Unit 16: Farming Business

Question 1

If a farmer rents his farmland to someone else to use, how is that income classified?

Answer 1

As rental income, not farming income

Question 2

Types of activities that count as “farms”:

Answer 2

• Agricultural farming
• Dairy farming
• Fish farming
• Silk farming
• Apiculture (Beekeeping)
• Snail farming

Question 3

A farmer does not have to pay estimated tax if:

Answer 3

He files his return and pays all the taxes owed by March 1

Question 4

If a farmer must pay an estimated tax, he is required to:

Answer 4

Make only one estimated tax payment, called the required annual payment, by January 15

Question 5

How much income must a farmer receive from farming to qualify for the special estimated tax payment rules?

Answer 5

2/3 or their income

Question 6

Farmers can use the following accounting methods:

Answer 6

• Cash Method
• Accrual Method
• Hybrid Method
• Special Methods, including the Crop Method

Question 7

What is the Crop Method?

Answer 7

If crops are not harvested and disposed of in the same tax year they are planted, the farmer can capitalize the entire cost of producing the crop, including the expense of seed or young plants, and deduct them in the year income is realized.

Question 8

The following farming businesses are required to use the accrual method of accounting:

Answer 8

• A farming corporation that had gross receipts of more than $27 million in 2022
• A partnership with a corporate partner that exceeds the gross receipts threshold
• A tax shelter (or any size or income)

Question 9

Farm inventory includes all items that are held for sale, purchased for resale, and for use as feed or seed, such as the following:

Question 10

Farm-Price Method:

Answer 10

Under this method, each item, whether raised or purchased, is valued at its market price minus the costs of disposition. The cost of disposition include broker’s commissions, freight, hauling to market, and other marketing costs. If a farming business chooses to use the farm-price method, it must use it for the entire inventory, except that livestock can be inventoried under the unit-livestock-price method

Question 11

Unit-Livestock-Price Method:

Answer 11

This method is an easier inventory method that allows farmers to group livestock, rather than track the costs of each animal. A farmer may classify livestock according to type and age and use a unit price for each animal within a class. The unit price must reasonably approximate the costs incurred in producing the animal. If a farming business uses the nit-livestock-price method, it must include all raised livestock in inventory, regardless of whether they are held for sale or for the costs incurred while raising an animal to maturity. It does not provide for any decrease in the animal’s market value after it reaches maturity

Question 12

Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets:

Answer 12

• Farmland
• Depreciable farm equipment
• Barns, stables, and other types of farm buildings
• Livestock held for draft, breeding, sport, or dairy purposes

Question 13

Postponing Gain Due to Weather Conditions: must meet the following conditions

Answer 13

• The principal trade or business must be farming
• The farmer must use the cash method of accounting
• The farmer must be able to show that he would not have sold the additional animals in that year except for the weather-related condition
• The area must be designated as eligible for federal disaster assistance

Question 14

Unique Tax Rules: Cars and truck expenses

Answer 14

Farmers can claim 75% of the use of a car or light truck as business use without any records (such as mileage log) if the vehicle is used most of the business day in a farming business

Question 15

Unique Tax Rules: Soil conversion

Answer 15

Farmers can choose to deduct as a business expense land-related expenses for soil or water conservation or the prevention of erosion.

Question 16

Unique Tax Rules: Excise Tax Credits

Answer 16

Farmers may be eligible to claim a credit or a refund of federal excise taxes on fuel used on a farm

Question 17

Farm Income Averaging:

Answer 17

Certain farmers that operate as sole proprietorships or partnerships may use Schedule J to average all or some of their current year’s farm income by allocating it to the prior three years. This election may lower a farmer’s current-year tax liability if the current year is high, and his taxable income from one or more of the three prior years was low.