Publication 225 - Introductory Material
Acknowledgment:
The valuable advice and assistance given us each year by the National Farm Income Tax Extension Committee is gratefully acknowledged.
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 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 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
Ordering forms and publications
Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 business days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
Tax questions
If you have a tax question, visit www.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 20416Send 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 report, confidentially, 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. Please contact your county extension office for more information.
What's New for 2007
The following items highlight a number of administrative and tax law changes for 2007. They are discussed in more detail throughout the publication. More information on these and other changes can be found in Publication 553, Highlights of 2007 Tax Changes. Publication 553 is available at www.irs.gov, click on More Forms and Publications, and then on What's Hot in Tax Forms, Publications, and Other Tax Products.
Peanut quota buyout program payments expire. The peanut quota buyout program payments previously included in chapter 3 are deleted since the compensation period for peanut quota buyout program payments has expired. See chapter 3.
Tobacco growers. . There are new rules for tobacco growers. See Tobacco Growers in chapter 3.
Repayment of Commodity Credit Corporation (CCC) loans. Beginning January 1, 2007, the CCC will report market gain associated with the repayment of a CCC loan whether the loan is repaid with cash or CCC certificates. See Commodity Credit Corporation (CCC) Loans, in chapter 3.
Welfare-to-work credit. For employees starting work after December 31, 2006, the welfare-to-work credit is combined with the work opportunity credit. Use Form 5884, Work Opportunity Credit, to claim a credit for an employee who began work for you during 2007. Use Form 8861, Welfare-to-Work Credit, for an employee who began work for you during 2006. See chapter 4.
Domestic production activities deduction percentage increases. Starting in 2007, the domestic production activities deduction percentage increased from 3% to 6%. For more information see chapter 4.
Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2007 is 48.5 cents a mile for all business miles driven. See 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 2007 is $125,000. The limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $500,000. 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 $97,500 for 2007. There is no maximum limit on earnings subject to the Medicare part (2.9%). See chapter 12.
Husband-wife farm. Beginning in 2007, you and your spouse, if you are filing married filing jointly, may be able to make a joint election to be taxed as a qualified joint venture instead of a partnership. See chapter 12.
Kerosene for use in aviation. The ultimate purchaser of kerosene for use in aviation on a farm for farming purposes can claim a credit or refund if they have not waived their right to make the claim. See chapter 14.
What's New for 2008
Extension of increased section 179 deduction. If you own qualified section 179 GO Zone property acquired on or after August 27, 2005, and placed it in service before January 1, 2009, you may be eligible for an increased section 179 deduction. 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 will increase to $102,000 for 2008. There is no maximum limit on earnings subject to the Medicare part. See chapter 12.
Federal unemployment (FUTA) tax rate. Beginning in 2008, the FUTA tax rate is scheduled to decrease from 6.2% to 6.0%. As this publication was prepared for printing, legislation had been introduced that would postpone the decrease. See Publication 553, Highlights of 2007 Tax Changes.
Substitute Forms W-4. You can no longer accept a substitute Form W-4 developed by an employee after October 10, 2007. For more information, see Federal Income Tax Withholding in Publication 51 (Circular A) Agricultural Employer's Tax Guide.
Wage limit for social security tax. The limit on wages subject to the social security tax for 2008 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.
Reminders
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.
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.
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 2008. You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2008. Those employees who owed a large amount of tax or received a large refund for 2007 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.
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 2008 and thereafter if you deposited more than $200,000 in federal depository taxes in 2006 or you had to use EFTPS in 2007. See chapter 13.
Publication 378, Fuel Tax Credits and Refunds, eliminated. Publication 378 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 income tax return for how to claim your credit. 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.
