Farm and Ranch Expenses and Credits (Portfolio 607)

Tax Management Portfolio, Farm and Ranch Expenses and Credits, No. 607-3rd, analyzes the federal income tax treatment of diverse expenditures by taxpayers engaged in farming or ranching as a trade or business or for the production of income.

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Tax Management Portfolio, Farm and Ranch Expenses and Credits, No. 607-3rd, analyzes the federal income tax treatment of diverse expenditures by taxpayers engaged in farming or ranching as a trade or business or for the production of income.

Part I consists of introductory material and provides cross-references to related topics not covered in this Portfolio.


Part II discusses the requirements for deduction as business expenses and production-of-income expenses, the limitation of deductions when an activity is not engaged in for profit, and the rules for distinguishing activities engaged in for profit from activities not engaged in for profit as applied in a farm and ranch setting. Part II also discusses specific business or production-of-income expenses that are commonly deductible in the farm or ranch context. Part III provides more general rules relative to deductions for interest, taxes, losses, depreciation, depletion, amortization, contributions to pension or profit-sharing plans, and domestic production activities. Part IV discusses limitations on the amount deductible, such as the disallowance of personal expenses, limitations on prepaid expenses, the at risk limitation, the limitation of passive activity losses, and the limitation on farming losses upon receipt of applicable subsidies.

Part V addresses the treatment of farmers' and ranchers' capital expenditures, including the application of the uniform capitalization rules. Part V also addresses various elections by which taxpayers engaged in farming may elect to deduct certain expenditures rather than capitalize them.

Part VI describes the requirements for obtaining credits or refunds that farmers or ranchers may claim. Part VII covers the treatment of net operating losses and special rules for farmers that allow longer carryback periods. The alternative minimum tax impact of the deduction of farm and ranch expenses is discussed in Part VIII. Part IX refers to returns and compliance matters of particular interest to farmers and ranchers, including the substantiation of farm deductions.


Carla Neeley Freitag, B.A., Duke University (magna cum laude 1974); J.D., University of Florida College of Law (with high honors 1976); LL.M. (in Taxation), University of Miami School of Law (1988); admitted to practice in Florida, Texas, and Georgia; member, American Bar Association; author, Estate Planner's Guide to Funding Living Trusts; contributor to Tax Practice Series; author of 462 T.M., Unrelated Business Income Tax, 465 T.M., Debt Financed Income (Section 514), 539 T.M., Net Operating Losses — Concepts and Computations, 517 T.M., Educational Expenses and Credits; co-author of 521 and 863 T.M., Charitable Contributions: Income Tax Aspects; Tax Management Distinguished Author.


Detailed Analysis

I. Introduction

II. Ordinary and Necessary Business Expenses and Production-of-Income Expenses

A. Requirements for Deduction

1. Business Expenses - § 162

2. Production-of-Income Expenses - § 212

B. Limitation of Allowable Deductions When Farming Not Engaged in for Profit - § 183

C. Distinguishing Activities Engaged in for Profit from Activities Not Engaged in for Profit

1. Profit or Nonprofit Objective

2. Scope of Activity

3. Presumption that Activity Is Engaged in for Profit

a. Continuing Farming Activity

b. Election to Postpone Determination Under Presumption Upon Commencement of Farming Activity

D. Common Deductible Farm and Ranch Business or Production-of-Income Expenses

1. Breeding Fees

2. Conservation and Endangered Species Recovery Expenses

3. Feed

4. Fertilizer and Lime

5. Freight and Trucking

6. Gasoline, Fuel, and Oil

7. Insurance

8. Labor

9. Rent or Lease

10. Repairs and Maintenance

11. Seeds and Plants Purchased

12. Supplies Purchased

13. Utilities

14. Other Expenses

III. Other Expenses Commonly Incurred in Farming and Ranching

Introductory Material

A. Interest - § 163

B. Taxes - § 164

1. In General

2. Taxes Deductible

3. Taxes Not Deductible

C. Losses - § 165

D. Depreciation, Depletion, and Amortization

1. Depreciation

a. Election to Expense Certain Depreciable Business Assets - § 179

(1) In General

(2) Disaster Areas

b. Deduction for Depreciation - § § 167 and 168

(1) In General

(2) First-Year Bonus Depreciation

(a) 2008-2009 Bonus Depreciation

(b) 50 Percent Bonus Depreciation

(c) 30 Percent Bonus Depreciation

(d) Rules Applicable to Bonus Depreciation

(e) Computation of First-Year Bonus Depreciation

(f) Claiming or Electing Out of Bonus Depreciation

(g) Gulf Opportunity Zone and Kansas Disaster Area Property

(h) Qualified Disaster Assistance Property

(i) Cellulosic Biomass Ethanol Plant Property

2. Depletion - § 611

3. Amortization

E. Pension and Profit-Sharing Plans

IV. Limitations on Deductions

Introductory Material

A. Personal Expenses

1. Deduction Disallowed

2. Allocation of Dual Purpose Expenses

B. Timing of Deduction

1. Accounting Method

2. IRS Limitation on Prepaid Feed Expenses

3. Prepaid Farm Supplies and Poultry Costs - § 464(f)

a. Expenses Covered by Limitation

(1) Three Timing Rules of § 464(a) and (b)

(2) Prepaid Farm Supplies

(3) Excess Prepaid Farm Supplies

b. Taxpayers Subject to Limitation

(1) General Rule

(2) Use of Cash Method of Accounting

(3) Qualified Farm-Related Taxpayers

c. Effect of Limitation on Amounts Deductible

4. Limitation of Deductions to Amounts At Risk - § 465

a. General Principles

b. Application to Farming

c. Amount At Risk

d. Separation and Aggregation of Activities

5. Limitation on Passive Activity Losses - § 469

a. Passive Activities

(1) Material Participation

(2) Special Rules for Farming Activities

(a) Retired or Disabled Farmers

(b) Surviving Spouses

(3) Rental Activities

b. Passive Activity Loss

6. Limitation on Farming Losses Upon Receipt of Applicable Subsidies - § 461

C. Substantiation

D. Taxpayer Entitled to Deduction

V. Capital Expenditures and Related Provisions

Introductory Material

A. Capital Expenditures Distinguished from Deductible Expenses - § 263

1. Treatment of Capital Expenditures Generally

2. Acquisition of Livestock and Election to Deduct Costs of Raising Livestock

3. Acquisition of Farmland and Related Assets

a. Scope of Acquisition

b. Purchase of Goods for Resale and Election to Deduct the Cost of Seeds and Young Plants Purchased for Cultivation and Resale

4. Orchards and Groves and the Election to Capitalize Deductible Expenses of the Preproductive Period

a. Description of Election

b. Application to Orchards and Groves

c. Election Irrevocable

5. Timber

a. In General

b. Christmas Trees

6. Improvements

7. Preparatory Expenditures

8. Basis Allocation

B. Uniform Capitalization Rules - § 263A

1. Uniform Capitalization of Costs

a. Property Subject to the Rules

(1) Property Produced by a Taxpayer

(2) Property Acquired for Resale

b. Costs Required to be Capitalized

c. General Exceptions

2. Special Rules for Farming Businesses

a. Definitions

(1) Farming Business

(2) Preproductive Period

(a) Plants

(b) Animals

b. Exception of Animals Produced from Scope of Uniform Capitalization Rules

c. Exception from Scope of Uniform Capitalization Rules for Plants Produced with a Preproductive Period of Two Years or Less

d. Exception of Replanting Costs Caused by Casualty Loss or Damage from Scope of Uniform Capitalization Rules

e. Election Out of Uniform Capitalization Rules with Respect to Plants Produced

f. Exceptions and Election Not Applicable to Certain Taxpayers Required to Use the Accrual Method

C. Election to Deduct Soil and Water Conservation or Endangered Species Recovery Expenditures - § 175

1. Taxpayers Engaged in the Business of Farming

2. Expenditures Subject to Election

a. Land Used in Farming

(1) Definition

(2) Appropriate Land Unit for Applying Definition

(3) Allocation of Expenditures that Benefit Land Not Used in Farming

b. Qualifying Soil and Water Conservation or Endangered Species Recovery Purposes

c. Expenditures Not Covered by Election

d. Assessments by Conservation or Drainage Districts

(1) Assessments for Conservation Expenditures

(2) Assessments for Depreciable Property

e. Conservation or Recovery Plan Approval

3. Limitation on Amount Deductible

a. 25% Limitation

(1) In General

(2) Net Operating Losses

b. Carryover of Excess Expenditures

4. Scope of Election

5. Time and Manner of Making Election

6. Recapture of Conservation Deductions on Sale of Farmland

D. Election to Deduct Expenditures for Fertilizer, Lime, and Other Soil Conditioners - § 180

1. Expenditures Subject to Election

2. Time and Manner of Making Election

E. Environmental Remediation Expenditures

1. In General

2. Making the § 198 Election

3. Extension of Expensing for Midwestern Disaster Areas

F. Certain Costs Incurred in Disaster Areas

1. Demolition and Clean-up Costs

2. Qualified Disaster Expenses

VI. Farm and Ranch Tax Credit

A. Gasoline Tax Credits

1. Farming Use

a. Eligibility Requirements

b. Claim for Credit

c. Inclusion in Gross Income

2. Off-Highway Use

a. Eligibility Requirements

b. Claim for Credit or Refund

c. Inclusion in Gross Income

B. Credit for Tax on Diesel, Kerosene, and Special Motor Fuels

C. Credit for Federal Highway Use Tax on Heavy Vehicles

D. General Business Credit

E. Earned Income Credit

VII. Net Operating Loss and Alternative Minimum Tax Treatment

A. Net Operating Loss Treatment

B. Alternative Minimum Tax Treatment

1. Deductions with No Minimum Tax Impact

2. Deductions with Potential Minimum Tax Impact

a. Deduction of Taxes Disallowed

b. Amount of Passive Activity Loss Disallowed

c. Denial of Loss from Tax Shelter Farm Activities

VIII. Tax Returns and Compliance


Working Papers

Table of Worksheets

Worksheet 1 Sample Request for Consent to Elect to Deduct Soil and Water Conservation or Endangered Species Recovery Expenses Under § 175

Worksheet 2 Sample Request for Consent to Revoke § 180 Election




Treasury Regulations:

Treasury Rulings: