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Filing 1040nr Ez

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Filing 1040nr Ez

Filing 1040nr ez 5. Filing 1040nr ez   Personal Use of Dwelling Unit (Including Vacation Home) Table of Contents Dividing Expenses Dwelling Unit Used as a HomeMain home. Filing 1040nr ez Shared equity financing agreement. Filing 1040nr ez Donation of use of the property. Filing 1040nr ez Examples. Filing 1040nr ez Days used for repairs and maintenance. Filing 1040nr ez Days used as a main home before or after renting. Filing 1040nr ez Reporting Income and DeductionsNot used as a home. Filing 1040nr ez Used as a home but rented less than 15 days. Filing 1040nr ez Used as a home and rented 15 days or more. Filing 1040nr ez If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Filing 1040nr ez In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Filing 1040nr ez Only your rental expenses may deducted on Schedule E (Form 1040). Filing 1040nr ez Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Filing 1040nr ez You must also determine if the dwelling unit is considered a home. Filing 1040nr ez The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Filing 1040nr ez Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Filing 1040nr ez There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Filing 1040nr ez Dwelling unit. Filing 1040nr ez   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Filing 1040nr ez It also includes all structures or other property belonging to the dwelling unit. Filing 1040nr ez A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Filing 1040nr ez   A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Filing 1040nr ez Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Filing 1040nr ez Example. Filing 1040nr ez You rent a room in your home that is always available for short-term occupancy by paying customers. Filing 1040nr ez You do not use the room yourself and you allow only paying customers to use the room. Filing 1040nr ez This room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Filing 1040nr ez Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Filing 1040nr ez When dividing your expenses, follow these rules. Filing 1040nr ez Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Filing 1040nr ez (This rule does not apply when determining whether you used the unit as a home. Filing 1040nr ez ) Any day that the unit is available for rent but not actually rented is not a day of rental use. Filing 1040nr ez Fair rental price. Filing 1040nr ez   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Filing 1040nr ez The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Filing 1040nr ez   Ask yourself the following questions when comparing another property with yours. Filing 1040nr ez Is it used for the same purpose? Is it approximately the same size? Is it in approximately the same condition? Does it have similar furnishings? Is it in a similar location? If any of the answers are no, the properties probably are not similar. Filing 1040nr ez Example. Filing 1040nr ez Your beach cottage was available for rent from June 1 through August 31 (92 days). Filing 1040nr ez Except for the first week in August (7 days), when you were unable to find a renter, you rented the cottage at a fair rental price during that time. Filing 1040nr ez The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Filing 1040nr ez Your family also used the cottage during the last 2 weeks of May (14 days). Filing 1040nr ez The cottage was not used at all before May 17 or after August 31. Filing 1040nr ez You figure the part of the cottage expenses to treat as rental expenses as follows. Filing 1040nr ez The cottage was used for rental a total of 85 days (92 − 7). Filing 1040nr ez The days it was available for rent but not rented (7 days) are not days of rental use. Filing 1040nr ez The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Filing 1040nr ez You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Filing 1040nr ez The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Filing 1040nr ez Your rental expenses are 85/99 (86%) of the cottage expenses. Filing 1040nr ez Note. Filing 1040nr ez When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Filing 1040nr ez Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Filing 1040nr ez Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Filing 1040nr ez If you have a net loss, you may not be able to deduct all of the rental expenses. Filing 1040nr ez See Dwelling Unit Used as a Home, next. Filing 1040nr ez Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Filing 1040nr ez You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Filing 1040nr ez See What is a day of personal use , later. Filing 1040nr ez If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price (discussed earlier), do not count that day as a day of rental use in applying (2) above. Filing 1040nr ez Instead, count it as a day of personal use in applying both (1) and (2) above. Filing 1040nr ez What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Filing 1040nr ez You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Filing 1040nr ez However, see Days used as a main home before or after renting , later. Filing 1040nr ez A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Filing 1040nr ez Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Filing 1040nr ez ), and lineal descendants (children, grandchildren, etc. Filing 1040nr ez ). Filing 1040nr ez Anyone under an arrangement that lets you use some other dwelling unit. Filing 1040nr ez Anyone at less than a fair rental price. Filing 1040nr ez Main home. Filing 1040nr ez   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Filing 1040nr ez Shared equity financing agreement. Filing 1040nr ez   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Filing 1040nr ez Donation of use of the property. Filing 1040nr ez   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Filing 1040nr ez Examples. Filing 1040nr ez   The following examples show how to determine if you have days of personal use. Filing 1040nr ez Example 1. Filing 1040nr ez You and your neighbor are co-owners of a condominium at the beach. Filing 1040nr ez Last year, you rented the unit to vacationers whenever possible. Filing 1040nr ez The unit was not used as a main home by anyone. Filing 1040nr ez Your neighbor used the unit for 2 weeks last year; you did not use it at all. Filing 1040nr ez Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Filing 1040nr ez Example 2. Filing 1040nr ez You and your neighbors are co-owners of a house under a shared equity financing agreement. Filing 1040nr ez Your neighbors live in the house and pay you a fair rental price. Filing 1040nr ez Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Filing 1040nr ez This is because your neighbors rent the house as their main home under a shared equity financing agreement. Filing 1040nr ez Example 3. Filing 1040nr ez You own a rental property that you rent to your son. Filing 1040nr ez Your son does not own any interest in this property. Filing 1040nr ez He uses it as his main home and pays you a fair rental price. Filing 1040nr ez Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Filing 1040nr ez Example 4. Filing 1040nr ez You rent your beach house to Rosa. Filing 1040nr ez Rosa rents her cabin in the mountains to you. Filing 1040nr ez You each pay a fair rental price. Filing 1040nr ez You are using your beach house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement that allows you to use her cabin. Filing 1040nr ez Example 5. Filing 1040nr ez You rent an apartment to your mother at less than a fair rental price. Filing 1040nr ez You are using the apartment for personal purposes on the days that your mother rents it because you rent it for less than a fair rental price. Filing 1040nr ez Days used for repairs and maintenance. Filing 1040nr ez   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Filing 1040nr ez Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Filing 1040nr ez Example. Filing 1040nr ez Corey owns a cabin in the mountains that he rents for most of the year. Filing 1040nr ez He spends a week at the cabin with family members. Filing 1040nr ez Corey works on maintenance of the cabin 3 or 4 hours each day during the week and spends the rest of the time fishing, hiking, and relaxing. Filing 1040nr ez Corey's family members, however, work substantially full time on the cabin each day during the week. Filing 1040nr ez The main purpose of being at the cabin that week is to do maintenance work. Filing 1040nr ez Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey. Filing 1040nr ez Days used as a main home before or after renting. Filing 1040nr ez   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Filing 1040nr ez Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Filing 1040nr ez You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Filing 1040nr ez However, this special rule does not apply when dividing expenses between rental and personal use. Filing 1040nr ez See Property Changed to Rental Use in chapter 4. Filing 1040nr ez Example 1. Filing 1040nr ez On February 29, 2012, you moved out of the house you had lived in for 6 years because you accepted a job in another town. Filing 1040nr ez You rented your house at a fair rental price from March 15, 2012, to May 14, 2013 (14 months). Filing 1040nr ez On June 1, 2013, you moved back into your old house. Filing 1040nr ez The days you used the house as your main home from January 1 to February 29, 2012, and from June 1 to December 31, 2013, are not counted as days of personal use. Filing 1040nr ez Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses. Filing 1040nr ez Example 2. Filing 1040nr ez On January 31, you moved out of the condominium where you had lived for 3 years. Filing 1040nr ez You offered it for rent at a fair rental price beginning on February 1. Filing 1040nr ez You were unable to rent it until April. Filing 1040nr ez On September 15, you sold the condominium. Filing 1040nr ez The days you used the condominium as your main home from January 1 to January 31 are not counted as days of personal use when determining whether you used it as a home. Filing 1040nr ez Examples. Filing 1040nr ez   The following examples show how to determine whether you used your rental property as a home. Filing 1040nr ez Example 1. Filing 1040nr ez You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Filing 1040nr ez You rented the basement apartment at a fair rental price to college students during the regular school year. Filing 1040nr ez You rented to them on a 9-month lease (273 days). Filing 1040nr ez You figured 10% of the total days rented to others at a fair rental price is 27 days. Filing 1040nr ez During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Filing 1040nr ez Your basement apartment was used as a home because you used it for personal purposes for 30 days. Filing 1040nr ez Rent-free use by your brothers is considered personal use. Filing 1040nr ez Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Filing 1040nr ez Example 2. Filing 1040nr ez You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Filing 1040nr ez Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Filing 1040nr ez You figured 10% of the total days rented to others at a fair rental price is 3 days. Filing 1040nr ez The room was used as a home because you used it for personal purposes for 21 days. Filing 1040nr ez That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Filing 1040nr ez Example 3. Filing 1040nr ez You own a condominium apartment in a resort area. Filing 1040nr ez You rented it at a fair rental price for a total of 170 days during the year. Filing 1040nr ez For 12 of these days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Filing 1040nr ez Your family actually used the apartment for 10 of those days. Filing 1040nr ez Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. Filing 1040nr ez You figured 10% of the total days rented to others at a fair rental price is 16 days. Filing 1040nr ez Your family also used the apartment for 7 other days during the year. Filing 1040nr ez You used the apartment as a home because you used it for personal purposes for 17 days. Filing 1040nr ez That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Filing 1040nr ez Minimal rental use. Filing 1040nr ez   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Filing 1040nr ez See Used as a home but rented less than 15 days, later, for more information. Filing 1040nr ez Limit on deductions. Filing 1040nr ez   Renting a dwelling unit that is considered a home is not a passive activity. Filing 1040nr ez Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Filing 1040nr ez The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Filing 1040nr ez Any expenses carried forward to the next year will be subject to any limits that apply for that year. Filing 1040nr ez This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Filing 1040nr ez   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5–1. Filing 1040nr ez Reporting Income and Deductions Property not used for personal purposes. Filing 1040nr ez   If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. Filing 1040nr ez Property used for personal purposes. Filing 1040nr ez   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Filing 1040nr ez Not used as a home. Filing 1040nr ez   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Filing 1040nr ez Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Filing 1040nr ez The expenses for personal use are not deductible as rental expenses. Filing 1040nr ez   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3. Filing 1040nr ez Used as a home but rented less than 15 days. Filing 1040nr ez   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Filing 1040nr ez You are not required to report the rental income and rental expenses from this activity. Filing 1040nr ez The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Filing 1040nr ez See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Filing 1040nr ez Used as a home and rented 15 days or more. Filing 1040nr ez   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Filing 1040nr ez Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Filing 1040nr ez The expenses for personal use are not deductible as rental expenses. Filing 1040nr ez   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Filing 1040nr ez You do not need to use Worksheet 5-1. Filing 1040nr ez   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Filing 1040nr ez To figure your deductible rental expenses and any carryover to next year, use Worksheet 5–1. Filing 1040nr ez Worksheet 5-1. Filing 1040nr ez Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Filing 1040nr ez Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Filing 1040nr ez ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Filing 1040nr ez Rental Use Percentage A. Filing 1040nr ez Total days available for rent at fair rental price A. Filing 1040nr ez       B. Filing 1040nr ez Total days available for rent (line A) but not rented B. Filing 1040nr ez       C. Filing 1040nr ez Total days of rental use. Filing 1040nr ez Subtract line B from line A C. Filing 1040nr ez       D. Filing 1040nr ez Total days of personal use (including days rented at less than fair rental price) D. Filing 1040nr ez       E. Filing 1040nr ez Total days of rental and personal use. Filing 1040nr ez Add lines C and D E. Filing 1040nr ez       F. Filing 1040nr ez Percentage of expenses allowed for rental. Filing 1040nr ez Divide line C by line E     F. Filing 1040nr ez . Filing 1040nr ez PART II. Filing 1040nr ez Allowable Rental Expenses 1. Filing 1040nr ez Enter rents received 1. Filing 1040nr ez   2a. Filing 1040nr ez Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Filing 1040nr ez       b. Filing 1040nr ez Enter the rental portion of real estate taxes b. Filing 1040nr ez       c. Filing 1040nr ez Enter the rental portion of deductible casualty and theft losses (see instructions) c. Filing 1040nr ez       d. Filing 1040nr ez Enter direct rental expenses (see instructions) d. Filing 1040nr ez       e. Filing 1040nr ez Fully deductible rental expenses. Filing 1040nr ez Add lines 2a–2d. Filing 1040nr ez Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Filing 1040nr ez   3. Filing 1040nr ez Subtract line 2e from line 1. Filing 1040nr ez If zero or less, enter -0- 3. Filing 1040nr ez   4a. Filing 1040nr ez Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Filing 1040nr ez       b. Filing 1040nr ez Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Filing 1040nr ez       c. Filing 1040nr ez Carryover of operating expenses from 2012 worksheet c. Filing 1040nr ez       d. Filing 1040nr ez Add lines 4a–4c d. Filing 1040nr ez       e. Filing 1040nr ez Allowable expenses. Filing 1040nr ez Enter the smaller of line 3 or line 4d (see instructions) 4e. Filing 1040nr ez   5. Filing 1040nr ez Subtract line 4e from line 3. Filing 1040nr ez If zero or less, enter -0- 5. Filing 1040nr ez   6a. Filing 1040nr ez Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Filing 1040nr ez       b. Filing 1040nr ez Enter the rental portion of depreciation of the dwelling unit b. Filing 1040nr ez       c. Filing 1040nr ez Carryover of excess casualty losses and depreciation from 2012 worksheet c. Filing 1040nr ez       d. Filing 1040nr ez Add lines 6a–6c d. Filing 1040nr ez       e. Filing 1040nr ez Allowable excess casualty and theft losses and depreciation. Filing 1040nr ez Enter the smaller of  line 5 or line 6d (see instructions) 6e. Filing 1040nr ez   PART III. Filing 1040nr ez Carryover of Unallowed Expenses to Next Year 7a. Filing 1040nr ez Operating expenses to be carried over to next year. Filing 1040nr ez Subtract line 4e from line 4d 7a. Filing 1040nr ez   b. Filing 1040nr ez Excess casualty and theft losses and depreciation to be carried over to next year. Filing 1040nr ez  Subtract line 6e from line 6d b. Filing 1040nr ez   Worksheet 5-1 Instructions. Filing 1040nr ez Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Filing 1040nr ez Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Filing 1040nr ez Line 2a. Filing 1040nr ez Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Filing 1040nr ez Do not include interest on a loan that did not benefit the dwelling unit. Filing 1040nr ez For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Filing 1040nr ez Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Filing 1040nr ez Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Filing 1040nr ez   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Filing 1040nr ez See the Schedule A instructions. Filing 1040nr ez However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Filing 1040nr ez See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Filing 1040nr ez Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Filing 1040nr ez   Note. Filing 1040nr ez Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Filing 1040nr ez Instead, figure the personal portion on a separate Schedule A. Filing 1040nr ez If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Filing 1040nr ez           Line 2c. Filing 1040nr ez Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Filing 1040nr ez To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Filing 1040nr ez If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Filing 1040nr ez On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Filing 1040nr ez Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Filing 1040nr ez   Note. Filing 1040nr ez Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Filing 1040nr ez Instead, figure the personal portion on a separate Form 4684. Filing 1040nr ez           Line 2d. Filing 1040nr ez Enter the total of your rental expenses that are directly related only to the rental activity. Filing 1040nr ez These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Filing 1040nr ez Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Filing 1040nr ez           Line 2e. Filing 1040nr ez You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Filing 1040nr ez Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Filing 1040nr ez           Line 4b. Filing 1040nr ez On line 2a, you entered the rental portion of the mortgage interest or qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Filing 1040nr ez If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Filing 1040nr ez Do not include interest on a loan that did not benefit the dwelling unit  (as explained in the line 2a instructions). Filing 1040nr ez           Line 4e. Filing 1040nr ez You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Filing 1040nr ez *           Line 6a. Filing 1040nr ez To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Filing 1040nr ez   A. Filing 1040nr ez Enter the amount from Form 4684, line 10       B. Filing 1040nr ez Enter the rental portion of line A       C. Filing 1040nr ez Enter the amount from line 2c of this worksheet       D. Filing 1040nr ez Subtract line C from line B. Filing 1040nr ez Enter the result here and on line 6a of this worksheet               Line 6e. Filing 1040nr ez You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Filing 1040nr ez * *Allocating the limited deduction. Filing 1040nr ez If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Filing 1040nr ez Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Filing 1040nr ez Prev  Up  Next   Home   More Online Publications
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The Filing 1040nr Ez

Filing 1040nr ez 4. Filing 1040nr ez   Farm Business Expenses Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible ExpensesReasonable allocation. Filing 1040nr ez Prepaid Farm Supplies Prepaid Livestock Feed Labor Hired Repairs and Maintenance Interest Breeding Fees Fertilizer and Lime Taxes Insurance Rent and Leasing Depreciation Business Use of Your Home Truck and Car Expenses Travel Expenses Marketing Quota Penalties Tenant House Expenses Items Purchased for Resale Other Expenses Domestic Production Activities Deduction Capital ExpensesForestation and reforestation costs. Filing 1040nr ez Nondeductible ExpensesPersonal, Living, and Family Expenses Other Nondeductible Items Losses From Operating a FarmAt-Risk Limits Passive Activity Limits Excess Farm Loss Limit Not-for-Profit FarmingUsing the presumption later. Filing 1040nr ez Category 1. Filing 1040nr ez Category 2. Filing 1040nr ez Category 3. Filing 1040nr ez What's New for 2013 Standard mileage rate. Filing 1040nr ez  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Filing 1040nr ez 5 cents. Filing 1040nr ez See Truck and Car Expenses , later. Filing 1040nr ez Simplified method for business use of home deduction. Filing 1040nr ez  The IRS now provides a simplified method to determine your expenses for business use of your home. Filing 1040nr ez For more information, see Schedule C (Form 1040), Part II, and its instructions. Filing 1040nr ez Introduction You can generally deduct the current costs of operating your farm. Filing 1040nr ez Current costs are expenses you do not have to capitalize or include in inventory costs. Filing 1040nr ez However, your deduction for the cost of livestock feed and certain other supplies may be limited. Filing 1040nr ez If you have an operating loss, you may not be able to deduct all of it. Filing 1040nr ez Topics - This chapter discusses: Deductible expenses Domestic production activities deduction Capital expenses Nondeductible expenses Losses from operating a farm Not-for-profit farming Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch F (Form 1040) Profit or Loss From Farming 1045 Application for Tentative Refund 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8903 Domestic Production Activities Deduction See chapter 16 for information about getting publications and forms. Filing 1040nr ez Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Filing 1040nr ez “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Filing 1040nr ez Schedule F, Part II, lists some common farm expenses that are typically deductible. Filing 1040nr ez This chapter discusses many of these expenses, as well as others not listed on Schedule F. Filing 1040nr ez Reimbursed expenses. Filing 1040nr ez   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Filing 1040nr ez If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Filing 1040nr ez See Refund or reimbursement under Income From Other Sources in chapter 3. Filing 1040nr ez Personal and business expenses. Filing 1040nr ez   Some expenses you pay during the tax year may be part personal and part business. Filing 1040nr ez These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Filing 1040nr ez   You must allocate these mixed expenses between their business and personal parts. Filing 1040nr ez Generally, the personal part of these expenses is not deductible. Filing 1040nr ez The business portion of the expenses is deductible on Schedule F. Filing 1040nr ez Example. Filing 1040nr ez You paid $1,500 for electricity during the tax year. Filing 1040nr ez You used 1/3 of the electricity for personal purposes and 2/3 for farming. Filing 1040nr ez Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Filing 1040nr ez Reasonable allocation. Filing 1040nr ez   It is not always easy to determine the business and nonbusiness parts of an expense. Filing 1040nr ez There is no method of allocation that applies to all mixed expenses. Filing 1040nr ez Any reasonable allocation is acceptable. Filing 1040nr ez What is reasonable depends on the circumstances in each case. Filing 1040nr ez Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Filing 1040nr ez Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought. Filing 1040nr ez Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Filing 1040nr ez However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry. Filing 1040nr ez Poultry bought for resale and not resold during the year. Filing 1040nr ez Deduction limit. Filing 1040nr ez   If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies). Filing 1040nr ez This limit does not apply if you meet one of the exceptions described later. Filing 1040nr ez See Chapter 2 for a discussion of the cash method of accounting. Filing 1040nr ez   If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. Filing 1040nr ez The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. Filing 1040nr ez The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Filing 1040nr ez Example. Filing 1040nr ez You may not qualify for the exception described next. Filing 1040nr ez During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Filing 1040nr ez Your total prepaid farm supplies expense for 2013 is $5,500. Filing 1040nr ez Your other deductible farm expenses totaled $10,000 for 2013. Filing 1040nr ez Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Filing 1040nr ez The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when you use or consume the supplies. Filing 1040nr ez Exceptions. Filing 1040nr ez   This limit on the deduction for prepaid farm supplies expense does not apply if you are a farm-related taxpayer and either of the following apply. Filing 1040nr ez Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances. Filing 1040nr ez Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years. Filing 1040nr ez   You are a farm-related taxpayer if any of the following tests apply. Filing 1040nr ez Your main home is on a farm. Filing 1040nr ez Your principal business is farming. Filing 1040nr ez A member of your family meets (1) or (2). Filing 1040nr ez For this purpose, your family includes your brothers and sisters, half-brothers and half-sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children. Filing 1040nr ez    Whether or not the deduction limit for prepaid farm supplies applies, your expenses for prepaid livestock feed may be subject to the rules for advance payment of livestock feed, discussed next. Filing 1040nr ez Prepaid Livestock Feed If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests. Filing 1040nr ez The payment is for the purchase of feed rather than a deposit. Filing 1040nr ez The prepayment has a business purpose and is not merely for tax avoidance. Filing 1040nr ez Deducting the prepayment does not result in a material distortion of your income. Filing 1040nr ez If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Filing 1040nr ez If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Filing 1040nr ez This rule does not apply to the purchase of commodity futures contracts. Filing 1040nr ez Payment for the purchase of feed. Filing 1040nr ez   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Filing 1040nr ez It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase. Filing 1040nr ez   The following are some factors that show a payment is a deposit rather than for the purchase of feed. Filing 1040nr ez The absence of specific quantity terms. Filing 1040nr ez The right to a refund of any unapplied payment credit at the end of the contract. Filing 1040nr ez The seller's treatment of the payment as a deposit. Filing 1040nr ez The right to substitute other goods or products for those specified in the contract. Filing 1040nr ez   A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. Filing 1040nr ez Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Filing 1040nr ez Business purpose. Filing 1040nr ez   The prepayment has a business purpose only if you have a reasonable expectation of receiving some business benefit from prepaying the cost of livestock feed. Filing 1040nr ez The following are some examples of business benefits. Filing 1040nr ez Fixing maximum prices and securing an assured feed supply. Filing 1040nr ez Securing preferential treatment in anticipation of a feed shortage. Filing 1040nr ez   Other factors considered in determining the existence of a business purpose are whether the prepayment was a condition imposed by the seller and whether that condition was meaningful. Filing 1040nr ez No material distortion of income. Filing 1040nr ez   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Filing 1040nr ez Your customary business practice in conducting your livestock operations. Filing 1040nr ez The expense in relation to past purchases. Filing 1040nr ez The time of year you made the purchase. Filing 1040nr ez The expense in relation to your income for the year. Filing 1040nr ez Labor Hired You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. Filing 1040nr ez You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Filing 1040nr ez The cost of boarding farm labor is a deductible labor cost. Filing 1040nr ez Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Filing 1040nr ez If you must withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. Filing 1040nr ez See chapter 13 for more information on employment taxes. Filing 1040nr ez Also, deduct the employer's share of the social security and Medicare taxes you must pay on your employees' wages as a farm business expense on Schedule F, line 29. Filing 1040nr ez See Taxes , later. Filing 1040nr ez Property for services. Filing 1040nr ez   If you transfer property to an employee in payment for services, you can deduct as wages paid the fair market value of the property on the date of transfer. Filing 1040nr ez If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the property. Filing 1040nr ez   Treat the wages deducted as an amount received for the property. Filing 1040nr ez You may have a gain or loss to report if the property's adjusted basis on the date of transfer is different from its fair market value. Filing 1040nr ez Any gain or loss has the same character the exchanged property had in your hands. Filing 1040nr ez For more information, see chapter 8. Filing 1040nr ez Child as an employee. Filing 1040nr ez   You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. Filing 1040nr ez Include these wages in the child's income. Filing 1040nr ez The child may have to file an income tax return. Filing 1040nr ez These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Filing 1040nr ez For more information, see Family Employees in chapter 13. Filing 1040nr ez    A Form W-2, Wage and Tax Statement, should be issued to the child employee. Filing 1040nr ez   The fact that your child spends the wages to buy clothes or other necessities you normally furnish does not prevent you from deducting your child's wages as a farm expense. Filing 1040nr ez The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Filing 1040nr ez Spouse as an employee. Filing 1040nr ez   You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. Filing 1040nr ez Wages you pay to your spouse are subject to social security and Medicare taxes. Filing 1040nr ez For more information, see Family Employees in chapter 13. Filing 1040nr ez Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Filing 1040nr ez However, those wages may be subject to the employment taxes discussed in chapter 13. Filing 1040nr ez Household workers. Filing 1040nr ez   Do not deduct amounts paid to persons engaged in household work, except to the extent their services are used in boarding or otherwise caring for farm laborers. Filing 1040nr ez Construction labor. Filing 1040nr ez   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Filing 1040nr ez These wages are part of the cost of the building or other improvement. Filing 1040nr ez You must capitalize them. Filing 1040nr ez Maintaining your home. Filing 1040nr ez   If your farm employee spends time maintaining or repairing your home, the wages and employment taxes you pay for that work are nondeductible personal expenses. Filing 1040nr ez For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Filing 1040nr ez The employee devotes the remaining time to work on your farm. Filing 1040nr ez You cannot deduct 5% of the wages and employment taxes you pay for that employee. Filing 1040nr ez Employment Credits Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit for qualified tax-exempt organizations hiring qualified veterans (Form 5884-C). Filing 1040nr ez Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Filing 1040nr ez Common items of repair and maintenance are repainting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery. Filing 1040nr ez However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses. Filing 1040nr ez For example, if you repair the barn roof, the cost is deductible. Filing 1040nr ez But if you replace the roof, it is a capital expense. Filing 1040nr ez For more information, see Capital Expenses , later. Filing 1040nr ez Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Filing 1040nr ez Cash method. Filing 1040nr ez   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Filing 1040nr ez You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Filing 1040nr ez You can, however, deduct the interest when you start making payments on the new loan. Filing 1040nr ez For more information, see Cash Method in chapter 2. Filing 1040nr ez Prepaid interest. Filing 1040nr ez   Under the cash method, you generally cannot deduct any interest paid before the year it is due. Filing 1040nr ez Interest paid in advance may be deducted only in the tax year in which it is due. Filing 1040nr ez Accrual method. Filing 1040nr ez   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Filing 1040nr ez However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Filing 1040nr ez For more information, see Accrual Method in chapter 2. Filing 1040nr ez Allocation of interest. Filing 1040nr ez   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Filing 1040nr ez Allocate the interest to the following categories. Filing 1040nr ez Trade or business interest. Filing 1040nr ez Passive activity interest. Filing 1040nr ez Investment interest. Filing 1040nr ez Portfolio interest. Filing 1040nr ez Personal interest. Filing 1040nr ez   You generally allocate interest on a loan the same way you allocate the loan proceeds. Filing 1040nr ez You allocate loan proceeds by tracing disbursements to specific uses. Filing 1040nr ez The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Filing 1040nr ez Secured loan. Filing 1040nr ez   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Filing 1040nr ez Example. Filing 1040nr ez You secure a loan with property used in your farming business. Filing 1040nr ez You use the loan proceeds to buy a car for personal use. Filing 1040nr ez You must allocate interest expense on the loan to personal use (purchase of the car) even though the loan is secured by farm business property. Filing 1040nr ez If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Filing 1040nr ez The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Filing 1040nr ez However, you can choose to treat the loan as not secured by your home. Filing 1040nr ez For more information, see Publication 936. Filing 1040nr ez Allocation period. Filing 1040nr ez   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Filing 1040nr ez The date the loan is repaid. Filing 1040nr ez The date the loan is reallocated to another use. Filing 1040nr ez More information. Filing 1040nr ez   For more information on interest, see chapter 4 in Publication 535. Filing 1040nr ez Breeding Fees You can deduct breeding fees as a farm business expense. Filing 1040nr ez However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc. Filing 1040nr ez For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Filing 1040nr ez Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. Filing 1040nr ez You can also deduct the cost of applying these materials in the year you pay or incur it. Filing 1040nr ez However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Filing 1040nr ez If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last. Filing 1040nr ez However, you can choose to deduct these expenses in the year paid or incurred. Filing 1040nr ez If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Filing 1040nr ez If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. Filing 1040nr ez Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Filing 1040nr ez It does not include land you have never used previously for producing crops or sustaining livestock. Filing 1040nr ez You cannot deduct initial land preparation costs. Filing 1040nr ez (See Capital Expenses , later. Filing 1040nr ez ) Include government payments you receive for lime or fertilizer in income. Filing 1040nr ez See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Filing 1040nr ez Taxes You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings. Filing 1040nr ez You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay. Filing 1040nr ez For information on employment taxes, see chapter 13. Filing 1040nr ez Allocation of taxes. Filing 1040nr ez   The taxes on the part of your farm you use as your home (including the furnishings and surrounding land not used for farming) are nonbusiness taxes. Filing 1040nr ez You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Filing 1040nr ez To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Filing 1040nr ez The allocation can be done from the assessed valuations. Filing 1040nr ez If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Filing 1040nr ez State and local general sales taxes. Filing 1040nr ez   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Filing 1040nr ez Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate. Filing 1040nr ez Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Filing 1040nr ez State and federal income taxes. Filing 1040nr ez   Individuals cannot deduct state and federal income taxes as farm business expenses. Filing 1040nr ez Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Filing 1040nr ez However, you cannot deduct federal income tax. Filing 1040nr ez Highway use tax. Filing 1040nr ez   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Filing 1040nr ez For information on the tax itself, including information on vehicles subject to the tax, see the Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return. Filing 1040nr ez Self-employment tax deduction. Filing 1040nr ez   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Filing 1040nr ez For more information, see chapter 12. Filing 1040nr ez Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Filing 1040nr ez This includes premiums you pay for the following types of insurance. Filing 1040nr ez Fire, storm, crop, theft, liability, and other insurance on farm business assets. Filing 1040nr ez Health and accident insurance on your farm employees. Filing 1040nr ez Workers' compensation insurance set by state law that covers any claims for job-related bodily injuries or diseases suffered by employees on your farm, regardless of fault. Filing 1040nr ez Business interruption insurance. Filing 1040nr ez State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Filing 1040nr ez Insurance to secure a loan. Filing 1040nr ez   If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense. Filing 1040nr ez In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Filing 1040nr ez Advance premiums. Filing 1040nr ez   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Filing 1040nr ez Example. Filing 1040nr ez On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Filing 1040nr ez The policy will cover a period of 3 years beginning on July 1, 2013. Filing 1040nr ez Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Filing 1040nr ez Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Filing 1040nr ez In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Filing 1040nr ez Deduct the remaining $500 in 2016. Filing 1040nr ez Had the policy been effective on January 1, 2013, the deductible expense would have been $1,000 for each of the years 2013, 2014, and 2015, based on one-third of the premium used each year. Filing 1040nr ez Business interruption insurance. Filing 1040nr ez   Use and occupancy and business interruption insurance premiums are deductible as a business expense. Filing 1040nr ez This insurance pays for lost profits if your business is shut down due to a fire or other cause. Filing 1040nr ez Report any proceeds in full on Schedule F, Part I. Filing 1040nr ez Self-employed health insurance deduction. Filing 1040nr ez   If you are self-employed, you can deduct as an adjustment to income on Form 1040 your payments for medical, dental, and qualified long-term care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040. Filing 1040nr ez Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2013, even if the child was not your dependent. Filing 1040nr ez Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Filing 1040nr ez   If you or your spouse is also an employee of another person, you cannot take the deduction for any month in which you are eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. Filing 1040nr ez   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Filing 1040nr ez Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Filing 1040nr ez   For more information, see Deductible Premiums in Publication 535, chapter 6. Filing 1040nr ez Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Filing 1040nr ez However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Filing 1040nr ez Advance payments. Filing 1040nr ez   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Filing 1040nr ez Farm home. Filing 1040nr ez   If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live. Filing 1040nr ez Lease or Purchase If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease. Filing 1040nr ez If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property. Filing 1040nr ez Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Filing 1040nr ez Conditional sales contract. Filing 1040nr ez   Whether an agreement is a conditional sales contract depends on the intent of the parties. Filing 1040nr ez Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Filing 1040nr ez No single test, or special combination of tests, always applies. Filing 1040nr ez However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Filing 1040nr ez The agreement applies part of each payment toward an equity interest you will receive. Filing 1040nr ez You get title to the property after you make a stated amount of required payments. Filing 1040nr ez The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. Filing 1040nr ez You pay much more than the current fair rental value of the property. Filing 1040nr ez You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Filing 1040nr ez Determine this value when you make the agreement. Filing 1040nr ez You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Filing 1040nr ez The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Filing 1040nr ez Example. Filing 1040nr ez You lease new farm equipment from a dealer who both sells and leases. Filing 1040nr ez The agreement includes an option to purchase the equipment for a specified price. Filing 1040nr ez The lease payments and the specified option price equal the sales price of the equipment plus interest. Filing 1040nr ez Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Filing 1040nr ez For federal income tax purposes, the agreement is a conditional sales contract. Filing 1040nr ez You cannot deduct any of the lease payments as rent. Filing 1040nr ez You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Filing 1040nr ez Motor vehicle leases. Filing 1040nr ez   Special rules apply to lease agreements that have a terminal rental adjustment clause. Filing 1040nr ez In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease. Filing 1040nr ez If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Filing 1040nr ez For more information, see Internal Revenue Code (IRC) section 7701(h). Filing 1040nr ez Leveraged leases. Filing 1040nr ez   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Filing 1040nr ez For more information, see Publication 535, chapter 3, and Revenue Procedure 2001-28, which begins on page 1156 of Internal Revenue Bulletin 2001-19 at www. Filing 1040nr ez irs. Filing 1040nr ez gov/pub/irs-irbs/irb01-19. Filing 1040nr ez pdf. Filing 1040nr ez Depreciation If property you acquire to use in your farm business is expected to last more than one year, you generally cannot deduct the entire cost in the year you acquire it. Filing 1040nr ez You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Filing 1040nr ez However, you can choose to deduct part or all of the cost of certain qualifying property, up to a limit, as a section 179 deduction in the year you place it in service. Filing 1040nr ez Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Filing 1040nr ez Business Use of Your Home You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly: As the principal place of business for any trade or business in which you engage, As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home. Filing 1040nr ez Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements. Filing 1040nr ez You use it exclusively and regularly for the administrative or management activities of your trade or business. Filing 1040nr ez You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Filing 1040nr ez If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Filing 1040nr ez The IRS now provides a simplified method to determine your expenses for business use of your home. Filing 1040nr ez For more information, see Schedule C (Form 1040), Part II, and its instructions. Filing 1040nr ez Deduction limit. Filing 1040nr ez   If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses. Filing 1040nr ez But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited. Filing 1040nr ez   Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses. Filing 1040nr ez The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses). Filing 1040nr ez Farm expenses other than expenses that relate to the use of your home. Filing 1040nr ez If you are self-employed, do not include your deduction for half of your self-employment tax. Filing 1040nr ez   Deductions over the current year's limit can be carried over to your next tax year. Filing 1040nr ez They are subject to the deduction limit for the next tax year. Filing 1040nr ez More information. Filing 1040nr ez   See Publication 587 for more information on deducting expenses for the business use of your home. Filing 1040nr ez Telephone expense. Filing 1040nr ez   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Filing 1040nr ez However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses. Filing 1040nr ez Cell phone charges for calls relating to your farm business are deductible. Filing 1040nr ez If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls. Filing 1040nr ez Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Filing 1040nr ez Only expenses for business use are deductible. Filing 1040nr ez These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Filing 1040nr ez Standard mileage rate. Filing 1040nr ez   Instead of using actual costs, under certain conditions you can use the standard mileage rate. Filing 1040nr ez The standard mileage rate for each mile of business use is 56. Filing 1040nr ez 5 cents in 2013. Filing 1040nr ez You can use the standard mileage rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease. Filing 1040nr ez   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Filing 1040nr ez You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business. Filing 1040nr ez Example. Filing 1040nr ez Maureen owns a car and four pickup trucks that are used in her farm business. Filing 1040nr ez Her farm employees use the trucks and she uses the car for business. Filing 1040nr ez Maureen cannot use the standard mileage rate for the car or the trucks. Filing 1040nr ez This is because all five vehicles are used in Maureen's farm business at the same time. Filing 1040nr ez She must use actual expenses for all vehicles. Filing 1040nr ez Business use percentage. Filing 1040nr ez   You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. Filing 1040nr ez You choose this method of substantiating business use the first year the vehicle is placed in service. Filing 1040nr ez Once you make this choice, you may not change to another method later. Filing 1040nr ez The following are uses directly connected with the business of farming. Filing 1040nr ez Cultivating land. Filing 1040nr ez Raising or harvesting any agricultural or horticultural commodity. Filing 1040nr ez Raising, shearing, feeding, caring for, training, and managing animals. Filing 1040nr ez Driving to the feed or supply store. Filing 1040nr ez   If you keep records and they show that your business use was more than 75%, you may be able to claim more. Filing 1040nr ez See Recordkeeping requirements under Travel Expenses , below. Filing 1040nr ez More information. Filing 1040nr ez   For more information on deductible truck and car expenses, see Publication 463, chapter 4. Filing 1040nr ez If you pay your employees for the use of their truck or car in your farm business, see Reimbursements to employees under Travel Expenses next. Filing 1040nr ez Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Filing 1040nr ez You cannot deduct lavish or extravagant expenses. Filing 1040nr ez Usually, the location of your farm business is considered your home for tax purposes. Filing 1040nr ez You are traveling away from home if: Your duties require you to be absent from your farm substantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of your work while away from home. Filing 1040nr ez If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses. Filing 1040nr ez The following are some types of deductible travel expenses. Filing 1040nr ez Air, rail, bus, and car transportation; Meals and lodging; Dry cleaning and laundry; Telephone and fax; Transportation between your hotel and your temporary work or business meeting location; and Tips for any of the above expenses. Filing 1040nr ez Meals. Filing 1040nr ez   You ordinarily can deduct only 50% of your business-related meals expenses. Filing 1040nr ez You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties. Filing 1040nr ez You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment. Filing 1040nr ez For information on entertainment expenses, see Publication 463, chapter 2. Filing 1040nr ez   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Filing 1040nr ez You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Filing 1040nr ez    Recordkeeping requirements. Filing 1040nr ez You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Filing 1040nr ez Estimates or approximations do not qualify as proof of an expense. Filing 1040nr ez   You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense. Filing 1040nr ez Generally, it is best to record the expense and get documentation of it at the time you pay it. Filing 1040nr ez   If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items. Filing 1040nr ez However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel. Filing 1040nr ez More information. Filing 1040nr ez   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Filing 1040nr ez Reimbursements to employees. Filing 1040nr ez   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Filing 1040nr ez Employees may be reimbursed under an accountable or nonaccountable plan. Filing 1040nr ez Under an accountable plan, the employee must provide evidence of expenses. Filing 1040nr ez Under a nonaccountable plan, no evidence of expenses is required. Filing 1040nr ez If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Filing 1040nr ez If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Filing 1040nr ez For more information, see Publication 535, chapter 11. Filing 1040nr ez Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Filing 1040nr ez However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received. Filing 1040nr ez Do not take a separate deduction for the penalty. Filing 1040nr ez Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Filing 1040nr ez These costs include repairs, utilities, insurance, and depreciation. Filing 1040nr ez The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Filing 1040nr ez Items Purchased for Resale If you use the cash method of accounting, you ordinarily deduct the cost of livestock and other items purchased for resale only in the year of sale. Filing 1040nr ez You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Filing 1040nr ez However, see Chickens, seeds, and young plants , below. Filing 1040nr ez Example. Filing 1040nr ez You use the cash method of accounting. Filing 1040nr ez In 2013, you buy 50 steers you will sell in 2014. Filing 1040nr ez You cannot deduct the cost of the steers on your 2013 tax return. Filing 1040nr ez You deduct their cost on your 2014 Schedule F, Part I. Filing 1040nr ez Chickens, seeds, and young plants. Filing 1040nr ez   If you are a cash method farmer, you can deduct the cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the year paid if you do it consistently and it does not distort income. Filing 1040nr ez You also can deduct the cost of seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do this consistently and you do not figure your income on the crop method. Filing 1040nr ez However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Filing 1040nr ez   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Filing 1040nr ez You cannot also deduct the cost from the selling price. Filing 1040nr ez   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Filing 1040nr ez Deduct the cost of these seeds and plants through depletion allowances. Filing 1040nr ez For more information, see Depletion in chapter 7. Filing 1040nr ez   The cost of chickens and plants used as food for your family is never deductible. Filing 1040nr ez   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Filing 1040nr ez These rules are discussed in chapter 6. Filing 1040nr ez Example. Filing 1040nr ez You use the cash method of accounting. Filing 1040nr ez In 2013, you buy 500 baby chicks to raise for resale in 2014. Filing 1040nr ez You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Filing 1040nr ez Unless you previously adopted the method of deducting these costs in the year you sell the chickens or the harvested crops, you can deduct the cost of both the baby chicks and the seed wheat in 2013. Filing 1040nr ez Election to use crop method. Filing 1040nr ez   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Filing 1040nr ez You must get IRS approval to use the crop method. Filing 1040nr ez If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Filing 1040nr ez For more information, see Crop method under Special Methods of Accounting in chapter 2. Filing 1040nr ez Choosing a method. Filing 1040nr ez   You can adopt either the crop method or the cash method for deducting the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds and young plants. Filing 1040nr ez   Although you must use the same method for egg-laying hens, pullets, and chicks, you can use a different method for seeds and young plants. Filing 1040nr ez Once you use a particular method for any of these items, use it for those items until you get IRS approval to change your method. Filing 1040nr ez For more information, see Change in Accounting Method in chapter 2. Filing 1040nr ez Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Filing 1040nr ez These expenses must be for business purposes and  (1) paid, if you use the cash method of accounting, or (2) incurred, if you use an accrual method of accounting. Filing 1040nr ez Accounting fees. Filing 1040nr ez Advertising. Filing 1040nr ez Business travel and meals. Filing 1040nr ez Commissions. Filing 1040nr ez Consultant fees. Filing 1040nr ez Crop scouting expenses. Filing 1040nr ez Dues to cooperatives. Filing 1040nr ez Educational expenses (to maintain and improve farming skills). Filing 1040nr ez Farm-related attorney fees. Filing 1040nr ez Farm magazines. Filing 1040nr ez Ginning. Filing 1040nr ez Insect sprays and dusts. Filing 1040nr ez Litter and bedding. Filing 1040nr ez Livestock fees. Filing 1040nr ez Marketing fees. Filing 1040nr ez Milk assessment. Filing 1040nr ez Recordkeeping expenses. Filing 1040nr ez Service charges. Filing 1040nr ez Small tools expected to last one year or less. Filing 1040nr ez Stamps and stationery. Filing 1040nr ez Subscriptions to professional, technical, and trade journals that deal with farming. Filing 1040nr ez Tying material and containers. Filing 1040nr ez Loan expenses. Filing 1040nr ez   You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan. Filing 1040nr ez Tax preparation fees. Filing 1040nr ez   You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business. Filing 1040nr ez You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Filing 1040nr ez   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Filing 1040nr ez Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Filing 1040nr ez You can deduct 9% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. Filing 1040nr ez Your deduction is limited to 50% of the Form W-2 wages you paid for the tax year that are properly allocable to domestic production gross receipts. Filing 1040nr ez For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Filing 1040nr ez Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Filing 1040nr ez Income from cooperatives. Filing 1040nr ez   If you receive a patronage dividend or qualified per-unit retain allocation from a cooperative which is engaged in the manufacturing, production, growth, or extraction in whole or in significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products, your income from the cooperative can give rise to a domestic production activities deduction. Filing 1040nr ez This deduction amount is reported on Form 1099-PATR, box 6. Filing 1040nr ez In order for you to qualify for the deduction, the cooperative is required to send you a written notice designating your portion of the domestic production activities deduction. Filing 1040nr ez More information. Filing 1040nr ez   For more information on the domestic production activities deduction, see the Instructions for Form 8903. Filing 1040nr ez Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. Filing 1040nr ez You include the expense in the basis of the asset. Filing 1040nr ez Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Filing 1040nr ez See chapters 2  and 6. Filing 1040nr ez Capital expenses are generally not deductible, but they may be depreciable. Filing 1040nr ez However, you can elect to deduct certain capital expenses, such as the following. Filing 1040nr ez The cost of fertilizer, lime, etc. Filing 1040nr ez (See Fertilizer and Lime under Deductible Expenses , earlier. Filing 1040nr ez ) Soil and water conservation expenses. Filing 1040nr ez (See chapter 5. Filing 1040nr ez ) The cost of property that qualifies for a deduction under section 179. Filing 1040nr ez (See chapter 7. Filing 1040nr ez ) Business start-up costs. Filing 1040nr ez (See Business start-up and organizational costs , later. Filing 1040nr ez ) Forestation and reforestation costs. Filing 1040nr ez (See Forestation and reforestation costs , later. Filing 1040nr ez ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Filing 1040nr ez Land and buildings. Filing 1040nr ez Additions, alterations, and improvements to buildings, etc. Filing 1040nr ez Cars and trucks. Filing 1040nr ez Equipment and machinery. Filing 1040nr ez Fences. Filing 1040nr ez Draft, breeding, sport, and dairy livestock. Filing 1040nr ez Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Filing 1040nr ez Water wells, including drilling and equipping costs. Filing 1040nr ez Land preparation costs, such as: Clearing land for farming, Leveling and conditioning land, Purchasing and planting trees, Building irrigation canals and ditches, Laying irrigation pipes, Installing drain tile, Modifying channels or streams, Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and Building roads. Filing 1040nr ez Business start-up and organizational costs. Filing 1040nr ez   You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Filing 1040nr ez The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Filing 1040nr ez Any remaining costs must be amortized. Filing 1040nr ez See chapter 7. Filing 1040nr ez   You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Filing 1040nr ez However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Filing 1040nr ez Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Filing 1040nr ez 9100-2” at the top of the amended return. Filing 1040nr ez File the amended return at the same address you filed the original return. Filing 1040nr ez The election applies when figuring taxable income for the current tax year and all subsequent years. Filing 1040nr ez   You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Filing 1040nr ez For more information about start-up and organizational costs, see chapter 7. Filing 1040nr ez Crop production expenses. Filing 1040nr ez   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Filing 1040nr ez However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. Filing 1040nr ez For more information, see Uniform Capitalization Rules in chapter 6. Filing 1040nr ez Timber. Filing 1040nr ez   Capitalize the cost of acquiring timber. Filing 1040nr ez Do not include the cost of land in the cost of the timber. Filing 1040nr ez You must generally capitalize direct costs incurred in reforestation. Filing 1040nr ez However, you can elect to deduct some forestation and reforestation costs. Filing 1040nr ez See Forestation and reforestation costs next. Filing 1040nr ez Reforestation costs include the following. Filing 1040nr ez Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Filing 1040nr ez The cost of seed or seedlings. Filing 1040nr ez Labor and tool expenses. Filing 1040nr ez Depreciation on equipment used in planting or seeding. Filing 1040nr ez Costs incurred in replanting to replace lost seedlings. Filing 1040nr ez You can choose to capitalize certain indirect reforestation costs. Filing 1040nr ez   These capitalized amounts are your basis for the timber. Filing 1040nr ez Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Filing 1040nr ez See Depletion in chapter 7. Filing 1040nr ez Forestation and reforestation costs. Filing 1040nr ez   You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Filing 1040nr ez Any remaining costs can be amortized over an 84-month period. Filing 1040nr ez See chapter 7. Filing 1040nr ez If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. Filing 1040nr ez The accounts should include all reforestation treatments and the dates they were applied. Filing 1040nr ez Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. Filing 1040nr ez The timber account should be maintained until the timber is disposed of. Filing 1040nr ez For more information, see Notice 2006-47, 2006-20 I. Filing 1040nr ez R. Filing 1040nr ez B. Filing 1040nr ez 892, available at  www. Filing 1040nr ez irs. Filing 1040nr ez gov/irb/2006-20_IRB/ar11. Filing 1040nr ez html. Filing 1040nr ez   You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. Filing 1040nr ez If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Filing 1040nr ez If you are not filing Form T (Timber), attach a statement to your return with the following information. Filing 1040nr ez The unique stand identification numbers. Filing 1040nr ez The total number of acres reforested during the tax year. Filing 1040nr ez The nature of the reforestation treatments. Filing 1040nr ez The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Filing 1040nr ez   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Filing 1040nr ez Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Filing 1040nr ez 9100-2” at the top of the amended return. Filing 1040nr ez File the amended return at the same address you filed the original return. Filing 1040nr ez    For more information about forestation and reforestation costs, see chapter 7. Filing 1040nr ez    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Filing 1040nr ez You can view this publication on the Internet at  www. Filing 1040nr ez fs. Filing 1040nr ez fed. Filing 1040nr ez us/publications. Filing 1040nr ez Christmas tree cultivation. Filing 1040nr ez   If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. Filing 1040nr ez Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Filing 1040nr ez For more information, see Timber Depletion under Depletion in chapter 7. Filing 1040nr ez   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Filing 1040nr ez Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Filing 1040nr ez   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Filing 1040nr ez If the improvements do not have a determinable useful life, add their cost to the basis of the land. Filing 1040nr ez The cost is recovered when you sell or otherwise dispose of it. Filing 1040nr ez If the improvements have a determinable useful life, recover their cost through depreciation. Filing 1040nr ez Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. Filing 1040nr ez Recover these costs through depreciation. Filing 1040nr ez Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Filing 1040nr ez Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Filing 1040nr ez These include rent and insurance premiums paid on property used as your home, life insurance premiums on yourself or your family, the cost of maintaining cars, trucks, or horses for personal use, allowances to minor children, attorneys' fees and legal expenses incurred in personal matters, and household expenses. Filing 1040nr ez Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Filing 1040nr ez Other Nondeductible Items You cannot deduct the following items on your tax return. Filing 1040nr ez Loss of growing plants, produce, and crops. Filing 1040nr ez   Losses of plants, produce, and crops raised for sale are generally not deductible. Filing 1040nr ez However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Filing 1040nr ez See chapter 11 for more information. Filing 1040nr ez Repayment of loans. Filing 1040nr ez   You cannot deduct the repayment of a loan. Filing 1040nr ez However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Filing 1040nr ez See Interest , earlier. Filing 1040nr ez Estate, inheritance, legacy, succession, and gift taxes. Filing 1040nr ez   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Filing 1040nr ez Loss of livestock. Filing 1040nr ez   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Filing 1040nr ez Losses from sales or exchanges between related persons. Filing 1040nr ez   You cannot deduct losses from sales or exchanges of property between you and certain related persons, including your spouse, brother, sister, ancestor, or lineal descendant. Filing 1040nr ez For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Filing 1040nr ez Cost of raising unharvested crops. Filing 1040nr ez   You cannot deduct the cost of raising unharvested crops sold with land owned more than one year if you sell both at the same time and to the same person. Filing 1040nr ez Add these costs to the basis of the land to determine the gain or loss on the sale. Filing 1040nr ez For more information, see Section 1231 Gains and Losses in chapter 9. Filing 1040nr ez Cost of unharvested crops bought with land. Filing 1040nr ez   Capitalize the purchase price of land, including the cost allocable to unharvested crops. Filing 1040nr ez You cannot deduct the cost of the crops at the time of purchase. Filing 1040nr ez However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Filing 1040nr ez Cost related to gifts. Filing 1040nr ez   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Filing 1040nr ez The costs are not deductible in the year of the gift or any later year. Filing 1040nr ez For example, you cannot deduct the cost of raising cattle or the cost of planting and raising unharvested wheat on parcels of land given as a gift to your children. Filing 1040nr ez Club dues and membership fees. Filing 1040nr ez   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Filing 1040nr ez This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Filing 1040nr ez Exception. Filing 1040nr ez   The following organizations will not be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Filing 1040nr ez Boards of trade. Filing 1040nr ez Business leagues. Filing 1040nr ez Chambers of commerce. Filing 1040nr ez Civic or public service organizations. Filing 1040nr ez Professional associations. Filing 1040nr ez Trade associations. Filing 1040nr ez Real estate boards. Filing 1040nr ez Fines and penalties. Filing 1040nr ez   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Filing 1040nr ez Losses From Operating a Farm If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. Filing 1040nr ez The amount of the loss you can deduct when figuring your taxable income may be limited. Filing 1040nr ez To figure your deductible loss, you must apply the following limits. Filing 1040nr ez The at-risk limits. Filing 1040nr ez The passive activity limits. Filing 1040nr ez The following discussions explain these limits. Filing 1040nr ez If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Filing 1040nr ez See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Filing 1040nr ez If you do not carry on your farming activity to make a profit, your loss deduction may be limited by the not-for-profit rules. Filing 1040nr ez See Not-for-Profit Farming, later. Filing 1040nr ez At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Filing 1040nr ez These rules limit the losses you can deduct when figuring your taxable income. Filing 1040nr ez The deductible loss from an activity is limited to the amount you have at risk in the activity. Filing 1040nr ez You are at risk in any activity for: The money and adjusted basis of property you contribute to the activity, and Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Filing 1040nr ez You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest. Filing 1040nr ez For more information, see Publication 925. Filing 1040nr ez Passive Activity Limits A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. Filing 1040nr ez Generally, a rental activity is a passive activity. Filing 1040nr ez If you have a passive activity, special rules limit the loss you can deduct in the tax year. Filing 1040nr ez You generally can deduct losses from passive activities only up to income from passive activities. Filing 1040nr ez Credits are similarly limited. Filing 1040nr ez For more information, see Publication 925. Filing 1040nr ez Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Filing 1040nr ez This limit applies to any farming businesses, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. Filing 1040nr ez Your farming losses are limited to the greater of: $300,000 ($150,000 for a married person filing a separate return), or The total net farm income for the prior five tax years. Filing 1040nr ez Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Filing 1040nr ez Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Filing 1040nr ez For more details, see IRC section 461(j). Filing 1040nr ez Excess farm loss. Filing 1040nr ez   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Filing 1040nr ez This loss can be determined by taking the excess of: The total deductions for the tax year from your farming businesses, over The total gross income or gain for the tax year from your farming businesses, plus the greater of: $300,000 ($150,000 for a married person filing a separate return), or The excess (if any) of the total gross income or gain from your farming businesses for the prior five tax years over the total deductions from your farming businesses for the prior five tax years. Filing 1040nr ez   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Filing 1040nr ez Not-for-Profit Farming If you operate a farm for profit, you can deduct all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. Filing 1040nr ez However, if you do not carry on your farming activity, or other activity you engage or invest in, to make a profit, you report the income from the activity on Form 1040, line 21, and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). Filing 1040nr ez Also, there is a limit on the deductions you can take. Filing 1040nr ez You cannot use a loss from that activity to offset income from other activities. Filing 1040nr ez Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Filing 1040nr ez An investment activity intended only to produce tax losses for the investors also comes under this limit. Filing 1040nr ez The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Filing 1040nr ez It does not apply to corporations other than S corporations. Filing 1040nr ez In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Filing 1040nr ez No one factor alone is decisive. Filing 1040nr ez Among the factors to consider are whether: You operate your farm in a businesslike manner; The time and effort you spend on farming indicate you intend to make it profitable; You depend on income from farming for your livelihood; Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming; You change your methods of operation in an attempt to improve profitability; You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; You were successful in making a profit in similar activities in the past; You make a profit from farming in some years and the amount of profit you make; and You can expect to make a future profit from the appreciation of the assets used in the farming activity. Filing 1040nr ez Presumption of profit. Filing 1040nr ez   Your farming or other activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Filing 1040nr ez Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Filing 1040nr ez The activity must be substantially the same for each year within this period. Filing 1040nr ez You have a profit when the gross income from an activity is more than the deductions for it. Filing 1040nr ez   If a taxpayer dies before the end of the 5-year (or 7-year) period, the period ends on the date of the taxpayer's death. Filing 1040nr ez   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Filing 1040nr ez This means the limits discussed here do not apply. Filing 1040nr ez You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Filing 1040nr ez You can rely on this presumption in every case, unless the IRS shows it is not valid. Filing 1040nr ez   If you fail the 3- (or 2-) years-of-profit test, you still may be considered to operate your farm for profit by considering the factors listed earlier. Filing 1040nr ez Using the presumption later. Filing 1040nr ez   If you are starting out in farming and do not have 3 (or 2) years showing a profit, you may want to take advantage of this presumption later, after you have had the 5 (or 7) years of experience allowed by the test. Filing 1040nr ez   You can choose to do this by filing Form 5213. Filing 1040nr ez Filing this form postpones any determination that your farming activity is not carried on for profit until 5 (or 7) years have passed since you first started farming. Filing 1040nr ez You must file Form 5213 within 3 years after the due date of your return for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving a written notice from the IRS proposing to disallow deductions attributable to the activity. Filing 1040nr ez   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Filing 1040nr ez Accordingly, it will not limit your deductions. Filing 1040nr ez Rather, you will gain time to earn a profit in 3 (or 2) out of the first 5 (or 7) years you carry on the farming activity. Filing 1040nr ez If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Filing 1040nr ez If you do not have 3 (or 2) years of profit (and cannot otherwise show that you operated your farm for profit), the limit applies retroactively to any year in the 5-year (or 7-year) period with a loss. Filing 1040nr ez   Filing Form 5213 automatically extends the period of limitations on any year