Farmer’s Tax Guide

Farmer’s Tax Guide highlights administrative and tax law changes for 2008 IRS Publication 225

Mike Habib, EA

IRS recently released Publication 225, Farmer’s Tax Guide, for use in preparing 2008 returns on its web site. It highlights several administrative and tax law changes for 2008 and 2009.

What’s new for 2008. IRS Publication 225 examines these new items for 2008.

  • Qualified principal residence debt. A taxpayer can exclude from income a canceled debt that is qualified principal residence debt. IRS Publication 225 states that this exclusion applies to debts cancelled after 2006 and before Jan. 1, 2010, which doesn’t reflect the recent extension of the exclusion through 2012 by the Emergency Economic Stabilization Act of 2008. The amount excluded from income is applied to reduce the basis of the taxpayer’s principal residence.
  • Standard mileage rate. For 2008, the standard mileage rate for each mile of business use is 50.5 cents per mile for the period Jan. 1 through June 30, 2008, and 58.5 cents per mile for the period July 1, 2008 through Dec. 31, 2008.
  • Increased Code Sec. 179 expense deduction dollar limits. The maximum amount the taxpayer can elect to deduct for most Code Sec. 179 property he places in service in 2008 is $250,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $800,000.
  • Special depreciation allowance for certain qualified property acquired after Dec. 31, 2007, and placed in service before Jan. 1, 2009. For qualifying property acquired and placed in service in 2008, a taxpayer may be able to take a depreciation deduction equal to 50% of the adjusted basis of the property. Qualifying property includes certain property with a recovery period of 20 years or less, certain computer software, water utility property, or qualified leasehold improvements.
  • Extension of increased Code Sec. 179 deduction for certain qualified GO Zone property. In addition to the increase discussed above, the higher Code Sec. 179 deduction has been extended for qualified Code Sec. 179 GO Zone property placed in service in 2008. Substantially all of the use of this property must be in specified portions of the GO Zone.
  • Additional tax relief for businesses affected by the Kansas storms and tornadoes. An increased Code Sec. 179 and a special depreciation allowance may be available for qualified Recovery Assistance property.
  • Kansas and Midwestern disaster areas. Special rules apply to casualties, thefts, and condemnations in the Kansas and Midwestern disaster areas. Specifically, temporary tax relief was enacted as a result of May 4, 2007, storms and tornadoes affecting the Kansas disaster area. The tax benefits provided by this relief include suspended limits for certain personal casualty losses and special rules for withdrawals and loans from IRAs and other qualified retirement plans. For more details on these and other tax benefits related to the Kansas disaster area, see Pub. 4492-A. Also, temporary tax relief was enacted as a result of severe storms, tornadoes, or flooding affecting Midwestern disaster areas after May 19, 2008, and before Aug. 1, 2008. As discussed in Federal Taxes Weekly Alert 10/09/2008, the tax benefits provided by this relief include:
    • … Suspended limits for certain personal casualty losses and cash contributions.
    • … An additional exemption amount if the taxpayer provided housing for a person displaced by the Midwestern storms, tornadoes, or flooding.
    • … An election to use the taxpayer’s 2007 earned income to figure his 2008 EIC and additional child tax credit.
    • … An increased charitable standard mileage rate for using the taxpayers’ vehicle for volunteer work related to the Midwestern storms, tornadoes, or flooding.
    • … Special rules for time and support tests for people who were temporarily relocated because of the Midwestern storms, tornadoes, or flooding.
    • … Special rules for withdrawals and loans from IRAs and other qualified retirement plans. Details on these and other tax benefits related to the Midwestern disaster areas will be explained in IRS Publication 4492-B.
  • Federally declared disasters. New rules apply to losses of personal use property attributable to federally declared disasters declared in tax years beginning after 2007 and that occurred before 2010. A federally declared disaster is any disaster determined by the President to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A disaster area is the area determined to warrant such assistance. The new rules do not apply to losses in the Midwestern disaster areas. The new rules are follows:

(1) The net disaster loss (defined in (3) below) is not subject to the 10% of adjusted gross income limit. (2) A taxpayer can deduct a net disaster loss even if he does not itemize his deductions on Schedule A (Form 1040). This is done by completing Form 4684 and entering the net disaster loss on line 7 of the Standard Deduction Worksheet-Line 40 in the Form 1040 Instructions.

(3) The taxpayer’s net disaster loss is the excess of his personal casualty losses attributable to a federally declared disaster and occurring in a disaster area, over his personal casualty gains.

  • Special rules for individuals impacted by Hurricanes Katrina, Rita, and Wilma. If one claimed a casualty or theft loss deduction and in a later year he received more reimbursement than he expected, he does not recompute the tax for the year in which he claimed the deduction. Instead, he must include the reimbursement in his income for the year in which it was received, but only to the extent the original deduction reduced his tax for the earlier year. However, an exception applies if the taxpayer claimed a casualty or theft loss deduction for damage to or destruction of his main home caused by Hurricane Katrina, Rita, or Wilma, and in a later year he received a hurricane relief grant. Under this exception, the taxpayer can choose to file an amended income tax return (Form 1040X) for the tax year in which he claimed the deduction and reduce (but not below zero) the amount of the deduction by the amount of the grant. If he makes this choice, he must file Form 1040X by the later of the due date for filing his return for the tax year in which he receives the grant, or July 30, 2009.
  • Maximum net self-employment earnings. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $102,000 for 2008. There is no maximum limit on earnings subject to the Medicare part.
  • Conservation Reserve Program (CRP) payments. For payments made after 2007, CRP payments are excluded from self-employment tax for individuals receiving social security benefits for retirement or disability.
  • Optional methods to figure net earnings. For tax years beginning after 2007, the amount of gross and net income from self-employment one may have when using the farm optional method or nonfarm optional method has increased. This allows electing taxpayers to secure up to four credits of social security benefits coverage. In future years, the thresholds will be indexed to maintain that level of coverage.

What’s new for 2009. IRS Publication 225 examines these new items for 2009.

  • New definition for race horses eligible for the 3-year recovery period. Any race horse (without regard to the age of the horse) placed in service after Dec. 31, 2008, is considered 3-year property for General Depreciation System (GDS) recovery purposes.
  • Expiration of GO Zone and Kansas storms and tornadoes provisions. Most GO Zone and Kansas disaster area relief provisions won’t apply to property placed in service after Dec. 31, 2008.
  • New recovery period for certain machinery and equipment. Any machinery or equipment (other than any grain bins, cotton ginning assets, fences, or other land improvements) which is used in a farming business where the original use begins with the taxpayer after Dec. 31, 2008, and is placed in service before Jan. 1, 2010, will be treated as 5-year property for GDS purposes (10-year property for purposes of the Alternative Depreciation System (ADS)).
  • Maximum net self-employment earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax increased to $106,800 for 2009. There is no maximum limit on earnings subject to the Medicare part.
  • Wage limit for social security tax. The limit on wages subject to the social security tax for 2009 is $106,800. There is no limit on wages subject to the Medicare tax.
  • New employment tax adjustment process in 2009. If a taxpayer discovers an error on a previously filed Form 943 after Dec. 31, 2008, he should make the correction using Form 943-X, Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees. Currently, taxpayers make corrections to Form 943 using Form 941c that is filed once a year with Form 943. Form 943-X is a stand-alone form, meaning taxpayers can file Form 943-X when an error is discovered, rather than waiting until the end of the year to file Form 941c with Form 943. Current year adjustments will continue to be made on line 8 of Form 943.

Farming tax problems? Get tax help and solutions to many tax problems.