Completing a Basic Tax Return and IRS Schedule F (Profit/Loss from Farming)

1. Completing a Basic Tax Return and IRS Schedule F (Profit/Loss from Farming) Jason M. Larison, Instructor Holton Ag Ed Department Holton, Kansas

2. Internal Revenue Service (IRS) Basic Vocabulary • Form 1040-Basic form to calculate tax owed • Schedule F-farm profit (or loss) calculation form • Proprietor-Person doing business • Tax Tables-Tables breaking down tax owed on taxable income • Depreciation Schedules-Allowance for wear and tear on equipment allowed by IRS (Non - Cash Expense)

3. Basic Vocabulary (Continued) • Exemptions - Set dollar amount per person excluded from taxable income ($2,900 per deduction in 2001) • Dependent - A person under your care (allowed exemption) • W-2 - Documentation of wage earning income and taxes paid by employer • Standard Deduction - Set dollar amount allowed to be deducted from taxes depending on filing status (4,550 for single in 2001)

4. Who should file a tax return? • According to the IRS, the you should file a tax return if you meet the following criteria: • If you are over 14 and under 65 years of age, single, and someone else is claiming you as a dependent: • Your earned income was over $4,550 • If you are under 65 years of age, single, and you are not a dependent of someone else: • Your gross income was greater than $7,450 • You should file if you do meet the above criteria, but can get a refund!!!

5. When do I file and what are my filing options? • Tax returns must be filed by April 15 to avoid interest and penalties. • You can file a return in one of three ways: • By mail (US Postal Service) • Most common for farmers and business because of attachments required (Schedule F, Depreciation Schedules, etc.) • By Telefile (Over the telephone), • If you have only worked for a wage • Over the Internet • Use a program like:

6. What do I need to file and where do I get everything? • W-2 forms from every employer you worked for during the year (should be sent to you) • The Following forms are available at the local bank, library, post office, or over the Internet • Form 1040A • Form 1040A Instructions Book (Tax Laws change year to year, so make sure you have the most recent copy) • Schedule F • Farmer’s Tax Guide (Schedule F Instruction Book) • Schedule SE (Self employment, may be needed)

7. Schedule F • Used on Form 1040 to calculate farming profit or loss • 2 methods of calculating profit • Cash • Accrual

8. Cash Method • Most commonly used method of farm tax accounting • Only counts income and expenses in the year which the cash changes hands • Reason many farmers do end of year tax planning ( i.e. - make purchases, wait on sales of livestock, etc.)

9. Accrual Method • Less commonly used • Takes actual inventory “accrued” during the year into account when figuring taxes • For Example - a farmer is taxed on wheat he owns at the end of the year whether he has sold it yet or not

10. Schedule F - Part 1 • Farm Cash Income • Line 1 - Sale of livestock or items bought for resale • Line 2 - Cost of livestock included in line 1 • Line 3 - Difference of Line 1 minus line 2 • Line 4 - Sale of livestock and crops raised • Line 5a - Cooperative Distributions • Line 6a - Ag government program payments

11. Schedule F - Part 1 • Farm Cash Income • Line 7 - CCC Loans - Government loan program, Credit taken on crops raised • Line 8 - Crop Insurance Proceeds • Line 9 - Income from Custom Work • Line 10 - Other income (Fuel tax refund, etc) • Line 11 - Gross Farm Income (Add lines 3-10)

12. Schedule F - Part 2 • Farm Expenses • Line 12 - Car and Truck Expenses • Can use actual expenses (Insurance, repairs, tags, etc.) • A rate of 34.5 cents per mile on personal vehicle farm related use (Must document) • Line 13 - Chemicals • Line 14 - Conservation Expenses • Line 15 - Custom work hired • Line 16 - Depreciation and section 179 deductions (must attach depreciation schedules) • Line 17 - Benefit expenses for employee’s hired

13. Schedule F - Part 2 • Farm Expenses • Line 18 - Total Feed Purchased • Line 19 - Fertilizers and lime purchased • Line 20 - Freight and trucking expenses • Line 21 - Gasoline, Fuel, and Oil • Line 22 - Insurance other than health • Line 23 - Interest Paid • Line 24 - Labor Hired

14. Schedule F - Part 2 • Farm Expenses • Line25 - Pension (retirement) and employee profit sharing plans • Line 26 - Rent or lease expenses for equipment, machinery and land • Line 27 - Repairs and maintenance • Line 28 - Seeds and plants purchased • Line 29 - Storage and warehousing costs

15. Schedule F - Part 2 • Farm Expenses • Line30 - Supplies purchased • Line 31 - Taxes (property, etc) • Line 32 - Utilities • Line 33 - Veterinary, Breeding, and medicine • Line 34 - Other Expenses

16. Profit or Loss Calculation • Line 35 - Total expenses - add lines 12 through 24 • Line 36 - Net Farm Profit (or Loss) subtract line 35 from 11 • Once calculated the profit or loss is transferred over to the Form 1040

17. Form 1040A • Taxable income is figured by subtracting total exemptions from total gross income • On form 1040A the profit or loss from farming is added into the other taxable income and tax is calculated • Using the tax tables, the amount of tax owed is figured on the back side of form 1040 after calculating the taxable income • The amount of tax paid (withheld on W-2) is subtracted from tax owed and refund or tax still owed is figured

18. Assignment #1 • Complete a federal income tax return for Jane Farmer (Schedule F and form 1040) Assignment #2 • Complete a federal income tax return for yourself (using SAE records) or complete Jim Rancher tax return if you do not have a W2 or production SAE