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Efile free 5. Efile free   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. Efile free Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. Efile free When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. Efile free Otherwise, these are capital expenses that must be added to the basis of the land. Efile free (See chapter 6 for information on determining basis. Efile free ) Conservation expenses for land in a foreign country do not qualify for this special treatment. Efile free The deduction for conservation expenses cannot be more than 25% of your gross income from farming. Efile free See 25% Limit on Deduction , later. Efile free Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. Efile free These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. Efile free You must include in income most government payments for approved conservation practices. Efile free However, you can exclude some payments you receive under certain cost-sharing conservation programs. Efile free For more information, see Agricultural Program Payments in chapter 3. Efile free To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. Efile free Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. Efile free You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. Efile free You are not farming if you are engaged only in forestry or the growing of timber. Efile free Farm defined. Efile free   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Efile free It also includes plantations, ranches, ranges, and orchards. Efile free A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. Efile free It does not include an area where they are merely caught or harvested. Efile free A plant nursery is a farm for purposes of deducting soil and water conservation expenses. Efile free Farm rental. Efile free   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. Efile free If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. Efile free   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. Efile free Example. Efile free You own a farm in Iowa and live in California. Efile free You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. Efile free You cannot deduct your soil conservation expenses for this farm. Efile free You must capitalize the expenses and add them to the basis of the land. Efile free     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. Efile free Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. Efile free If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. Efile free Keep a copy of the plan with your books and records to support your deductions. Efile free Conservation plan. Efile free   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. Efile free There are three types of approved plans. Efile free NRCS individual site plans. Efile free These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. Efile free NRCS county plans. Efile free These plans include a listing of farm conservation practices approved for the county where the farmland is located. Efile free You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. Efile free Comparable state agency plans. Efile free These plans are approved by state agencies and can be approved individual site plans or county plans. Efile free   A list of NRCS conservation programs is available at www. Efile free nrcs. Efile free usda. Efile free gov/programs. Efile free Individual site plans can be obtained from NRCS offices and the comparable state agencies. Efile free Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. Efile free These expenses include, but are not limited to, the following. Efile free The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. Efile free The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. Efile free The eradication of brush. Efile free The planting of windbreaks. Efile free You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. Efile free These expenses are added to the basis of the land. Efile free If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. Efile free See chapter 3 for information about payments eligible for the cost-sharing exclusion. Efile free New farm or farmland. Efile free   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. Efile free You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. Efile free The new farming activity does not have to be the same as the old farming activity. Efile free For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. Efile free Land not used for farming. Efile free   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. Efile free For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. Efile free You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. Efile free Depreciable conservation assets. Efile free   You generally cannot deduct your expenses for depreciable conservation assets. Efile free However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. Efile free See Assessment for Depreciable Property , later. Efile free   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. Efile free These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. Efile free You recover your capital investment through annual allowances for depreciation. Efile free   You can deduct soil and water conservation expenses for nondepreciable earthen items. Efile free Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. Efile free Water well. Efile free   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. Efile free It is a capital expense. Efile free You recover your cost through depreciation. Efile free You also must capitalize your cost for drilling a test hole. Efile free If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. Efile free You can recover the total cost through depreciation deductions. Efile free   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. Efile free Abandonment means that all economic benefits from the well are terminated. Efile free For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. Efile free Endangered species recovery expenses. Efile free   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. Efile free Otherwise, these are capital expenses that must be added to the basis of the land. Efile free   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. Efile free See Internal Revenue Code section 175 for more information. Efile free Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. Efile free You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. Efile free Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. Efile free This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. Efile free The depreciable property must be used in the district's soil and water conservation activities. Efile free However, the following limits apply to these assessments. Efile free The total assessment limit. Efile free The yearly assessment limit. Efile free After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. Efile free The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. Efile free See Table 5-1 for a brief summary of these limits. Efile free Table 5-1. Efile free Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. Efile free Your deductible share of the cost to the district for the property. Efile free Your gross income from farming. Efile free No one taxpayer can deduct more than 10% of the total assessment. Efile free Any amount over 10% is a capital expense and is added to the basis of your land. Efile free If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Efile free If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. Efile free You can deduct the remainder in equal amounts over the next 9 tax years. Efile free Limit for all conservation expenses, including assessments for depreciable property. Efile free Amounts greater than 25% can be carried to the following year and added to that year's expenses. Efile free The total is then subject to the 25% of gross income from farming limit in that year. Efile free To ensure your deduction is within the deduction limits, keep records to show the following. Efile free The total assessment against all members of the district for the depreciable property. Efile free Your deductible share of the cost to the district for the depreciable property. Efile free Your gross income from farming. Efile free Total assessment limit. Efile free   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. Efile free This applies whether you pay the assessment in one payment or in installments. Efile free If your assessment is more than 10% of the total amount assessed, both the following rules apply. Efile free The amount over 10% is a capital expense and is added to the basis of your land. Efile free If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Efile free Yearly assessment limit. Efile free   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. Efile free If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. Efile free If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. Efile free You can deduct the remainder in equal amounts over the next 9 tax years. Efile free Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. Efile free Example 1. Efile free This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. Efile free Of the assessment, $1,500 is for digging drainage ditches. Efile free You can deduct this part as a soil or conservation expense as if you had paid it directly. Efile free The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. Efile free The total amount assessed by the district against all its members for the depreciable equipment is $7,000. Efile free The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. Efile free The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. Efile free To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. Efile free Add $500 to the result for a total of $570. Efile free Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). Efile free You can deduct the balance at the rate of $70 a year over the next 9 years. Efile free You add $70 to the $1,500 portion of the assessment for drainage ditches. Efile free You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. Efile free Example 2. Efile free Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. Efile free The total amount assessed by the district against all its members for depreciable equipment is $5,500. Efile free The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. Efile free The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). Efile free Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. Efile free You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. Efile free Sale or other disposal of land during 9-year period. Efile free   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. Efile free Death of farmer during 9-year period. Efile free   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. Efile free 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. Efile free Gross income from farming. Efile free   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. Efile free Gains from sales of draft, breeding, or dairy livestock are included. Efile free Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. Efile free Carryover of deduction. Efile free   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. Efile free However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. Efile free Example. Efile free In 2012, you have gross income of $32,000 from two farms. Efile free During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. Efile free However, your deduction is limited to 25% of $32,000, or $8,000. Efile free The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. Efile free The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. Efile free Any expenses over the limit in that year are carried to 2014 and later years. Efile free Net operating loss. Efile free   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. Efile free If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. Efile free When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. Efile free If you do not choose to deduct the expenses, you must capitalize them. Efile free Change of method. Efile free   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. Efile free To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. Efile free You or your authorized representative must sign the request. Efile free   The request must include the following information. Efile free Your name and address. Efile free The first tax year the method or change of method is to apply. Efile free Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. Efile free If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. Efile free The total expenses you paid or incurred in the first tax year the method or change of method is to apply. Efile free A statement that you will account separately in your books for the expenses to which this method or change of method relates. Efile free Send your request to the following  address. Efile free  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. Efile free Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). Efile free However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. Efile free Gain on sale of farmland. Efile free   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. Efile free If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. Efile free See Section 1252 property under Other Gains in chapter 9. Efile free Prev  Up  Next   Home   More Online Publications
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Efile free 7. Efile free   Figuring Gross Profit Table of Contents Introduction Items To Check Testing Gross Profit AccuracyExample. Efile free Additions to Gross Profit Introduction After you have figured the gross receipts from your business (chapter 5) and the cost of goods sold (chapter 6), you are ready to figure your gross profit. Efile free You must determine gross profit before you can deduct any business expenses. Efile free These expenses are discussed in chapter 8. Efile free If you are filing Schedule C-EZ, your gross profit is your gross receipts plus certain other amounts, explained later under Additions to Gross Profit. Efile free Businesses that sell products. Efile free   If you are filing Schedule C, figure your gross profit by first figuring your net receipts. Efile free Figure net receipts (line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). Efile free Returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off the actual sales price. Efile free   Next, subtract the cost of goods sold (line 4) from net receipts (line 3). Efile free The result is the gross profit from your business. Efile free Businesses that sell services. Efile free   You do not have to figure the cost of goods sold if the sale of merchandise is not an income-producing factor for your business. Efile free Your gross profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). Efile free Most professions and businesses that sell services rather than products can figure gross profit directly from net receipts in this way. Efile free Illustration. Efile free   This illustration of the gross profit section of the income statement of a retail business shows how gross profit is figured. Efile free Income Statement Year Ended December 31, 2013 Gross receipts $400,000 Minus: Returns and allowances 14,940 Net receipts $385,060 Minus: Cost of goods sold 288,140 Gross profit $96,920   The cost of goods sold for this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900   Minus: Items withdrawn for personal use 2,650 283,250 Goods available for sale $321,095 Minus: Inventory at end of year 32,955 Cost of goods sold $288,140 Items To Check Consider the following items before figuring your gross profit. Efile free Gross receipts. Efile free   At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. Efile free You may find it helpful to use cash registers to keep track of receipts. Efile free You should also use a proper invoicing system and keep a separate bank account for your business. Efile free Sales tax collected. Efile free   Check to make sure your records show the correct sales tax collected. Efile free   If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts. Efile free   If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income. Efile free Inventory at beginning of year. Efile free   Compare this figure with last year's ending inventory. Efile free The two amounts should usually be the same. Efile free Purchases. Efile free   If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc. Efile free ) be sure to remove them from the cost of goods sold. Efile free For details on how to adjust cost of goods sold, see Merchandise withdrawn from sale in chapter 6. Efile free Inventory at end of year. Efile free   Check to make sure your procedures for taking inventory are adequate. Efile free These procedures should ensure all items have been included in inventory and proper pricing techniques have been used. Efile free   Use inventory forms and adding machine tapes as the only evidence for your inventory. Efile free Inventory forms are available at office supply stores. Efile free These forms have columns for recording the description, quantity, unit price, and value of each inventory item. Efile free Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. Efile free These forms will help satisfy you that the total inventory is accurate. Efile free They will also provide you with a permanent record to support its validity. Efile free   Inventories are discussed in chapter 2. Efile free Testing Gross Profit Accuracy If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure. Efile free First, divide gross profit by net receipts. Efile free The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price. Efile free Next, compare this percentage to your markup policy. Efile free Little or no difference between these two percentages shows that your gross profit figure is accurate. Efile free A large difference between these percentages may show that you did not accurately figure sales, purchases, inventory, or other items of cost. Efile free You should determine the reason for the difference. Efile free Example. Efile free   Joe Able operates a retail business. Efile free On the average, he marks up his merchandise so that he will realize a gross profit of 331/3% on its sales. Efile free The net receipts (gross receipts minus returns and allowances) shown on his income statement is $300,000. Efile free His cost of goods sold is $200,000. Efile free This results in a gross profit of $100,000 ($300,000 − $200,000). Efile free To test the accuracy of this year's results, Joe divides gross profit ($100,000) by net receipts ($300,000). Efile free The resulting 331/3% confirms his markup percentage of 331/3%. Efile free Additions to Gross Profit If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. Efile free The result is gross business income. Efile free If you use Schedule C-EZ, include the income on line 1 of the schedule. Efile free Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts. 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