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 2006. They are discussed in more detail throughout the publication. More information on these and other changes can be found in Publication 553, Highlights of 2006 Tax Changes.

Addition to small watershed programs. The Conservation Security Program has been added to the list of small watershed programs. You may be able to exclude cost-share payments you receive from this program. See chapter 3.

Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2006 is 44.5 cents a mile for all business miles driven. See chapter 4.

Forestation and reforestation costs. If you elected to deduct qualifying reforestation costs on a return filed before June 15, 2006, see Forestation and reforestation costs under Capital Expenses in 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 2006 is $108,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $430,000. For qualified section 179 Gulf Opportunity Zone (GO Zone) property, the maximum section 179 deduction is increased. See chapter 7.

Limited applicability of special depreciation allowances. You may be able to claim the special depreciation allowances for certain aircraft and certain property with a long production period placed in service or manufactured before January 1, 2007, in areas affected by Hurricanes Katrina, Rita, or Wilma. See chapter 7.

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 $94,200 for 2006. There is no maximum limit on earnings subject to the Medicare part (2.9%). See chapter 12.

Alternative fuel. Effective after September 30, 2006, there will be a tax on the sale or use of any liquid, other than gas oil, fuel oil, or any product taxable under Internal Revenue Code section 4081. Also effective after that date, two new credits will be available: the alternative fuel credit, and the alternative fuel mixture credit. See Publication 510, Excise Taxes for 2007, for a list of these fuels and when the credits may be available.

Publication 378 eliminated. Publication 378, Fuel Tax Credits and Refunds, is no longer available as a separate product. Publication 510 contains the information on fuel tax credits and refunds previously found in Publication 378. See chapter 14.

Telephone excise tax refund. This is a one-time credit available only on your 2006 federal tax return. It is a credit of previously paid long-distance federal excise taxes listed on your telephone bill. See the instructions for your 2006 income tax return for how to claim your credit.

Increased charitable contribution deduction for qualified conservation contributions.  Farmers and ranchers who contribute property used in agriculture or livestock production for qualified conservation purposes may be subject to a new limitation on the deduction for these charitable contributions. For more information, see Publication 526, Charitable Contributions.

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2007 will be published in Publication 553. There is no maximum limit on earnings subject to the Medicare part. See chapter 12.

Redesigned Form 940. For 2006, we completely redesigned Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. You will find that the redesigned form and instructions are easier to read and fill out. Also, IRS now can optically scan the form and will capture data more accurately and efficiently than before. Form 940-EZ is no longer available. If you previously filed Form 940-EZ, you must now use the redesigned Form 940. See chapter 13.

Wage limit for social security tax. The limit on wages subject to the social security tax for 2007 will be published in Publication 51 (Circular A), Agricultural Employer's Tax Guide. There is no limit on wages subject to the Medicare tax. See chapter 13.

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, and (5) 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.

Form W-4 for 2007. You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2007. Those employees who owed a large amount of tax or received a large refund for 2006 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.

Limits on personal casualty or theft losses caused by Hurricanes Katrina, Rita, or Wilma. The following losses to personal use property are not subject to the $100 rule or 10% rule. For more information, see Deduction Limits on Losses of Personal-Use Property, later.

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 2007 and thereafter if you deposited more than $200,000 in federal depository taxes in 2005 or you had to use EFTPS in 2006. See chapter 13.

Aerial applicator waiver is no longer required. The aerial applicator waiver is no longer required to be provided by the farmer. For aviation gasoline, the aerial applicator is the claimant. See chapter 14.

Kerosene for use in aviation. A registered ultimate vendor that sells kerosene for use in aviation 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.

Farmers must claim refunds for undyed diesel fuel and undyed kerosene. For sales of undyed diesel fuel or undyed kerosene (other than kerosene for use in aviation), refunds or credits for fuel used on a farm for farming purposes must be claimed by the farmer. See Schedule 1 of Form 8849 and Form 4136.

Leaking Underground Storage Tank (LUST) tax is included on sales of dyed diesel fuel and dyed kerosene. The $.001 LUST tax is included on sales of dyed diesel fuel and dyed kerosene. The LUST tax cannot be refunded. 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.