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 17 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.

The following items highlight a number of administrative and tax law changes for 2005. They are discussed in more detail throughout the publication. More information on these and other changes can be found in Publication 553, Highlights of 2005 Tax Changes.

Tobacco quota buyout program payments.  The tobacco marketing quota and price support programs were terminated. The USDA will pay eligible tobacco quota holders and growers for the loss in value of the quotas. See chapter 3.

Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2005 is 40.5 cents a mile for all business miles driven before September 1, 2005. The rate is 48.5 cents a mile for business miles driven after August 31, 2005. See chapter 4.

Domestic production activities deduction.  You may be able to take the domestic production activities deduction when figuring your adjusted gross income on Form 1040 or figuring taxable income on a business income tax return. See chapter 4.

Increased section 179 deduction dollar limits. The maximum amount you can elect to deduct for most section 179 property you placed in service in 2005 is $105,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $420,000. See chapter 7.

Depreciation limits for business cars. The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile (that is not an electric vehicle or a truck or van) you use in your business and first place in service in 2005 is generally $2,960. Different limits apply to electric vehicles and trucks and vans. See chapter 7.

Limited applicability of special depreciation allowances. The additional special depreciation allowances (including the increased limits for passenger automobiles) do not apply to most property placed in service in 2005. Generally, you can only claim the special depreciation allowances for certain aircraft and certain property with a long production period. See chapter 7.

Disaster mitigation. Qualified disaster mitigation payments are now nontaxable. Also, if you have a gain on the sale or other transfer of property to the government under a hazard mitigation program, you may not have to report the gain. See chapter 11.

Extended replacement period for property located in the Hurricane Katrina disaster area. The replacement period for property in the Hurricane Katrina disaster area that was damaged, destroyed, stolen, or condemned after August 24, 2005, has been extended from 2 to 5 years. See chapter 11.

Limit on personal casualty or theft losses suspended. If your loss arose in the Hurricane Katrina disaster area, the $100 rule and 10% rule do not apply. See chapter 11.

Tax rates and maximum net earnings. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $90,000 for 2005. There is no maximum limit on earnings subject to the Medicare part (2.9%). See chapter 12.

Undyed diesel fuel and undyed kerosene. Effective for sales of undyed diesel fuel or undyed kerosene (other than kerosene for use in aviation) after September 30, 2005, refunds or credits for fuel used on a farm for farming purposes must be claimed by the farmer. See chapter 14.

Aviation-grade kerosene (before October 1, 2005) and kerosene for use in aviation (after September 30, 2005). Aviation-grade kerosene and kerosene for use in aviation are taxed. Claims for aviation-grade kerosene and kerosene used in aviation on a farm for farming purposes can only be made by the registered ultimate vendor. See chapter 14.

Aerial applicator waiver is no longer required. Effective after September 30, 2005, the aerial applicator waiver is no longer required to be provided by the farmer. See chapter 14.

LUST tax is included on sales of dyed diesel fuel and dyed kerosene. Effective after September 30, 2005, the $.001 Leaking Underground Storage Tank (LUST) tax is included on sales of dyed diesel fuel and dyed kerosene. The LUST tax cannot be refunded. See chapter 14.

Gasoline. The reduced rates of tax that applied to gasohol and gasoline sold for the production of gasohol have been repealed. The credits and refunds for the nontaxable use of gasohol and, generally, the use of gasoline taxed at the full rate to produce gasohol have been eliminated. See chapter 14.

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2006 will be published in Publications 334 and 553. There is no maximum limit on earnings subject to the Medicare part.

Wage limit for social security tax. The limit on wages subject to the social security tax for 2006 will be published in Publication 51 (Circular A), Agricultural Employer's Tax Guide. There is no limit on wages subject to the Medicare tax.

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

IRS e-file (Electronic Filing)

You can file your tax returns electronically using an IRS e-file option. The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. You can use one of the following IRS e-file options.

For details on these fast filing methods, see your income tax package.

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.

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.

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.

Reportable transactions. You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. You may have to pay a penalty if you are required to file Form 8886 but do not do so. Reportable transactions include (1) transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, (2) transactions offered to you under conditions of confidentiality and for which you paid an advisor a minimum fee, (3) transactions for which you have or a related party has a right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained, (4) transactions that result in losses of at least $2 million in any single year or $4 million in any combination of years, (5) transactions resulting in book-tax differences of more than $10 million, and (6) transactions with asset holding periods of 45 days or less and that result in a tax credit of more than $250,000. For more information, see the Instructions for Form 8886.

Section 179 deduction limit for sport utility vehicles. The maximum section 179 expense deduction for certain sport utility vehicles is $25,000. For more information, see chapter 7.

Amortization of business start-up costs. You can elect to deduct certain start-up costs. See chapter 4. The remaining costs must be amortized over a 180-month period. See chapter 7.

Amortization of reforestation costs. . You can elect to deduct certain reforestation costs. See chapter 4. The remaining costs can be amortized over an 84-month period. See chapter 7.

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 2003 has been extended to tax years beginning before 2006. For more information on marginal production, see section 613A(c)(6) of the Internal Revenue Code.

Form W-4 for 2006. You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2006. Those employees who owed a large amount of tax or received a large refund for 2005 may need to file a new Form W-4. See Publication 919, How Do I Adjust My Tax Withholding.

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.

Bond or other debt received as payment. Any bond or other evidence of debt you receive from the buyer that has interest coupons attached or that can be readily traded on an established securities market is treated as a payment in the year you receive it. See chapter 10.

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 2006 and thereafter if you deposited more than $200,000 in federal depository taxes in 2004 or you had to use EFTPS in 2005. See chapter 13.

Aviation-grade kerosene and kerosene for use in aviation. A registered ultimate vendor that sells aviation-grade kerosene (kerosene for use in aviation after September 30, 2005) on a farm for farming purposes is the only person allowed to claim a credit or refund of the excise tax on that fuel. Farmers cannot claim a credit or refund for the excise tax paid on those fuels. See chapter 14.

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.