Publication 225 - Introductory Material


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 livestock, 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 16 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 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 write to us at the following address:

Internal Revenue Service 
Business Forms and Publications Branch 
SE:W:CAR:MP:T:B 
1111 Constitution Ave. NW, IR-6526 
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.

  You can email us at taxforms@irs.gov. Please put “Publications Comment” on the subject line. You can also send us comments from www.irs.gov/formspubs/, select “Comment on Tax Forms and Publications” under “More Information.

  Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.

Ordering forms and publications.   Visit www.irs.gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received.

Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613

Tax questions.   If you have a tax question, check the information available on IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

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,

  • Fax your comments to 202-481-5719,

  • Write to 
    Office of the National Ombudsman 
    U.S. Small Business Administration 
    409 3rd Street, S.W. 
    Washington, DC 20416

  • Send an email to ombudsman@sba.gov, or

  • Download the appraisal form at  
    www.sba.gov/ombudsman.

Treasury Inspector General for Tax Administration.   If you want to confidentially report 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.

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

Rural tax education website.   The Rural Tax Education website is a source for information concerning agriculturally related income and deductions and self-employment tax. The website is available for farmers and ranchers, other agricultural producers, Extension educators, and any one interested in learning about the tax side of the agricultural community. Members of the National Farm Income Tax Extension Committee are contributors for the website and the website is hosted by Utah State University Cooperative Extension. You can visit the website at www.ruraltax.org.

Future Developments

The IRS has created a page on IRS.gov for information about Publication 225, at  
www.irs.gov/pub225. Information about recent developments affecting Publication 225 will be posted on that page.

What's New for 2013

The following items highlight a number of administrative and tax law changes for 2013. They are discussed in more detail throughout the publication.

Standard mileage rate. For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56.5 cents. See chapter 4.

Simplified method for business use of home deduction. The IRS now provides a simplified method to determine your expenses for business use of your home. For more information, see Schedule C (Form 1040), Part II, and its instructions. See chapter 4.

Increased section 179 expense deduction dollar limits. The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. See chapter 7.

Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. See chapter 7.

Expiration of the 3-year recovery period for certain race horses. . The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. See chapter 7.

Tax rates. For tax years beginning in 2013, the social security part of the self-employment tax increases from 10.4% to 12.4%. As a result, the self-employment tax is increased from 13.3% to 15.3%. See chapter 12.

Maximum net earnings. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $113,700 for 2013. There is no maximum limit on earnings subject to the Medicare part (2.9%). See chapter 12.

Net investment income tax. For tax years beginning in 2013, individuals, estates, and trusts may be subject to the net investment income tax (NIIT). If you are a trader in financial instruments and commodities and required to file Schedule C (Form 1040), your investment income (for purposes of the NIIT) may be reduced by your interest and other investment expenses to the extent those expenses are not used to reduce your self-employment income. For information about NIIT and the special rule for traders in financial instruments and commodities, see the Instructions for Form 8960.

Social Security and Medicare Tax for 2013. The employee tax rate for social security is 6.2%. The employer tax rate for social security remains unchanged at 6.2%. The social security wage base limit is $113,700.The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2012. There is no wage base limit for Medicare tax. See chapter 13.

Additional Medicare Tax. For tax years beginning in 2013, a 0.9% Additional Medicare Tax applies to your Medicare wages, Railroad Tax Act (RRTA) compensation, and self-employment income above a threshold amount. Use Form 8959, Additional Medicare Tax, to figure this tax. For more information, see the Instructions for Form 8959 and the Instructions for Schedule SE (Form 1040).In addition to withholding Medicare tax at 1.45%, you must withhold a 0.9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E), Employer's Tax Guide. For more information on Additional Medicare Tax, visit IRS.gov and enter “Additional Medicare Tax” in the search box. See chapter 13.

Leave-Based donation programs to aid victims of Hurricane Sandy. Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2014, to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy. The donated leave will not be included in the income or wages of the employee. The employer may deduct the cash payments as business expenses or charitable contributions. See chapter 13.

Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans extended. The work opportunity tax credit is now available for eligible unemployed veterans who begin work before January 1, 2014. Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. For more information, visit IRS.gov and enter “work opportunity credit” in the search box. See chapter 13.

Estimated tax. For tax years beginning in 2013, the Net Investment Income Tax (NIIT) may need to be included when calculating your estimated tax. Also, when figuring your estimated tax, you may need to include the 0.9% Additional Medicare Tax applicable to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above the threshold amount based on your filing status. For more information, see Publication 505.

What's New for 2014

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. See chapter 12.

Social security and Medicare tax for 2014. The employee and employer tax rates for social security and the maximum amount of wages subject to social security tax for 2014 will be discussed in Publication 51 (Circular A), Agricultural Employer's Tax Guide (For use in 2014). The Medicare tax rate for 2014 will also be discussed in Publication 51 (Circular A) (For use in 2014). There is no limit on the amount of wages subject to Medicare tax. See chapter 13.

Reminders

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

 

IRS e-file (Electronic Filing)

e-file

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.

  • Use an authorized IRS e-file provider.

  • Use a personal computer.

  • Visit a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) site.

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 (Form 1040).

Publication on employer identification numbers (EIN). Publication 1635, Understanding Your Employer Identification Number, 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 address, you should use Form 8822, Change of Addres, to notify the IRS. If you change your business address, you should use Form 8822-B, Change of Address or Responsible Party — Business, 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 2014. You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2014. Those employees who owed a large amount of tax or received a large refund for 2013 may need to submit a new Form W-4. See Publication 919, How Do I Adjust My Tax Withholding.

Form 1099-MISC. Generally, 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.

Limited Liability Company (LLC). For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301.7701-3. See Publication 3402 for more details.

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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