Introduction

You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. A farm includes stock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards.

This publication explains how the federal tax laws apply to farming. Use this publication as a guide to figure your taxes and complete your farm tax return. If you need more information on a subject, get the specific IRS tax publication covering that subject. We refer to many of these free publications throughout this publication. See chapter 21 for information on ordering these publications.

The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. However, the information given does not cover every situation and is not intended to replace the law or change its meaning. This publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will continue to present the interpretation of the Service.

IRS Mission.   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Farm tax classes.   Many state Cooperative Extension Services conduct farm tax workshops in conjunction with the IRS. Please contact your county extension office for more information.

Important Changes for 2002

The following items highlight a number of administrative and tax law changes for 2002. They are discussed in more detail throughout the publication. More information on these and other changes can be found in Publication 553, Highlights of 2002 Tax Changes.

Special depreciation allowance.   You can take a special depreciation allowance for qualified property you place in service during 2002. See chapter 8.

Depreciation limits on business cars.   The total section 179 deduction and depreciation (including the special depreciation allowance) you can take on a car you use in your business and first place in service in 2002 is generally $7,660. Special rules apply to electric vehicles. See chapter 8.

Additions to the general business credit.   Several credits have been added to the general business credit. For a complete list, see chapter 9.

Renewable electricity production credit extended.   The renewable electricity production credit is extended to include electricity produced by facilities placed in service before 2004.

Work opportunity credit extended.   The work opportunity credit has been extended to include wages paid to qualified individuals who begin work for you in 2002 or 2003. For more information about the work opportunity credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Welfare-to-work credit extended.   The welfare-to-work credit has been extended to include wages paid to qualified individuals who begin work for you in 2002 or 2003. For more information on the welfare-to-work credit, see Publication 954.

Changing your method of accounting for Commodity Credit Corporation (CCC) loans.   You can obtain automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. For more information, see Automatic Change Procedures under Change in Accounting Method in Publication 538, Accounting Periods and Methods.

Production flexibility contracts eliminated.   After May 13, 2002, no payments are to be made under a production flexibility contract, unless requested by the producer that is a party to the contract. For more information, see chapter 4.

Direct and counter-cyclical payments.   The USDA can make two new types of payments - direct and counter-cyclical payments. These payments are included in taxable income. For more information, see chapter 4.

Peanut quota buyout program payments.   The marketing quota program for peanuts was repealed effective May 13, 2002. The USDA will pay eligible peanut quota holders for the loss in value of peanut quotas resulting from the repeal. The payments received by quota holders are subject to federal income tax. For more information, see chapter 4.

Earned income credit.   The maximum earned income credit has increased. To claim the credit, you must have earned income (including net earnings from self-employment) and adjusted gross income of less than $33,178 ($34,178 for married filing jointly) and meet certain other requirements. For more information, including what counts as earned income, see Publication 596, Earned Income Credit (EIC).

Self-employed health insurance deduction.   The part of your self-employed health insurance premiums you can deduct as an adjustment to income increased to 70%. See chapter 5.

Standard mileage rate.   The standard mileage rate for the cost of operating your car, van, pickup, or panel truck increased to 36½ cents a mile for all business miles driven. See chapter 5.

Tax rates and maximum net earnings for self-employment tax.   The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $84,900. There is no maximum limit on earnings subject to the Medicare part (2.9%). See chapter 15.

Marginal production of oil and gas.   The suspension of the taxable income limit on percentage depletion from the marginal production of oil and natural gas that was scheduled to expire for tax years beginning after 2001 has been extended to tax years beginning before 2004. For more information on marginal production, see section 613A(c) of the Internal Revenue Code.

Retirement plans.   Many changes to the tax laws for retirement plans take effect in 2002. For information, see chapter 17.

Backup withholding.   For amounts paid in 2002 and 2003, the backup withholding rate is decreased to 30%. See chapter 2.

Electronic Form 1099.   Form 1099 can be issued electronically if the recipient consents to receive it that way.

Important Changes for 2003

The following items highlight a number of administrative and tax law changes for 2003. More information on these and other changes can be found in Publication 553, Highlights of 2002 Tax Changes.

Section 179 deduction.   Beginning in 2003, the total cost you can elect to deduct under section 179 of the Internal Revenue Code is increased to $25,000. For information on the section 179 deduction, see chapter 8.

Maximum net earnings for self-employment tax.   The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2003 will be published in Publications 533 and 553. There is no maximum limit on earnings subject to the Medicare part.

Wage limits for social security and Medicare taxes.   The maximum wages subject to the social security tax for 2003 will be published in Publication 51, Circular A, Agricultural Employer's Tax Guide. There is no limit on wages subject to the Medicare tax.

Reportable transactions.   You may have to disclose information about certain transactions (called reportable transactions) in which you participated, directly or indirectly. This disclosure requirement applies to reportable transactions entered into after 2002. Reportable transactions include transactions that are the same or substantially similar to tax avoidance transactions identified by the IRS, transactions that are offered under conditions of confidentiality, and transactions that result in large losses. You must disclose information about reportable transactions on Form 8886, Reportable Transaction Disclosure Statement. For more information, see the instructions for Form 8886.

Self-employed health insurance deduction.   The part of your self-employed health insurance premiums you can deduct as an adjustment to income increases to 100%. See chapter 5.

Important Reminders

The following reminders and other items may help you file your tax return.

Principal agricultural activity codes.   You must enter on line B of Schedule F (Form 1040) a code that identifies your principal agricultural activity. It is important to use the correct code because this information will identify market segments of the public for IRS Taxpayer Education programs. The U.S. Census Bureau also uses this information for its economic census. See the list of Principal Agricultural Activity Codes on page 2 of Schedule F.

Postponed tax deadlines in disaster areas.   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. See chapter 13.

Business use of your home.   You may be able to deduct expenses for your home office even if it is not where you perform your most important business activities or spend most of your business time. See chapter 5.

Child tax credit.   You may be able to claim a tax credit for each of your qualifying children under age 17 at the end of the year. The credit can be as much as $600 for each qualifying child.

Estimated tax.   When you figure your estimated tax, you must include any alternative minimum tax you expect to owe. See chapter 14 and Publication 505.

Averaging of farm income.   You, as an individual farmer, can choose to average all or part of your taxable farm income when you figure your income tax. If you average your income, you may be able to use a negative taxable income amount for a base year when figuring your tax on Schedule J (Form 1040). See chapter 4.

Voluntary withholding.   You can request income tax withholding from the following payments on Form W-4V, Voluntary Withholding Request.

• Commodity Credit Corporation (CCC) loans.
• Certain crop disaster payments received under the Agricultural Act of 1949 or title II of the Disaster Assistance Act of 1988.
• Social security benefits.
• Unemployment compensation.
• Certain other government payments.

See chapter 4 for information on CCC loans and disaster relief payments.

Direct deposit of refund.   If you are due a refund on your tax return, you can have it deposited directly into your account at a bank or other financial institution. See your income tax package for details.

Change of address.   If you change your home or business address, you should use Form 8822, Change of Address, to notify the IRS. Be sure to include your suite, room, or other unit number.

Third party designee.   You can check the Yes box in the Third Party Designee area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to ask any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.

Electronic deposits of taxes.   You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur in 2003 and thereafter if you deposited more than $200,000 in federal depository taxes in 2001 or you had to use EFTPS in 2002. See chapter 16.

Overdue tax bill.   If you receive a bill for overdue taxes, do not ignore it. If you owe the tax shown on the bill, you should make arrangements to pay it. If you believe it is incorrect, contact the IRS immediately to suspend action until the mistake is corrected. See Publication 594, The IRS Collection Process, for more information.

Comments on IRS enforcement actions.   The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about federal agency enforcement actions. The Ombudsman will annually evaluate the enforcement activities of each agency and rate its responsiveness to small business. If you wish to comment on the enforcement actions of the IRS, you can:

• Call 1-888-734-3247,
• Send an e-mail to [email protected], or
• Download the appraisal form at www.sba.gov/ombudsman.

Treasury Inspector General for Tax Administration.   If you want to report confidentially misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). You can remain anonymous.

Publication on employer identification numbers (EIN).   Publication 1635, Understanding Your EIN, provides general information on employer identification numbers. Topics include how to apply for an EIN and how to complete Form SS-4.

Form W-4 for 2003.   You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2003. Those employees who owed a large amount of tax or received a large refund for 2002 may need to file a new Form W-4. See Publication 919, How Do I Adjust My Tax Withholding.

Earned income credit.   You, as an employer, must notify employees who worked for you and from whom you did not withhold income tax about the earned income credit. See chapter 16.

Form 1099-MISC.   File Form 1099-MISC if you pay at least $600 in rents, services, and other miscellaneous payments in your farming business to an individual (for example, an accountant, an attorney, or a veterinarian) who is not your employee and is not incorporated. See chapter 2.

Children employed by parents.   Wages you pay to your children age 18 and older for services in your trade or business are subject to social security and Medicare taxes. See chapter 16.

Farmers and crew leaders must withhold income tax.   Farmers and crew leaders must withhold federal income tax from farm workers who are subject to social security and Medicare taxes. See chapter 16.

Social security tests for seasonal farm workers.   If you pay seasonal farm workers less than $150 in annual cash wages, the wages are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farm workers. The seasonal farm worker must meet certain tests. See chapter 16.

Medical savings accounts (MSAs).   If you are covered only under a high deductible health plan, you may be able to participate in an Archer MSA program. You can deduct contributions to your Archer MSA even if you do not itemize your deductions. See Publication 969, Medical Savings Accounts (MSAs).

Accrual basis taxpayers.   For sales occurring after December 16, 1999, accrual basis taxpayers were required to report installment sales under an accrual method of accounting. The Installment Tax Correction Act of December 28, 2000, repealed that requirement.

If you entered into an installment sale after December 16, 1999, and reported it under an accrual method on your income tax return filed by April 16, 2001, you can revoke your effective election not to use the installment method. To revoke the election, you must file an amended return for the year of the installment sale (and any other year affected by the sale) reporting the gain on the installment method. See chapter 12 for information on installment sales.

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843- 5678) if you recognize a child.

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