Tax Segment F-1 - Farming Business

You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. You are in the business of farming if you harvest fruits and vegetables. In addition, you are considered a farmer if your business includes stock, dairy, poultry and fish. You're considered a farmer if your venture includes plantations, ranches, ranges, orchards, and truck farms. Use this topic to figure your taxes and complete your farm tax return. In this topic you will learn how the federal tax law applies to farming.

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In this section, we will review some tax rules that affect every person who may have to file a federal income tax return. We will cover topics such as who must file, what filing status and how many exemptions to use. In addition, this section is about the standard deduction and taxpayers who do not itemize their deductions.

1. For tax year 2010, farm income averaging may be elected as a tax computation method:

A. Only before March 1 of the year following the end of the tax year.
B. Even if the time for filing a claim has expired for that election year.
C. After the due date of the return, such as an IRS audit adjustment.
D. Only if you were engaged in farming in the election year and all of the base years.

2. Leonard Brown operated a cattle and grain farm in 2010. Leonard sold $42,000 of grain and $23,000 of cattle held for breeding purposes. Leonard also received patronage dividends from the local feed store of $432, feed assistance payments of $1,200, and $1,500 for haying and caring for his neighbor's cattle. Leonard should report the following on Schedule F of his federal income tax return for 2010:

A. $45,132.
B. $67,700.
C. $44,700.
D. $66,932.

3. John Jacobsen is a cash basis cattle rancher. In 2010, John sold 12 head of cattle for $9,600. The cattle were born on his ranch in 2007. During the 3 years that John used these cattle in his breeding operation, he spent and deducted $10,000 for feed and other expenses related to the cattle. How much is John's gain or loss for 2010, and where should he report the amount on his Federal income tax return?

A. John should report a net gain of $9,600 on Part I, Form 4797.
B. John should report a net loss of $400 on Part I, Form 4797.
C. John should report $9,600 from the sale of the cattle on Part I, Schedule F.
D. John should report a net loss of $400 on Part I, Schedule F.

4. If at least two-thirds of your gross income for 2009 or 2010 was from farming, only one estimated tax payment is due. The required annual payment is the:

A. Larger of two-thirds of your total tax for 2010 or 100% of the total tax shown on your full-year 2009 return.
B. Smaller of two-thirds of your total tax for 2009 or 100% of the total tax shown on your full-year 2010 return.
C. Larger of two-thirds of your tax for 2009 or 100% of the total tax shown on your full-year 2010 return.
D. Smaller of two-thirds of your total tax for 2010 or 100% of the total tax shown on your full-year 2009 return.

5. Farmer Bob sold a breeding cow on March 8, 2010 for $2,500. Expenses related to the sale were $250. Farmer Bob deducted $1,000 in costs of raising the cow during the years the cow was raised. What is Farmer Bob's gain (loss) on the sale of the breeding cow, without regard to the Uniform Capitalization Rules?

A. $(350).
B. $1,150.
C. $2,250.
D. None of the above.

6. Farmer Judy is a calendar-year taxpayer who uses the cash method of accounting. She normally sells 200 head of sheep a year. Because of a drought, she sold 250 head of sheep in 2010. Farmer Judy realized $50,000 from the sale. The affected area was declared a disaster area eligible for federal assistance on March 12, 2010. How much, if any, income can Farmer Judy postpone to 2011?

A. $10,000.
B. $50,000.
C. $12,500.
D. $0, since only sales because of flooding quality for postponement.

7. The receipt of Agricultural Program Payments by a farmer for refraining from growing crops should be reported as:

A. Miscellaneous income on Form 1040.
B. Farm income, not subject to self-employment tax.
C. Rental income, not subject to self-employment tax.
D. Farm income, subject to self-employment tax.

8. In November of 2009, Farmer Smith, a cash basis taxpayer, sells 100 additional beef feeder cattle (raised for resale) due to severe lack of water in his area. Normally, these feeders sell in February 2010. The transaction is correctly reported:

A. In 2009 as a capital gain or loss.
B. In 2010 as a capital gain or loss.
C. Upon election, as ordinary farm income in either 2009 or 2010.
D. Not taxable due to drought conditions.

9. Dan, a calendar year taxpayer, has the following amounts of gross income for 2010:

Dan has tax, including self employment tax, of $20,000, and withholding of $1,000. To avoid any filing or estimated tax penalties, Dan must:

A. File an estimated tax payment by January 18, 2011, or file his return and pay the tax by March 1, 2011.
B. File his tax return and pay all tax due by March 2, 2011.
C. File an estimated tax payment by March 1, 2011, and pay 66 2/3% of the tax due.
D. File his tax return and pay all tax due by April 15, 2011.

10. Farm income averaging is computed on Schedule J, which may be filed:

A. For the current year when a taxpayer files Schedule F showing a farm loss.
B. By allocating it to the 3 prior years (base years).
C. Only by the IRS after the taxpayer's return is completed and reviewed.
D. On a family farming corporation with less than $25 million in gross receipts.

11. A farmer has the following sources of income:

The income to be reported on Schedule F, "Profit or Loss from Farming", is:

A. $175,000.
B. $156,000.
C. $168,000.
D. $163,000.

12. Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization. It includes all of the following types of property, except:

A. Office equipment.
B. Client filing cabinets.
C. Building elevator.
D. Storage facilities used in distributing petroleum.

13. If you sell more livestock than you normally would in a year because of a drought, flood, or other weather related condition, you may be able to postpone reporting the gain from selling the additional animals until the next year. You must meet all of the following conditions to make the election except:

A. You can show that, under your usual business practices, you would not have sold the animals this year except for the weather-related conditions.
B. The weather-related conditions caused an area to be designated as eligible for assistance by the federal government.
C. You use the accrual method of accounting.
D. Your principal trade or business is farming.

14. Qualified farmers have the following choices to file their tax return without incurring any penalties:

A. File and pay 100% of the tax due by March 1 each year.
B. File one estimated payment for two-thirds of the tax by January 18 and file and pay the balance by April 15.
C. File and pay the tax due by April 15 each year.
D. Both A and B above.

15. A farmer sold a 3-year old dairy cow for $600. It cost him $75 for shipping and commissions to sell the cow. He reports this sale as follows on his tax return:

A. A loss of $700 on his Schedule F because he believed it cost him $1,300 to raise the dairy cow.
B. A Section 1245 gain of $525 reported on Form 4797 Part III.
C. A gain of $525 reported on Schedule F as ordinary farm income.
D. A Section 1231 gain of $525 reported on Part I of Form 4797.

16. Sandy had the following total gross income for 2010:

How much of Sandy's gross income qualifies as gross income from farming?

A. $75,000.
B. $80,000.
C. $81,500.
D. $127,500.

17. You are in the business of farming if you

A. Cultivate a farm for profit.
B. Operate a farm for profit.
C. Manage a farm for profit.
D. Any of the above.

18. Everyone in business, including farmers, must keep appropriate records. Recordkeeping will help you

A. Monitor the progress of your farming business.
B. Prepare your financial statements and tax returns.
C. Identify the source of receipts and keep track of deductible expenses.
D. All of the above.

19. You can choose any recordkeeping system suited to your farming business that clearly shows your income and expenses.

True False

20. Use this Schedule to figure the net profit or loss from regular farming operations. Income from farming includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. Report your farm income on

A. Schedule C (Form 1040).
B. Schedule F (Form 1040).
C. Schedule E (Form 1040).
D. None of the above.

21. You can use income averaging to figure your tax for any year in which you were engaged in a farming business as

A. An individual.
B. A partnership.
C. An S corporation.
D. Any of the above.

22. If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. To qualify

A. Your principal trade or business must be in farming and you must use the cash method of accounting.
B. You must show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition.
C. The weather-related condition caused an area to be designated as eligible for assistance by the federal government.
D. All of the above.

23. You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. If you have not yet established a usual business practice,

A. Rely on the usual business practices of similarly situated farmers in your general region.
B. Rely on the business practices stated in the IRS journal of business practices.
C. Take into account your sales in an earlier year.
D. Considerer all the facts and circumstances by taking into account your sales in the previous three years.

24. Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. However, you may have a basis in the animal and therefore may be able to claim a deduction if

A. You us inventories to determine your income and you include the animals in your inventory.
B. You capitalized the expenses associated with the animals under the uniform Capitalization  rules and therefore have a tax basis in the animals subject to a casualty or theft.
C. Either A or B above.
D. You do not use inventories to determine your income.

25. The amount of income from your farming business that your elect to have taxed at base year rates is

A. Farmer income averaging (FIA).
B. Elected Farming Income (EFI).
C. Other Source Income (OSI).
D. None of the above.

26. If you (or your partnership or S corporation) liquidate your farming business, gains on property sold within a reasonable time after operations stop can be designate as EFI.

True False

27. Prepaid farm supplies are amounts paid during the tax year for

A. Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year.
B. Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business.
C. Poultry bought for resale and not resold during the year.
D. Any of the above.

28. You are a farm-related taxpayer if

A. Your main home is on a farm.
B. Your principal business is farming.
C. A member of your family's main house is on a farm or his or her principal business is farming.
D. Any of the above.

29. If you report your income and expenses under the cash method of accounting, your cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless

A. The payment is for the purchase of feed rather than a deposit.
B. The prepayment has a business purpose and is not merely for tax avoidance.
C. Deducting the prepayment does not result in a material distortion of your income.
D. All of the above.

30. Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. It is for the purchase of feed if your can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled to a refund or re-purchase. The following can show it is a payment for the purchase of feed.

A. The absence of specific quantity terms.
B. The right to substitute other goods or products for those specified in the contract.
C. The right to a refund on any unapplied payment credit at the end of the contract.
D. None of the above.

31. If you withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. Deduct the employer's share of the social security and Medicare taxes you must pay on your employee's  wages as a farm business expense on

A. Schedule C line 2.
B. Schedule F line 31.
C. Form 1040 line 12.
D. None of the above.

32. You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. Wages you pay to your spouse are not subject to social security and Medicare taxes.

True False

33. You can deduct one-half of your self-employment tax in figuring your adjusted gross income on

A. Form 1040, line 56.
B. Schedule F line 31.
C. Form 1040 line 12.
D. None of the above.

34. You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. This does not include

A. Health and accident insurance on your farm employees.
B. A policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan.
C. Use and occupancy insurance and business interruption insurance premiums.
D. Fire, storm, crop, theft, liability, and other insurance on farm business assets.

35. If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses.

True False

36. If you rent a farm, do not deduct the part of the rental expenses that represents the fair rental value of the farm home in which you live.

True False

37. You can deduct the actual cost of operating a truck or car in your farm business. Only expenses for business use are deductible. These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation. Instead of using actual costs, under certain conditions you can use the standard mileage rate. For 2010, the rate is 

A. 50.5 cents a mile for all business miles driven for the period January 1 through June 30, 2010.
B. 58.5 cents a mile for all business miles driven for the period July 1 through December 31, 2010.
C. 50 cents a mile for all business miles driven.
D. Both A and B above.

38. You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. You choose this method of substantiating business use the first year the vehicle is placed in service. A use directly connected with the business of farming is

A. Cultivating land.
B. Raising or harvesting any agricultural or horticultural commodity.
C. Driving to the feed or supply store.
D. Any of the above.

39. You can claim 75% of the use of a car or light truck as a business use without any records if you used the vehicle during most of the normal business of farming. If you keep records and they show that your business use was more than 75%, you may be able to claim more.

True False

40. If you were the landowner (or sub-lessor) and did not materially participate in the operation or management of the farm

A. Report farm rental income based on crops or livestock produced by the tenant.
B. Report farm rental income only based on crops or livestock produced by you.
C. Report only if the tenant had rental activity for purposes of the passive activity loss limitations.
D. Use Form 4835 only if you were in a partnership or S corporation with rental income and expenses from crop and livestock shares