Table of Contents
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 and groves.
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 rendered 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.
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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.
The following items highlight a number of administrative and tax law changes for 2016. They are discussed in more detail throughout the publication.
Standard mileage rate. For 2016, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 54 cents. 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 2016 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 $2,010,000. See chapter 7.
Special depreciation allowance for specified plants. . You can elect to claim the special depreciation allowance for certain specified plants bearing fruits and nuts that are planted or grafted after December 31, 2015. 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 not apply to horses placed in service after December 31, 2016. See chapter 7.
Maximum net earnings. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax is $118,500 for 2016, unchanged from 2015. There is no maximum limit on earnings subject to the Medicare part (2.9%) or, if applicable, the Additional Medicare Tax (0.9%). See chapter 12.
New filing due date for 2016 Forms W-2, W-3, and 1099-MISC. Both paper and electronically filed 2016 Forms W-2 and W-3 must be filed with the Social Security Administration (SSA) by January 31, 2017. Both paper and electronically filed 2016 Forms 1099-MISC that report non-employee compensation must be filed with the IRS by January 31, 2017. See chapter 13.
Social security and Medicare tax for 2016. The social security tax rate is 6.2% each for the employee and employer, unchanged from 2015. The social security wage base limit is $118,500, unchanged from 2015.The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2015. There is no wage base limit for Medicare tax. 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 after December 31, 2014, and before January 1, 2020. Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884C. For more information, visit IRS.gov and enter “work opportunity tax credit” in the search box. See chapter 13.
Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2017 will be discussed in the 2016 Pub. 334. See chapter 12.
Social security and Medicare tax for 2017. The employee and employer tax rates for social security and the maximum amount of wages subject to social security tax for 2017 will be discussed in Pub. 51 (Circular A), Agricultural Employer’s Tax Guide (For use in 2017).The Medicare tax rate for 2017 will also be discussed in Pub. 51 (Circular A) (For use in 2017). There is no limit on the amount of wages subject to Medicare tax. See chapter 13.
The following reminders and other items may help you file your tax return.
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 (EINs). Publication 1635, Understanding Your Employer Identification Number, provides general information on EINs. 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 Address, 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 2017. You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2017. Those employees who owed a large amount of tax or received a large refund for 2016 may need to submit a new Form W-4.
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. Payments made to corporations for medical and health care payments, including payments made to veterinarians, generally must be reported on Form 1099.
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 & 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) (24 hours a day, 7 days a week) if you recognize a child.
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