Publication 225 |
2000 Tax Year |
Preparing the Return
Schedule F (Form 1040)
The first step in preparing Mr. Brown's income tax return is to
determine his net farm profit or loss on Schedule F. The income and
expenses shown on this Schedule F are taken from his farm receipt and
expense records. Data for the depreciation and section 179 deductions
are taken from Form 4562 and the illustrated Depreciation
Worksheet that follows Form 4562. Mr. Brown has filed all
required Form 1099 information returns.
On line B he writes the number "112120" from the list of
Principal Agricultural Activity Codes on page 2 of Schedule
F (not shown). This indicates that his principal source of farm income
is from dairy farming.
Schedule F--Part I (Income)
Mr. Brown keeps records of the various types of farm income he
receives during the year. (Farm income is discussed in chapter 4.)
He
uses this information to complete Part I of Schedule F.
Line items.
He fills in all applicable items of farm income.
Line 1.
In 2000, he sold steers he had bought for resale. He enters sales
of $26,584.
Line 2.
He enters the cost of the steers, $6,523. He has kept a record of
the cost of the livestock he bought and is careful to deduct the cost
of an animal in the year of its sale.
Line 3.
He subtracts his cost on line 2 from the sales on line 1 and
reports the difference, $20,061, as his profit on line 3. Had he sold
any other items he bought for resale, he would combine the sales and
costs of these items with the sales and costs of the steers and report
only the totals on lines 1, 2, and 3. He does not report here sales of
livestock held for draft, breeding, sport, or dairy purposes. He
reports those sales on Form 4797.
Line 4.
He enters the income he received during 2000 from sales of items he
raised or produced on his farm. His principal source of farm income is
dairy farming. The amount reported on this line, $163,018, includes
sales of all of the following.
Milk |
$133,874 |
Steers and calves he raised |
2,914 |
Vegetables he grew |
1,457 |
Corn ($7,286), hay ($8,944), and wheat ($8,543)
he raised |
24,773 |
Total reported on line 4 |
$163,018 |
Lines 5a and 5b.
He reports the $33 he received from cooperatives on line 5a. Since
this is the dollar amount of a qualified written notice of allocation
paid as part of a patronage dividend, he enters $33 as the taxable
amount on line 5b.
Lines 6a and 6b.
He received Farm Service Agency (FSA) cost-sharing payments of $438
on a soil conservation project (diversion channels) completed in 2000.
He received the income as materials and services paid for by the
government and reports it on both line 6a and line 6b. The Department
of Agriculture (USDA) generally reports such payments to the recipient
on Form 1099-G. The entire $438 has been included on line 14 of
Schedule F as a conservation expense. He did not receive any
cost-sharing payments this year that he could exclude from his farm
income.
Line 7a.
He reports the $665 loan he received from the Commodity Credit
Corporation (CCC) because he elected in a previous year to treat these
loans as income in the year received. (If he had elected not to report
his CCC loan as income in the year received and forfeited the loan in
a later year, he would report the loan as income on lines 7b and 7c in
the year of forfeiture.)
Line 9.
He reports his $1,258 of income from custom harvesting.
Line 10.
On his 1999 income tax return, he claimed a credit of $142 for
excise taxes on gasoline used on his farm. He includes the entire $142
in his 2000 income on line 10 because he deducted the total cost of
gasoline (including the $142 of excise taxes) as a farm business
expense in 1999. He also includes $250 he received as a director of
the local milk marketing cooperative and $175 received for firewood
that he cut and sold in 2000.
Schedule F-- Part II (Expenses)
Mr. Brown records his farm expenses during the year for tax
purposes and summarizes these expenses at the end of the year. (Farm
business expenses are discussed in chapter 5.)
This gives him his
deductible expenses, which he enters in Part II of Schedule F.
Line items.
He fills in all applicable items of farm expense deductions.
Line 12.
He uses his trucks 100% for his farming business and the actual
cost (not including depreciation) of operating the trucks in 2000 was
$2,659. He uses his family car 60% for business. It cost $2,307 to
operate the car in 2000. He can deduct $1,384 for the car ($2,307
x .60). He enters a total of $4,043 ($2,659 + $1,384) on line
12. (Depreciation is reported on line 16.)
Line 13.
The $2,701 on this line is the amount he paid for pesticides and
herbicides purchased during the year.
Line 14.
He deducts the $1,040 spent on diversion channels in 2000. The
amount listed here includes the full cost of the government
cost-sharing project, which he has reported as income on line 6. He
continues the policy elected in previous years of deducting annual
soil and water conservation expenses. The expenses are consistent with
a conservation plan approved by the Natural Resources Conservation
Service of the USDA. Because the amount was not more than 25% of Mr.
Brown's gross income from farming, the entire amount is deductible.
See chapter 6
for more information on soil and water conservation
expenses.
Line 15.
The $1,575 on this line is the amount he paid a company for
spraying his crops. He made the payment to a corporation, so he does
not file a Form 1099-MISC to report the payment.
Line 16.
He enters the $38,039 depreciation from Form 4562, discussed later.
Line 18.
He enters the $18,019 cost of feed bought for and consumed by his
livestock in 2000. He did not include the cost of feed bought for
livestock he and his family intend to consume. He also did not include
the value of feed grown on his farm.
Line 19.
He enters $6,544. This is the amount paid for fertilizer and lime.
Line 20.
He deducts the $5,105 he paid for trucking and milk marketing
expenses. He chose to itemize the $807 government milk assessment and
lists it separately on line 34a.
Line 21.
He deducts the $3,521 cost of gasoline, fuel, and oil bought for
farm use, other than amounts he included on line 12 for car and truck
expenses. He did not deduct the cost of fuel used for heating,
lighting, or cooking in his home.
Line 22.
He deducts the $1,070 cost of insurance on his farm buildings (but
not on his home), equipment, livestock, and crops. He did not deduct
the entire premiums on 3-year and 5-year insurance policies in the
year of payment, but deducts each year only the part that applies to
that year. For more information, see Insurance in chapter 5.
Lines 23a and 23b.
He deducts on line 23a the $3,175 interest paid on the farm
mortgage for the land and buildings used in farming. He deducts on
line 23b the $1,043 interest paid on obligations incurred to buy
livestock and other personal property used in farming or held for
sale. He deducts his home mortgage interest on Schedule A (Form 1040),
which is not shown.
Line 24.
He enters the $16,416 in wages he paid during the year for labor
hired to operate his farm, including wages paid to his wife and
children. He did not include amounts paid to himself. He has no
employment credits that would reduce the amount of wages entered. For
those wages paid that were subject to social security and Medicare
taxes, he included the full amount of the wages before reduction for
the employee's share of those taxes, or other amounts withheld. His
share of the social security and Medicare taxes is included in the
total taxes deducted on line 31. See chapter 16
for information on
employment taxes.
Line 26b.
He enters only the $2,400 cash rent paid for the use of land he
rented from a neighbor, Mr. Green. He did not deduct rent paid in crop
shares. He completed a Form 1099-MISC for the rent paid to Mr.
Green and sent Copy A to the IRS with Form 1096. He gave Mr. GreenCopy
B of the Form 1099-MISC.
Line 27.
The $5,424 he enters includes $4,902 for repairs to farm machinery
and $522 for repairs to farm buildings. He did not include the value
of his own labor or the cost of repairs on his home. He prepared Form
1099-MISC for the farm machinery repairs because the repair shop
is a limited liability company (LLC) that is not classified as a
corporation. He sent Copy A to the IRS with Form 1096 and gave Copy B
to the owner of the repair shop. If the repair shop had been a
corporation, Mr. Brown would not have had to file a Form
1099-MISC. He does not have to file a Form 1099-MISC for
the building repair because he paid less than $600.
Line 28.
He enters the $2,132 cost of seeds and plants used in farming. He
deducts these costs each year. He did not include the cost of plants
and seeds purchased for the family garden.
Line 30.
He enters the $2,807 paid for livestock supplies and other
supplies, including bedding.
Line 31.
He enters $3,201 for taxes paid during 2000, including state and
local taxes on the real estate and personal property used in farming.
He did not include the sales tax paid on farm supplies because this
tax was included in the cost for supplies that he deducted on line 30.
He also did not include the gasoline tax on the gasoline bought for
farm use, including the gasoline used in his trucks and family car for
farm business, because these taxes were included in the costs for
gasoline that he deducted on lines 21 and 12. He included his share of
social security and Medicare taxes paid for agricultural employees. He
filed Form 943 (not shown) in January 2001, reporting these taxes for
calendar year 2000.
He does not deduct, on Schedule F, his state income tax or the
taxes on his home and the part of his land not used for farming. He
deducts these taxes on Schedule A (Form 1040), which is not shown. He
does not deduct any federal income tax paid during the year.
Line 32.
He enters $3,997 for the cost of water, electricity, gas, and
telephone service used only in farming. He cannot deduct personal
utilities. He also cannot deduct the cost of basic local telephone
service (including any taxes) for the first telephone line to his
home.
Line 33.
He enters $3,217, the total paid during 2000 for veterinary fees
($1,821), livestock medicines ($650), and breeding fees ($746). He
does not prepare Form 1099-MISC for the veterinarian and the
supplier of breeding services because both are incorporated.
Line 34.
He enters other farm business expenses. These include: an $807
government milk assessment; $347 for commissions, dues, and fees; $287
for financial records and office supplies; and $534 for farm business
travel and meals. Farm business travel includes expenses for the State
Forage Tour and for attending the farm management conference at State
University. He included only 50% of the cost of meals in the
deduction.
Line 36--Net farm profit.
To arrive at his net farm profit, he subtracts the amount on line
35 ($127,444) from the amount on line 11 ($186,040). His net farm
profit, entered on line 36, is $58,596. He also enters that amount on
line 18 of Form 1040, and on line 1 of Section A, Schedule SE (Form
1040). Because he shows a net profit on line 36, he skips line 37.
Form 4562 -- Depreciation
and Amortization
Mr. Brown follows the instructions and lists the information called
for in Parts I through IV. He also completes Part V on page 2 to
provide information on listed property used in his farming business.
The three vehicles used in his business are listed property. The
truck, sold in July and shown on Form 4797, was placed in service in
1991 and fully depreciated in 1996. No depreciation is allowed for
2000.
Depreciation record.
He records information on his depreciable property in a book that
he can use to figure his depreciation allowance for several years. He
uses the Depreciation Worksheet from the Form 4562
instructions to figure his 2000 deduction.
Basis for depreciation.
He bought his farm on January 8, 1978. Timber on the farm was
immature and had no fair market value (FMV). He immediately allocated
the total purchase price of the farm among the land, house, barn, and
fences (no other capital improvements were included in the price of
the farm). He made the allocation on the purchase date in proportion
to (but not in excess of) the FMVs of the assets and in the required
asset order. See Trade or Business Acquired in Publication 551
for more information.
He entered in his depreciation record the part of the purchase
price for the depreciable barn and fences, giving him the basis for
figuring his depreciation allowance. The fences were fully depreciated
in 1987. Because he cannot depreciate the house and land, he keeps a
separate record showing their bases.
Methods of depreciation.
He depreciates all his property placed in service before 1981 using
the straight-line method. He chose the alternate ACRS method for his
machine shed placed in service in 1986. Using the Modified Accelerated
Cost Recovery System (MACRS) and the half-year convention, he chose
the following systems for all of his assets placed in service in the
year indicated.
- 1996--straight line Alternative Depreciation System
(ADS).
- 1997--150% declining balance ADS.
- 1998 & 2000--150% declining balance General
Depreciation System (GDS).
Depreciable property.
One of his purchased dairy cows was killed by lightning in July
2000. Two other purchased cows (#52 and #60) were sold in 2000. The
cows were depreciated under MACRS (ADS), using a half-year convention.
Therefore, he can claim a half-year's depreciation for each cow in
2000.
He has other breeding and dairy cows that he raised. He did not
claim depreciation on them since his basis in the cows is zero for
income tax purposes.
During 2000 the Browns owned two family cars. One of them was not
used for farm business. Mr. Brown cannot deduct depreciation on it. He
determined that his other car was used 60% for his farm business and
40% for personal driving.
The Depreciation Worksheet contains an itemized list of
Mr. Brown's assets for which he is deducting depreciation in 2000. He
must list each item separately to keep track of its basis. The pickup
truck and car purchased in 1997 are listed property in the 5-year
property class.
New assets.
Mr. Brown added three assets to his farming business in 2000.
- In January, he completed and placed in service a dairy
facility designed specifically for the production of milk and to
house, feed, and care for dairy cattle (single purpose livestock
structure). The building is depreciated separately from the milking
equipment it houses. The cost of the building is $56,500 and it is
10-year property under MACRS. The cost of the equipment is $72,000 and
it is 7-year property under MACRS.
- In February, he made improvements to his machine shed for a
total cost of $1,300. The improvements are depreciated as if they were
a separate building with a 20-year recovery period.
- In July, he acquired tractor #5 by trading tractor #2 and
paying $23,729 cash. The adjusted basis of tractor #2 was $1,378 when
it was traded (Mr. Brown claimed half a year of depreciation). The new
tractor has a basis of $25,107 ($23,729 + $1,378). The portion of the
new basis carried over from tractor #2 ($1,378) is depreciated over
the remaining life of tractor #2. Therefore, Mr. Brown left the
depreciation of that portion of the basis on his Depreciation
Worksheet as if he still owned tractor #2 but made a note that the
remaining basis on that line is part of his basis in tractor #5. Mr.
Brown made a new entry on his Depreciation Worksheet to depreciate the
$23,729 of new basis in tractor #5 over the new 7-year life of tractor
#5. He completed Form 8824, Like-Kind Exchanges, (not
shown) to report the trade and will include this form when he files
his return. He elected to expense part of the cost of the tractor in
2000 and depreciate the rest of the new basis.
Line items.
Form 4562 is completed by referring to the Depreciation
Worksheet.
Line 2.
Mr. Brown enters $152,229 on line 2. This is the total cost of all
section 179 property placed in service in 2000. In figuring his cost,
he does not include the portion of the new basis in the acquired
tractor that was carried over from the traded tractor ($1,378). The
dairy facility and equipment qualify as section 179 property. However,
the machine shed improvement does not qualify. It is not a single
purpose agricultural (livestock) structure.
Line 6.
He enters the description of the property (tractor) he is electing
to expense under section 179. His cost basis for the section 179
deduction is limited to the cash he paid for the tractor. He enters
his cost basis of $23,729 in column (b). He then enters the tentative
deduction, $20,000, in column (c). However, this amount is subject to
the business income limit on line 11. (The total cost of his section
179 property did not exceed the investment limit, $200,000, and he is
therefore subject to the maximum dollar limit, $20,000.)
Lines 11 and 12.
His taxable income from his farming business (without including the
section 179 deduction and the self-employment tax deduction) exceeds
the maximum dollar limit on line 5. He enters $20,000 on lines 11 and
12. See chapter 8
for information on the section 179 deduction.
Line 15.
All property placed in service in 2000 in each class is combined
and entered in Part II, line 15. The abbreviation HY used in column
(e) stands for the half-year convention. The 150 DB in column (f)
stands for the 150% declining balance method under MACRS.
Line 17.
He enters $2,823, his MACRS depreciation deduction for assets
placed in service from 1996 through 1998, on line 17 of Part III. None
of the assets included are listed property. Listed property is entered
in Part V as explained later under Line 20.
Line 19.
On line 19, he enters $574 for the asset placed in service before
1981 and the asset depreciated under ACRS.
Line 20.
He enters his depreciation deduction for listed property, $2,244,
on line 20. This is the total shown on line 26, Part V, page 2 of the
form. He has two depreciable assets that are listed property--the
car used 60% for business and the pickup truck purchased in 1997. His
deduction for the car cannot be more than 60% of the limit for
passenger automobiles for the year he placed the car in service. The
other truck, which he sold this year, was fully depreciated.
Line 21.
He enters the total depreciation on line 21 and carries the total,
$38,039, to line 16 of Schedule F.
Other items.
He completes Sections A and B of Part V to provide the information
required for listed property. He does not complete Section C because
he does not provide vehicles for his employees' use.
He follows the practice of writing down the odometer readings on
his vehicles at the end of each year and when he places the vehicles
in service and disposes of them. In addition, because he uses his car
only partly for business, he writes down the number of business miles
it is driven any day that it is used for business. He uses these
records to answer the questions on lines 23a and 23b of Section A and
lines 28 through 34 of Section B.
He has no amortization, so he does not use Part VI of Form 4562.
Schedule SE (Form 1040)
Self-Employment Tax
After figuring his net farm profit on page 1 of Schedule F, Mr.
Brown figures his self-employment tax. To do this, he figures his net
earnings from farm self-employment on Short Schedule SE (Section A).
He is not required to use Long Schedule SE (Section B). First he
prints his name (as shown on his Form 1040) and his social security
number at the top of Schedule SE. Only his name and social security
number go on Schedule SE. His wife does not have self-employment
income. If she had self-employment income, she would file her own
Schedule SE.
Line items.
He figures his self-employment tax on the following lines.
Line 1.
He enters his net farm profit, $58,596. All the income, losses, and
deductions listed on Schedule F are included in determining net
earnings from farm self-employment (see the types of self-employment
income listed in chapter 15).
Consequently, he did not have to adjust
his net profit to determine his self-employment net earnings from
farming.
Line 3.
If he were engaged in one or more other businesses in addition to
farming, he would combine his net profits from all his trades or
businesses on line 3 of this schedule. However, because farming was
his only business, he enters his net profit from farming (the amount
shown on line 1).
Line 4.
He multiplies line 3 by .9235 to get his net earnings from
self-employment and enters $54,113 on line 4.
Lines 5 and 6.
He multiplies line 4 by 15.3% and enters $8,279 on line 5. This is
his self-employment tax for 2000. He also enters $8,279 on line 52 of
Form 1040. He enters $4,140 on line 6 and also on line 27 of Form 1040
(deduction for one-half of his self-employment tax).
Form 4684--Casualties
and Thefts
Mr. Brown's only business casualty occurred on July 7 when a dairy
cow he purchased four years ago was killed by lightning. He shows the
loss from the casualty on page 2 of Form 4684. Only page 2 is shown,
since page 1 is for nonbusiness casualties.
He prints his name, his wife's name, and his identifying number at
the top of page 2.
Part I.
He shows the kind of property, "Dairy cow #42," its location,
and the date acquired on line 19. He enters his adjusted basis in the
cow, $257, on line 20 and the $109 insurance payment he received for
the cow on line 21. Since line 20 is more than line 21, he skips line
22. On lines 23 and 24, he enters the FMVs before and after the
casualty ($500 and $0, respectively), and he shows the difference,
$500, on line 25. He enters the amount from line 20 on line 26,
subtracts line 21 from line 26, and enters $148 on lines 27 and 28.
Part II.
Since he owned the cow for more than one year, he identifies the
casualty on line 34 and enters $148 on lines 34(b)(i), 35(b)(i), 37,
and 38a, and on Form 4797, Part II, line 14.
Form 4797--Sales of
Business Property
After completing Schedule F and Section B of Form 4684, Mr. Brown
fills in Form 4797 to report the sales of business property. See
Table 11-1 in chapter 11
for the types of property
reported on Form 4797.
He prints his name, his wife's name, and his identifying number at
the top of Form 4797.
Before he can complete Parts I and II, he must complete Part III to
report the sale of certain depreciable property.
Part III.
Mr. Brown sold three depreciable assets in 2000 at a gain. They
consisted of a truck, a mower, and purchased dairy cow #60. He has
information about their cost and depreciation in his records. Only the
dairy cow appears on the Depreciation Worksheet. The truck
and mower were fully depreciated.
He sold the truck on July 9, the mower on August 12, and the cow on
October 28. Since the gains on these items were gains from
dispositions of depreciable personal property, as explained in chapter 11,
he must determine the part of the gain for each item that was
ordinary income.
He enters the description of each item on lines 19A through 19C and
relates the corresponding property columns to the properties on those
lines. He completes lines 20 through 25(b) for each disposition.
Gain from dispositions.
The gain on each item is shown on line 24. His gain on the sale of
the truck is $700 (Property A). His gain on the sale of the mower is
$70 (Property B). His gain on the sale of the cow is $82 (Property C).
The gain on each item is entered in the appropriate property column on
line 25(b).
Summary of Part III gains.
On line 30, he enters $852, the total of property columns A through
C, line 24. On line 31, he enters $852, the total of property columns
A through C, line 25(b). This amount is the gain that is ordinary
income. He also enters this amount on line 13, Part II.
He subtracts line 31 from line 30 and enters -0- on line 32. He has
no long-term capital gain on the dispositions. All his gain is
ordinary income.
Part I.
All the animals in Part I met the required holding period.
Mr. Brown sold at a gain several cows he had raised and used for
dairy purposes. His selling expense was $325 for these cows, which he
shows on line 2(f). He enters the gain from the sale on line 2(g). He
also shows on line 2(f), a selling expense of $20 for a raised dairy
heifer and enters on line 2(g) the gain from the sale of the heifer
and the loss from the sale of purchased dairy cow #52. Because he sold
purchased dairy cow #52 at a loss, he entered it in Part I instead of
Part III. See Table 11-1 in chapter 11
for where to
report items on Form 4797.
He combines the gains and loss on line 2(g) and enters $14,770 on
line 7(g). Since he has no nonrecaptured net section 1231 losses from
prior years, he does not fill in lines 8, 9, and 12. If he had
nonrecaptured section 1231 losses, part or all of the gain on line 7
would be ordinary income and entered on line 12. Following the
instructions for line 7, he enters $14,770 as a long-term capital gain
on line 11(f) of Schedule D.
Part II.
Mr. Brown enters on line 10 the $250 gain from the sale of a raised
dairy heifer held less than 24 months for breeding purposes. He had
previously entered the $852 gain from line 31, Part III, on line 13
and the $148 loss from Form 4684 on line 14. He totals lines 10
through 17 and enters $954 on line 18. He carries the gain from line
18 to line 18b(2) and shows it as ordinary income on line 14 of Form
1040.
Schedule D (Form 1040)
Capital Gains and Losses
After completing Form 4797, Mr. Brown fills in Schedule D to report
gains and losses on capital assets. He prints his name, his wife's
name, and his social security number at the top of Schedule D.
Entries.
He enters the required information in the appropriate columns.
Lines 1 and 3.
He reports as a short-term loss on line 1 his $50 loss on the 2000
sale of H. T. Corporation stock held one year or less. He includes the
gross sales price of the stock in column (d) on lines 1 and 3.
Line 7.
He completes Part I of Schedule D by entering on line 7 the loss in
column (f) on line 1.
Lines 8 and 10.
He enters in column (f) on line 8 his $745 long-term gain on the
sale of Circle Corporation stock held more than one year. He includes
the gross sales price in column (d) on lines 8 and 10.
Line 11.
Mr. Brown had previously entered on line 11 the gain from line 7 of
Form 4797.
Line 16.
He combines the column (f) amounts on lines 8 and 11 and enters the
result on line 16.
Line 17.
In Part III, he combines lines 7 and 16 and enters his total
capital gain on line 17. He also enters this amount on Form 1040, line
13.
After he completes his Form 1040 through line 39, he will use Part
IV to figure his tax without regard to farm income averaging. See
Schedule J (Form 1040) Farm Income Averaging, later.
He does not have a capital loss carryover this year, so he does not
complete the Capital Loss Carryover Worksheet in the
instructions.
Although Mr. Brown must complete Schedule D (Form 1040) and attach
it to his return, certain other taxpayers may be able to complete the
Capital Gain Tax Worksheet in the Form 1040 instructions
instead. See the instructions for line 13 of the 2000 Form 1040.
Form 1040, Page 1
Mr. Brown is filing a joint return with his wife. He uses the form
he received from the IRS.
Line items.
He fills in all applicable items on page 1 of Form 1040.
Line 6c.
He prints the name and social security number of each dependent
child he claims. He also checks the boxes in column (4) since all of
his children are qualifying children for the child tax credit.
Line 7.
Mrs. Brown worked part time as a substitute teacher for the county
school system during 2000. She also worked for Mr. Brown on the farm
during 2000. He enters on line 7 her total wages, $8,950 ($7,750 from
the school system and $1,200 from the farm), as shown on the Forms
W-2 that he and the school system gave her.
Lines 8a and 9.
He did not actually receive cash payment for the interest he listed
on line 8a ($375). It was credited to his account so that he could
have withdrawn it in 2000. Therefore, he constructively received it
and correctly included it in his income for 2000. He enters the $220
in dividends he received from the Circle Corporation on line 9.
He received patronage dividends from farmers' cooperatives based on
business done with these cooperatives. He does not list these
dividends here, but properly included them on lines 5a and 5b, Part I
of Schedule F.
Since he did not receive more than $400 in interest or $400 in
dividends and none of the other conditions listed at the beginning of
the Schedule B instructions applied, he is not required to complete
Schedule B.
Lines 13, 14, and 18.
He previously entered the following items.
- His capital gain on line 13 from Schedule D, line 17.
- His other gain on line 14 from Form 4797, line
18b(2).
- His net farm profit on line 18 from Schedule F, line
36.
Line 22.
He adds the amounts on lines 7 through 21 and enters the total,
$84,560.
Line 27.
He has already entered one-half of his self-employment tax, $4,140,
which he figured on Schedule SE.
Line 28.
He paid premiums of $8,400 during 2000 for health insurance
coverage for himself and his family and qualifies for the
self-employed health insurance deduction. He figures the part of his
insurance payment that he can deduct by completing the
Self-Employed Health Insurance Deduction Worksheet (not
shown) in the instructions for Form 1040. He enters the result,
$5,040, on line 28 and includes the remaining part of his insurance
payment in figuring his medical expense deduction on Schedule A (Form
1040), which is not shown.
Line 32.
He adds the amounts on lines 23 through 31a and enters the total,
$9,180, on line 32.
Lines 33 and 34.
He subtracts line 32 from line 22 to get his "adjusted gross
income" and enters the result, $75,380, on line 33 and also on line
34 of page 2.
Form 1040, Page 2
Mr. Brown fills in the following lines on page 2 of Form 1040.
Line 36.
He enters $7,800 from his Schedule A (Form 1040), which is not
shown, because the total of his itemized deductions is larger than the
$7,350 standard deduction for his filing status (married filing
jointly).
Lines 37, 38, and 39.
He subtracts the $7,800 on line 36 from the $75,380 on line 34 and
enters the result, $67,580 on line 37. He enters $14,000 (5 x
$2,800) on line 38 and subtracts this amount from the amount on line
37 to get a taxable income of $53,580 on line 39.
Line 40.
He enters $7,258 from Schedule J, line 22. For information on how
he figured his tax using farm income averaging, see Schedule J
(Form 1040), later.
Line 42.
Since the Browns do not owe alternative minimum tax (line 41), he
enters on line 42 the tax shown on line 40.
Line 47.
The Browns qualify for the child tax credit. He figures his credit
by completing the Child Tax Credit Worksheet (not shown) in
the instructions for Form 1040. He enters his credit, $1,500, on line
47.
Lines 50 and 51.
He enters on line 50 the child tax credit from line 47 since it is
the only amount he entered on lines 43 through 49. He subtracts that
amount from the tax on line 42 and enters $5,758 on line 51.
Line 52.
He has already entered the $8,279 self-employment tax he figured on
Schedule SE.
Line 57.
He adds the amounts on lines 51 through 56 and enters $14,037,
which is the total tax for 2000.
Line 58.
He enters the income tax withheld from Mrs. Brown's wages, $435, as
shown on the Forms W-2 she received. He attaches a copy of her
Forms W-2 to the front of Form 1040.
Line 59.
He did not make 2000 estimated tax payments since two-thirds of his
gross income for 1999 was from farming. He was sure that at least
two-thirds of his gross income for 2000 would again be from farming.
Farmers who meet either of these conditions do not have to make 2000
estimated tax payments. If he files his Form 1040 and pays the tax due
no later than March 1, 2001, he will not be penalized for failure to
pay estimated taxes. He makes no entry on line 59.
Line 60a.
The Browns are not entitled to claim the earned income credit on
line 60a, because their modified adjusted gross income is more than
$31,152.
Line 64.
Mr. Brown enters his credit for $350 of federal excise tax on
gasoline used in 2000. He checks box "b" and attaches Form 4136
(not shown) to his return, showing how he figured the credit. He must
report the credit as other income on his Schedule F for 2001, since he
deducted the total cost of gasoline (including the $350 of excise
taxes) as a farm business expense on his 2000 Schedule F.
Lines 65 and 69.
He adds the amounts on lines 58 through 64 and enters the total,
$785, on line 65. He subtracts that figure from the amount on line 57.
The balance, $13,252, is entered on line 69.
Schedule J (Form 1040)
Farm Income Averaging
In 2000, Mr. Brown's taxable income, $53,580, is substantially
higher than in each of the 3 previous years. His taxable income
amounts were only $2,500, $1,050, and $700 for 1999, 1998, and 1997,
respectively. He elects to use farm income averaging by completing
Schedule J to figure his tax.
First, he uses Part IV of Schedule D to figure his tax without
regard to farm income averaging. Next, he uses Schedule J to figure
his tax using farm income averaging.
Line items.
He fills in the lines on Schedule J.
Line 1.
He enters $53,580, his taxable income from line 39 of Form 1040.
Line 2.
He enters the part of his farm income he is electing to average,
$34,580. He elects to treat this elected farm income as all coming out
of his $58,596 of ordinary farm income from Schedule F. He could have
elected to treat up to $14,770 of it as coming out of his gain from
the sale of farm assets (other than land) that are reported in Part I
of Form 4797. Reducing his ordinary income by this amount allows him
to take advantage of the lowest tax brackets for this year and the 3
previous years.
Line 3.
He subtracts the amount on line 2 from the amount on line 1 and
enters $19,000 on line 3.
Line 4.
Because he has capital gains and losses this year, he computes the
tax on $19,000 using Part IV of Schedule D (not shown) and enters the
result, $2,076, on line 4. In this example, he decided to treat the
elected farm income as all coming from his ordinary income. However,
he could have made a different election to use some or all of the
capital gains for 2000. In that case, the calculation for this line
would have been made by reducing his capital gains for 2000 by the
amount included in elected farm income and, unless all of the capital
gains for 2000 were included in elected farm income, using Schedule D
to compute the tax on line 4.
Lines 5, 9, and 13.
He enters his taxable income from 1997, 1998, and 1999 on lines 5,
9, and 13, respectively.
Lines 6, 10, and 14.
He divides the amount on line 2 by 3.0 and enters the result,
$11,527, on lines 6, 10, and 14.
Lines 7, 11, and 15.
He figures his adjusted taxable income for the 3 previous years by
adding the amounts on lines 6, 10, and 14 to the amounts on lines 5,
9, and 13, respectively.
Lines 8, 12, and 16.
He figures the tax on the amounts on lines 7, 11, and 15 using the
appropriate Tax Rate Schedules and enters the results on lines 8, 12,
and 16, respectively. In this example, he decided to treat the elected
farm income as all coming from his ordinary income for 2000 and he
added one-third of the elected farm income to the ordinary income of
each of the previous 3 years. His income is taxed at the 15% rate for
each year. However, if he had made a different election to use some or
all of the capital gains for 2000, one-third of that amount would be
treated as capital gains for each of the previous three years and the
tax on lines 8, 12, and 16 would be calculated using the appropriate
Schedule D. The gains would be taxed at the appropriate capital gains
rate for the previous years.
Line 17.
He adds the amounts on lines 4, 8, 12, and 16 and enters the total,
$7,901, on line 17.
Lines 18, 19, and 20.
He enters his tax from his 1997, 1998, and 1999 returns on lines
18, 19, and 20, respectively.
Line 21.
He adds the amounts on lines 18, 19, and 20 and enters the total,
$643, on line 21.
Line 22.
He subtracts the amount on line 21 from the amount on line 17 and
enters $7,258 on line 22. The tax on this line is less than the $8,239
of tax he figured using Schedule D. Therefore, he enters on line 40 of
his Form 1040 the amount from this line.
Completing the Return
The Browns sign their names and enter the date signed, their
occupations, and their telephone number at the bottom of page 2 of
Form 1040. (If they had not prepared their own tax return, the
preparer would also sign the return and provide the information
requested at the bottom of the page.) Mr. Brown attaches to the return
the address label in the instructions after verifying the accuracy of
the label. He writes his and his wife's social security numbers in the
boxes next to the address label.
He writes a check payable to the U.S. Treasury for the full amount
on line 69 of Form 1040. On the check, he writes his social security
number, their telephone number, and "2000 Form 1040." His name
and address are printed on the check. Mr. Brown could instead have
chosen to pay his taxes by credit card (American Express� Card,
MasterCard�, or Discover� Card).
After making a copy of their complete return for his records, he
assembles the various forms and schedules behind Form 1040 in the
following order, based on the "Attachment Sequence Number" shown
in the upper right corner of each schedule or form and included after
each item listed below.
- Schedule A. (07) (not shown)
- Schedule D. (12)
- Schedule F. (14)
- Schedule SE. (17)
- Schedule J. (20)
- Form 4136. (23) (not shown)
- Form 4684. (26)
- Form 4797. (27)
- Form 4562. (67)
- Form 8824. (109) (not shown)
He completes Form 1040-V, Payment Voucher, which
was included in his tax package. He carefully follows the instructions
for mailing his return and paying the tax.
Form 1040 - page 1
Form 1040 - page 2
Schedule D (Form 1040) - page 1
Schedule D (Form 1040) - page 2
Schedule F (Form 1040) - page 1
Schedule SE (Form 1040) - page 1
Schedule J (Form 1040) - page 1
Form 4684 - page 2
Form 4797 - page 1
Form 4797 - page 2
Form 4562 - page 1
Form 4562 - page 2
Depreciation Worksheet
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