Teaching Tax Issues to Beginning
Farmers and Ranchers
Dr. Ruby Ward
Department of Applied Economics
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Outline
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Resources available
How to use resources
Other topics available
Upcoming webinars April 23rd
– Details on RuralTax.org website
• Future Plans
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Why
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Addition to RuralTax.org
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Chapter 13
Tax Reporting and payment
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What does your tax return include
and look like?
• Material from RuralTax.org being used for the
next part.
– Sample 1040 form
– Sample Schedule F
• We are only using the forms here.
RuralTax.org also has the explanations.
• Both are located under the Sample Tax
Returns area
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1040 Form
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Bottom half front page 1040
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2nd Page 1040
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Filling out Schedule F
 Name, SSN, etc.
 Income
 Expenses
 Net Profit (or loss)
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Income
 Income from selling livestock (you purchased)
less cost (or basis) of livestock (lines 1-3)
 Cash basis a summary of cash that came to you
based on things you sold which you produced
(line 4)
 COOP earnings (line 5)
 Gov. Program Payments (line 6)
 Insurance Proceeds (line 8)
 Custom Hire (line 9)
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Profit and Loss Form
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Expenses
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Chemicals (line 13)
Conservation Expenses (line 14)
Custom Hire (line 15)
Depreciation (line 16)
Feed Purchase (line 18)
Fertilizer (line 19)
Gas, Fuel and Oil (line 21)
Interest (line 23)
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Profit and Loss Form
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Net Profit = Total Income – Total Expenses
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Specific Issues to be aware of
• There is a fact sheet available for each of
these topics at RuralTax.org
• Self-employment tax
• Hobby loss rules
• 1099 informational returns
• New depreciation rules
• Cash flow issues with new depreciation rules
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Drought and selling livestock
• Breeding Livestock
• Market Livestock (calves)
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Breeding Livestock
• If sell more breeding livestock than normal
because of weather-related issues (drought).
• No need for declaration of disaster area, but
must show weather caused the sale.
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Breeding Livestock
• Can defer gain from the additional head sold
– Must replace within two years
– If not replaced within two years or replaced for
less than the original cattle were sold
• then the tax return for the year sold must be amended
• any additional tax and interest must be paid
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Example
• Trent normally sells 5 cows per year.
• This year he sells 20 cows because of drought
causing limited forage and feed.
• Gains from sale of 15 cows (extra sold) would
not be reported as income if Trent plans on
replacing them within two years.
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Example if raised livestock sold
• The cows are raised so they have $0 basis (no money
was spent to purchase them).
• They are sold for $500 a head.
• The gain on 15 head is $7,500 ($500 * 15), but it is
not reported on his tax return.
• Trent purchases 15 cows in a year for $600 each.
• The new cows have a basis of $100 each, the
additional amount per cow to purchase them ($600 $500).
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Example if purchased livestock sold
• The cows sold have a $200 basis (the amount
purchased for less depreciation already deducted).
• They are sold for $500 a head.
• The gain on 15 head is $4,500 ($300 * 15), but it is
not reported on his tax return.
• Trent purchases 15 cows in a year for $600 each.
• The new cows have a basis of $300 each, the
additional amount per cow to purchase them ($600 $500) plus the original basis ($200).
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How to do it
• Must attach a statement to the tax return and
include the following:
• Name, address and ID number
• Evidence of the weather conditions that forced the
sale and how it is related to the sale
• Number of livestock sold
• Number sold under normal conditions (usually the
average sold over the previous 3 years).
• Amount of income that is postponed.
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Market livestock / calves
• The area much be federally declared as eligible to
receive federal assistance.
• The livestock does not need to be raised in the
disaster area, just show that conditions in the
disaster area caused the sale.
• Only livestock sales in excess of normal qualify.
• The animals are not replaced
• The gain is put off to the next year.
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Example
• Joe sold 150 head of calves in 2011 instead of the
usual 75.
• He sold the 150 calves for $50,000.
• He can defer income from 75 of them (150-75
normally sold).
• He can defer $25,000 of income.
• The income would not be included on the 2011 tax
return
• It would be included on the
• 2012 tax return.
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How to do it
• Similar to what is needed for breeding
livestock
• Must include that the declaration is under IRS
Section 451(e).
• Federal disaster designation.
• All the other stuff needed for breeding
animals.
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Hobby vs. business losses
• If you have a hobby, you cannot deduct losses,
but must pay taxes on positive income.
• If you have a business, you can deduct losses,
which lowers the total Adjusted Gross Income
and Taxable Income (if you have income from
other sources).
• If you have positive income in 3 out of the last
5 consecutive years it is a business.
• If not, IRS can look at guidelines.
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9 Factors IRS can look at
1. Is the activity carried on in a businesslike manner?
2. What is the expertise of the farmer/rancher or his
advisors?
3. How much time and effort is the farmer/rancher
putting in?
4. Are the assets expected to go up in value?
5. Has the farmer/rancher done this before?
6. What’s been happening here?
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7. Has the producer made any money?
8. Is the producer making money doing
something else?
9. Is the producer having fun?
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What can you do?
• Have some profit in at least 3 of every 5 years.
• Keep written records of everything done
– On the Farm/Ranch
– Education you receive (Shiprock Ag Days)
– Consultations with “experts” (you sought advice to
make the business profitable)
– Write down what you changed to make the
business profitable
– Conditions beyond your control
– (flood, drought, disease, etc.).
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For more information
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RuralTax.org
Under Tax Topics
Weather Related Sales of Livestock
Farm Losses Vs. Hobby Losses
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Tax Webinars
• Details will be available on RuralTax.org
website.
• April 23, 2012
• All time are in Mountain Daylight Savings Time
• Noon Introduction to tax issues
• 1:00 pm Weather Related Sales of Livestock
• 2:00 pm Government Payments: Federal and
State
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Future Plans
• Summer/Fall of 2012 new materials will be
added.
• Curriculum modules for tax management
• New fact sheets
• Case study and sample return for a beginning
farmer situation
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