a taxable income of $37,916 on line 43.

taxmap/pubs/p225-073.htm#TXMP2318e63e Line 44.

He enters $3,792 from Schedule J (1040), line 22. For information on how he figured his tax using income averaging, see Schedule J (Form 1040), Income Averaging for Farmers and Fishermen, later.

taxmap/pubs/p225-073.htm#TXMP6ee3364e Lines 46 through 56.

Mr. Brown determined that he and his wife do not owe alternative minimum tax (line 45). Therefore, he enters on line 46 the same tax shown on line 44. Nor is he claiming any of the credits on lines 47 through 55, so the same tax is also shown on line 57.

taxmap/pubs/p225-073.htm#TXMP71903cfb Line 58.

He has already entered the $8,994 self-employment tax he figured on Schedule SE (1040).

taxmap/pubs/p225-073.htm#TXMP6fdda497 Line 63.

He adds the amounts on lines 57 through 62 and enters $12,786, which is the total tax for 2006.

taxmap/pubs/p225-073.htm#TXMP209c3250 Line 64.

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

taxmap/pubs/p225-073.htm#TXMP39870311 Line 65.

Mr. Brown is a qualified farmer for purposes of the estimated tax rules because his income from farming was at least two-thirds of his and Mrs. Brown's total income for 2005 or 2006. In accordance with the special estimated tax rules for farmers, Mr. Brown did not have to make a 2006 estimated tax payment (which would have been due on January 16, 2007) because they intend to file their tax return and pay the tax in full by March 1, 2007. See chapter 15 for more information on special estimated tax rules for qualified farmers.

taxmap/pubs/p225-073.htm#TXMP091a4313 Line 66(a).

The Browns are not entitled to claim the earned income credit on line 66 because their adjusted gross income exceeds the maximum for claiming the credit.

taxmap/pubs/p225-073.htm#TXMP45329d63 Line 70.

Mr. Brown enters his credit for $350 of federal excise tax on gasoline used in 2006. 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 (1040) for 2007 because his deduction for the total cost of gasoline (including the $350 of excise taxes) as a farm business expense on Schedule F (1040) reduced his 2006 taxes.

taxmap/pubs/p225-073.htm#TXMP56dfb7cb Lines 72 and 76.

He adds the amounts on lines 64 through 71 and enters the total, $1,785, on line 72. He subtracts that figure from the amount on line 63. The balance, $11,001, he entered on line 76.

taxmap/pubs/p225-073.htm#TXMP1709a964 Schedule J (Form 1040)   Income Averaging for Farmers and Fishermen

Schedule J (Form 1040) Income Averaging for Farmers and Fishermen

In 2006, Mr. Brown's taxable income, $37,916, is substantially higher than in each of the 3 previous years. His taxable income amounts were only $1,112 , $667, and $3,968 for 2003, 2004, and 2005, respectively. He elects to use income averaging by completing Schedule J to figure his tax.

He prints his name, his wife's name, and his identifying number at the top of Schedule J (1040).

taxmap/pubs/p225-073.htm#TXMP158fea30 Line items.

He fills in the lines on Schedule J (1040).

taxmap/pubs/p225-073.htm#TXMP43b89657 Line 1.

He enters $37,916, his taxable income from line 43 of Form 1040.

taxmap/pubs/p225-073.htm#TXMP338dcea4 Line 2.

He enters the part of his farm income he is electing to average, $27,189. He elects to treat this elected farm income as all coming out of ordinary farm income. His ordinary farm income is $60,114 ($63,657 of ordinary income from Schedule F (Form 1040), plus $954 of net ordinary gain from Form 4797, minus the $4,497 deduction for one-half of self-employment tax). Elected farm income is limited to the smaller of the ordinary farm income of $60,114 or total taxable income of $37,916. See the Schedule J (1040) instructions for more information on elected farm income.

taxmap/pubs/p225-073.htm#TXMP420a9a64 Line 3.

He subtracts the amount on line 2 from the amount on line 1 and enters $10,727 on line 3.

taxmap/pubs/p225-073.htm#TXMP01260d7d Line 4.

He uses the 2006 tax rates to figure the tax on the amount on line 3 and enters $1,073.

taxmap/pubs/p225-073.htm#TXMP344c2992 Lines 5, 9, and 13.

He enters his taxable income from 2003, 2004, and 2005 on lines 5, 9, and 13, respectively.

taxmap/pubs/p225-073.htm#TXMP0275c5e3 Lines 6, 10, and 14.

He divides the amount on line 2 by 3.0 and enters the result, $9,063, on lines 6, 10, and 14.

taxmap/pubs/p225-073.htm#TXMP69a37eec Lines 7, 11, and 15.

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.

taxmap/pubs/p225-073.htm#TXMP00d2dd22 Lines 8, 12, and 16.

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. His income is taxed at no more than a 15% rate for each prior year.

taxmap/pubs/p225-073.htm#TXMP4e304c41 Line 17.

He adds the amounts on lines 4, 8, 12, and 16 and enters the total, $4,367, on line 17.

taxmap/pubs/p225-073.htm#TXMP45f4da3e Lines 18, 19, and 20.

He enters his tax from his 2003, 2004, and 2005 returns on lines 18, 19, and 20, respectively.

taxmap/pubs/p225-073.htm#TXMP57ba68d0 Line 21.

He adds the amounts on lines 18, 19, and 20 and enters the total, $575, on line 21.

taxmap/pubs/p225-073.htm#TXMP73576817 Line 22.

He subtracts the amount on line 21 from the amount on line 17 and enters $3,792 on line 22. The tax on this line is less than the $4,959 of tax he figured using the 2006 tax tables. Therefore, he enters on line 44 of his Form 1040 the amount from this line.

taxmap/pubs/p225-073.htm#TXMP74d991c0 Completing the Return

The Browns sign their names and enter the date signed, their occupations, and their telephone number at the bottom of page 2 of Form 1040. (If they had paid a preparer to do their tax return, the preparer would also sign the return and provide the information requested at the bottom of the page.) Mr. Brown prints his name, his wife's name, and their address in the label section. He writes his and his wife's social security numbers in the boxes next to the label section.

He writes a check payable to the United States Treasury for the full amount on line 76 of Form 1040. On the check, he writes his social security number, their telephone number, and "2006 Form 1040." His name and address are printed on the check. Mr. Brown could have chosen instead to pay his taxes by credit card (American Express® Card, Discover® Card, MasterCard® card, or Visa® card). For information about how to pay by credit card, see the Form 1040 Instructions.

After making a copy of their complete return for his records, he assembles the various forms and schedules behind Form 1040 in the following order, based on the Attachment Sequence Number shown in the upper right corner of each schedule or form and included after each item listed below.

1. Schedule A. (07) (not shown)
2. Schedule D. (12)
3. Schedule F. (14)
4. Schedule SE. (17)
5. Schedule J. (20)
6. Form 4136. (23) (not shown)
7. Form 4684. (26)
8. Form 4797. (27)
9. Form 4562. (67)
10. Form 8903. (143)

He completes Form 1040-V, Payment Voucher, which was included in his tax package. He carefully follows the instructions for mailing his return and paying the tax due.

taxmap/pubs/p225-073.htm#f11049L27

taxmap/pubs/p225-073.htm#TXMP68cd2edc

Form 1040 U.S. Individual Income Tax Form  

taxmap/pubs/p225-073.htm#f11049L29

taxmap/pubs/p225-073.htm#TXMP708afc25

Form 1040 - page 2  

taxmap/pubs/p225-073.htm#f11049L31

taxmap/pubs/p225-073.htm#TXMP674a4558

Schedule D (Form 1040) Capital Gaines and Losses 2005  

taxmap/pubs/p225-073.htm#f11049L32

taxmap/pubs/p225-073.htm#TXMP01bceb12

Schedule D (Form 1040) Capital Gaines and Losses 2005, Page  

taxmap/pubs/p225-073.htm#f11049L33

taxmap/pubs/p225-073.htm#TXMP76bbdb84

Schedule F (Form 1040) - page 1  

taxmap/pubs/p225-073.htm#f11049L35

taxmap/pubs/p225-073.htm#TXMP6027814f

Schedule SE (Form 1040) - page 1  

taxmap/pubs/p225-073.htm#f11049L42

taxmap/pubs/p225-073.htm#TXMP4efd7dd5

Schedule J (Form 1040) Income Averaging for Farmers and Fisherman 2005  

taxmap/pubs/p225-073.htm#f11049L37

taxmap/pubs/p225-073.htm#TXMP71d61f9d

Form 4684 - page 2  

taxmap/pubs/p225-073.htm#f11049L39

taxmap/pubs/p225-073.htm#TXMP6991cd66

Form 4797 - page 1  

taxmap/pubs/p225-073.htm#f11049L41

taxmap/pubs/p225-073.htm#TXMP280bd391

Form 4797 - page 2  

taxmap/pubs/p225-073.htm#f11049L43

taxmap/pubs/p225-073.htm#TXMP39fa4d43

Form 4562 - page 1  

taxmap/pubs/p225-073.htm#f11049L45

taxmap/pubs/p225-073.htm#TXMP2f66178a

Form 4562 - page 2  

taxmap/pubs/p225-073.htm#f11049L47

taxmap/pubs/p225-073.htm#TXMP3e97895a

Depreciation Worksheet  

taxmap/pubs/p225-073.htm#f11049L49

taxmap/pubs/p225-073.htm#TXMP26d05ba3

Form 8903 - page 1  

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