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State Tax Extension

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State Tax Extension

State tax extension 9. State tax extension   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. State tax extension Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. State tax extension Amount to report as ordinary income. State tax extension Applicable percentage. State tax extension Amount to report as ordinary income. State tax extension Applicable percentage. State tax extension Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. State tax extension When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. State tax extension Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. State tax extension Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. State tax extension Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. State tax extension Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. State tax extension Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). State tax extension Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. State tax extension Table 9-1. State tax extension Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. State tax extension Held 24 mos. State tax extension  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. State tax extension Held 12 mos. State tax extension   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). State tax extension Do not take that gain into account as section 1231 gain. State tax extension Section 1231 transactions. State tax extension   Gain or loss on the following transactions is subject to section 1231 treatment. State tax extension Sale or exchange of cattle and horses. State tax extension The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. State tax extension Sale or exchange of other livestock. State tax extension This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. State tax extension Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. State tax extension Other livestock does not include poultry. State tax extension Sale or exchange of depreciable personal property. State tax extension This property must be used in your business and held longer than 1 year. State tax extension Generally, property held for the production of rents or royalties is considered to be used in a trade or business. State tax extension Examples of depreciable personal property include farm machinery and trucks. State tax extension It also includes amortizable section 197 intangibles. State tax extension Sale or exchange of real estate. State tax extension This property must be used in your business and held longer than 1 year. State tax extension Examples are your farm or ranch (including barns and sheds). State tax extension Sale or exchange of unharvested crops. State tax extension The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. State tax extension You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). State tax extension Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. State tax extension Distributive share of partnership gains and losses. State tax extension Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). State tax extension Cutting or disposal of timber. State tax extension Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . State tax extension Condemnation. State tax extension The condemned property (defined in chapter 11) must have been held longer than 1 year. State tax extension It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. State tax extension It cannot be property held for personal use. State tax extension Casualty or theft. State tax extension The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). State tax extension You must have held the property longer than 1 year. State tax extension However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. State tax extension Section 1231 does not apply to personal casualty gains and losses. State tax extension See chapter 11 for information on how to treat those gains and losses. State tax extension If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. State tax extension See Table 9-1. State tax extension Property for sale to customers. State tax extension   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. State tax extension If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. State tax extension Treatment as ordinary or capital. State tax extension   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. State tax extension If you have a net section 1231 loss, it is an ordinary loss. State tax extension If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. State tax extension The rest, if any, is long-term capital gain. State tax extension Nonrecaptured section 1231 losses. State tax extension   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. State tax extension These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. State tax extension Example. State tax extension In 2013, Ben has a $2,000 net section 1231 gain. State tax extension To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. State tax extension From 2008 through 2012 he had the following section 1231 gains and losses. State tax extension Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. State tax extension 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. State tax extension Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. State tax extension To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. State tax extension For more information, see chapter 3 of Publication 544. State tax extension Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. State tax extension Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. State tax extension See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. State tax extension Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. State tax extension Personal property (either tangible or intangible). State tax extension Other tangible property (except buildings and their structural components) used as any of the following. State tax extension See Buildings and structural components below. State tax extension An integral part of manufacturing, production, or extraction, or of furnishing certain services. State tax extension A research facility in any of the activities in (a). State tax extension A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). State tax extension That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. State tax extension Amortization of certified pollution control facilities. State tax extension The section 179 expense deduction. State tax extension Deduction for clean-fuel vehicles and certain refueling property. State tax extension Expenditures to remove architectural and transportation barriers to the handicapped and elderly. State tax extension Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. State tax extension Single purpose agricultural (livestock) or horticultural structures. State tax extension Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. State tax extension Buildings and structural components. State tax extension   Section 1245 property does not include buildings and structural components. State tax extension The term building includes a house, barn, warehouse, or garage. State tax extension The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. State tax extension   Do not treat a structure that is essentially machinery or equipment as a building or structural component. State tax extension Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. State tax extension   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. State tax extension Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. State tax extension Facility for bulk storage of fungible commodities. State tax extension   This is a facility used mainly for the bulk storage of fungible commodities. State tax extension Bulk storage means storage of a commodity in a large mass before it is used. State tax extension For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. State tax extension To be fungible, a commodity must be such that one part may be used in place of another. State tax extension Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. State tax extension The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. State tax extension The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). State tax extension For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. State tax extension For details, see chapter 3 of Publication 544. State tax extension Use Part III of Form 4797 to figure the ordinary income part of the gain. State tax extension Depreciation claimed on other property or claimed by other taxpayers. State tax extension   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. State tax extension Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. State tax extension For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. State tax extension Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). State tax extension Example. State tax extension Jeff Free paid $120,000 for a tractor in 2012. State tax extension On February 23, 2013, he traded it for a chopper and paid an additional $30,000. State tax extension To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. State tax extension Jeff can also depreciate the additional $30,000 for the chopper. State tax extension Depreciation and amortization. State tax extension   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. State tax extension See Depreciation Recapture in chapter 3 of Publication 544 for more details. State tax extension Ordinary depreciation deductions. State tax extension Section 179 deduction (see chapter 7). State tax extension Any special depreciation allowance. State tax extension Amortization deductions for all the following costs. State tax extension Acquiring a lease. State tax extension Lessee improvements. State tax extension Pollution control facilities. State tax extension Reforestation expenses. State tax extension Section 197 intangibles. State tax extension Qualified disaster expenses. State tax extension Franchises, trademarks, and trade names acquired before August 11, 1993. State tax extension Example. State tax extension You file your returns on a calendar year basis. State tax extension In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. State tax extension You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. State tax extension You did not claim the section 179 expense deduction for the truck. State tax extension You sold it in May 2013 for $7,000. State tax extension The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). State tax extension Figure the gain treated as ordinary income as follows. State tax extension 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. State tax extension   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. State tax extension If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. State tax extension If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. State tax extension This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. State tax extension Disposition of plants and animals. State tax extension   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. State tax extension If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. State tax extension For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. State tax extension For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. State tax extension You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. State tax extension Example. State tax extension Janet Maple sold her apple orchard in 2013 for $80,000. State tax extension Her adjusted basis at the time of sale was $60,000. State tax extension She bought the orchard in 2006, but the trees did not produce a crop until 2009. State tax extension Her pre-productive expenses were $6,000. State tax extension She elected not to use the uniform capitalization rules. State tax extension Janet must treat $6,000 of the gain as ordinary income. State tax extension Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. State tax extension It includes buildings and structural components that are not section 1245 property (discussed earlier). State tax extension It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. State tax extension A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. State tax extension Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. State tax extension To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. State tax extension You will not have additional depreciation if any of the following apply to the property disposed of. State tax extension You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. State tax extension You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. State tax extension The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. State tax extension These properties are depreciated using the straight line method. State tax extension Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. State tax extension This applies even if no payments are received in that year. State tax extension If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. State tax extension For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. State tax extension If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. State tax extension To do this, allocate the selling price and the payments you receive in the year of sale to each asset. State tax extension Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. State tax extension For more information on installment sales, see chapter 10. State tax extension Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. State tax extension By gift. State tax extension At death. State tax extension In like-kind exchanges. State tax extension In involuntary conversions. State tax extension Publication 544 also explains how to handle a single transaction involving multiple properties. State tax extension Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. State tax extension Deductions for soil and water conservation expenditures (section 1252 property). State tax extension Exclusions from income for certain cost sharing payments (section 1255 property). State tax extension Section 1252 property. State tax extension   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. State tax extension Exceptions. State tax extension   Do not treat gain on the following transactions as gain on section 1252 property. State tax extension Disposition of farmland by gift. State tax extension Transfer of farm property at death (except for income in respect of a decedent). State tax extension For more information, see Regulations section 1. State tax extension 1252-2. State tax extension Amount to report as ordinary income. State tax extension   You report as ordinary income the lesser of the following amounts. State tax extension Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). State tax extension The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. State tax extension Applicable percentage. State tax extension   The applicable percentage is based on the length of time you held the land. State tax extension If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. State tax extension If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. State tax extension If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. State tax extension Example. State tax extension You acquired farmland on January 19, 2005. State tax extension On October 3, 2013, you sold the land at a $30,000 gain. State tax extension Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. State tax extension The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. State tax extension You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. State tax extension Section 1255 property. State tax extension   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. State tax extension If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. State tax extension Amount to report as ordinary income. State tax extension   You report as ordinary income the lesser of the following amounts. State tax extension The applicable percentage of the total excluded cost-sharing payments. State tax extension The gain on the disposition of the property. State tax extension You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. State tax extension However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. State tax extension Applicable percentage. State tax extension   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. State tax extension If the property is held less than 10 years after you receive the payments, the percentage is 100%. State tax extension After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. State tax extension Form 4797, Part III. State tax extension   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. State tax extension Prev  Up  Next   Home   More Online Publications
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The State Tax Extension

State tax extension 5. State tax extension   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. State tax extension Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. State tax extension 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. State tax extension Otherwise, these are capital expenses that must be added to the basis of the land. State tax extension (See chapter 6 for information on determining basis. State tax extension ) Conservation expenses for land in a foreign country do not qualify for this special treatment. State tax extension The deduction for conservation expenses cannot be more than 25% of your gross income from farming. State tax extension See 25% Limit on Deduction , later. State tax extension Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. State tax extension 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. State tax extension You must include in income most government payments for approved conservation practices. State tax extension However, you can exclude some payments you receive under certain cost-sharing conservation programs. State tax extension For more information, see Agricultural Program Payments in chapter 3. State tax extension 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. State tax extension 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. State tax extension You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. State tax extension You are not farming if you are engaged only in forestry or the growing of timber. State tax extension Farm defined. State tax extension   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. State tax extension It also includes plantations, ranches, ranges, and orchards. State tax extension A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. State tax extension It does not include an area where they are merely caught or harvested. State tax extension A plant nursery is a farm for purposes of deducting soil and water conservation expenses. State tax extension Farm rental. State tax extension   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. State tax extension 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. State tax extension   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. State tax extension Example. State tax extension You own a farm in Iowa and live in California. State tax extension 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. State tax extension You cannot deduct your soil conservation expenses for this farm. State tax extension You must capitalize the expenses and add them to the basis of the land. State tax extension     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. State tax extension 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. State tax extension If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. State tax extension Keep a copy of the plan with your books and records to support your deductions. State tax extension Conservation plan. State tax extension   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. State tax extension There are three types of approved plans. State tax extension NRCS individual site plans. State tax extension These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. State tax extension NRCS county plans. State tax extension These plans include a listing of farm conservation practices approved for the county where the farmland is located. State tax extension 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. State tax extension Comparable state agency plans. State tax extension These plans are approved by state agencies and can be approved individual site plans or county plans. State tax extension   A list of NRCS conservation programs is available at www. State tax extension nrcs. State tax extension usda. State tax extension gov/programs. State tax extension Individual site plans can be obtained from NRCS offices and the comparable state agencies. State tax extension Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. State tax extension These expenses include, but are not limited to, the following. State tax extension The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. State tax extension The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. State tax extension The eradication of brush. State tax extension The planting of windbreaks. State tax extension You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. State tax extension These expenses are added to the basis of the land. State tax extension 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. State tax extension See chapter 3 for information about payments eligible for the cost-sharing exclusion. State tax extension New farm or farmland. State tax extension   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. State tax extension 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. State tax extension The new farming activity does not have to be the same as the old farming activity. State tax extension 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. State tax extension Land not used for farming. State tax extension   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. State tax extension 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. State tax extension You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. State tax extension Depreciable conservation assets. State tax extension   You generally cannot deduct your expenses for depreciable conservation assets. State tax extension 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. State tax extension See Assessment for Depreciable Property , later. State tax extension   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. State tax extension 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. State tax extension You recover your capital investment through annual allowances for depreciation. State tax extension   You can deduct soil and water conservation expenses for nondepreciable earthen items. State tax extension Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. State tax extension Water well. State tax extension   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. State tax extension It is a capital expense. State tax extension You recover your cost through depreciation. State tax extension You also must capitalize your cost for drilling a test hole. State tax extension 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. State tax extension You can recover the total cost through depreciation deductions. State tax extension   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. State tax extension Abandonment means that all economic benefits from the well are terminated. State tax extension For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. State tax extension Endangered species recovery expenses. State tax extension   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. State tax extension Otherwise, these are capital expenses that must be added to the basis of the land. State tax extension   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. State tax extension See Internal Revenue Code section 175 for more information. State tax extension 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. State tax extension 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. State tax extension 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. State tax extension This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. State tax extension The depreciable property must be used in the district's soil and water conservation activities. State tax extension However, the following limits apply to these assessments. State tax extension The total assessment limit. State tax extension The yearly assessment limit. State tax extension After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. State tax extension The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. State tax extension See Table 5-1 for a brief summary of these limits. State tax extension Table 5-1. State tax extension 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. State tax extension Your deductible share of the cost to the district for the property. State tax extension Your gross income from farming. State tax extension No one taxpayer can deduct more than 10% of the total assessment. State tax extension Any amount over 10% is a capital expense and is added to the basis of your land. State tax extension If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. State tax extension 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. State tax extension You can deduct the remainder in equal amounts over the next 9 tax years. State tax extension Limit for all conservation expenses, including assessments for depreciable property. State tax extension Amounts greater than 25% can be carried to the following year and added to that year's expenses. State tax extension The total is then subject to the 25% of gross income from farming limit in that year. State tax extension To ensure your deduction is within the deduction limits, keep records to show the following. State tax extension The total assessment against all members of the district for the depreciable property. State tax extension Your deductible share of the cost to the district for the depreciable property. State tax extension Your gross income from farming. State tax extension Total assessment limit. State tax extension   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. State tax extension This applies whether you pay the assessment in one payment or in installments. State tax extension If your assessment is more than 10% of the total amount assessed, both the following rules apply. State tax extension The amount over 10% is a capital expense and is added to the basis of your land. State tax extension If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. State tax extension Yearly assessment limit. State tax extension   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. State tax extension 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. State tax extension If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. State tax extension You can deduct the remainder in equal amounts over the next 9 tax years. State tax extension 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. State tax extension Example 1. State tax extension This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. State tax extension Of the assessment, $1,500 is for digging drainage ditches. State tax extension You can deduct this part as a soil or conservation expense as if you had paid it directly. State tax extension The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. State tax extension The total amount assessed by the district against all its members for the depreciable equipment is $7,000. State tax extension 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. State tax extension The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. State tax extension 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%. State tax extension Add $500 to the result for a total of $570. State tax extension 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). State tax extension You can deduct the balance at the rate of $70 a year over the next 9 years. State tax extension You add $70 to the $1,500 portion of the assessment for drainage ditches. State tax extension 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. State tax extension Example 2. State tax extension 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. State tax extension The total amount assessed by the district against all its members for depreciable equipment is $5,500. State tax extension The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. State tax extension 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). State tax extension Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. State tax extension 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. State tax extension Sale or other disposal of land during 9-year period. State tax extension   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. State tax extension Death of farmer during 9-year period. State tax extension   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. State tax extension 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. State tax extension Gross income from farming. State tax extension   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. State tax extension Gains from sales of draft, breeding, or dairy livestock are included. State tax extension Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. State tax extension Carryover of deduction. State tax extension   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. State tax extension However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. State tax extension Example. State tax extension In 2012, you have gross income of $32,000 from two farms. State tax extension During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. State tax extension However, your deduction is limited to 25% of $32,000, or $8,000. State tax extension 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. State tax extension 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. State tax extension Any expenses over the limit in that year are carried to 2014 and later years. State tax extension Net operating loss. State tax extension   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. State tax extension 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. State tax extension 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. State tax extension If you do not choose to deduct the expenses, you must capitalize them. State tax extension Change of method. State tax extension   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. State tax extension 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. State tax extension You or your authorized representative must sign the request. State tax extension   The request must include the following information. State tax extension Your name and address. State tax extension The first tax year the method or change of method is to apply. State tax extension 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. State tax extension If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. State tax extension The total expenses you paid or incurred in the first tax year the method or change of method is to apply. State tax extension A statement that you will account separately in your books for the expenses to which this method or change of method relates. State tax extension Send your request to the following  address. State tax extension  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. State tax extension 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). State tax extension However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. State tax extension Gain on sale of farmland. State tax extension   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. State tax extension 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. State tax extension See Section 1252 property under Other Gains in chapter 9. State tax extension Prev  Up  Next   Home   More Online Publications