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Irs Form1040ez

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Irs Form1040ez

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Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). These questions and answers reflect the holdings in Revenue Ruling 2013-17 in 2013-38 IRB 201.

Q1. When are individuals of the same sex lawfully married for federal tax purposes?

A1. For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

Q2. Can same-sex spouses file federal tax returns using a married filing jointly or married filing separately status?

A2. Yes. For tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. For tax year 2012 and all prior years, same-sex spouses who file an original tax return on or after Sept. 16, 2013 (the effective date of Rev. Rul. 2013-17), generally must file using a married filing separately or jointly filing status. For tax year 2012, same-sex spouses who filed their tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status. For tax years 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html

Q3. Can a taxpayer and his or her same-sex spouse file a joint return if they were married in a state that recognizes same-sex marriages but they live in a state that does not recognize their marriage?

A3. Yes. For federal tax purposes, the IRS has a general rule recognizing a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. The rules for using a married filing jointly or married filing separately status described in Q&A #2 apply to these married individuals. 

Q4. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?

A4. No. A taxpayer’s spouse cannot be a dependent of the taxpayer.

Q5. Can a same-sex spouse file using head of household filing status?

A5. A taxpayer who is married cannot file using head of household filing status. However, a married taxpayer may be considered unmarried and may use the head-of-household filing status if the taxpayer lives apart from his or her spouse for the last 6 months of the taxable year and provides more than half the cost of maintaining a household that is the principal place of abode of the taxpayer’s dependent child for more than half of the year. See Publication 501 for more details.

Q6. If same-sex spouses (who file using the married filing separately status) have a child, which parent may claim the child as a dependent?

A6. If a child is a qualifying child under section 152(c) of both parents who are spouses (who file using the married filing separate status), either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time during the taxable year. If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.   

Q7. Can a taxpayer who is married to a person of the same sex claim the standard deduction if the taxpayer’s spouse itemized deductions?

A7. No. If a taxpayer’s spouse itemized his or her deductions, the taxpayer cannot claim the standard deduction (section 63(c)(6)(A)).

Q8. If a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

A8. No. The adopting parent may not claim an adoption credit. A taxpayer may not claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse (section 23). 

Q9. Do provisions of the federal tax law such as section 66 (treatment of community income) and section 469(i)(5) ($25,000 offset for passive activity losses for rental real estate activities) apply to same-sex spouses?

A9. Yes. Like other provisions of the federal tax law that apply to married taxpayers, section 66 and section 469(i)(5) apply to same-sex spouses because same-sex spouses are married for all federal tax purposes.

Q10. If an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, can the employee file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse?

A10. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer provided health coverage for an employee’s same-sex spouse, the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee’s spouse been recognized as the employee’s legal spouse for tax purposes. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan covering eligible employees and their dependents and spouses (including same-sex spouses). Fifty percent of the cost of health coverage elected by employees is paid by Employer. Employee A was married to same-sex Spouse B at all times during 2012. Employee A elected coverage for Spouse B through Employer’s group health plan beginning Jan. 1, 2012. The value of the employer-funded portion of Spouse B’s health coverage was $250 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee A included $3,000 ($250 per month x 12 months) of income reflecting the value of employer-funded health coverage provided to Spouse B.  Employee A filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee A may file an amended Form 1040 for the 2012 taxable year excluding the value of Spouse B’s employer-funded health coverage ($3,000) from gross income.

Q11. If an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, can a participating employee file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee’s same-sex spouse?

A11. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee’s same-sex spouse under the employer’s health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee’s spouse. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan as part of a cafeteria plan with a calendar year plan year. The full cost of spousal and dependent coverage is paid by the employees. In the open enrollment period for the 2012 plan year, Employee C elected to purchase self-only health coverage through salary reduction under Employer’s cafeteria plan. On March 1, 2012, Employee C was married to same-sex spouse D. Employee C purchased health coverage for Spouse D through Employer’s group health plan beginning March 1, 2012. The premium paid by Employee C for Spouse D’s health coverage was $500 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee C included the $5,000 ($500 per month x 10 months) of premiums paid by Employee C for Spouse D’s health coverage. Employee C filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee C’s salary reduction election is treated as including the value of the same-sex spousal coverage purchased for Spouse D. Employee C may file an amended Form 1040 for the 2012 taxable year excluding the premiums paid for Spouse D’s health coverage ($5,000) from gross income.

Q12. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund for the Social Security taxes and Medicare taxes paid on the benefits? 

A12. Yes. If the period of limitations for filing a claim for refund is open, the employer may claim a refund of, or make an adjustment for, any overpayment of Social Security taxes and Medicare taxes. The requirements for filing a claim for refund or for making an adjustment for an overpayment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for overpayments of Social Security taxes and Medicare taxes paid on same-sex spouse benefits. 

Q13. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund or make an adjustment of income tax withholding that was withheld from the employee with respect to the benefits in prior years? 

A13. No. Claims for refund of overwithheld income tax for prior years cannot be made by employers. The employee may file for any refund of income tax due for prior years on Form 1040X, provided the period of limitations for claiming a refund has not expired. See Q&A #10 and Q&A #11.

Employers may make adjustments for income tax withholding that was overwithheld from an employee in the current year provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year.

Q14. If an employer cannot locate a former employee with a same-sex spouse who received the benefits described in Q&A #10 and Q&A #11, may the employer still claim a refund of the employer portion of the Social Security and Medicare taxes on the benefits?

A14. Yes, if the employer makes reasonable attempts to locate an employee who received the benefits described in Q&A #10 and Q&A #11 that were treated as wages but the employer is unable to locate the employee, the employer can claim a refund of the employer portion of Social Security and Medicare taxes, but not the employee portion. Also, if an employee is notified and given the opportunity to participate in the claim for refund of Social Security and Medicare taxes but declines in writing, the employer can claim a refund of the employer portion of the taxes, but not the employee portion. Employers can use the special administrative procedure set forth in Notice 2013-61 to file these claims.

Q15. If a sole proprietor employs his or her same-sex spouse in his or her business, can the sole proprietor get a refund of Social Security, Medicare and FUTA taxes on the wages that the sole proprietor paid to the same-sex spouse as an employee in the business?

A15. Services performed by an employee in the employ of his or her spouse are excluded from the definition of employment for purposes of the Federal Unemployment Tax Act (FUTA). Therefore, for all years for which the period of limitations is open, the sole proprietor can claim a refund of the FUTA tax paid on the compensation that the sole proprietor paid his or her same-sex spouse as an employee in the business. Services of a spouse are excluded from Social Security and Medicare taxes only if the services are not in the course of the employer's trade or business, or if it is domestic service in a private home of the employer.

Q16. What rules apply to qualified retirement plans pursuant to Rev. Rul. 2013-17?

A16. Qualified retirement plans are required to comply with the following rules pursuant to Rev. Rul. 2013-17:

  1. A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.
  2. For purposes of satisfying the federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
  3. A person who is in a registered domestic partnership or civil union is not  considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person’s partner is of the opposite or same sex.

Q17. What are some examples of the consequences of these rules for qualified retirement plans?

A17. The following are some examples of the consequences of these rules:

  1. Plan A, a qualified defined benefit plan, is maintained by Employer X, which operates only in a state that does not recognize same-sex marriages. Nonetheless, Plan A must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
  2. Plan B is a qualified defined contribution plan and provides that the participant’s account must be paid to the participant’s spouse upon the participant’s death unless the spouse consents to a different beneficiary. Plan B does not provide for any annuity forms of distribution. Plan B must pay this death benefit to the same-sex surviving spouse of any deceased participant. Plan B is not required to provide this death benefit to a surviving registered domestic partner of a deceased participant. However, Plan B is allowed to make a participant’s registered domestic partner the default beneficiary who will receive the death benefit unless the participant chooses a different beneficiary.

Q18. As of when do the rules of Rev. Rul. 2013-17 apply to qualified retirement plans?

A18. Qualified retirement plans must comply with these rules as of Sept. 16, 2013. Although Rev. Rul. 2013-17 allows taxpayers to file amended returns that relate to prior periods in reliance on the rules in Rev. Rul. 2013-17 with respect to many matters, this rule does not extend to matters relating to qualified retirement plans. The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans with respect to periods before Sept. 16, 2013.

Q19. Will the IRS issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17?

A19. The IRS intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17.  It is expected that future guidance will address the following, among other issues:

  1. Plan amendment requirements (including the timing of any required amendments).
  2. Any necessary corrections relating to plan operations for periods before future guidance is issued.

Q20. Can a same-sex married couple elect to treat a jointly owned and operated unincorporated business as a Qualified Joint Venture?

A20. Yes. Spouses that wholly own and operate an unincorporated business and that meet certain other requirements may avoid Federal partnership tax treatment by electing to be a Qualified Joint Venture. For more information on Qualified Joint Ventures, see the tax topic “Husband and Wife Business” at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Husband-and-Wife-Business.

Q21. In the situations described in FAQ #10 and FAQ #11, may the employee claim a refund for the social security and Medicare taxes paid on the benefits if the employer will not?

A21. Yes. If the period of limitations for filing a claim for refund is open and the employee has not been reimbursed by the employer for the Social Security and Medicare taxes and has not authorized the employer to file a claim for refund of those taxes on his or her behalf, the employee may claim a refund. The employee should seek a refund of Social Security and Medicare taxes from his or her employer first. However, if the employer indicates an intention not to file a claim or adjust the overpaid Social Security and Medicare taxes, the employee may claim a refund of any overpayment of employee Social Security and Medicare taxes by filing Form 843, Claim for Refund and Request for Abatement. The requirements for an employee filing a claim for refund of the employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 843. Employees should write “Windsor Claim” in dark, bold letters across the top margin of Form 843.

Q22. Is an employer that repays or reimburses an employee on or before Dec. 31, 2013, for an overpayment of Social Security and Medicare taxes and income tax withholding with respect to same-sex spouse benefits provided in 2013 required to obtain a written statement from the employee confirming the employee did not make a claim for refund of the overcollected taxes (or the claim was rejected) and will not make any future claim for refund or credit of the overcollected taxes?

A22. No. An employer using the first special administrative procedure under Notice 2013-61 (i.e., employer repays or reimburses an employee for 2013 overpayments of taxes on or before Dec. 31, 2013, and corrects the overpayment on the fourth quarter 2013 Form 941) does not need to obtain the written statement from its employee with respect to the 2013 overpayments. However, an employer using the second special administrative procedure under Notice 2013-61 (i.e., employer does not repay or reimburse an employee for an overpayment of taxes on or before Dec. 31, 2013, and corrects the overpayment on a Form 941-X) is required to obtain such written statement from each affected employee.

Q23. If an individual employed his or her same-sex spouse to perform domestic (household) services in the individual’s private home, can the individual get a refund of Social Security, Medicare and FUTA taxes on wages that the individual paid to the spouse for such service? If so, which forms should the individual use to claim refunds?

A23. Yes, if the period of limitations for filing a claim for refund is open, the individual can get a refund of Social Security, Medicare and FUTA taxes paid on remuneration for domestic services in the individual’s private home that were performed by his or her same sex spouse as the individual’s employee. If the taxes for these services were reported on Schedule H (Form 1040), Household Employment Taxes, and taxes were paid in connection with the Form 1040, the individual should file an amended Form 1040 to claim refund of those taxes together with an amended Schedule H. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. If the Social Security and Medicare taxes for the domestic service were reported on Form 941, Employer’s QUARTERLY Federal Tax Return, the individual employer can use Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to claim a refund of these taxes. The requirements for filing a claim for refund or making an adjustment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for an overpayment of social security taxes and Medicare taxes on same-sex spouse benefits. If the FUTA taxes for the domestic service were reported on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, the individual employer can file an amended Form 940 for the prior year to obtain a refund. The previous year’s Form 940 should be used to claim a refund of FUTA taxes for that prior year. (Forms 940 for prior years may also be found at IRS.gov.)

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Page Last Reviewed or Updated: 07-Mar-2014

The Irs Form1040ez

Irs form1040ez 5. Irs form1040ez   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. Irs form1040ez Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. Irs form1040ez When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. Irs form1040ez Otherwise, these are capital expenses that must be added to the basis of the land. Irs form1040ez (See chapter 6 for information on determining basis. Irs form1040ez ) Conservation expenses for land in a foreign country do not qualify for this special treatment. Irs form1040ez The deduction for conservation expenses cannot be more than 25% of your gross income from farming. Irs form1040ez See 25% Limit on Deduction , later. Irs form1040ez Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. Irs form1040ez These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. Irs form1040ez You must include in income most government payments for approved conservation practices. Irs form1040ez However, you can exclude some payments you receive under certain cost-sharing conservation programs. Irs form1040ez For more information, see Agricultural Program Payments in chapter 3. Irs form1040ez To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. Irs form1040ez Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. Irs form1040ez You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. Irs form1040ez You are not farming if you are engaged only in forestry or the growing of timber. Irs form1040ez Farm defined. Irs form1040ez   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Irs form1040ez It also includes plantations, ranches, ranges, and orchards. Irs form1040ez A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. Irs form1040ez It does not include an area where they are merely caught or harvested. Irs form1040ez A plant nursery is a farm for purposes of deducting soil and water conservation expenses. Irs form1040ez Farm rental. Irs form1040ez   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. Irs form1040ez If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. Irs form1040ez   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. Irs form1040ez Example. Irs form1040ez You own a farm in Iowa and live in California. Irs form1040ez You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. Irs form1040ez You cannot deduct your soil conservation expenses for this farm. Irs form1040ez You must capitalize the expenses and add them to the basis of the land. Irs form1040ez     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. Irs form1040ez Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. Irs form1040ez If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. Irs form1040ez Keep a copy of the plan with your books and records to support your deductions. Irs form1040ez Conservation plan. Irs form1040ez   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. Irs form1040ez There are three types of approved plans. Irs form1040ez NRCS individual site plans. Irs form1040ez These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. Irs form1040ez NRCS county plans. Irs form1040ez These plans include a listing of farm conservation practices approved for the county where the farmland is located. Irs form1040ez You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. Irs form1040ez Comparable state agency plans. Irs form1040ez These plans are approved by state agencies and can be approved individual site plans or county plans. Irs form1040ez   A list of NRCS conservation programs is available at www. Irs form1040ez nrcs. Irs form1040ez usda. Irs form1040ez gov/programs. Irs form1040ez Individual site plans can be obtained from NRCS offices and the comparable state agencies. Irs form1040ez Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. Irs form1040ez These expenses include, but are not limited to, the following. Irs form1040ez The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. Irs form1040ez The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. Irs form1040ez The eradication of brush. Irs form1040ez The planting of windbreaks. Irs form1040ez You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. Irs form1040ez These expenses are added to the basis of the land. Irs form1040ez If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. Irs form1040ez See chapter 3 for information about payments eligible for the cost-sharing exclusion. Irs form1040ez New farm or farmland. Irs form1040ez   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. Irs form1040ez You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. Irs form1040ez The new farming activity does not have to be the same as the old farming activity. Irs form1040ez For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. Irs form1040ez Land not used for farming. Irs form1040ez   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. Irs form1040ez For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. Irs form1040ez You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. Irs form1040ez Depreciable conservation assets. Irs form1040ez   You generally cannot deduct your expenses for depreciable conservation assets. Irs form1040ez However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. Irs form1040ez See Assessment for Depreciable Property , later. Irs form1040ez   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. Irs form1040ez These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. Irs form1040ez You recover your capital investment through annual allowances for depreciation. Irs form1040ez   You can deduct soil and water conservation expenses for nondepreciable earthen items. Irs form1040ez Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. Irs form1040ez Water well. Irs form1040ez   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. Irs form1040ez It is a capital expense. Irs form1040ez You recover your cost through depreciation. Irs form1040ez You also must capitalize your cost for drilling a test hole. Irs form1040ez If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. Irs form1040ez You can recover the total cost through depreciation deductions. Irs form1040ez   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. Irs form1040ez Abandonment means that all economic benefits from the well are terminated. Irs form1040ez For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. Irs form1040ez Endangered species recovery expenses. Irs form1040ez   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. Irs form1040ez Otherwise, these are capital expenses that must be added to the basis of the land. Irs form1040ez   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. Irs form1040ez See Internal Revenue Code section 175 for more information. Irs form1040ez Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. Irs form1040ez You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. Irs form1040ez Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. Irs form1040ez This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. Irs form1040ez The depreciable property must be used in the district's soil and water conservation activities. Irs form1040ez However, the following limits apply to these assessments. Irs form1040ez The total assessment limit. Irs form1040ez The yearly assessment limit. Irs form1040ez After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. Irs form1040ez The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. Irs form1040ez See Table 5-1 for a brief summary of these limits. Irs form1040ez Table 5-1. Irs form1040ez Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. Irs form1040ez Your deductible share of the cost to the district for the property. Irs form1040ez Your gross income from farming. Irs form1040ez No one taxpayer can deduct more than 10% of the total assessment. Irs form1040ez Any amount over 10% is a capital expense and is added to the basis of your land. Irs form1040ez If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Irs form1040ez If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. Irs form1040ez You can deduct the remainder in equal amounts over the next 9 tax years. Irs form1040ez Limit for all conservation expenses, including assessments for depreciable property. Irs form1040ez Amounts greater than 25% can be carried to the following year and added to that year's expenses. Irs form1040ez The total is then subject to the 25% of gross income from farming limit in that year. Irs form1040ez To ensure your deduction is within the deduction limits, keep records to show the following. Irs form1040ez The total assessment against all members of the district for the depreciable property. Irs form1040ez Your deductible share of the cost to the district for the depreciable property. Irs form1040ez Your gross income from farming. Irs form1040ez Total assessment limit. Irs form1040ez   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. Irs form1040ez This applies whether you pay the assessment in one payment or in installments. Irs form1040ez If your assessment is more than 10% of the total amount assessed, both the following rules apply. Irs form1040ez The amount over 10% is a capital expense and is added to the basis of your land. Irs form1040ez If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Irs form1040ez Yearly assessment limit. Irs form1040ez   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. Irs form1040ez If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. Irs form1040ez If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. Irs form1040ez You can deduct the remainder in equal amounts over the next 9 tax years. Irs form1040ez Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. Irs form1040ez Example 1. Irs form1040ez This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. Irs form1040ez Of the assessment, $1,500 is for digging drainage ditches. Irs form1040ez You can deduct this part as a soil or conservation expense as if you had paid it directly. Irs form1040ez The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. Irs form1040ez The total amount assessed by the district against all its members for the depreciable equipment is $7,000. Irs form1040ez The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. Irs form1040ez The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. Irs form1040ez To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. Irs form1040ez Add $500 to the result for a total of $570. Irs form1040ez Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). Irs form1040ez You can deduct the balance at the rate of $70 a year over the next 9 years. Irs form1040ez You add $70 to the $1,500 portion of the assessment for drainage ditches. Irs form1040ez You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. Irs form1040ez Example 2. Irs form1040ez Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. Irs form1040ez The total amount assessed by the district against all its members for depreciable equipment is $5,500. Irs form1040ez The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. Irs form1040ez The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). Irs form1040ez Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. Irs form1040ez You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. Irs form1040ez Sale or other disposal of land during 9-year period. Irs form1040ez   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. Irs form1040ez Death of farmer during 9-year period. Irs form1040ez   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. Irs form1040ez 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. Irs form1040ez Gross income from farming. Irs form1040ez   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. Irs form1040ez Gains from sales of draft, breeding, or dairy livestock are included. Irs form1040ez Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. Irs form1040ez Carryover of deduction. Irs form1040ez   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. Irs form1040ez However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. Irs form1040ez Example. Irs form1040ez In 2012, you have gross income of $32,000 from two farms. Irs form1040ez During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. Irs form1040ez However, your deduction is limited to 25% of $32,000, or $8,000. Irs form1040ez The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. Irs form1040ez The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. Irs form1040ez Any expenses over the limit in that year are carried to 2014 and later years. Irs form1040ez Net operating loss. Irs form1040ez   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. Irs form1040ez If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. Irs form1040ez When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. Irs form1040ez If you do not choose to deduct the expenses, you must capitalize them. Irs form1040ez Change of method. Irs form1040ez   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. Irs form1040ez To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. Irs form1040ez You or your authorized representative must sign the request. Irs form1040ez   The request must include the following information. Irs form1040ez Your name and address. Irs form1040ez The first tax year the method or change of method is to apply. Irs form1040ez Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. Irs form1040ez If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. Irs form1040ez The total expenses you paid or incurred in the first tax year the method or change of method is to apply. Irs form1040ez A statement that you will account separately in your books for the expenses to which this method or change of method relates. Irs form1040ez Send your request to the following  address. Irs form1040ez  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. Irs form1040ez Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). Irs form1040ez However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. Irs form1040ez Gain on sale of farmland. Irs form1040ez   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. Irs form1040ez If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. Irs form1040ez See Section 1252 property under Other Gains in chapter 9. Irs form1040ez Prev  Up  Next   Home   More Online Publications