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File 1040x online 1. File 1040x online   Importance of Records Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Benefits of Recordkeeping Kinds of Records To Keep How Long To Keep Records Introduction A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount of tax. File 1040x online This chapter explains the benefits of keeping records, what kinds of records you must keep, and how long you must keep them for federal tax purposes. File 1040x online Tax records are not the only type of records you need to keep for your farming business. File 1040x online You should also keep records that measure your farm's financial performance. File 1040x online This publication only discusses tax records. File 1040x online The Farm Financial Standards Council has produced a publication that provides a detailed explanation of the recommendations of the Council for financial reporting and analysis. File 1040x online For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www. File 1040x online ffsc. File 1040x online org. File 1040x online For more information, contact Countryside Marketing, Inc. File 1040x online in the following manner. File 1040x online Call 262-253-6902. File 1040x online Send a fax to 262-253-6903. File 1040x online Write to: Farm Financial Standards Council N78 W14573 Appleton Ave. File 1040x online , #287 Menomonee Falls, WI 53051. File 1040x online Topics - This chapter discusses: Benefits of recordkeeping Kinds of records to keep How long to keep records Useful Items - You may want to see: Publication 51 (Circular A), Agricultural Employer's Tax Guide 463 Travel, Entertainment, Gift, and Car Expenses See chapter 16 for information about getting publications. File 1040x online Benefits of Recordkeeping Everyone in business, including farmers, must keep appropriate records. File 1040x online Recordkeeping will help you do the following. File 1040x online Monitor the progress of your farming business. File 1040x online   You need records to monitor the progress of your farming business. File 1040x online Records can show whether your business is improving, which items are selling, or what changes you need to make. File 1040x online Records can help you make better decisions that may increase the likelihood of business success. File 1040x online Prepare your financial statements. File 1040x online   You need records to prepare accurate financial statements. File 1040x online These include income (profit and loss) statements and balance sheets. File 1040x online These statements can help you in dealing with your bank or creditors and help you to manage your farm business. File 1040x online Identify source of receipts. File 1040x online   You will receive money or property from many sources. File 1040x online Your records can identify the source of your receipts. File 1040x online You need this information to separate farm from nonfarm receipts and taxable from nontaxable income. File 1040x online Keep track of deductible expenses. File 1040x online   You may forget expenses when you prepare your tax return unless you record them when they occur. File 1040x online Prepare your tax returns. File 1040x online   You need records to prepare your tax return. File 1040x online For example, your records must support the income, expenses, and credits you report. File 1040x online Generally, these are the same records you use to monitor your farming business and prepare your financial statements. File 1040x online Support items reported on tax returns. File 1040x online   You must keep your business records available at all times for inspection by the IRS. File 1040x online If the IRS examines any of your tax returns, you may be asked to explain the items reported. File 1040x online A complete set of records will speed up the examination. File 1040x online Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. File 1040x online You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses. File 1040x online You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. File 1040x online See  chapter 2. File 1040x online If you are in more than one business, you should keep a complete and separate set of records for each business. File 1040x online A corporation should keep minutes of board of directors' meetings. File 1040x online Your recordkeeping system should include a summary of your business transactions. File 1040x online This summary is ordinarily made in accounting journals and ledgers. File 1040x online For example, they must show your gross income, as well as your deductions and credits. File 1040x online In addition, you must keep supporting documents. File 1040x online Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. File 1040x online These documents contain the information you need to record in your journals and ledgers. File 1040x online It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return. File 1040x online Keep them in an orderly fashion and in a safe place. File 1040x online For instance, organize them by year and type of income or expense. File 1040x online Electronic records. File 1040x online   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. File 1040x online When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. File 1040x online An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. File 1040x online The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. File 1040x online All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. File 1040x online Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. File 1040x online The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. File 1040x online You still have the responsibility of retaining any other books and records that are required to be retained. File 1040x online The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. File 1040x online This test is not considered an examination and the results must be shared with you. File 1040x online If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. File 1040x online If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copybooks and records in a manner that allows you and the IRS to determine your correct tax. File 1040x online For details on electronic storage system requirements, see Rev. File 1040x online Proc. File 1040x online 97-22. File 1040x online You can find Rev. File 1040x online Proc. File 1040x online 97-22 on page 9 of Internal Revenue Bulletin 1997-13 at  www. File 1040x online irs. File 1040x online gov/pub/irs-irbs/irb97-13. File 1040x online pdf. File 1040x online Travel, transportation, entertainment, and gift expenses. File 1040x online   Specific recordkeeping rules apply to these expenses. File 1040x online For more information, see Publication 463. File 1040x online Employment taxes. File 1040x online   There are specific employment tax records you must keep. File 1040x online For a list, see Publication 51 (Circular A). File 1040x online Excise taxes. File 1040x online   See How To Claim a Credit or Refund in chapter 14 for the specific records you must keep to verify your claim for credit or refund of excise taxes on certain fuels. File 1040x online Assets. File 1040x online   Assets are the property, such as machinery and equipment, you own and use in your business. File 1040x online You must keep records to verify certain information about your business assets. File 1040x online You need records to figure your annual depreciation deduction and the gain or (loss) when you sell the assets. File 1040x online Your records should show all the following. File 1040x online When and how you acquired the asset. File 1040x online Purchase price. File 1040x online Cost of any improvements. File 1040x online Section 179 deduction taken. File 1040x online Deductions taken for depreciation. File 1040x online Deductions taken for casualty losses, such as losses resulting from fires or storms. File 1040x online How you used the asset. File 1040x online When and how you disposed of the asset. File 1040x online Selling price. File 1040x online Expenses of sale. File 1040x online   The following are examples of records that may show this information. File 1040x online Purchase and sales invoices. File 1040x online Real estate closing statements. File 1040x online Canceled checks. File 1040x online Bank statements. File 1040x online Financial account statements as proof of payment. File 1040x online   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. File 1040x online These include account statements prepared for the financial institution by a third party. File 1040x online These account statements must be legible. File 1040x online The following table lists acceptable account statements. File 1040x online IF payment is by. File 1040x online . File 1040x online . File 1040x online THEN the statement must show the. File 1040x online . File 1040x online . File 1040x online Check Check number. File 1040x online Amount. File 1040x online Payee's name. File 1040x online Date the check amount was posted to the account by the financial institution. File 1040x online Electronic funds  transfer Amount transferred. File 1040x online Payee's name. File 1040x online Date the transfer was posted to the account by the financial institution. File 1040x online Credit card Amount charged. File 1040x online Payee's name. File 1040x online Transaction date. File 1040x online    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. File 1040x online You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. File 1040x online Tax returns. File 1040x online   Keep copies of your filed tax returns. File 1040x online They help in preparing future tax returns and making computations if you file an amended return. File 1040x online Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2. File 1040x online How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. File 1040x online Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. File 1040x online A period of limitations is the period of time after which no legal action can be brought. File 1040x online Generally, that means you must keep your records for at least 3 years from when your tax return was due or filed or within 2 years of the date the tax was paid, whichever is later. File 1040x online However, certain records must be kept for a longer period of time, as discussed below. File 1040x online Employment taxes. File 1040x online   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. File 1040x online Assets. File 1040x online   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. File 1040x online You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure your basis for computing gain or (loss) when you sell or otherwise dispose of the property. File 1040x online   You may need to keep records relating to the basis of property longer than the period of limitation. File 1040x online Keep those records as long as they are important in figuring the basis of the original or replacement property. File 1040x online Generally, this means as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. File 1040x online For example, if you received property in a nontaxable exchange, you must keep the records for the old property, as well as for the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. File 1040x online For more information on basis, see chapter 6. File 1040x online Records for nontax purposes. File 1040x online   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. File 1040x online For example, your insurance company or creditors may require you to keep them longer than the IRS does. File 1040x online Prev  Up  Next   Home   More Online Publications
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File 1040x online 9. File 1040x online   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. File 1040x online Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. File 1040x online Amount to report as ordinary income. File 1040x online Applicable percentage. File 1040x online Amount to report as ordinary income. File 1040x online Applicable percentage. File 1040x online Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. File 1040x online When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. File 1040x online Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. File 1040x online Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. File 1040x online Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. File 1040x online Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. File 1040x online Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). File 1040x online Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. File 1040x online Table 9-1. File 1040x online Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. File 1040x online Held 24 mos. File 1040x online  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. File 1040x online Held 12 mos. File 1040x online   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). File 1040x online Do not take that gain into account as section 1231 gain. File 1040x online Section 1231 transactions. File 1040x online   Gain or loss on the following transactions is subject to section 1231 treatment. File 1040x online Sale or exchange of cattle and horses. File 1040x online The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. File 1040x online Sale or exchange of other livestock. File 1040x online This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. File 1040x online Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. File 1040x online Other livestock does not include poultry. File 1040x online Sale or exchange of depreciable personal property. File 1040x online This property must be used in your business and held longer than 1 year. File 1040x online Generally, property held for the production of rents or royalties is considered to be used in a trade or business. File 1040x online Examples of depreciable personal property include farm machinery and trucks. File 1040x online It also includes amortizable section 197 intangibles. File 1040x online Sale or exchange of real estate. File 1040x online This property must be used in your business and held longer than 1 year. File 1040x online Examples are your farm or ranch (including barns and sheds). File 1040x online Sale or exchange of unharvested crops. File 1040x online The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. File 1040x online You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). File 1040x online Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. File 1040x online Distributive share of partnership gains and losses. File 1040x online Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). File 1040x online Cutting or disposal of timber. File 1040x online Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . File 1040x online Condemnation. File 1040x online The condemned property (defined in chapter 11) must have been held longer than 1 year. File 1040x online It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. File 1040x online It cannot be property held for personal use. File 1040x online Casualty or theft. File 1040x online The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). File 1040x online You must have held the property longer than 1 year. File 1040x online However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. File 1040x online Section 1231 does not apply to personal casualty gains and losses. File 1040x online See chapter 11 for information on how to treat those gains and losses. File 1040x online If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. File 1040x online See Table 9-1. File 1040x online Property for sale to customers. File 1040x online   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. File 1040x online If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. File 1040x online Treatment as ordinary or capital. File 1040x online   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. File 1040x online If you have a net section 1231 loss, it is an ordinary loss. File 1040x online If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. File 1040x online The rest, if any, is long-term capital gain. File 1040x online Nonrecaptured section 1231 losses. File 1040x online   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. File 1040x online These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. File 1040x online Example. File 1040x online In 2013, Ben has a $2,000 net section 1231 gain. File 1040x online To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. File 1040x online From 2008 through 2012 he had the following section 1231 gains and losses. File 1040x online Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. File 1040x online 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. File 1040x online Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. File 1040x online To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. File 1040x online For more information, see chapter 3 of Publication 544. File 1040x online Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. File 1040x online Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. File 1040x online See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. File 1040x online Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. File 1040x online Personal property (either tangible or intangible). File 1040x online Other tangible property (except buildings and their structural components) used as any of the following. File 1040x online See Buildings and structural components below. File 1040x online An integral part of manufacturing, production, or extraction, or of furnishing certain services. File 1040x online A research facility in any of the activities in (a). File 1040x online A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). File 1040x online That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. File 1040x online Amortization of certified pollution control facilities. File 1040x online The section 179 expense deduction. File 1040x online Deduction for clean-fuel vehicles and certain refueling property. File 1040x online Expenditures to remove architectural and transportation barriers to the handicapped and elderly. File 1040x online Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. File 1040x online Single purpose agricultural (livestock) or horticultural structures. File 1040x online Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. File 1040x online Buildings and structural components. File 1040x online   Section 1245 property does not include buildings and structural components. File 1040x online The term building includes a house, barn, warehouse, or garage. File 1040x online The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. File 1040x online   Do not treat a structure that is essentially machinery or equipment as a building or structural component. File 1040x online Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. File 1040x online   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. File 1040x online Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. File 1040x online Facility for bulk storage of fungible commodities. File 1040x online   This is a facility used mainly for the bulk storage of fungible commodities. File 1040x online Bulk storage means storage of a commodity in a large mass before it is used. File 1040x online For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. File 1040x online To be fungible, a commodity must be such that one part may be used in place of another. File 1040x online Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. File 1040x online The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. File 1040x online The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). File 1040x online For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. File 1040x online For details, see chapter 3 of Publication 544. File 1040x online Use Part III of Form 4797 to figure the ordinary income part of the gain. File 1040x online Depreciation claimed on other property or claimed by other taxpayers. File 1040x online   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. File 1040x online Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. File 1040x online For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. File 1040x online Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). File 1040x online Example. File 1040x online Jeff Free paid $120,000 for a tractor in 2012. File 1040x online On February 23, 2013, he traded it for a chopper and paid an additional $30,000. File 1040x online To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. File 1040x online Jeff can also depreciate the additional $30,000 for the chopper. File 1040x online Depreciation and amortization. File 1040x online   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. File 1040x online See Depreciation Recapture in chapter 3 of Publication 544 for more details. File 1040x online Ordinary depreciation deductions. File 1040x online Section 179 deduction (see chapter 7). File 1040x online Any special depreciation allowance. File 1040x online Amortization deductions for all the following costs. File 1040x online Acquiring a lease. File 1040x online Lessee improvements. File 1040x online Pollution control facilities. File 1040x online Reforestation expenses. File 1040x online Section 197 intangibles. File 1040x online Qualified disaster expenses. File 1040x online Franchises, trademarks, and trade names acquired before August 11, 1993. File 1040x online Example. File 1040x online You file your returns on a calendar year basis. File 1040x online In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. File 1040x online You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. File 1040x online You did not claim the section 179 expense deduction for the truck. File 1040x online You sold it in May 2013 for $7,000. File 1040x online The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). File 1040x online Figure the gain treated as ordinary income as follows. File 1040x online 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. File 1040x online   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. File 1040x online If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. File 1040x online If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. File 1040x online This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. File 1040x online Disposition of plants and animals. File 1040x online   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. File 1040x online If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. File 1040x online For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. File 1040x online For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. File 1040x online You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. File 1040x online Example. File 1040x online Janet Maple sold her apple orchard in 2013 for $80,000. File 1040x online Her adjusted basis at the time of sale was $60,000. File 1040x online She bought the orchard in 2006, but the trees did not produce a crop until 2009. File 1040x online Her pre-productive expenses were $6,000. File 1040x online She elected not to use the uniform capitalization rules. File 1040x online Janet must treat $6,000 of the gain as ordinary income. File 1040x online Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. File 1040x online It includes buildings and structural components that are not section 1245 property (discussed earlier). File 1040x online It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. File 1040x online A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. File 1040x online Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. File 1040x online To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. File 1040x online You will not have additional depreciation if any of the following apply to the property disposed of. File 1040x online You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. File 1040x online You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. File 1040x online The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. File 1040x online These properties are depreciated using the straight line method. File 1040x online Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. File 1040x online This applies even if no payments are received in that year. File 1040x online If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. File 1040x online For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. File 1040x online If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. File 1040x online To do this, allocate the selling price and the payments you receive in the year of sale to each asset. File 1040x online Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. File 1040x online For more information on installment sales, see chapter 10. File 1040x online Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. File 1040x online By gift. File 1040x online At death. File 1040x online In like-kind exchanges. File 1040x online In involuntary conversions. File 1040x online Publication 544 also explains how to handle a single transaction involving multiple properties. File 1040x online Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. File 1040x online Deductions for soil and water conservation expenditures (section 1252 property). File 1040x online Exclusions from income for certain cost sharing payments (section 1255 property). File 1040x online Section 1252 property. File 1040x online   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. File 1040x online Exceptions. File 1040x online   Do not treat gain on the following transactions as gain on section 1252 property. File 1040x online Disposition of farmland by gift. File 1040x online Transfer of farm property at death (except for income in respect of a decedent). File 1040x online For more information, see Regulations section 1. File 1040x online 1252-2. File 1040x online Amount to report as ordinary income. File 1040x online   You report as ordinary income the lesser of the following amounts. File 1040x online Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). File 1040x online The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. File 1040x online Applicable percentage. File 1040x online   The applicable percentage is based on the length of time you held the land. File 1040x online If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. File 1040x online If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. File 1040x online If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. File 1040x online Example. File 1040x online You acquired farmland on January 19, 2005. File 1040x online On October 3, 2013, you sold the land at a $30,000 gain. File 1040x online Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. File 1040x online The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. File 1040x online You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. File 1040x online Section 1255 property. File 1040x online   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. File 1040x online If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. File 1040x online Amount to report as ordinary income. File 1040x online   You report as ordinary income the lesser of the following amounts. File 1040x online The applicable percentage of the total excluded cost-sharing payments. File 1040x online The gain on the disposition of the property. File 1040x online You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. File 1040x online However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. File 1040x online Applicable percentage. File 1040x online   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. File 1040x online If the property is held less than 10 years after you receive the payments, the percentage is 100%. File 1040x online After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. File 1040x online Form 4797, Part III. File 1040x online   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. File 1040x online Prev  Up  Next   Home   More Online Publications