Contents

Introduction .................. 1

What's New for 2023 ............. 2

What's New for 2024 ............. 3

Reminders ................... 3

Chapter 1. Importance of Records .... 4

Chapter 2. Accounting Methods ..... 6

Chapter 3. Farm Income .......... 9

Chapter 4. Farm 

Business Expenses ......... 19

Chapter 5. Soil and Water 

Conservation Expenses ....... 28

Chapter 6. Basis of Assets ....... 31

Chapter 7. Depreciation, Depletion, 

and Amortization ........... 37

Chapter 8. Gains and Losses ...... 49

Chapter 9. Dispositions of 

Property Used in Farming ...... 57

Chapter 10. Installment Sales ..... 60

Chapter 11. Casualties, Thefts, and 

Condemnations ............ 66

Chapter 12. Self-Employment Tax ... 74

Chapter 13. Employment Taxes .... 79

Chapter 14. Fuel Excise Tax 

Credits and Refunds ......... 85

Chapter 15. Estimated Tax ........ 88

Chapter 16. How To Get Tax Help ... 89

Index ..................... 93

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 livestock, 

dairy, poultry, fish, fruit, and truck farms. It also 

includes plantations, ranches, ranges, and orchards and groves.

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 16 for information on ordering 

these publications.

The explanations and examples in this publication reflect the IRS'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. 

Department 

of the 

Treasury

Internal 

Revenue 

Service

Publication 225

Cat. No. 11049L

Farmer's

Tax Guide

For use in preparing

2023 Returns

Acknowledgment: The valuable advice and assistance given us each 

year by the National Farm Income Tax Extension Committee is 

gratefully acknowledged. 

Get forms and other information faster and easier at:

• IRS.gov (English) 

• IRS.gov/Spanish (Español) 

• IRS.gov/Chinese (中文) 

• IRS.gov/Korean (한국어) 

• IRS.gov/Russian (Pусский) 

• IRS.gov/Vietnamese (Tiếng Việt) 

Oct 10, 2023
This publication covers subjects on which a 

court may have rendered a decision more favorable to taxpayers than the interpretation by the 

IRS. Until these differing interpretations are resolved by higher court decisions, or in some 

other way, this publication will continue to 

present the interpretation by the IRS.

The IRS Mission. Provide America's taxpayers 

top-quality service by helping them understand 

and meet their tax responsibilities and enforce 

the tax law with integrity and fairness to all.

Comments and suggestions. We welcome 

your comments about this publication and suggestions for future editions.

You can send us comments through 

IRS.gov/FormComments. Or, you can write to 

the Internal Revenue Service, Tax Forms and 

Publications, 1111 Constitution Ave. NW, 

IR-6526, Washington, DC 20224.

Although we can’t respond individually to 

each comment received, we do appreciate your 

feedback and will consider your comments and 

suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions. 

If you have a tax question not answered by this 

publication or the How To Get Tax Help section 

at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the 

search feature or viewing the categories listed.

Getting tax forms, instructions, and publications. Go to IRS.gov/Forms to download 

current and prior-year forms, instructions, and 

publications.

Ordering tax forms, instructions, and 

publications. Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year 

forms and instructions. The IRS will process 

your order for forms and publications as soon 

as possible. Don’t resubmit requests you’ve already sent us. You can get forms and publications faster online.

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 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 SW

Washington, DC 20416;

• Send an email to ombudsman@sba.gov; 

or

• Complete and submit a Federal Agency 

Comment Form online at

sba.gov/ombudsman/comment.

Treasury Inspector General for Tax Administration (TIGTA). If you want to confidentially 

report misconduct, waste, fraud, or abuse by an 

IRS employee, you can visit TIGTA. You can remain anonymous.

Farm tax classes. Many state Cooperative Extension Services conduct farm tax workshops in 

conjunction with the IRS. Contact your county or 

regional extension office for more information.

Rural Tax Education website. The Rural Tax 

Education website is a source for information 

concerning agriculturally related income and 

deductions and self-employment tax. The website is available for farmers and ranchers, other 

agricultural producers, Extension educators, 

and anyone interested in learning about the tax 

side of the agricultural community. Members of 

the National Farm Income Tax Extension Committee are contributors to the website, and the 

website is hosted by Utah State University Cooperative Extension. You can visit the website at 

ruraltax.org.

Future Developments

The IRS has created a page on IRS.gov for 

information about Pub. 225 at

IRS.gov/Pub225. Information about recent 

developments affecting Pub. 225 will be posted 

on that page.

What's New for 2023

The following items highlight a number of 

administrative and tax law changes for 2023. 

They are discussed in more detail throughout 

this publication.

Standard mileage rate. The business standard mileage rate for 2023 has increased to 65.5 

cents per business mile. See chapter 4.

Increased section 179 expense deduction 

dollar limits. The maximum amount you can 

elect to deduct for most section 179 property 

you placed in service in 2023 is $1,160,000. 

This limit is reduced by the amount by which the 

cost of the property placed in service during the 

tax year exceeds $2,890,000. Also, the maximum section 179 expense deduction for sport 

utility vehicles placed in service in tax years beginning in 2023 is $28,900. See chapter 7.

Phase down of special depreciation allowance. The special depreciation allowance is 

80% for certain qualified property acquired after 

September 27, 2017, and placed in service after December 31, 2022, and before January 1, 

2024 (other than certain property with a long 

production period and certain aircraft). The special depreciation allowance is also 80% for certain specified plants bearing fruits and nuts 

planted or grafted after December 31, 2022, 

and before January 1, 2024. See Certain qualified property acquired after September 27, 

2017 and Certain specified plants under What 

Is Qualified Property, later.

Maximum net earnings. The maximum net 

self-employment earnings subject to the social 

security part (12.4%) of the self-employment tax 

is $160,200 for 2023, up from $147,000 for 

2022. There is no maximum limit on earnings 

subject to the Medicare part (2.9%) or, if applicable, the Additional Medicare Tax (0.9%).

The maximum net self-employment earnings 

subject to the social security part of the self-employment tax for 2024 will be discussed in the 

2023 Pub. 334.

2023 withholding tables. The federal income 

tax withholding tables are now included in Pub. 

15-T, Federal Income Tax Withholding Methods.

Business meals deduction. The temporary 

100% deduction for food or beverages provided 

by a restaurant has expired. The business meal 

deduction reverts back to the previous 50% allowable deduction beginning January 1, 2023.

Qualified small business payroll tax credit 

for increasing research activities. For tax 

years beginning before January 1, 2023, a 

qualified small business may elect to claim up 

to $250,000 of its credit for increasing research 

activities as a payroll tax credit. The Inflation 

Reduction Act of 2022 (the IRA) increases the 

election amount to $500,000 for tax years beginning after December 31, 2022. The payroll 

tax credit election must be made on or before 

the due date of the originally filed income tax return (including extensions). The portion of the 

credit used against payroll taxes is allowed in 

the first calendar quarter beginning after the 

date that the qualified small business filed its income tax return. The election and determination 

of the credit amount that will be used against 

the employer's payroll taxes are made on Form 

6765, Credit for Increasing Research Activities. 

The amount from Form 6765, line 44, must then 

be reported on Form 8974, Qualified Small 

Business Payroll Tax Credit for Increasing Research Activities.

Starting in the first quarter of 2023, the payroll tax credit is first used to reduce the employer share of social security tax up to 

$250,000 per quarter and any remaining credit 

reduces the employer share of Medicare tax for 

the quarter. Any remaining credit, after reducing 

the employer share of social security tax and 

the employer share of Medicare tax, is then carried forward to the next quarter. Form 8974 is 

used to determine the amount of the credit that 

can be used in the current quarter. The amount 

from Form 8974, line 12 or, if applicable, line 17, 

is reported on Form 943, line 12a. For more information about the payroll tax credit, see the 

Instructions for Form 8974 and go to IRS.gov/

ResearchPayrollTC.

Credit for COBRA premium assistance payments. The COBRA premium assistance 

credit lines have been “Reserved for future use” 

on Form 943 because the first quarter of 2022 

was the last quarter in which most employers 

may have been eligible to claim the COBRA 

premium assistance credit. Section 9501 of the 

American Rescue Plan Act of 2021 (the ARP) 

provided for COBRA premium assistance in the 

form of a full reduction in the premium otherwise 

payable by certain individuals and their families 

who elected COBRA continuation coverage due 

to a loss of coverage as the result of a reduction 

in hours or an involuntary termination of employment (assistance eligible individuals). This 

COBRA premium assistance was available for 

periods of coverage beginning on or after April 

1, 2021, through periods of coverage beginning 

on or before September 30, 2021. A premium 

Page 2 Publication 225 (2023)
payee was entitled to the COBRA premium assistance credit at the time an eligible individual 

elected coverage. Therefore, due to the COBRA 

notice and election period requirements (generally, employers had 60 days to provide notice 

and assistance eligible individuals had 60 days 

to elect coverage), the first quarter of 2022 was 

the last quarter in which most employers may 

have been eligible to claim the COBRA premium assistance credit.

Pub. 51 discontinued after 2023. Pub. 51, 

Agricultural Employer's Tax Guide, will no longer be available after 2023. Instead, information 

specific to agricultural employers will be included in Pub. 15, Employer's Tax Guide, beginning with the Pub. 15 for use in 2024. Beginning 

in 2024, there will be a new Pub. 15 (sp) that is 

a Spanish-language version of Pub. 15. References to Pub. 51 were retained throughout this 

chapter because this chapter is for tax year 

2023. If you need information specific to tax 

year 2024, you will use Pub. 15 or Pub. 15 (sp) 

in 2024.

Social security and Medicare tax for 2023. 

The rate of social security tax on taxable wages, 

including qualified sick leave wages and qualified family leave wages paid in 2023 for leave 

taken after March 31, 2021, and before October 

1, 2021, is 6.2% each for the employer and employee or 12.4% for both. Qualified sick leave 

wages and qualified family leave wages paid in 

2023 for leave taken after March 31, 2020, and 

before April 1, 2021, aren't subject to the employer share of social security tax; therefore, the 

tax rate on these wages is 6.2%. The social security wage base limit is $160,200.

The Medicare tax rate is 1.45% (0.0145) 

each for the employee and employer, unchanged from 2022. There is no wage base limit 

for Medicare tax.

What's New for 2024

Phase down of special depreciation allowance. The special depreciation allowance is 

60% for certain qualified property acquired after 

September 27, 2017, and placed in service after December 31, 2023, and before January 1, 

2025 (other than certain property with a long 

production period and certain aircraft). For 

property with a long production period and certain aircraft placed in service after December 

31, 2023, and before January 1, 2025, the special depreciation allowance is 80%. The special 

depreciation allowance is also 60% for certain 

specified plants bearing fruits and nuts planted 

or grafted after December 31, 2023, and before 

January 1, 2025. See Certain qualified property 

acquired after September 27, 2017 and Certain 

specified plants under What Is Qualified Property, later.

Social security and Medicare tax for 2024. 

The employee and employer tax rates for social 

security and the maximum amount of wages 

subject to social security tax for 2024 will be 

discussed in Pub. 15 (for use in 2024).

The Medicare tax rate for 2024 will also be 

discussed in Pub. 15 (for use in 2024). There is 

no limit on the amount of wages subject to Medicare tax.

Reminders

The following reminders and other items may 

help you file your tax return.

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 (Form 1040).

Publication on employer identification numbers (EINs). Pub. 1635, Understanding Your 

Employer Identification Number, provides general information on EINs. Topics include how to 

apply for an EIN and how to complete Form 

SS-4.

Change of address. If you change your home 

address, you should use Form 8822, Change of 

Address, to notify the IRS. If you change your 

business address, you should use Form 

8822-B, Change of Address or Responsible 

Party—Business, to notify the IRS. Be sure to 

include your suite, room, or other unit number.

Coronavirus Food Assistance Program 

(CFAP). The CFAP provides direct payments to 

producers of eligible agricultural commodities 

adversely affected by the coronavirus 

(COVID-19) pandemic to help offset sales losses and increased marketing costs associated 

with the COVID-19 pandemic. CFAP payments 

are agricultural program payments that you 

must include in gross income. Report the full 

amount of your CFAP payments on Schedule F 

(Form 1040), lines 4a and 4b. Go to usda.gov. 

See chapter 3.

The COVID-19 related credit for qualified 

sick and family leave wages is limited to 

leave taken after March 31, 2020, and before October 1, 2021. Generally, the credit for 

qualified sick and family leave wages, as enacted under the Families First Coronavirus Response Act (FFCRA) and amended and extended by the COVID-related Tax Relief Act of 

2020, for leave taken after March 31, 2020, and 

before April 1, 2021, and the credit for qualified 

sick and family leave wages under sections 

3131, 3132, and 3133 of the Internal Revenue 

Code, as enacted under the ARP, for leave 

taken after March 31, 2021, and before October 

1, 2021, have expired. However, employers that 

pay qualified sick and family leave wages in 

2023 for leave taken after March 31, 2020, and 

before October 1, 2021, are eligible to claim a 

credit for qualified sick and family leave wages 

in 2023.

For more information about the credit for 

qualified sick and family leave wages, see the 

Instructions for Form 943, and go to IRS.gov/

PLC.

An employer who receives a refund of 

payroll taxes resulting from qualified 

sick and family leave credit reported on 

a 2022 Form 943 generally won't receive that 

refund until the 2023 calendar year. Even 

though that credit isn't received until 2023, income reported in 2022 must be increased by 

the refundable and nonrefundable portions of 

TIP

the qualified sick and family leave credit reported on their 2022 Form 943. For more information, see the instructions for the income tax return or the Form 1040 schedule you file for your 

business.

Advance payment of COVID-19 credits 

ended. Although you may pay qualified sick 

and family leave wages in 2023 for leave taken 

after March 31, 2020, and before October 1, 

2021, or provide COBRA premium assistance 

payments in 2023, you may no longer request 

an advance payment of any credit on Form 

7200, Advance Payment of Employer Credits 

Due to COVID-19.

Certification program for professional employer organizations (PEOs). The Stephen 

Beck, Jr., Achieving a Better Life Experience 

Act of 2014 required the IRS to establish a voluntary certification program for PEOs. PEOs 

handle various payroll administration and tax reporting responsibilities for their business clients 

and are typically paid a fee based on payroll 

costs. To become and remain certified under 

the certification program, certified professional 

employer organizations (CPEOs) must meet 

various requirements described in sections 

3511 and 7705 and related published guidance. 

Certification as a CPEO may affect the employment tax liabilities of both the CPEO and its 

customers. A CPEO is generally treated for employment tax purposes as the employer of any 

individual who performs services for a customer 

of the CPEO and is covered by a contract described in section 7705(e)(2) between the 

CPEO and the customer (CPEO contract), but 

only for wages and other compensation paid to 

the individual by the CPEO. To become a 

CPEO, the organization must apply through the 

IRS Online Registration System. For more information or to apply to become a CPEO, go to 

IRS.gov/CPEO.

CPEOs must generally file Form 943 and 

Schedule R (Form 943), Allocation Schedule for 

Aggregate Form 943 Filers, electronically. For 

more information about a CPEO's requirement 

to file electronically, see Revenue Procedure 

2023-18, 2023-13 I.R.B. 605, available at 

IRS.gov/irb/2023-13_IRB#REV-PROC-2023-18.

Work opportunity tax credit for qualified 

tax-exempt organizations hiring qualified 

veterans. Qualified tax-exempt organizations 

that hire eligible unemployed veterans may be 

able to claim the work opportunity tax credit 

against their payroll tax liability using Form 

5884-C. For more information, go to IRS.gov/

WOTC.

Correcting a previously filed Form 943. If 

you discover an error on a previously filed Form 

943, or if you otherwise need to amend a previously filed Form 943, make the correction using 

Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or 

Claim for Refund. Form 943-X is filed separately 

from Form 943. For more information, see the 

Instructions for Form 943-X, section 9 of Pub. 

51, or go to IRS.gov/

CorrectingEmploymentTaxes.

Federal tax deposits must be made by electronic funds transfer (EFT). You must use 

EFT to make all federal tax deposits. Generally, 

an EFT is made using the Electronic Federal 

Tax Payment System (EFTPS). If you don't want 

Publication 225 (2023) Page 3
to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or 

other trusted third party to make electronic deposits on your behalf. Also, you may arrange for 

your financial institution to initiate a same-day 

wire payment on your behalf. EFTPS is a free 

service provided by the Department of the 

Treasury. Services provided by your tax professional, financial institution, payroll service, or 

other third party may have a fee.

Note. An exception applies to the EFT requirement for making your federal tax deposits. 

If your liability is less than $2,500 (Form 943, 

line 13), you may pay in full with a check or 

money order with a timely filed return. See the 

Instructions of Form 943 for more information.

For more information on making federal tax 

deposits, see section 7 of Pub. 51. To get more 

information about EFTPS or to enroll in EFTPS, 

go to EFTPS.gov or call one of the following 

numbers.

• 800-555-4477

• 800-244-4829 (Spanish)

• 303-967-5916 if you're outside the United 

States (toll call)

To contact EFTPS using Telecommunications Relay Services (TRS) for people who are 

deaf, hard of hearing, or have a speech disability, dial 711 and then provide the TRS assistant 

the 800-555-4477 number above or 

800-733-4829. Additional information about 

EFTPS is also available in Pub. 966.

Electronic filing and payment. Businesses 

can enjoy the benefits of filing tax returns and 

paying their federal taxes electronically. 

Whether you rely on a tax professional or handle your own taxes, the IRS offers you convenient and secure programs to make filing and 

paying easier. Spend less time worrying about 

taxes and more time running your business. 

Use e-file and EFTPS to your benefit.

• For e-file, go to IRS.gov/EmploymentEfile 

for additional information. A fee may be 

charged to file electronically.

• For EFTPS, go to EFTPS.gov or call 

EFTPS at one of the numbers provided under the Note, earlier.

• For electronic filing of Form W-2, Wage 

and Tax Statement, go to SSA.gov/

employer. You may be required to file 

Forms W-2 electronically. For details, see 

the General Instructions for Forms W-2 

and W-3.

Note. For employers in Puerto Rico, references 

to Form W-2 also apply to Form 499R-2/W-2PR 

and references to Form W-3 also apply to Form 

W-3 (PR), unless otherwise specified.

Special rules for qualified disaster losses. 

Special rules apply to federally declared disaster area losses. A federally declared disaster is 

a disaster that occurred in an area declared by 

the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

See Disaster Area Losses, later, and Pub. 

547, Casualties, Disasters, and Thefts, for more 

information on the special relief. Also, see 

IRS.gov/DisasterTaxRelief for more information.

Additional employment tax information for 

farmers. See Pub. 51 for more detailed 

guidance on employment taxes for tax year 

2023 for employers of agricultural workers. See 

Pub. 15 for more detailed guidance on employment taxes for tax year 2024 for employers of 

agricultural workers. For the latest information 

about developments related to Pub. 15, such as 

legislation enacted after it was published, go to 

IRS.gov/Pub15. For general tax information relevant to agricultural employers, go to IRS.gov/

AgricultureTaxCenter. For general information 

about employment taxes, go to IRS.gov/

EmploymentTaxes. For information about employer responsibilities under the Affordable 

Care Act, go to IRS.gov/ACA. For information 

about COVID-19 tax relief, go to IRS.gov/

Coronavirus.

You may have nonfarm employees as 

well as farm employees, for example, 

workers at a retail farm market. See 

Pub.15 for employment tax rules for wages and 

noncash wages paid to these employees as 

they may differ from those discussed in this 

chapter.

Photographs of missing children. The IRS is 

a proud partner with the National Center for 

Missing & Exploited Children® (NCMEC). 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) (24 hours a day, 7 days a 

week) if you recognize a child.

1.

Importance of 

Records

Introduction

A farmer, like other taxpayers, must keep records to prepare an accurate income tax return 

and determine the correct amount of tax. This 

chapter explains the benefits of keeping records, what kinds of records you must keep, 

and how long you must keep them for federal 

tax purposes.

While this publication only discusses tax records, the records you keep as a farm business 

owner should allow you to accurately measure 

your farm’s financial performance, create financial statements, and help you make management decisions in addition to calculating taxable 

farm income.

Records that provide information beyond 

your tax return require additional information 

and effort on the part of the record keeper. To 

assist you in developing or improving your recordkeeping system, the Farm Financial Standards Council produces publications that provide 

recommendations for financial reporting and 

analysis. You can download the Implementation 

Guidelines at https://ffsc.org. For more 

CAUTION

!

information, contact the Farm Financial Standards Council in the following manner.

• Call 262-253-6902.

• Send a fax to 262-253-6903.

• Write to:

Farm Financial Standards Council

N78 W14573 Appleton Ave., #287

Menomonee Falls, WI 53051.

Topics

This chapter discusses:

• Benefits of recordkeeping

• Kinds of records to keep

• How long to keep records

Useful Items

You may want to see:

Publication

(Circular A), Agricultural Employer's 

Tax Guide

Travel, Gift, and Car Expenses

Sales and Other Dispositions of 

Assets

How To Depreciate Property

See chapter 16 for information about getting 

publications.

Benefits of 

Recordkeeping

Everyone in business, including farmers, must 

keep appropriate records. Recordkeeping will 

help you do the following.

Monitor the progress of your farming business. You need records to monitor the progress of your business. In addition to measuring 

overall profitability, detailed records can help 

you identify which crop or livestock enterprises 

are most profitable or indicate where management changes may be needed to improve profitability. Records that help you make better decisions should also increase the likelihood of 

business success.

Prepare your financial statements. You will 

need records to prepare accurate financial 

statements. These include income (profit and 

loss) statements, cash flow statements, balance 

sheets, and statements of owner’s equity. 

These statements will be required and helpful 

when working with your bank or creditors and 

may also help you manage your farm business.

Identify source of receipts. You will receive 

money, property, and/or services from many 

sources. Your records can identify the source of 

your receipts. You need this information to separate farm from nonfarm receipts and taxable 

from nontaxable income. See chapter 3 for 

more information.

Keep track of deductible expenses. You 

may forget expenses when you prepare your tax 

return unless you record them when they occur. 

Your records can identify the purpose and 

timing of expenses. You need this information to 

 51

 463

 544

 946

Page 4 Chapter 1 Importance of Records
separate farm business expenses from nonfarm 

payments and other expenses. You also need to 

keep these records to separate expenses deductible for tax purposes from those that are 

non-tax related. See chapter 4 for more information.

Prepare your tax returns. You need records 

to prepare your tax return. These records must 

accurately support the income, expenses, and 

credits you report. Generally, these are the 

same records you use to monitor your farming 

business and prepare your financial statements. 

You will also need records to prepare information returns such as a Form 1099-MISC or Form 

1099-NEC provided to a vendor or a Form W-2 

provided to an employee.

Support items reported on tax returns. You 

must keep your business records available at all 

times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked 

to explain the items reported. A complete set of 

records will assist in the examination.

Kinds of Records

To Keep

Except in a few cases, the law does not require 

any specific kind of records. You can choose 

any recordkeeping system suited to your farming business that clearly shows, for example, 

your income and expenses.

You should set up your recordkeeping system using an accounting method that clearly 

shows your income for your tax year. If you are 

in more than one business, you should keep a 

complete and separate set of records for each 

business. A corporation’s recordkeeping system 

should include board of directors meeting minutes. See chapter 2 for more information.

Your recordkeeping system should include a 

summary of your business transactions, which 

shows your gross income, as well as any expenses, deductions, and credits you are reporting. 

In addition, you must keep supporting documents, such as invoices and receipts, for purchases, sales, payroll, and other business 

transactions.

It is important to keep these documents because they support the entries in your journals 

and ledgers and on your tax return. Keep them 

in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.

Electronic records. All requirements that apply to hard copy books and records also apply 

to electronic storage systems that maintain tax 

books and records. When you replace hard 

copy books and records, you must maintain the 

electronic storage systems for as long as they 

are material to the administration of tax law.

An electronic storage system is any system 

for preparing or keeping your records either by 

electronic imaging or by transfer to electronic 

storage media. The electronic storage system 

must index, store, preserve, retrieve, and reproduce the electronically stored books and records in legible format. All electronic storage 

systems must provide a complete and accurate 

record of your data that is accessible to the IRS.

Electronic storage systems are also subject 

to the same controls and retention guidelines as 

those imposed on your original hard copy books 

and records. The original hard copy books and 

records may be destroyed, provided that the 

electronic storage system has been tested to 

establish that the hard copy books and records 

are being reproduced in compliance with IRS 

requirements for an electronic storage system 

and procedures are established to ensure continued compliance with all applicable rules and 

regulations. You still have the responsibility of 

retaining any other books and records that are 

required to be retained.

The IRS may test your electronic storage 

system, including the equipment used, indexing 

methodology, software, and retrieval capabilities. This test is not considered an examination 

and the results must be shared with you. If your 

electronic storage system meets the requirements mentioned earlier, you will be in compliance. If not, you may be subject to penalties for 

noncompliance, unless you continue to maintain your original hard copy books and records 

in a manner that allows you and the IRS to determine your correct tax. For details on electronic storage system requirements, see Revenue Procedure 97-22. You can find Revenue 

Procedure 97-22 on page 9 of Internal Revenue 

Bulletin 1997-13 at

IRS.gov/pub/irs-irbs/irb97-13.pdf.

Travel, transportation, entertainment, and 

gift expenses. Specific recordkeeping rules 

apply to these expenses. For more information, 

see Pub. 463.

Employment taxes. There are specific employment tax records you must keep. Payroll records are important when claiming various tax 

deductions and credits based on payroll items 

such as number of employees and wages paid. 

For a list of employment tax records you must 

keep, see Pub. 51 (Circular A).

Excise taxes. See How To Claim a Credit or 

Refund in chapter 14 for the specific records 

you must keep to verify your claim for credit or 

refund of excise taxes on certain fuels.

Assets. Assets are the property, such as machinery and equipment, you own and use in 

your business. You must keep records to verify 

certain information about your business assets. 

You need records to figure your annual depreciation deduction and the gain or (loss) when you 

sell the assets. Your records should show all the 

following.

• When and how you acquired the asset 

(whether the asset was new or used).

• Full purchase cost of the asset.

• Cost of any improvements.

• Section 179 deduction taken.

• Deductions taken for depreciation.

• Deductions taken for casualty losses, such 

as losses resulting from fires or storms.

• How you used the asset.

• When and how you disposed of the asset.

• Fair market value of property when traded.

• Selling price.

• Expenses of sale.

The following are examples of records that 

may show this information.

• Purchase and sales invoices.

• Real estate closing statements.

• Canceled checks.

• Bank statements.

Financial account statements as proof of 

payment. If you do not have a canceled check, 

you may be able to prove payment with certain 

financial account statements prepared by financial institutions. These include account statements prepared for the financial institution by a 

third party. These account statements must be 

legible. The following table lists acceptable account statements.

IF payment is by...

THEN the statement must 

show the...

Check • Check number.

• Amount.

• Payee's name.

• Date the check amount 

was posted to the 

account by the financial 

institution.

Electronic funds 

transfer

• Amount transferred.

• Payee's name.

• Date the transfer was 

posted to the account by 

the financial institution.

Credit card • Amount charged.

• Payee's name.

• Transaction date.

Proof of payment of an amount, by itself, does not establish you are entitled 

to a tax deduction. You should also 

keep other documents, such as credit card 

sales slips and invoices, to show that you also 

incurred the cost.

Tax returns. Keep copies of your filed tax returns. They help in preparing future tax returns 

and making computations if you file an amended return. Keep copies of your information returns such as Form 1099, Schedule K-1, and 

Form W-2.

How Long To Keep 

Records

You must keep your records as long as they 

may be needed for the administration of any 

provision of the Internal Revenue Code. Keep 

records that support an item of income or a deduction appearing on a return until the period of 

limitations for the return runs out. A period of 

limitations is the period of time after which no legal action can be brought. Generally, that 

means you must keep your records for at least 3 

years from when your tax return was due or filed 

or within 2 years of the date the tax was paid, 

whichever is later. However, certain records 

must be kept for a longer period of time, as discussed below.

Employment taxes. If you have employees, 

you must keep all employment tax records for at 

least 4 years after the date the tax becomes 

due or is paid, whichever is later.

CAUTION

!

Chapter 1 Importance of Records Page 5
Assets. Keep records relating to property until 

the period of limitations expires for the year in 

which you dispose of the property in a taxable 

disposition. You must keep these records to figure any depreciation, amortization, or depletion 

deduction and to figure your basis for computing gain or (loss) when you sell or otherwise dispose of the property.

You may need to keep records relating to the 

basis of property longer than the period of limitation. Keep those records as long as they are 

important in figuring the basis of the original or 

replacement property. Generally, this means as 

long as you own the property and, after you dispose of it, for the period of limitations that applies to you. For example, if you received property in a nontaxable exchange, you must keep 

the records for the old property, as well as for 

the new property, until the period of limitations 

expires for the year in which you dispose of the 

new property in a taxable disposition. For more 

information on basis, see chapter 6.

Records for nontax purposes. When your records are no longer needed for tax purposes, 

do not discard them until you check to see if you 

have to keep them longer for other purposes. 

For example, your insurance company or creditors may require you to keep them longer than 

the IRS does.

2.

Accounting 

Methods

Introduction

You must use an accounting method that 

clearly shows the income and expenses used to 

figure your taxable income. You must also file 

an income tax return for an annual accounting 

period called a “tax year.”

This chapter discusses accounting methods. For information on accounting periods, see 

Pub. 538, Accounting Periods and Methods, 

and the Instructions for Form 1128, Application 

To Adopt, Change, or Retain a Tax Year.

Topics

This chapter discusses:

• Cash method

• Accrual method

• Farm inventory

• Special methods of accounting

• Changes in methods of accounting

Useful Items

You may want to see:

Publication

Accounting Periods and Methods

Form (and Instructions)

Application To Adopt, Change, or 

Retain a Tax Year

Application for Change in 

Accounting Method

See chapter 16 for information about getting 

publications and forms.

Accounting Methods

An accounting method is a set of rules used to 

determine when and how your income and expenses are reported on your tax return. Your accounting method includes not only your overall 

method of accounting, but also the accounting 

treatment you use for any material item.

Facts and circumstances affect whether an 

item is material. Factors to consider in determining the materiality of an item include the size 

of the item (both in absolute terms and in relation to income and expenses) and the treatment 

of the item on your financial statements. Generally, an item considered material for financial 

statement purposes is also considered material 

for income tax purposes. See Pub. 538 for more 

information.

You generally choose an accounting method 

for your farm business when you file your first income tax return that includes a Schedule F 

(Form 1040), Profit or Loss From Farming. If you 

later want to change your accounting method, 

you must generally get IRS approval. How to 

obtain IRS approval is discussed later under 

Changes in Methods of Accounting.

Types of accounting methods. Generally, 

you can use any of the following accounting 

methods. Each method is discussed in detail 

below.

• Cash method.

• Accrual method.

• Special methods of accounting for certain 

items of income and expenses.

• Combination (hybrid) method using elements of two or more of the above methods.

Business and other items. You can account 

for business and personal items using different 

accounting methods. For example, you can figure your business income under an accrual 

method, even if you use the cash method to figure personal items.

Two or more businesses. If you operate two 

or more separate and distinct businesses, you 

can use a different accounting method for each 

business. Generally, no business is separate 

and distinct unless a complete and separate set 

of books and records is maintained for each 

business.

 538

 1128

 3115

Cash Method

Most farmers use the cash method because 

they find it easier to keep records using the 

cash method. Certain farm corporations and 

partnerships and all tax shelters are generally 

required to use an accrual method of accounting. However, for tax years beginning in 2023, 

farm corporations or partnerships that have 

average annual gross receipts of $29 million or 

less for the 3 preceding tax years and are not 

tax shelters can use the cash method instead of 

the accrual method. See Accrual Method Required, later. Also, see Inventory, later.

Income

Under the cash method, include in your gross 

income all items of income you actually or constructively received during the tax year. Items of 

income include money received as well as property or services received. If you received property or services, you must include the fair market value (FMV) of the property or services 

received in income. See chapter 3 for information on how to report farm income on your income tax return.

Constructive receipt. Income is constructively 

received when an amount is credited to your account or made available to you without restriction. You do not need to have possession of the 

income for it to be treated as income for the tax 

year. You need to have the ability to receive the 

income. If you authorize someone to be your 

agent and receive income for you, you are considered to have received the income when your 

agent receives it. Income is not constructively 

received if your receipt of the income is subject 

to substantial restrictions or limitations.

Delaying receipt of income. You cannot 

hold checks or postpone taking possession of 

similar property from one tax year to another to 

avoid paying tax on the income. You must report 

the income in the year the money or property is 

received or made available to you without restriction.

Example. Frances Jones, a farmer who 

uses the cash method of accounting was entitled to receive a $10,000 payment on a grain 

contract in December 2023. Frances was told in 

December that the payment was available, and 

requested not to be paid until January 2024. 

Frances must include this payment in 2023 income because it was made available in 2023.

Debts paid by another person or canceled. If your debts are paid by another person 

or are canceled by your creditors, you may have 

to report part or all of this debt relief as income. 

If you receive income in this way, you constructively receive the income when the debt is canceled or paid. See Cancellation of Debt in chapter 3 for more information.

Deferred payment contract. If you sell an 

item under a deferred payment contract that 

calls for payment in a future year, there is no 

constructive receipt in the year of sale. However, if the sales contract states that you have 

the right to the proceeds of the sale from the 

buyer at any time after delivery of the item, then 

you must include the sales price in income in 

Page 6 Chapter 2 Accounting Methods
the year of the sale, regardless of when you actually receive payment.

Example. You are a farmer who uses the 

cash method and a calendar tax year. You sell 

grain in December 2023 under a bona fide 

arm's-length contract that calls for payment in 

2024. You include the proceeds from the sale in 

your 2024 gross income since that is the year 

payment is received. However, if the contract 

states that you have the right to the proceeds 

from the buyer at any time after the grain is delivered, you must include the sales price in your 

2023 income, even if payment is received in the 

following year.

Repayment of income. If you include an 

amount in income and in a later year you have 

to repay all or part of it, then you may be able to 

deduct the repayment in the year repaid. The 

type of deduction you are allowed in the year of 

repayment depends on the type of income you 

included in the earlier year. If you use the cash 

method of accounting, you can take the deduction (or credit, if applicable) for the tax year in 

which you actually make the repayment. If you 

use any other accounting method, you can deduct the repayment or claim a credit for it only 

for the tax year in which it is a proper deduction 

under your accounting method. For example, if 

you use the accrual method, you are entitled to 

the deduction or credit in the tax year in which 

the obligation for the repayment accrues.

Expenses

Under the cash method, you generally deduct 

expenses in the tax year you pay them. This includes business expenses for which you contest liability. However, you may not be able to 

deduct an expense paid in advance or you may 

be required to capitalize certain costs, as explained under Uniform Capitalization Rules in 

chapter 6. See chapter 4 for information on how 

to deduct farm business expenses on your income tax return.

Prepayment. Generally, you cannot deduct expenses paid in advance. This rule applies to any 

expense paid far enough in advance to, in effect, create an asset with a useful life extending 

substantially beyond the end of the current tax 

year.

Example. On November 1, 2023, you 

signed and paid $3,600 for a 3-year (36-month) 

insurance contract for equipment. In 2023, you 

are allowed to deduct only $200 (2/36 x $3,600) 

of the cost of the policy that is attributable to 

2023. In 2024, you'll be able to deduct $1,200 

(12/36 x $3,600); in 2025, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2026, 

you'll be able to deduct the remaining balance 

of $1,000.

An exception applies if the expense qualifies 

for the 12-month rule. Under the 12-month rule, 

a taxpayer is not required to capitalize amounts 

paid to create certain rights or benefits for the 

earlier of the following:

• 12 months after the right or benefit begins, 

or

• The end of the tax year after the tax year in 

which payment is made.

See Pub. 538 for more information and examples.

See chapter 4 for special rules for prepaid 

farm supplies and prepaid livestock feed.

Accrual Method

Under the accrual method of accounting, you 

generally report income in the year earned and 

deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to correctly match income and expenses in the correct tax year. Certain large 

farm businesses must use an accrual method of 

accounting for its farm activities and for sales 

and purchases of inventory items. See Accrual 

Method Required and Farm Inventory, later.

Income

Generally, you include an amount in income for 

the tax year in which all events that fix your right 

to receive the income have occurred, and you 

can determine the amount with reasonable accuracy. Under this rule, include an amount in income on the earliest of the following dates.

• When you receive payment.

• When the income amount is due to you.

• When you earn the income.

• When title passes.

• When included as revenue in an applicable 

financial statement, if you have an applicable financial statement.

For more information, see Pub. 538. If you 

use an accrual method of accounting, complete 

Part III of Schedule F (Form 1040) to report your 

income.

Inventory

Generally, if you keep an inventory, you must 

use an accrual method of accounting to determine your gross income. However, see Exception below. An inventory is necessary to clearly 

show income when the production, purchase, or 

sale of merchandise is an income-producing 

factor. See Pub. 538 for more information. Also, 

see Farm Inventory, later, for more information 

on items that must be included in inventory by 

farmers, and inventory valuation methods for 

farmers.

Exception. For tax years beginning in 2023, 

you are not required to maintain an inventory if 

the average annual gross receipts for the 3 preceding tax years for the farm is $29 million or 

less and the farm is not a tax shelter. In this 

case, the farm can use a method of accounting 

that (1) treats inventory as nonincidental materials and supplies, or (2) accounts for the inventory in the same manner as the applicable financial statements. If it does not have an 

applicable financial statement, it can use the 

method of accounting used in its books and records prepared according to its accounting procedures.

Expenses

Under an accrual method of accounting, you 

generally deduct or capitalize a business expense when both of the following apply.

1. The all-events test has been met. This test 

is met when:

a. All events have occurred that fix the 

fact that you have a liability, and

b. The amount of the liability can be determined with reasonable accuracy.

2. Economic performance has occurred.

Economic performance. Generally, you cannot deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided to 

you, or for your use of property, economic performance occurs as the property or services are 

provided or as the property is used. If your expense is for property or services you provide to 

others, economic performance occurs as you 

provide the property or services.

Example. Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. To take advantage of early payment 

discounts, Jane paid for seed in October 2022. 

The seed was delivered in March 2023. Economic performance did not occur until the seed 

was delivered and planted. Jane incurs the expense in 2023.

An exception to the economic performance 

rule allows certain recurring items to be treated 

as incurred during a tax year even though economic performance has not occurred. For more 

information, see Economic Performance in Pub. 

538.

Special rule for related persons. Business 

expenses and interest owed to a related person 

who uses the cash method of accounting are 

not deductible until you make the payment and 

the corresponding amount is includible in the 

related person's gross income. Determine the 

relationship for this rule as of the end of the tax 

year for which the expense or interest would 

otherwise be deductible.

Accrual Method Required

Generally, the following businesses, if engaged 

in farming, are required to use an accrual 

method of accounting.

1. A corporation that has gross receipts of 

more than $29 million.

2. A partnership with a corporation as a partner, if that corporation meets the requirements of (1) above.

3. A tax shelter (discussed below).

Note. Items (1) and (2) above do not apply 

to an S corporation or a business operating a 

nursery or sod farm, or the raising or harvesting 

of trees (other than fruit and nut trees).

Tax shelter. A tax shelter is a partnership, noncorporate enterprise, or S corporation that 

meets either of the following tests.

1. Its principal purpose is the avoidance or 

evasion of federal income tax.

2. It is a farming syndicate. A farming syndicate is an entity that meets either of the 

following tests.

Chapter 2 Accounting Methods Page 7
a. Interests in the activity have been offered for sale in an offering required to 

be registered with a federal or state 

agency with the authority to regulate 

the offering of securities for sale.

b. More than 35% of the losses during 

the tax year are allocable to limited 

partners or limited entrepreneurs.

A “limited partner” is one whose personal liability for partnership debts is limited to the 

money or other property the partner contributed 

or is required to contribute to the partnership.

A “limited entrepreneur” is one who has an 

interest in an enterprise other than as a limited 

partner and does not actively participate in the 

management of the enterprise.

Note. If a farming business has average annual gross receipts of $29 million or less for the 

3 preceding tax years and is not a tax shelter, 

the farm is not subject to the uniform capitalization rules. See Uniform capitalization rules, 

later. Also, see Uniform Capitalization Rules in 

chapter 6.

Farm Inventory

If you are required to keep an inventory, you 

should keep a complete record of your inventory as part of your farm records. This record 

should show the actual count or measurement 

of the inventory. It should also show all factors 

that enter into its valuation, including quality and 

weight, if applicable. Below are some items that 

could be included in inventory.

Hatchery business. If you are in the hatchery 

business, and use an accrual method of accounting, you must include in inventory eggs in 

the process of incubation.

Products held for sale. All harvested and purchased farm products held for sale or for feed or 

seed, such as grain, hay, silage, concentrates, 

cotton, tobacco, etc., must be included in inventory.

Supplies. Supplies acquired for sale or that 

become a physical part of items held for sale 

must be included in inventory. Deduct the cost 

of supplies in the year used or consumed in operations. Do not include incidental supplies in 

inventory as these are deductible in the year of 

purchase.

Livestock. Livestock held primarily for sale 

must be included in inventory. Livestock held for 

draft, breeding, or dairy purposes can either be 

depreciated or included in inventory. Also, see 

Unit-livestock-price method, later. If you are in 

the business of breeding and raising chinchillas, 

mink, foxes, or other fur-bearing animals, these 

animals are livestock for inventory purposes.

Growing crops. Generally, growing crops are 

not required to be included in inventory. However, if the crop has a preproductive period of 

more than 2 years, you may have to capitalize 

(or include in inventory) costs associated with 

the crop.

Uniform capitalization rules. The following applies if you are required to use an accrual 

method of accounting.

• The uniform capitalization rules apply to all 

costs of raising a plant, even if the preproductive period of raising a plant is 2 years 

or less.

• The costs of animals are subject to the uniform capitalization rules.

Note. If a farming business has average annual gross receipts of $29 million or less for the 

3 preceding tax years and is not a tax shelter, 

the farm is not subject to the uniform capitalization rules. See Uniform Capitalization Rules in 

chapter 6.

Items to include in inventory. Your inventory 

should include all items held for sale, or for use 

as feed, seed, etc., whether raised or purchased, that are unsold at the end of the year.

Inventory valuation methods. The following 

methods, described below, are those generally 

available for valuing inventory. The method you 

use must conform to generally accepted accounting principles for similar businesses and 

must clearly reflect income.

• Cost.

• Lower of cost or market.

• Farm-price method.

• Unit-livestock-price method.

Cost and lower of cost or market methods. See Pub. 538 for information on these valuation methods.

If you value your livestock inventory at 

cost or the lower of cost or market, you 

do not need IRS approval to change to 

the unit-livestock-price method. However, if you 

value your livestock inventory using the 

farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method.

Farm-price method. Under this method, 

each item, whether raised or purchased, is valued at its market price less the direct cost of 

disposition. Market price is the current price at 

the nearest market in the quantities you usually 

sell. Cost of disposition includes broker's commissions, freight, hauling to market, and other 

marketing costs. If you use this method, you 

must use it for your entire inventory, except that 

livestock can be inventoried under the unit-livestock-price method.

Unit-livestock-price method. This method 

recognizes the difficulty of establishing the exact costs of producing and raising each animal. 

You group or classify livestock according to type 

and age and use a standard unit price for each 

animal within a class or group. The unit price 

you assign should reasonably approximate the 

normal costs incurred in producing the animals 

in such classes. Unit prices and classifications 

are subject to approval by the IRS on examination of your return. You must annually reevaluate 

your unit livestock prices and adjust the prices 

upward or downward to reflect increases or decreases in the costs of raising livestock. IRS approval is not required for these adjustments. 

TIP

Any other changes in unit prices or classifications do require IRS approval.

If you use this method, include all raised 

livestock in inventory, regardless of whether 

they are held for sale or for draft, breeding, 

sport, or dairy purposes. This method accounts 

only for the increase in cost of raising an animal 

to maturity. It does not provide for any decrease 

in the animal's market value after it reaches maturity. Also, if you raise cattle, you are not required to inventory hay you grow to feed your 

herd.

Do not include animals that were sold or lost 

in the year-end inventory. If your records do not 

show which animals were sold or lost, treat the 

first animals acquired as sold or lost. The animals on hand at the end of the year are considered those most recently acquired.

You must include in inventory all livestock 

purchased primarily for sale. You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport, or 

dairy purposes. However, you must be consistent from year to year, regardless of the method 

you have chosen. You cannot change your 

method without obtaining approval from the 

IRS.

You must include in inventory animals purchased after maturity or capitalize them at their 

purchase price. If the animals are not mature at 

purchase, increase the cost at the end of each 

tax year according to the established unit price. 

However, in the year of purchase, do not increase the cost of any animal purchased during 

the last 6 months of the year. This “no increase” 

rule does not apply to tax shelters, which must 

make an adjustment for any animal purchased 

during the year. It also does not apply to taxpayers that must make an adjustment to reasonably 

reflect the particular period in the year in which 

animals are purchased, if necessary to avoid 

significant distortions in income.

Note. A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. This applies to 

any plant or animal, even if the farmer does not 

hold or treat the plant or animal as inventory 

property.

Cash Versus Accrual Method

The following examples compare the cash and 

accrual methods of accounting.

Example 1, Accrual Method. You are a 

farmer who uses an accrual method of accounting. You keep your books on the calendar year 

basis. You sell grain in December 2023 but you 

are not paid until January 2024. Because you 

use the accrual method, you report the grain 

sale in 2023 because that is when the income 

was earned, even though you did not receive 

the income until 2024.

Example 2, Cash Method. Assume the 

same facts as in Example 1 except that you use 

the cash method and there was no constructive 

receipt of the sales proceeds in 2023. Under the 

cash method, you include the sales proceeds in 

income in 2024, the year you receive payment. 

You deduct the costs of producing the grain in 

the year you pay for them.

Page 8 Chapter 2 Accounting Methods
Special Methods

of Accounting

There are special methods of accounting for 

certain items of income and expense.

Crop method. If you do not harvest and dispose of your crop in the same tax year that you 

plant it, you can, with IRS approval, use the crop 

method of accounting. You cannot use the crop 

method for any tax return, including your first tax 

return, unless you receive approval from the 

IRS. Under this method, you deduct the entire 

cost of producing the crop, including the expense of seed or young plants, in the year you 

realize income from the crop.

See chapter 4 for details on deducting the 

costs of operating a farm. Also, see Regulations 

section 1.162-12.

Other special methods. Other special methods of accounting apply to the following items.

• Amortization, see chapter 7.

• Casualties, see chapter 11.

• Condemnations, see chapter 11.

• Depletion, see chapter 7.

• Depreciation, see chapter 7.

• Farm business expenses, see chapter 4.

• Farm income, see chapter 3.

• Installment sales, see chapter 10.

• Soil and water conservation expenses, see 

chapter 5.

• Thefts, see chapter 11.

Combination Method

Generally, you can use any combination of 

cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 

However, the following restrictions apply.

• If you use the cash method for figuring your 

income, you must use the cash method for 

reporting your expenses.

• If you use an accrual method for reporting 

your expenses, you must use an accrual 

method for figuring your income.

Changes in Methods of 

Accounting

A change in your method of accounting includes a change in:

• Your overall method, such as from the cash 

method to an accrual method, and

• Your treatment of any material item, such 

as a change in your method of valuing inventory. For example, you change your inventory method from the farm-price 

method to the unit-livestock-price method.

Generally, once you have set up your accounting method, you must receive approval from the 

IRS before you can change either an overall 

method of accounting or the accounting treatment of any material item. A user fee may be required for any non-automatic change requests.

Form 3115. To obtain approval, you must generally file Form 3115. There are instances when 

you can obtain automatic consent to change 

certain accounting methods. In other instances, 

you can file Form 3115 using the non-automatic 

change request procedures to request an accounting method change. For more information, 

see Form 3115 and the Instructions for Form 

3115. Also, see Pub. 538.

3.

Farm Income

Reminders

Coronavirus Food Assistance Program 

(CFAP) payments. You must report the full 

amount of the CFAP payments you received in 

2023 as gross income on Schedule F (Form 

1040). See CFAP, later.

Introduction

You may receive income from many sources. 

You must report the income from all the different 

sources on your tax return, unless it is excluded 

by law. Where you report the income on your 

tax return depends on its source.

This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss 

From Farming. For information on where to report other income, see the Instructions for 

Forms 1040 and 1040-SR, U.S. Individual Income Tax Return.

Accounting method. The rules discussed in 

this chapter assume you use the cash method 

of accounting. Under the cash method, you 

generally include an item of income in gross income in the year you receive it. See Cash 

Method in chapter 2.

If you use an accrual method of accounting, 

different rules may apply to your situation. See 

Accrual Method in chapter 2.

Topics

This chapter discusses:

• Schedule F (Form 1040)

• Sales of farm products

• Rents (including crop shares)

• Agricultural program payments

• Income from cooperatives

• Cancellation of debt

• Income from other sources

• Income averaging for farmers

Useful Items

You may want to see:

Publication

525 Taxable and Nontaxable Income

544 Sales and Other Dispositions of 

Assets

550 Investment Income and Expenses

 525

 544

 550

Bankruptcy Tax Guide

Passive Activity and At-Risk Rules

Canceled Debts, Foreclosures, 

Repossessions, and Abandonments

Form (and Instructions)

Reduction of Tax Attributes Due to 

Discharge of Indebtedness

Supplemental 

Income and Loss

Profit or Loss From 

Farming

Income Averaging for 

Farmers and Fishermen

Certain Government Payments

iscellaneous Information

onemployee Compensation

axable Distributions

Received From Cooperatives

Sales of Business Property

Farm Rental Income and

Expenses

See chapter 16 for information about getting 

publications and forms.

Schedule F (Form 1040)

Individuals, trusts, partnerships, S corporations, 

LLCs taxed as partnerships, and sole members 

of a domestic LLC engaged in the business of 

farming report farm income on Schedule F 

(Form 1040). Use this schedule to figure the net 

profit or loss from regular farming operations.

Corporations use Form 1120 to report 

the income or loss from regular farming 

operations.

Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or 

profit, either as owner or tenant. This includes 

income from operating a stock, dairy, poultry, 

fish, fruit, or truck farm and income from operating a plantation, ranch, range, orchard, or grove. 

It also includes income from the sale of crop 

shares if you materially participate in producing 

the crop. See Rents (Including Crop Shares), 

later.

Income received from operating a nursery, 

which specializes in growing ornamental plants, 

is considered to be income from farming.

Income reported on Schedule F doesn't include gains or losses from sales or other dispositions of the following farm assets.

• Land.

• Depreciable farm equipment.

• Buildings and structures.

• Livestock held for draft, breeding, sport, or 

dairy purposes.

Gains and losses from most dispositions of 

farm assets are discussed in chapters 8 and 9. 

Gains and losses from casualties, thefts, and 

condemnations are discussed in chapter 11.

 908

 925

 4681

 982

 Sch E (Form 1040)

 Sch F (Form 1040)

 Sch J (Form 1040)

 1099-G

 1099-MISC

 1099 NEC

 1099-PATR

 4797

 4835

TIP

Chapter 3 Farm Income Page 9
Sales of Farm Products

Where to report. Table 3-1 shows where to report the sale of farm products on your tax return.

Schedule F. Amounts received from the 

sales of products you raised on your farm for 

sale (or bought for resale), such as livestock, 

produce, or grains, are reported on Schedule F. 

This includes money and the fair market value 

of any property or services you receive. When 

you sell farm products bought for resale, your 

profit or loss is the difference between your selling price (money plus the fair market value of 

any property) and your basis in the item (usually 

the cost). See chapter 6 for information on the 

basis of assets. You generally report these 

amounts on Schedule F for the year you receive 

payment.

Example. In 2022, you bought 20 feeder 

calves for $20,000 for resale. You sold them in 

2023 for $25,000. You report the $25,000 sales 

price on Schedule F, line 1a, subtract your 

$20,000 basis on line 1b, and report the resulting $5,000 profit on line 1c.

Form 4797. Sales of livestock held for draft, 

breeding, sport, or dairy purposes may result in 

ordinary or capital gains or losses, depending 

on the circumstances. In either case, you 

should not report these sales on Schedule F. Instead, report these sales on Form 4797. See 

Livestock under Ordinary or Capital Gain or 

Loss in chapter 8. Animals that you don't hold 

primarily for sale are considered business assets of your farm. Some sales of timber/forest 

products are also reported on Form 4797. See 

Timber in chapter 8 for more information.

Sale by agent. If your agent sells your farm 

products, you have constructive receipt of the 

income when your agent receives payment and 

you must include the net proceeds from the sale 

in gross income for the year the agent receives 

payment. This applies even if your agent pays 

you in a later year. For a discussion on constructive receipt of income, see Cash Method 

under Accounting Methods in chapter 2.

Sales Caused by 

Weather-Related Conditions

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. This applies to livestock that are 

held for sale (either raised or purchased) as well 

as livestock held for draft, breeding, sport, or 

dairy purposes. You must meet all the following 

conditions to qualify.

• Your principal trade or business is farming.

• You use the cash method of accounting.

• You can show that, under your usual business practices, you wouldn't have sold or 

exchanged the additional animals this year 

except for the weather-related condition.

• The weather-related condition caused an 

area to be designated as eligible for assistance by the federal government.

Disaster assistance and emergency 

relief for individuals and businesses. Special tax law provisions 

may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares 

their location to be a major disaster area. Get 

the latest tax relief guidance in disaster situations at IRS.gov/uac/Tax-Relief-in-DisasterSituations and in disaster area losses-agriculture tax tips at IRS.gov/businesses/SmallBusinesses-Self-Employed/DisasterAssistance-and-Emergency-Relief-forIndividuals-and-Businesses.

Sales or exchanges made before an area 

became eligible for federal assistance qualify if 

the weather-related condition that caused the 

sale or exchange also caused the area to be 

designated as eligible for federal assistance. 

The designation can be made by the President, 

the Department of Agriculture (or any of its 

agencies), or by other federal departments or 

agencies.

A weather-related sale or exchange of 

livestock (other than poultry) held for 

draft, breeding, or dairy purposes may 

be an involuntary conversion. See Other Involuntary Conversions in chapter 11.

Usual business practice. 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. Do 

this by considering all the facts and circumstances, but don't take into account your sales in 

any earlier year for which you postponed the 

gain. If you haven't yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general 

region.

Connection with affected area. The livestock 

doesn't have to be raised or sold in an area affected by a weather-related condition for the 

postponement to apply. However, the sale must 

occur solely because of a weather-related condition that affected the water, grazing, or other 

requirements of the livestock. This requirement 

generally won't be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition aren't substantial in relation to the total costs of holding 

the livestock.

Classes of livestock. You must figure the 

amount to be postponed separately for each 

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generic class of animals—for example, hogs, 

sheep, and cattle. Don’t separate animals into 

classes based on age, sex, or breed.

Amount to be postponed. Follow these steps 

to figure the amount of gain to be postponed for 

each class of animals.

1. Divide the total income realized from the 

sale of all livestock in the class during the 

tax year by the total number of such livestock sold. For this purpose, don't treat 

any postponed gain from the previous year 

as income received from the sale of livestock.

2. Multiply the result in (1) by the excess 

number of such livestock sold solely because of weather-related conditions.

Example. You're a calendar year taxpayer 

and you normally wean 100 beef calves in the 

fall and feed them through the winter, selling in 

January or February. As a result of drought, you 

decide you don't have enough feed for all of 

your calves, so you sell 35 head in the fall at 

weaning and plan to sell the remaining 65 

calves in January. As a result, you sold 135 

head during 2022. You realized $121,500 from 

the sale ($121,500 ÷ 135 = $900 per head). On 

August 10, 2022, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. The income you can 

postpone until 2023 is $31,500 [($121,500 ÷ 

135) × 35].

How to postpone gain. To postpone gain, attach a statement to your tax return for the year 

of the sale. The statement must include your 

name and address and give the following information for each class of livestock for which 

you're postponing gain.

• A statement that you're postponing gain 

under section 451(e).

• Evidence of the weather-related conditions 

that forced the early sale or exchange of 

the livestock and the date, if known, on 

which an area was designated as eligible 

for assistance by the federal government 

because of weather-related conditions.

• A statement explaining the relationship of 

the area affected by the weather-related 

condition to your early sale or exchange of 

the livestock.

• The number of animals sold in each of the 

3 preceding years.

• The number of animals you would have 

sold in the tax year had you followed your 

normal business practice in the absence of 

weather-related conditions.

Table 3-1. Where To Report Sales of Farm Products

Item Sold Schedule F* Form 4797**

Farm products raised for sale X 

Farm products bought for resale X 

Farm assets not held primarily for sale, such as 

livestock held for draft, breeding, sport, or dairy 

purposes (bought or raised), and equipment X

* See the Instructions for Schedule F for more information.

** See the Instructions for Form 4797 for more information.

Page 10 Chapter 3 Farm Income
• The total number of animals sold and the 

number sold because of weather-related 

conditions during the tax year.

• A computation, as described above, of the 

income to be postponed for each class of 

livestock.

Generally, you must file the statement and 

the return by the due date of the return, including extensions. However, for sales or exchanges treated as an involuntary conversion 

from weather-related sales of livestock in an 

area eligible for federal assistance (discussed 

in chapter 11), you are required to attach a 

statement in the year you realize the gain and 

again in the year you replace the livestock. For 

other sales or exchanges, if you timely filed your 

return for the year without postponing gain, you 

can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed 

pursuant to section 301.9100-2” at the top of 

the amended return. File the amended return at 

the same address you filed the original return. 

Once you have filed the statement, you can 

cancel your postponement of gain only with the 

approval of the IRS.

Rents (Including Crop 

Shares)

The rent you receive for the use of your farmland by another person or entity is generally 

rental income, not farm income. However, the 

rent is farm income if:

1. Your arrangement with your tenant provides that you will materially participate in 

the production or management of production of the farm products on the land, and

2. You materially participate.

See Landlord Participation in Farming in chapter 12.

Pasture income and rental. If you pasture 

someone else's livestock and take care of them 

for a fee, the income is from your farming business. You must enter it as “Other Income” on 

Schedule F. If you simply rent your pasture or 

other farm real estate for a flat cash amount 

without providing services, report the income as 

rent on Schedule E (Form 1040), Part I.

Crop Shares

You must include rent you receive in the form of 

crop shares in income in the year you convert 

the shares to money or the equivalent of money. 

It doesn't matter whether you use the cash 

method of accounting or an accrual method of 

accounting.

If you receive rent in the form of crop shares 

or livestock, the rental income is included in 

self-employment income if:

1. Your arrangement with your tenant provides that you will materially participate in 

the production or management of production of the farm products on the land, and

2. You materially participate.

See Landlord Participation in Farming in chapter 12. Report the rental income on Schedule F.

The crop share income isn’t included in 

self-employment income if:

1. Your arrangement with your tenant doesn’t 

provide that you will materially participate 

in the production or management of production of the farm products on the land, 

or

2. You don't materially participate in operating the farm.

Report this income on Form 4835, and carry the 

net income or loss to Schedule E (Form 1040), 

page 2.

Crop shares you use to feed livestock. Crop 

shares you receive as a landlord and feed to 

your livestock are considered converted to 

money when fed to the livestock. You must include the fair market value of the crop shares in 

income at that time. You're entitled to a business expense deduction for the livestock feed in 

the same amount and at the same time you include the fair market value of the crop share as 

rental income. Although these two transactions 

cancel each other for figuring adjusted gross income on Form 1040 or 1040-SR, they may be 

necessary to figure your self-employment tax. 

See Landlord Participation in Farming and Farm 

Optional Method in chapter 12.

Crop shares you give to others (gift). Crop 

shares you receive as a landlord and give to 

others are considered converted to money 

when you make the gift. You must report the fair 

market value of the crop share as income, even 

though someone else receives payment for the 

crop share. This applies even if the gift is made 

to a qualified charitable organization.

Example. A tenant farmed part of your land 

under a crop-share arrangement. The tenant 

harvested and delivered the crop in your name 

to an elevator company. Before selling any of 

the crop, you instructed the elevator company to 

cancel your warehouse receipt and make out 

new warehouse receipts in equal amounts of 

the crop in the names of your children. They sell 

their crop shares in the following year and the 

elevator company makes payments directly to 

your children.

In this situation, you're considered to have 

received rental income and then made a gift of 

that income. You must include the fair market 

value of the crop shares in your income for the 

tax year you gave the crop shares to your children.

Crop share loss. If you're involved in a rental 

or crop-share lease arrangement that isn't included in self-employment income, any loss from 

these activities may be subject to the limits under the passive loss rules.

Agricultural Program 

Payments

You must include in income most government 

payments, such as those for approved conservation practices, livestock indemnity payments, 

or livestock forage disaster payments whether 

you receive them in cash, materials, services, or 

commodity certificates. However, you can exclude from income some payments you receive 

under certain cost-sharing conservation programs if there is a corresponding reduction in 

basis of a related improvement. See Cost-Sharing Exclusion (Improvements), later.

Report the agricultural program payment on 

the appropriate line of Schedule F, Part I. Report 

the full amount even if you return a government 

check for cancellation, refund any of the payment you receive, or the government collects all 

or part of the payment from you by reducing the 

amount of some other payment or Commodity 

Credit Corporation (CCC) loan. However, you 

can deduct the amount you refund or return or 

that reduces some other payment or loan to 

you. Claim the deduction on Schedule F, Part II, 

for the year of repayment or reduction.

Commodity Credit 

Corporation (CCC) Loans

Generally, you don't report loans you receive as 

income. However, if you pledge part or all of 

your production to secure a CCC loan, you can 

treat the loan as if it were a sale of the crop and 

report the loan proceeds as income in the year 

you receive them. You don't need approval from 

the IRS to adopt this method of reporting CCC 

loans.

Once you report a CCC loan as income for 

the year received, you must generally report all 

CCC loans in that year and later years in the 

same way. However, you can obtain for your tax 

year an automatic consent to change your 

method of accounting for loans received from 

the CCC, from including the loan amount in 

gross income for the tax year in which the loan 

is received to treating the loan amount as a 

loan. For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. Revenue Procedure 2008-52, 

2008-36 I.R.B. 587, is available at

IRS.gov/irb/2008-36_IRB#NOT-2008-52.

You can request income tax withholding from CCC loan payments you receive. Use Form W-4V. See chapter 16 

for information about ordering the form.

To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F for the year you receive it. Attach a statement to your return showing the details of the 

loan.

You must file the statement and the return by 

the due date of the return, including extensions. 

If you timely filed your return for the year without 

making the election, you can still make the election by filing an amended return within 6 months 

of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section 

301.9100-2” at the top of the return. File the 

amended return at the same address you filed 

the original return.

When you make this election, the amount 

you report as income becomes your basis in the 

commodity. See chapter 6 for information on the 

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Chapter 3 Farm Income Page 11
basis of assets. If you later repay the loan, redeem the pledged commodity, and sell it, you 

report as income at the time of sale the sale 

proceeds minus your basis in the commodity. If 

the sale proceeds are less than your basis in 

the commodity, you can report the difference as 

a loss on Schedule F.

If you forfeit the pledged crops to the CCC in 

full payment of the loan, the forfeiture is treated 

for tax purposes as a sale of the crops. If you 

didn't report the loan proceeds as income for 

the year you received them, you must include 

them in your income for the year of the forfeiture.

Form 1099-A. If you forfeit pledged crops to 

the CCC in full payment of a loan, you may receive a Form 1099-A. “CCC” should be shown 

in box 6. The amount of any CCC loan outstanding when you forfeited your commodity 

should also be indicated on the form.

Market Gain

Under the CCC nonrecourse marketing assistance loan program, your repayment amount for 

a loan secured by your pledge of an eligible 

commodity is generally based on the lower of 

the loan rate or the prevailing world market price 

for the commodity on the date of repayment. If 

you repay the loan when the world price is 

lower, the difference between that repayment 

amount and the original loan amount is market 

gain. Whether you use cash or CCC certificates 

to repay the loan, you will receive a Form 

1099-G showing the market gain you realized. 

Market gain should be reported as follows.

• If you elected to include the CCC loan in 

income in the year you received it, don’t include the market gain in income. However, 

reduce (adjust) the basis of the commodity 

for the amount of the market gain.

• If you didn’t include the CCC loan in income in the year received, include the market gain in your income.

The following examples show how to report 

market gain.

Example 1. Mike Green is a cotton farmer. 

He uses the cash method of accounting and 

files his tax return on a calendar year basis. He 

has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. In 2022, Mike pledged 10,000 pounds 

of cotton as collateral for a CCC loan of $5,200 

(a loan rate of $0.52 per pound). In 2023, he repaid the loan and redeemed the cotton for 

$4,000 when the world price was $0.40 per 

pound (lower than the loan amount). Later in 

2023, he sold the cotton for $6,500.

The market gain on the redemption was 

$0.12 ($0.52 – $0.40) per pound. Mike realized 

total market gain of $1,200 ($0.12 x 10,000 

pounds). How he reports this market gain and 

figures his gain or loss from the sale of the cotton depends on whether he included CCC 

loans in income in 2022.

Included CCC loan. Mike reported the 

$5,200 CCC loan as income for 2022 on Schedule F, line 5a, so he is treated as if he sold the 

cotton for $5,200 when he pledged it and repurchased the cotton for $4,000 when he 

redeemed it. The $1,200 market gain isn’t recognized on the redemption. He reports it for 

2023 as an agricultural program payment on 

Schedule F, line 4a, but doesn't include it as a 

taxable amount on line 4b.

Mike's basis in the cotton after he redeemed 

it was $4,000, which is the redemption (repurchase) price paid for the cotton. His gain from the 

sale is $1,200 ($5,200 – $4,000). He reports the 

$5,000 sale on line 1a and the $4,000 basis on 

line 1b. After subtracting his basis from the sale, 

Mike will have a $1,200 gain for 2023 on Schedule F, line 1c.

Excluded CCC loan. Mike didn’t elect to 

report the $5,200 CCC loan as income and 

therefore didn’t include it on his 2022 Schedule F. When he paid $4,000 to pay off the loan in 

2023, he had to recognize $1,200 of income 

from market gain.

Example 2. The facts are the same as in 

Example 1, except that, instead of selling the 

cotton for $6,500 after redeeming it, Mike entered into an option-to-purchase contract with a 

cotton buyer before redeeming the cotton. Under that contract, Mike authorized the cotton 

buyer to pay the CCC loan on Mike's behalf. In 

2023, the cotton buyer repaid the loan for 

$4,000 and immediately exercised his option, 

buying the cotton for $4,000. How Mike reports 

the $1,200 market gain on the redemption of the 

cotton and figures his gain or loss from its sale 

depends on whether he included CCC loans in 

income in 2022.

Included CCC loan. As in Example 1, Mike 

is treated as though he sold the cotton for 

$5,200 when he pledged it and repurchased the 

cotton for $4,000 when the cotton buyer redeemed it for him. The $1,200 market gain isn’t 

recognized on the redemption. Mike reports it 

for 2023 as an agricultural program payment on 

Schedule F, line 4a, but doesn't include it as a 

taxable amount on line 4b.

Also, as in Example 1, Mike's basis in the 

cotton when the cotton buyer redeemed it for 

him was $4,000. Mike has no gain or loss on its 

sale to the cotton buyer for that amount.

Excluded CCC loan. As in Example 1, 

Mike didn't report the $5,200 loan as income in 

2022 and must recognize $1,200 of income 

from market gain in 2023.

Conservation Reserve

Program (CRP)

Under the CRP, if you own or operate highly 

erodible or other specified cropland, you may 

enter into a long-term contract with the USDA, 

agreeing to convert to a less intensive use of 

that cropland. You must include the annual payments and any one-time incentive payment you 

receive under the program on the appropriate 

lines of Schedule F. Cost-share payments you 

receive may qualify for the cost-sharing exclusion. See Cost-Sharing Exclusion (Improvements), later. CRP payments are reported to 

you on Form 1099-G.

Individuals who are receiving social security retirement or disability benefits 

may exclude CRP payments when calculating self-employment tax. See the Instructions for Schedule SE (Form 1040).

Crop Insurance and Crop 

Disaster Payments

You must include in income any crop insurance 

proceeds you receive as the result of physical 

crop damage or reduction of crop revenue, or 

both. You generally include them in the year you 

receive them. Treat as crop insurance proceeds 

the crop disaster payments you receive from the 

federal government as the result of destruction 

or damage to crops, or the inability to plant 

crops, because of drought, flood, or any other 

natural disaster.

You can request income tax withholding from crop disaster payments you 

receive from the federal government. 

Use Form W-4V. See chapter 16 for information 

about ordering the form.

Election to postpone reporting until the following year. You can postpone reporting some 

or all crop insurance proceeds as income until 

the year following the year the physical damage 

occurred if you meet all the following conditions.

• You use the cash method of accounting.

• You receive the crop insurance proceeds in 

the same tax year the crops are damaged.

• You can show that under your normal business practice you would have included 

more than 50% of the income from the 

damaged crops in any tax year following 

the year the damage occurred.

Proceeds received from revenue insurance 

policies may be the result of either yield loss 

due to physical damage or to decline in price 

from planting to harvest. For these policies, only 

the amount of the proceeds received as a result 

of yield loss can be deferred. Proceeds received from weather insurance policies cannot 

be deferred if the payment is based on rainfall 

amounts and is not a result of physical damage 

to a crop.

To postpone reporting some or all crop insurance proceeds received in 2023, report the 

amount you received on Schedule F, line 6a, but 

don't include it as a taxable amount on line 6b. 

Check the box on line 6c and attach a statement to your tax return. The statement must include your name and address and contain the 

following information.

• A statement that you're making an election 

under section 451(g) and Regulations section 1.451-6.

• The specific crop or crops physically destroyed or damaged.

• A statement that under your normal business practice you would have included 

more than 50% of the income from some 

or all of the destroyed or damaged crops in 

gross income for a tax year following the 

year the crops were destroyed or damaged.

• The cause of the physical destruction or 

damage and the date or dates it occurred.

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Page 12 Chapter 3 Farm Income
• The total payments you received from insurance carriers, itemized for each specific 

crop, and the date you received each payment.

• The name of each insurance carrier from 

whom you received payments.

One election covers all crops representing a 

single trade or business. If you have more than 

one farming business, make a separate election 

for each one. For example, if you operate two 

separate farms on which you grow different 

crops and you keep separate books for each 

farm, you should make two separate elections 

to postpone reporting insurance proceeds you 

receive for crops grown on each of your farms.

An election is binding for the year unless the 

IRS approves your request to change it. To request IRS approval to change your election, 

write to the IRS at the following address, giving 

your name, address, identification number, the 

year you made the election, and your reasons 

for wanting to change it.

Ogden Submission Processing Center

P. O. Box 9941

Ogden, UT 84409

Feed Assistance and 

Payments

The Disaster Assistance Act of 1988 authorizes 

programs to provide feed assistance, reimbursement payments, and other benefits to 

qualifying livestock producers if the Secretary of 

Agriculture determines that, because of a natural disaster, a livestock emergency exists. 

These programs include partial reimbursement 

for the cost of purchased feed and for certain 

transportation expenses. They also include the 

donation or sale at a below-market price of feed 

owned by the CCC.

Include in income:

• The market value of donated feed received,

• The difference between the market value 

and the price you paid for feed you buy at 

below-market prices, and

• Any cost reimbursement you receive.

You must include these benefits in income in 

the year you receive them. You can't postpone 

reporting them under the rules explained earlier 

for weather-related sales of livestock or crop insurance proceeds. Report the benefits on 

Schedule F, Part I, as agricultural program payments. You can usually take a current deduction 

for the same amount as a feed expense.

Cost-Sharing Exclusion 

(Improvements)

You can exclude from your income part or all of 

a payment you receive under certain federal or 

state cost-sharing conservation, reclamation, 

and restoration programs. However, see Effects 

of the exclusion, later. A payment is any economic benefit you get as a result of an improvement. However, this exclusion applies only to 

that part of a payment that meets all three of the 

following tests.

1. It was for a capital expense. You can't exclude any part of a payment for an expense you can deduct in the year you pay 

or incur it. You must include the payment 

for a deductible expense in income, and 

you can take any offsetting deduction. See 

chapter 5 for information on deducting soil 

and water conservation expenses.

2. It doesn't substantially increase your annual income from the property for which 

it's made. An increase in annual income is 

substantial if it's more than the greater of 

the following amounts.

a. 10% of the average annual income 

derived from the affected property before receiving the improvement.

b. $2.50 times the number of affected 

acres.

3. The Secretary of Agriculture certified that 

the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for 

wildlife.

Qualifying programs. If the three tests listed 

above are met, you can exclude part or all of the 

payments from the following programs.

• The rural clean water program authorized 

by the Federal Water Pollution Control Act.

• The rural abandoned mine program authorized by the Surface Mining Control and 

Reclamation Act of 1977.

• The water bank program authorized by the 

Water Bank Act.

• The emergency conservation measures 

program authorized by title IV of the Agricultural Credit Act of 1978.

• The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act.

• The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act.

• The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the 

Soil Conservation and Domestic Allotment 

Act.

• Certain small watershed programs, listed 

later.

• Any program of a state, territory of the United States, a political subdivision of any of 

these, or of the District of Columbia, under 

which payments are made to individuals 

primarily for conserving soil, protecting or 

restoring the environment, improving forests, or providing a habitat for wildlife. Several state programs have been approved. 

For information about the status of those 

programs, contact the state offices of the 

Farm Service Agency (FSA) and the Natural Resources and Conservation Service 

(NRCS).

Small watershed programs. If the three 

tests listed earlier are met, you can exclude part 

or all of the payments you receive under the following programs for improvements made in 

connection with a watershed.

• The programs under the Watershed Protection and Flood Prevention Act.

• The flood prevention projects under the 

Flood Control Act of 1944.

• The Emergency Watershed Protection Program under the Flood Control Act of 1950.

• Certain programs under the Colorado 

River Basin Salinity Control Act.

• The Wetlands Reserve Program authorized by the Food Security Act of 1985, the 

Federal Agriculture Improvement and Reform Act of 1996, and the Farm Security 

and Rural Investment Act of 2002.

• The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 

1996.

• The Wildlife Habitat Incentives Program 

(WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996.

• The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000.

• The Agricultural Management Assistance 

Program authorized by the Agricultural 

Risk Protection Act of 2000.

• The Conservation Reserve Program authorized by the Food Security Act of 1985 

and the Federal Agriculture Improvement 

and Reform Act of 1996.

• The Forest Land Enhancement Program 

authorized under the Farm Security and 

Rural Investment Act of 2002.

• The Conservation Security Program authorized by the Food Security Act of 1985.

• The Forest Health Protection Program 

(FHPP) authorized by the Cooperative Forestry Assistance Act of 1978.

Income realized. The gross income you realize upon getting an improvement under these 

cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any).

Value of the improvement. You determine 

the value of the improvement by multiplying its 

fair market value (defined in chapter 6) by a 

fraction. The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following 

items.

• Any government payments under a program not listed earlier.

• Any part of a government payment under a 

program listed earlier that the Secretary of 

Agriculture hasn't certified as primarily for 

conservation.

• Any government payment to you for rent or 

for your services.

The denominator of the fraction is the total cost 

of the improvement.

Excludable portion. The excludable portion is the present fair market value of the right 

to receive annual income from the affected 

acreage of the greater of the following amounts.

1. 10% of the prior average annual income 

from the affected acreage. The prior average annual income is the average of the 

gross receipts from the affected acreage 

for the last 3 tax years before the tax year 

in which you started to install the improvement.

Chapter 3 Farm Income Page 13
2. $2.50 times the number of affected acres.

The calculation of present fair market 

value of the right to receive annual income is too complex to discuss in this 

publication. You may need to consult your tax 

advisor for assistance.

Example. One hundred acres of your land 

was reclaimed under a rural abandoned mine 

program contract with the NRCS of the USDA. 

The total cost of the improvement was 

$500,000. The USDA paid $490,000. You paid 

$10,000. The value of the cost-sharing improvement is $15,000.

The present fair market value of the right to 

receive the annual income described in (1) 

above was calculated to be $1,380, and the 

present fair market value of the right to receive 

the annual income described in (2) is $1,550. 

The excludable portion is the greater amount, 

$1,550.

You figure the amount to include in gross income as follows:

Value of cost-sharing 

improvement .................. $15,000

Minus: Your share ..... $10,000

Excludable 

portion ........ 1,550 11,550

Amount included in income .... $ 3,450

Effects of the exclusion. When you figure the 

basis of property you acquire or improve using 

cost-sharing payments excluded from income, 

subtract the excluded payments from your capital costs. Any payment excluded from income 

isn't part of your basis. In the example above, 

the increase in basis is $500,000 – $490,000 + 

$3,450 = $13,450.

In addition, you can't take depreciation, amortization, or depletion deductions for the part of 

the cost of the property for which you receive 

cost-sharing payments you exclude from income.

How to report the exclusion. Attach a statement to your tax return (or amended return) for 

the tax year you receive the last government 

payment for the improvement. The statement 

must include the following information.

• The dollar amount of the cost funded by 

the government payment.

• The value of the improvement.

• The amount you're excluding.

Report the total cost-sharing payments you 

receive on Schedule F, line 4a, and the taxable 

amount on line 4b.

Recapture. If you dispose of the property 

within 20 years after you received the excluded 

payments, you must treat as ordinary income 

part or all of the cost-sharing payments you excluded. In the above example, if the 100 acres 

were sold within 20 years of the exclusion for a 

gain of $2,000, $1,550 of that amount would be 

included in ordinary income. You must report 

the recapture on Form 4797. See Section 1255 

property under Other Gains in chapter 9.

Electing not to exclude payments. You can 

elect not to exclude all or part of any payments 

CAUTION

!

you receive under these programs. If you make 

this election for all of these payments, none of 

the above restrictions and rules apply. You must 

make this election by the due date, including extensions, for filing your return. In the example 

above, an election not to exclude payments results in $5,000 included in income and a 

$15,000 increase in basis. If you timely filed 

your return for the year without making the election, you can still make the election by filing an 

amended return within 6 months of the due date 

of the return (excluding extensions). Write “Filed 

pursuant to section 301.9100-2” at the top of 

the amended return and file it at the same address you filed the original return.

CFAP

The CFAP provides direct payments to producers of eligible agricultural commodities adversely affected by the coronavirus (COVID-19) 

pandemic to help offset sales losses and increased marketing costs associated with the 

COVID-19 pandemic.

CFAP payments are agricultural program 

payments that you must include in gross income. Report the full amount of your CFAP payments on Schedule F (Form 1040), lines 4a and 

4b. Go to USDA.gov for more information.

Other Payments

You must include most other government program payments in income.

Fertilizer and Lime

Include in income the value of fertilizer or lime 

you receive under a government program. How 

to claim the offsetting deduction is explained 

under Fertilizer and Lime in chapter 4.

Improvements

If government payments are based on improvements, such as a pollution control facility, you 

must include them in income. You must also 

capitalize the full cost of the improvement. 

Since you have included the payments in income, they don't reduce your basis. However, 

see Cost-Sharing Exclusion (Improvements), 

earlier, for additional information.

Payment to More Than One 

Person

The USDA reports program payments to the 

IRS. It reports a program payment intended for 

more than one person as having been paid to 

the person whose identification number is on 

record for that payment (payee of record). If 

you, as the payee of record, receive a program 

payment belonging to someone else, such as 

your landlord, the amount belonging to the other 

person is a nominee distribution. You should file 

Form 1099-G to report the identity of the actual 

recipient to the IRS. You should also give this information to the recipient. You can avoid the inconvenience of unnecessary inquiries about the 

identity of the recipient if you file this form.

Report the total amount reported to you as 

the payee of record on Schedule F. However, 

don't report as a taxable amount any amount 

belonging to someone else.

See chapter 16 for information about ordering Form 1099-G.

Income From 

Cooperatives

If you buy farm supplies through a cooperative, 

you may receive income from the cooperative in 

the form of patronage dividends (refunds). If you 

sell your farm products through a cooperative, 

you may receive either patronage dividends or a 

per-unit retain certificate, explained later, from 

the cooperative.

Form 1099-PATR. The cooperative will report 

the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. Form 

1099-PATR may also show an alternative minimum tax adjustment that you must include on 

Form 6251 if you're required to file the form. For 

information on the alternative minimum tax, see 

the Instructions for Form 6251.

Patronage Dividends

You generally report patronage dividends as income on Schedule F for the tax year you receive them. They include the following items.

• Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative).

• The stated dollar value of qualified written 

notices of allocation.

• The fair market value of other property.

Don’t report as income any patronage dividends you receive from expenditures that 

weren't deductible, such as buying personal or 

family items, capital assets, or depreciable 

property. You must reduce the cost or other basis of these items by the amount of such patronage dividends received. Personal items include 

fuel purchased for personal use and basic local 

telephone service.

If you can't determine what the dividend is 

for, report it as income on Schedule F, lines 3a 

and 3b.

Qualified written notice of allocation. If you 

receive a qualified written notice of allocation as 

part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F in the year you receive it. 

A written notice of allocation is qualified if at 

least 20% of the patronage dividend is paid in 

money or by qualified check and either of the 

following conditions is met.

1. The notice must be redeemable in cash for 

at least 90 days after it's issued, and you 

must have received a written notice of your 

right of redemption at the same time as the 

written notice of allocation.

2. You must have agreed to include the stated dollar value in income in the year you 

receive the notice by doing one of the following.

Page 14 Chapter 3 Farm Income
a. Signing and giving a written agreement to the cooperative.

b. Getting or keeping membership in the 

cooperative after it adopted a bylaw 

providing that membership constitutes 

agreement. The cooperative must notify you in writing of this bylaw and 

give you a copy.

c. Endorsing and cashing a qualified 

check paid as part of the same patronage dividend. You must cash the 

check by the 90th day after the close 

of the payment period for the cooperative's tax year for which the patronage 

dividend was paid.

Qualified check. A qualified check is any 

instrument that's redeemable in money and 

meets both of the following requirements.

• It's part of a patronage dividend that also 

includes a qualified written notice of allocation for which you met condition 2c above.

• It's imprinted with a statement that endorsing and cashing it constitutes the payee's 

consent to include in income the stated 

dollar value of any written notices of allocation paid as part of the same patronage 

dividend.

Loss on redemption. You can deduct on 

Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your 

farming business. The loss is the difference between the stated dollar amount of the qualified 

written notice you included in income and the 

amount you received when you redeemed it.

Nonqualified notice of allocation. Don’t include the stated dollar value of any nonqualified 

notice of allocation in income when you receive 

it. Your basis in the notice is zero. You must include in income for the tax year of disposition 

any amount you receive from its sale, redemption, or other disposition. Report that amount, 

up to the stated dollar value of the notice, on 

Schedule F. However, don't include that amount 

in your income if the notice resulted from buying 

or selling capital assets or depreciable property 

or from buying personal items, as explained in 

the following discussions.

If the amount you receive is more than the 

stated dollar value of the notice, report the excess as the type of income it represents. For example, if it represents interest income, report it 

on your return as interest.

Buying or selling capital assets or depreciable property. Patronage dividends from buying capital assets or depreciable property used 

in your business are not included in income. 

You must, however, reduce the basis of these 

assets by the dividends. This reduction is taken 

into account as of the first day of the tax year in 

which the dividends are received. If the dividends are more than your unrecovered basis, 

reduce the unrecovered basis to zero and include the difference on Schedule F for the tax 

year you receive them.

This rule and the exceptions explained below also apply to amounts you receive from the 

sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from 

buying or selling capital assets or depreciable 

property.

Example. On July 1, 2022, Mr. Brown, a 

patron of a cooperative association, bought a 

used machine for his dairy farm business from 

the association for $2,900. The machine has a 

life of 7 years under MACRS. Mr. Brown files his 

return on a calendar year basis. For 2022, he 

claimed a depreciation deduction of $311, using 

the 10.71% depreciation rate from the 150% 

declining balance, half-year convention table 

(shown in Table A-14 in Appendix A of Pub. 

946). On July 2, 2023, the cooperative association paid Mr. Brown a $300 cash patronage dividend for buying the machine. Mr. Brown adjusts 

the basis of the machine and figures his depreciation deduction for 2022 (and later years) as 

follows.

Cost of machine on July 1, 2022 .......... $2,900

Minus: 2022 depreciation ........ $311

2023 cash dividend ....... $300 $611

Adjusted basis for

 depreciation for 2023: ...........

$2,289

Depreciation rate: 1.0 ÷ 61/2 (remaining recovery period 

as of 1/1/2023) = (0.1538) × 1.5 = 23.07%

Depreciation deduction for 2023

($2,289 × 0.2307) ..............

$528

Exceptions. If the dividends are for buying 

or selling capital assets or depreciable property 

you didn't own at any time during the year you 

received the dividends, you must include them 

on Schedule F, unless one of the following rules 

applies.

• If the dividends relate to a capital asset you 

held for more than 1 year for which a loss 

was or would have been deductible, treat 

them as gain from the sale or exchange of 

a capital asset held for more than 1 year.

• If the dividends relate to a capital asset for 

which a loss wasn't or wouldn't have been 

deductible, don't report them as income 

(ordinary or capital gain).

If the dividends are for selling capital assets 

or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale.

Personal purchases. Because you can't deduct the cost of personal, living, or family items, 

such as supplies, equipment, or services not related to the production of farm income, you can 

omit from the taxable amount of patronage dividends on Schedule F any dividends from buying those items (and you must reduce the cost 

or other basis of those items by the amount of 

the dividends). This rule also applies to 

amounts you receive from the sale, redemption, 

or other disposition of a nonqualified written notice of allocation resulting from these purchases.

Per-Unit Retain Certificates

A per-unit retain certificate is any written notice 

that shows the stated dollar amount of a 

per-unit retain allocation made to you by the cooperative. A per-unit retain allocation is an 

amount paid to patrons for products sold for 

them that's fixed without regard to the net earnings of the cooperative. These allocations can 

be paid in money, other property, or qualified 

certificates.

Per-unit retain certificates issued by a cooperative generally receive the same tax treatment 

as patronage dividends, discussed earlier.

Qualified certificates. Qualified per-unit retain 

certificates are those issued to patrons who 

have agreed to include the stated dollar amount 

of these certificates in income in the year of receipt. The agreement may be made in writing or 

by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. If you receive 

qualified per-unit retain certificates, include the 

stated dollar amount of the certificates in income on Schedule F, for the tax year you receive them.

Nonqualified certificates. Don't include the 

stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. 

Your basis in the certificate is zero. You must include in income any amount you receive from its 

sale, redemption, or other disposition. Report 

the amount you receive from the disposition as 

ordinary income on Schedule F, lines 3a and 3b, 

for the tax year of disposition.

Cancellation of Debt

This section explains the general rule for including canceled debt in income and the exceptions 

to the general rule. For more information on 

canceled debt, see Pub. 4681.

General Rule

Generally, if your debt is canceled or forgiven, 

other than as a gift or bequest to you, you must 

include the canceled amount in gross income 

for tax purposes. Report the canceled amount 

on Schedule F if you incurred the debt in your 

farming business. If the debt is a nonbusiness 

debt, report the canceled amount as “Other income” on Schedule 1 (Form 1040), line 8.

Special rules apply to C and S corporations 

and partnerships. See section 108(i), Regulations sections 1.108(i)-0 and 1.108(i)-2, and 

Pub. 4681 for details.

Form 1099-C. If a federal agency, financial institution, credit union, finance company, or 

credit card company cancels or forgives your 

debt of $600 or more, you may receive a Form 

1099-C, Cancellation of Debt. The amount of 

debt canceled is shown in box 2.

Exceptions

The following discussion covers some exceptions to the general rule for canceled debt. 

These exceptions apply before the exclusions 

discussed below.

Price reduced after purchase. If your purchase of property was financed by the seller 

and the seller reduces the amount of the debt at 

a time when you aren't insolvent and the 

Chapter 3 Farm Income Page 15
reduction doesn't occur in a chapter 11 bankruptcy case, the amount of the debt reduction 

will be treated as a reduction in the purchase 

price of the property. Reduce your basis in the 

property by the amount of the reduction in the 

debt. The rules that apply to bankruptcy and insolvency are explained below under Exclusions.

Deductible debt. You don't realize income 

from a canceled debt to the extent the payment 

of the debt would have been a deductible expense. This exception applies before the price 

reduction exception discussed above and the 

bankruptcy and insolvency exclusions discussed next.

Example. You get accounting services for 

your farm on credit. Later, you have trouble paying your farm debts, but you aren't bankrupt or 

insolvent. Your accountant forgives part of the 

amount you owe for the accounting services. 

How you treat the canceled debt depends on 

your method of accounting.

• Cash method—You don't include the canceled debt in income because payment of 

the debt would have been deductible as a 

business expense.

• Accrual method—You include the canceled 

debt in income because the expense was 

deductible when you incurred the debt.

Exclusions

Don't include canceled debt in income in the following situations.

1. The cancellation takes place in a bankruptcy case under title 11 of the U.S. 

Code.

2. The cancellation takes place when you're 

insolvent.

3. The canceled debt is a qualified farm debt.

4. The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). See 

chapter 5 of Pub. 334.

5. The canceled debt is qualified principal 

residence indebtedness which is:

a. Discharged before 2023, or

b. Subject to an arrangement that is entered into and evidenced in writing before January 1, 2026.

The exclusions don't apply in the following 

situations.

• If a canceled debt is excluded from income 

because it takes place in a bankruptcy 

case, the exclusions in situations (2), (3), 

(4), and (5) don't apply.

• If a canceled debt is excluded from income 

because it takes place when you're insolvent, the exclusions in situations (3) and 

(4) don't apply to the extent you're insolvent.

• If a canceled debt is excluded from income 

because it’s qualified principal residence 

indebtedness, the exclusion in situation (2) 

doesn't apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness.

See Form 982, later, for information on how 

to claim an exclusion for a canceled debt.

Debt. For this discussion, debt includes any 

debt for which you're liable or that attaches to 

property you hold.

Bankruptcy and Insolvency

You can exclude a canceled debt from income if 

you're bankrupt or to the extent you're insolvent.

Bankruptcy. A bankruptcy case is a case under title 11 of the U.S. Code if you're under the 

jurisdiction of the court and the cancellation of 

the debt is granted by the court or is the result 

of a plan approved by the court.

Don't include debt canceled in a bankruptcy 

case in your income in the year it's canceled. Instead, you must use the amount canceled to reduce your tax attributes, explained below under 

Reduction of tax attributes.

Insolvency. You're insolvent to the extent your 

liabilities are more than the fair market value of 

your assets immediately before the cancellation 

of debt.

You can exclude canceled debt from gross 

income up to the amount by which you're insolvent. If the canceled debt is more than this 

amount and the debt qualifies, you can apply 

the rules for qualified farm debt or qualified real 

property business debt to the difference. Otherwise, you include the difference in gross income. Use the amount excluded because of insolvency to reduce any tax attributes, as 

explained below under Reduction of tax attributes. You must reduce the tax attributes under 

the insolvency rules before applying the rules 

for qualified farm debt or for qualified real property business debt.

Example. You had a $15,000 debt that 

wasn't qualified principal residence debt canceled outside of bankruptcy. Immediately before 

the cancellation, your liabilities totaled $80,000 

and your assets totaled $75,000. Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − 

$75,000). You can exclude this amount from income. The remaining canceled debt ($10,000) 

may be subject to the qualified farm debt or 

qualified real property business debt rules. If 

not, you must include it in income.

Reduction of tax attributes. If you exclude 

canceled debt from income in a bankruptcy 

case or during insolvency, you must use the excluded debt to reduce certain tax attributes.

Order of reduction. You must use the excluded canceled debt to reduce the following 

tax attributes in the order listed unless you elect 

to reduce the basis of depreciable property first, 

as explained later.

1. Net operating loss (NOL). Reduce any 

NOL for the tax year of the debt cancellation, and then any NOL carryover to that 

year. Reduce the NOL or NOL carryover 1 

dollar for each dollar of excluded canceled 

debt.

2. General business credit carryover. Reduce the credit carryover to or from the tax 

year of the debt cancellation. Reduce the 

carryover 331/3 cents for each dollar of excluded canceled debt.

3. Minimum tax credit. Reduce the minimum tax credit available at the beginning 

of the tax year following the tax year of the 

debt cancellation. Reduce the credit 331/3 

cents for each dollar of excluded canceled 

debt.

4. Capital loss. Reduce any net capital loss 

for the tax year of the debt cancellation, 

and then any capital loss carryover to that 

year. Reduce the capital loss or loss carryover 1 dollar for each dollar of excluded 

canceled debt.

5. Basis. Reduce the basis of the property 

you hold at the beginning of the tax year 

following the tax year of the debt cancellation in the following order.

a. Real property (except inventory) used 

in your trade or business or held for investment that secured the canceled 

debt.

b. Personal property (except inventory 

and accounts and notes receivable) 

used in your trade or business or held 

for investment that secured the canceled debt.

c. Other property (except inventory and 

accounts and notes receivable) used 

in your trade or business or held for investment.

d. Inventory and accounts and notes receivable.

e. Other property.

Reduce the basis 1 dollar for each dollar of excluded canceled debt. However, 

the reduction can't be more than the total 

basis of property and the amount of 

money you hold immediately after the debt 

cancellation minus your total liabilities immediately after the cancellation.

For allocation rules that apply to basis 

reductions for multiple canceled debts, 

see Regulations section 1.1017-1(b)(2). 

Also see Electing to reduce the basis of 

depreciable property first, later.

6. Passive activity loss and credit carryovers. Reduce the passive activity loss 

and credit carryovers from the tax year of 

the debt cancellation. Reduce the loss 

carryover 1 dollar for each dollar of excluded canceled debt. Reduce the credit carryover 331/3 cents for each dollar of excluded canceled debt.

7. Foreign tax credit. Reduce the credit carryover to or from the tax year of the debt 

cancellation. Reduce the carryover 331/3 

cents for each dollar of excluded canceled 

debt.

How to make tax attribute reductions. 

Always make the required reductions in tax attributes after figuring your tax for the year of the 

debt cancellation. In making the reductions in 

(1) and (4) earlier, first reduce the loss for the 

tax year of the debt cancellation. Then reduce 

any loss carryovers to that year in the order of 

the tax years from which the carryovers arose, 

Page 16 Chapter 3 Farm Income
starting with the earliest year. In making the reductions in (2) and (7) earlier, reduce the credit 

carryovers to the tax year of the debt cancellation in the order in which they are taken into account for that year.

Electing to reduce the basis of depreciable 

property first. You can elect to apply any portion of the excluded canceled debt first to reduce the basis of depreciable property you hold 

at the beginning of the tax year following the tax 

year of the debt cancellation in the following order.

1. Depreciable real property used in your 

trade or business or held for investment 

that secured the canceled debt.

2. Depreciable personal property used in 

your trade or business or held for investment that secured the canceled debt.

3. Other depreciable property used in your 

trade or business or held for investment.

4. Real property held as inventory if you elect 

to treat it as depreciable property on Form 

982.

The amount you apply can't be more than 

the total adjusted basis of all the depreciable 

properties. Depreciable property for this purpose means any property subject to depreciation, but only if a reduction of basis will reduce 

the depreciation or amortization otherwise allowable for the period immediately following the 

basis reduction.

You make this reduction before reducing the 

other tax attributes listed earlier. If the excluded 

canceled debt is more than the depreciable basis you elect to reduce first, use the difference 

to reduce the other tax attributes. In figuring the 

limit on the basis reduction in (5) under Order of 

reduction, earlier, use the remaining adjusted 

basis of your properties after making this election.

See Form 982, later, for information on how 

to make this election. If you make this election, 

you can revoke it only with the consent of the 

IRS.

Recapture of basis reductions. If you reduce 

the basis of property under these provisions (either the election to reduce basis first or the basis reduction without that election) and later sell 

or otherwise dispose of the property at a gain, 

the part of the gain due to this basis reduction is 

taxable as ordinary income under the depreciation recapture provisions. Treat any property 

that isn't section 1245 or section 1250 property 

as section 1245 property. For section 1250 

property, determine the straight-line depreciation adjustments as though there were no basis 

reduction for debt cancellation. Sections 1245 

and 1250 property and the recapture of gain as 

ordinary income are explained in chapter 9.

More information. For more information on 

debt cancellation in bankruptcy proceedings or 

during insolvency, see Pub. 908.

Qualified Farm Debt

You can exclude from income a canceled debt 

that's qualified farm debt owed to a qualified 

person. This exclusion applies only if you were 

solvent when the debt was canceled or, if you 

were insolvent, only to the extent the canceled 

debt is more than the amount by which you 

were insolvent. This exclusion doesn't apply to 

a canceled debt excluded from income because 

it relates to your principal residence or it takes 

place in a bankruptcy case.

Your debt is qualified farm debt if both the 

following requirements are met.

• You incurred it directly in operating a farming business.

• At least 50% of your total gross receipts for 

the 3 tax years preceding the year of debt 

cancellation were from your farming business.

For more information, see Pub. 4681.

Qualified person. This is a person who is actively and regularly engaged in the business of 

lending money. A qualified person includes any 

federal, state, or local government, or any of 

their agencies or subdivisions. The USDA is a 

qualified person. A qualified person doesn't include any of the following.

• A person related to you.

• A person from whom you acquired the 

property (or a person related to this person).

• A person who receives a fee from your investment in the property (or a person related to this person).

For the definition of a related person, see 

Related persons under At-Risk Amounts in Pub. 

925.

Exclusion limit. The amount of canceled 

qualified farm debt you can exclude from income is limited. It can't be more than the sum of 

your adjusted tax attributes and the total adjusted basis of the qualified property you hold at 

the beginning of the tax year following the tax 

year of the debt cancellation. Figure this limit after taking into account any reduction of tax attributes because of the exclusion of canceled 

debt from gross income during insolvency.

If the canceled debt is more than this limit, 

you must include the difference in gross income.

Adjusted tax attributes. Adjusted tax attributes means the sum of the following items.

1. Any NOL for the tax year of the debt cancellation and any NOL carryover to that 

year.

2. Any general business credit carryover to or 

from the year of the debt cancellation, multiplied by 3.

3. Any minimum tax credit available at the 

beginning of the tax year following the tax 

year of the debt cancellation, multiplied by 

3.

4. Any net capital loss for the tax year of the 

debt cancellation and any capital loss carryover to that year.

5. Any passive activity loss and credit carryovers from the tax year of the debt cancellation. Any credit carryover is multiplied by 

3.

6. Any foreign tax credit carryovers to or from 

the tax year of the debt cancellation, multiplied by 3.

Qualified property. This is any property 

you use or hold for use in your trade or business 

or for the production of income.

Reduction of tax attributes. If you exclude 

canceled debt from income under the qualified 

farm debt rules, you must use the excluded debt 

to reduce tax attributes. (If you also excluded 

canceled debt under the insolvency rules, you 

reduce the amount of the tax attributes remaining after reduction for the exclusion allowed under the insolvency rules.) You must generally 

follow the reduction rules previously explained 

under Bankruptcy and Insolvency. However, 

don't follow the rules in (5) under Order of reduction, earlier. Instead, follow the special rules 

explained next.

Special rules for reducing the basis of 

property. You must use special rules to reduce 

the basis of property for excluded canceled 

qualified farm debt. Under these special rules, 

you only reduce the basis of qualified property 

(defined earlier). Reduce it in the following order.

1. Depreciable qualified property. You may 

elect on Form 982 to treat real property 

held as inventory as depreciable property.

2. Land that's qualified property and is used 

or held for use in your farming business.

3. Other qualified property.

Form 982

Use Form 982 to show the amounts of canceled 

debt excluded from income and the reduction of 

tax attributes in the order listed on the form. 

Also use it if you're electing to apply the excluded canceled debt to reduce the basis of depreciable property before reducing tax attributes. 

You make this election by showing the amount 

you elect to apply on line 5 of the form.

When to file. You must file Form 982 with your 

timely filed income tax return (including extensions) for the tax year in which the cancellation 

of debt occurred. If you timely filed your return 

for the year without electing to apply the excluded canceled debt to reduce the basis of depreciable property first, you can still make the election by filing an amended return within 6 months 

of the due date of the return (excluding extensions). For more information, see When To File 

in the Form 982 instructions.

Income From Other 

Sources

This section discusses other types of income 

you may receive.

Tax for Certain Children Who Have Unearned Income. If your child was under age 19 

(24 if a full-time student) at the end of the tax 

year and had unearned income of more than 

$1,250 but less than $12,500, this income will 

be taxed at the parent’s tax rate if the parent’s 

Chapter 3 Farm Income Page 17
tax rate is higher than the child’s rate. For more 

information, see the Instructions for Form 8615.

Barter income. If you're paid for your work in 

farm products, other property, or services, you 

must report as income the fair market value of 

what you receive. The same rule applies if you 

trade farm products for other farm products, 

property, or someone else's labor. This is called 

barter income. For example, if you help a neighbor build a barn and receive a cow for your 

work, you must report the fair market value of 

the cow as ordinary income. Your basis for 

property you receive in a barter transaction is 

usually the fair market value that you include in 

income. If you pay someone with property, see 

Property for services under Labor Hired in 

chapter 4.

Below-market loans. A below-market loan is a 

loan on which either no interest is charged or interest is charged at a rate below the applicable 

federal rate. If you make a below-market loan, 

you may have to report income from the loan in 

addition to any stated interest you receive from 

the borrower. See chapter 1 of Pub. 550 for 

more information on below-market loans.

Commodity futures and options. See Hedging in chapter 8 for information on gains and 

losses from commodity futures and options 

transactions.

Custom hire (machine work). Pay you receive for contract work or custom work that you 

or your hired help perform off your farm for others, or for the use of your property or machines, 

is income to you whether or not income tax was 

withheld. This rule applies whether you receive 

the pay in cash, services, or merchandise. Report this income on Schedule F. If you perform 

custom work activities that are more than incidental to your farming business, include the income and expenses from the custom work on 

Schedule C.

Easements and rights-of-way. Income you 

receive for granting easements or rights-of-way 

on your farm or ranch for flooding land, laying 

pipelines, constructing electric or telephone 

lines, etc., may result in income, a reduction in 

the basis of all or part of your farmland, or both.

Income you received for granting a temporary construction easement is rental income. 

Report the income as rent on Part I of Schedule E (Form 1040).

Example. You granted a permanent 

right-of-way for a gas pipeline through your 

property for $10,000. Only a specific part of 

your farmland was affected. You reserved the 

right to continue farming the surface land after 

the pipe was laid. Treat the payment for the 

right-of-way in one of the following ways.

1. If the payment is less than the basis properly allocated to the part of your land affected by the right-of-way, reduce the basis by 

$10,000.

2. If the payment is equal to or more than the 

basis of the affected part of your land, reduce the basis to zero and the rest, if any, 

is gain from a sale. The gain is reported on 

Form 4797 and is treated as section 1231 

gain if you held the land for more than 1 

year. See chapter 9.

The contract also contained a provision for a 

temporary workspace (temporary easement) to 

allow for the collection of topsoil and for equipment movement. This temporary easement is 

only for the construction period (usually a period of months). The gain is reported on Schedule E and does not affect the basis of the land.

Easement contracts usually describe 

the affected land using square feet. 

Your basis may be figured per acre. 

One acre equals 43,560 square feet.

If construction of the pipeline damaged 

growing crops and you later receive a settlement of $250 for this damage, the $250 is income and is included on Schedule F. It doesn't 

affect the basis of your land.

Fuel tax credit and refund. Include any credit 

or refund of federal excise taxes on fuels in your 

gross income if you deducted the cost of the 

fuel (including excise tax) as an expense that 

reduced your income tax. See chapter 14 for 

more information about fuel tax credits and refunds.

Illegal federal irrigation subsidy. The federal 

government, operating through the Bureau of 

Reclamation, has made irrigation water from 

certain reclamation and irrigation projects available for agricultural purposes. The excess of the 

amount required to be paid for water from these 

projects over the amount you actually paid is an 

illegal subsidy.

For example, if the amount required to be 

paid is full cost and you paid less than full cost, 

the difference is an illegal subsidy and you must 

include it in income. Report this on Schedule F, 

line 8. You can't take a deduction for the amount 

you must include in income.

For more information on reclamation and irrigation projects, contact your local Bureau of 

Reclamation.

Prizes. Report prizes you win on farm livestock 

or products at contests, exhibitions, fairs, etc., 

on Schedule F, line 8. If you receive a prize in 

cash, include the full amount in income. If you 

receive a prize in produce or other property, include the fair market value of the property. For 

prizes of $600 or more, you should receive a 

Form 1099-MISC.

See chapter 12 for information about prizes 

related to 4-H Club or FFA projects. See Pub. 

525 for information about other prizes.

Property sold, destroyed, stolen, or condemned. You may have an ordinary or capital 

gain if property you own is sold or exchanged; 

stolen; destroyed by fire, flood, or other casualty; or condemned by a public authority. In 

some situations, you can postpone the tax on 

the gain to a later year. See chapters 8 through 

11.

Recapture of section 179 expense deduction. If you took a section 179 expense deduction for property used in your farming business 

and at any time during the property's recovery 

period you don't use it more than 50% in your 

business, you must include part of the deducTIP

tion in income. See chapter 7 for information on 

the section 179 expense deduction and when to 

recapture that deduction.

In addition, if the percentage of business 

use of listed property (see chapter 7) falls to 

50% or less in any tax year during the recovery 

period, you must include in income any excess 

section 179 expense deduction you took on the 

property.

Both of these amounts are farm income. Use 

Form 4797, Part IV, to figure how much to include in income.

Refund or reimbursement. You must generally include in income a reimbursement, refund, 

or recovery of an item for which you took a deduction in an earlier year. Include it for the tax 

year you receive it. However, if any part of the 

earlier deduction didn't decrease your income 

tax, you don't have to include that part of the reimbursement, refund, or recovery.

Example. A tenant farmer purchased fertilizer for $1,000 in April 2022. He deducted 

$1,000 on his 2022 Schedule F and the entire 

deduction reduced his tax. The landowner reimbursed him $500 of the cost of the fertilizer in 

February 2023. The tenant farmer must include 

$500 in income on his 2023 tax return because 

the entire deduction decreased his 2022 tax.

Sale of soil and other natural deposits. If 

you remove and sell topsoil, loam, fill dirt, sand, 

gravel, or other natural deposits from your property, the proceeds are ordinary income. A reasonable allowance for depletion of the natural 

deposit sold may be claimed as a deduction. 

See Depletion in chapter 7.

Sod. Report proceeds from the sale of sod 

on Schedule F. A deduction for cost depletion is 

allowed, but only for the topsoil removed with 

the sod.

Granting the right to remove deposits. If 

you enter into a legal relationship granting 

someone else the right to excavate and remove 

natural deposits from your property, you must 

determine whether the transaction is a sale or 

another type of transaction (for example, a 

lease).

If you receive a specified sum or an amount 

fixed without regard to the quantity produced 

and sold from the deposit and you retain no 

economic interest in the deposit, your transaction is a sale. You're considered to retain an 

economic interest if, under the terms of the legal 

relationship, you depend on the income derived 

from extraction of the deposit for a return of your 

capital investment in the deposit.

Your income from the deposit is capital gain 

if the transaction is a sale. Otherwise, it's ordinary income subject to an allowance for depletion. See chapter 7 for information on depletion 

and chapter 8 for the tax treatment of capital 

gains.

Timber sales. Timber sales, including sales of 

logs, firewood, and pulpwood, are discussed in 

chapter 8.

Tree farmers, in the business of tree 

farming, may use section 631(a) to 

capture favorable income tax treatment 

of timber sales and then report the actual cash 

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Page 18 Chapter 3 Farm Income
sale of timber on Schedule F. Section 2032A 

defines sale of trees as farm income (under the 

special use valuation for estate tax purposes). 

However, land owners who make frequent sales 

(for example, two to three within 5 years, per 

case law) may use Schedule F to report this 

business income.

Income Averaging for 

Farmers

If you're engaged in a farming business, you 

may be able to average all or some of your farm 

income by using income tax rates from the 3 

prior years (base years) to calculate the tax on 

that income. Income averaging may lower your 

income tax liability in a year when farm income 

and taxable income are higher compared to 1 or 

more of the 3 prior years. See the Instructions 

for Schedule J (Form 1040) for the definition of 

the term “farming business.”

Farmers electing farm income averaging may want to include taxable income 

from the fair market value (trade value) 

of traded farm assets as electable farm income. 

Under the Tax Cuts and Jobs Act, personal 

property, such as tractors and equipment, no 

longer qualifies for a like-kind exchange and is 

now subject to depreciation recapture on the 

fair market value of the trade as if cash was exchanged.

Who can use income averaging? You can 

use income averaging to figure your tax for any 

year in which you were engaged in a farming 

business as an individual, a partner in a partnership, or a shareholder in an S corporation. 

Services performed as an employee are disregarded in determining whether an individual is 

engaged in a farming business. However, if 

you're a shareholder of an S corporation engaged in a farming business, you may treat 

compensation received from the corporation 

that's attributable to the farming business as 

farm income. You don't need to have been engaged in a farming business in any base year.

Corporations, partnerships, S corporations, 

estates, and trusts can't use income averaging.

Elected Farm Income (EFI)

EFI is the amount of income from your farming 

business that you elect to have taxed at base 

year rates. You can designate as EFI any type of 

income attributable to your farming business. 

However, your EFI can't be more than your taxable income, and any EFI from a net capital gain 

attributable to your farming business can't be 

more than your total net capital gain.

Income from your farming business is the 

sum of any farm income or gain minus any farm 

expenses or losses allowed as deductions in 

figuring your taxable income. However, it 

doesn't include gain or loss from the sale or 

other disposition of land, or from the sale of development rights, grazing rights, and other similar rights.

Gains or losses from the sale or other disposition of farm property. Gains or losses 

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from the sale or other disposition of farm property other than land can be designated as EFI if 

you (or your partnership or S corporation) used 

the property regularly for a substantial period in 

a farming business. Whether the property has 

been regularly used for a substantial period depends on all the facts and circumstances.

Liquidation of a farming business. If you 

(or your partnership or S corporation) liquidate 

your farming business, gains or losses on property sold within a reasonable time after operations stop can be designated as EFI. A period of 

1 year after stopping operations is a reasonable 

time. After that, what is a reasonable time depends on the facts and circumstances.

EFI and base year rates. If your EFI includes 

both ordinary income and capital gains, you 

must use tax rates from each base year to compute tax on an equal portion of each type of income. For example, you can't tax all of the capital gains at the rate for capital gains from a 

single base year.

How To Figure the Tax

If you average your farm income, you will figure 

your tax on Schedule J (Form 1040).

Negative taxable income for base year. If 

your taxable income for any base year was zero 

because your deductions were more than your 

income, you may have negative taxable income 

for that year to combine with your EFI on 

Schedule J.

Filing status. You aren't prohibited from using 

income averaging solely because your filing status isn't the same as your filing status in the 

base years. For example, if you're married and 

file jointly, but filed as single in all of the base 

years, you may still average farm income.

Effect on Other Tax 

Determinations

You subtract your EFI from your taxable income 

and add one-third of it to the taxable income of 

each of the base years to determine the tax rate 

to use for income averaging. The allocation of 

your EFI to the base years doesn't affect other 

tax determinations. For example, you make the 

following determinations before subtracting your 

EFI (or adding it to income in the base years).

• The amount of your self-employment tax.

• Whether, in the aggregate, sales and other 

dispositions of business property (section 

1231 transactions) produce long-term capital gain or ordinary loss.

• The amount of any NOL carryover or net 

capital loss carryover applied and the 

amount of any carryover to another year.

• The limit on itemized deductions based on 

your adjusted gross income.

• The amount of any net capital loss or NOL 

in a base year.

Alternative Minimum Tax 

(AMT)

You can elect to use income averaging to compute your regular tax liability. However, income 

averaging isn't used to determine your regular 

tax or tentative minimum tax when figuring your 

AMT. Using income averaging may reduce your 

total tax even if you owe AMT.

Credit for prior year minimum tax. You may 

be able to claim a nonrefundable tax credit if 

you owed AMT in a prior year. See the Instructions for Form 8801.

Schedule J

You can use income averaging by filing Schedule J (Form 1040) with your timely filed (including extensions) return for the year. You can also 

use income averaging on a late return, or use, 

change, or cancel it on an amended return if the 

time for filing a claim for refund hasn't expired 

for that election year. You must generally file the 

claim for refund within 3 years from the date you 

filed your original return or 2 years from the date 

you paid the tax, whichever is later.

4.

Farm Business 

Expenses

What's New

Standard mileage rate. The standard mileage 

rate for the cost of operating your car, van, 

pickup, or panel truck for each mile of business 

use is 65.5 cents per mile. See Truck and Car 

Expenses, later.

Business meals deduction. The temporary 

100% deduction for food or beverages provided 

by a restaurant has expired. The business meal 

deduction reverts back to the previous 50% allowable deduction beginning January 1, 2023.

Topics

This chapter discusses:

• Deductible expenses

• Capital expenses

• Nondeductible expenses

• Losses from operating a farm

• Not-for-profit farming

Useful Items

You may want to see:

Publication

463 Travel, Gift, and Car Expenses

334 Tax Guide for Small Business

587 Business Use of Your Home

925 Passive Activity and At-Risk Rules

936 Home Mortgage Interest Deduction

 463

 334

 587

 925

 936

Chapter 4 Farm Business Expenses Page 19
Form (and Instructions)

Itemized

Deductions

Profit or Loss From 

Farming

Limitation on Business Losses

Application for Tentative Refund

Election To Postpone

Determination as To Whether the 

Presumption Applies That an

Activity Is Engaged in for Profit

Limitation on Business Interest 

Expense IRC 163(j)

See chapter 16 for information about getting 

publications and forms.

Deductible Expenses

The ordinary and necessary costs of operating 

a farm for profit are deductible business expenses. “Ordinary” means what most farmers do, 

and “necessary” means what is useful and helpful in farming. Schedule F, Part II, lists some 

common farm expenses that are typically deductible. This chapter discusses many of these 

expenses, as well as others not listed on 

Schedule F.

Reimbursed expenses. If the reimbursement 

is received in the same year that the expense is 

claimed, reduce the expense by the amount of 

the reimbursement. If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. 

See Refund or reimbursement under Income 

From Other Sources in chapter 3.

Personal and business expenses. Some expenses you pay during the tax year may be part 

personal and part business. These may include 

expenses for gasoline, oil, fuel, water, rent, 

electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes.

You must allocate these mixed expenses between their business and personal parts. Generally, the personal part of these expenses isn't 

deductible. The business portion of the expenses is deductible on Schedule F.

Example. You paid $3,600 for electricity 

during the tax year. You used 1/3 of the electricity for personal purposes and 2/3 for farming. 

Under these circumstances, you can deduct 

$2,400 (2/3 of $3,600) of your electricity expense as a farm business expense.

Reasonable allocation. It isn't always easy 

to determine the business and nonbusiness 

parts of an expense. There is no method of allocation that applies to all mixed expenses. Any 

reasonable allocation is acceptable. What is 

reasonable depends on the circumstances in 

each case.

Prepaid Farm Supplies

Prepaid farm supplies include the following 

items if paid for during the year.

• Feed, seed, fertilizer, and similar farm supplies not used or consumed during the 

 Sch A (Form 1040)

 Sch F (Form 1040)

 461

 1045

 5213

 8990

year, but not including farm supplies that 

you would have consumed during the year 

if not for a fire, storm, flood, other casualty, 

disease, or drought.

• Poultry (including egg-laying hens and 

baby chicks) bought for use (or for both 

use and resale) in your farm business. 

However, include only the amount that 

would be deductible in the following year if 

you had capitalized the cost and deducted 

it ratably over the lesser of 12 months or 

the useful life of the poultry.

• Poultry bought for resale and not resold 

during the year.

Deduction limit. If you use the cash method of 

accounting to report your income and expenses, your deduction for prepaid farm supplies in 

the year you pay for them may be limited to 50% 

of your other deductible farm expenses for the 

year (all Schedule F deductions except prepaid 

farm supplies). This limit doesn't apply if you 

meet one of the exceptions described later. See 

chapter 2 for a discussion of the Cash Method 

of accounting.

If the limit applies, you can deduct the excess cost of farm supplies other than poultry in 

the year you use or consume the supplies. The 

excess cost of poultry bought for use (or for 

both use and resale) in your farm business is 

deductible in the year following the year you pay 

for it. The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry.

Example. During 2023, you bought fertilizer 

($40,000), feed ($10,000), and seed ($5,000) 

for use on your farm in the following year. Your 

total prepaid farm supplies expense for 2023 is 

$55,000. Your other deductible farm expenses 

totaled $100,000 for 2023. Therefore, your deduction for prepaid farm supplies can't be more 

than $50,000 (50% of $100,000) for 2023. The 

excess prepaid farm supplies expense of 

$5,000 ($55,000 − $50,000) is deductible in a 

later tax year when you use or consume the 

supplies. However, the deduction limit doesn't 

apply if you qualify for the exceptions listed 

next.

Exceptions. This limit on the deduction for 

prepaid farm supplies expense doesn't apply if 

you are a farm-related taxpayer and either of the 

following apply.

1. Your prepaid farm supplies expense is 

more than 50% of your other deductible 

farm expenses because of a change in 

business operations caused by unusual 

circumstances.

2. Your total prepaid farm supplies expense 

for the preceding 3 tax years is less than 

50% of your total other deductible farm expenses for those 3 tax years.

If one of the exceptions is applicable, then 

the 50% limit on the deduction doesn't apply. 

Therefore, you can deduct more than 50% of 

prepaid farm supplies.

You are a farm-related taxpayer if any of the 

following tests apply.

1. Your main home is on a farm.

2. Your principal business is farming.

3. A member of your family meets (1) or (2).

For this purpose, your family includes your 

brothers and sisters, half brothers and half sisters, spouse, parents, grandparents, children, 

grandchildren, and aunts and uncles and their 

children.

Whether or not the deduction limit for 

prepaid farm supplies applies, your expenses for prepaid livestock feed may 

be subject to the rules for advance payment of 

livestock feed, discussed next.

Prepaid Livestock Feed

If you report your income and expenses under 

the cash method of accounting, you can't deduct in the year paid the cost of feed your livestock will consume in a later year unless you 

meet all the following tests.

1. The payment is for the purchase of feed 

rather than a deposit.

2. The prepayment has a business purpose 

and isn't merely for tax avoidance.

3. Deducting the prepayment doesn't result 

in a material distortion of your income.

If you meet all three tests, you can deduct 

the prepaid feed, subject to the limit on prepaid 

farm supplies discussed earlier.

If you fail any of these tests, you can deduct 

the prepaid feed only in the year it is consumed.

This rule doesn't apply to the purchase 

of commodity futures contracts.

Payment for the purchase of feed. 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 you 

can show you made it under a binding commitment to accept delivery of a specific quantity of 

feed at a fixed price and you aren't entitled, by 

contract or business custom, to a refund or repurchase.

The following are some factors that show a 

payment is a deposit rather than for the purchase of feed.

• The absence of specific quantity terms.

• The right to a refund of any unapplied payment credit at the end of the contract.

• The seller's treatment of the payment as a 

deposit.

• The right to substitute other goods or products for those specified in the contract.

A provision permitting substitution of ingredients to vary the particular feed mix to meet your 

livestock's current diet requirements won't suggest a deposit. Further, a price adjustment to reflect market value at the date of delivery isn't, by 

itself, proof of a deposit.

Business purpose. The prepayment has a 

business purpose only if you have a reasonable 

expectation of receiving some business benefit 

from prepaying the cost of livestock feed. The 

following are some examples of business benefits.

• Fixing maximum prices and securing an 

assured feed supply.

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Page 20 Chapter 4 Farm Business Expenses
• Securing preferential treatment in anticipation of a feed shortage.

Other factors considered in determining the 

existence of a business purpose are whether 

the prepayment was a condition imposed by the 

seller and whether that condition was meaningful.

No material distortion of income. The following are some factors considered in determining whether deducting prepaid livestock 

feed materially distorts income.

• Your customary business practice in conducting your livestock operations.

• The expense in relation to past purchases.

• The time of year you made the purchase.

• The expense in relation to your income for 

the year.

Labor Hired

You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and 

other forms of labor hired to perform your farming operations. You can pay wages in cash or in 

noncash items such as inventory, capital assets, or assets used in your business. The cost 

of boarding farm labor is a deductible labor 

cost. Other deductible costs you incur for farm 

labor include health insurance, workers' compensation insurance, and other benefits.

If you must withhold social security, Medicare, and income taxes from your employees' 

cash wages, you can still deduct the full amount 

of wages before withholding. See chapter 13 for 

more information on Employment Taxes. Also, 

deduct the employer's share of the social security and Medicare taxes you must pay on your 

employees' wages as a farm business expense 

on Schedule F, line 29. See Taxes, later.

Property for services. If you transfer property 

to an employee in payment for services, you 

can deduct as wages paid the fair market value 

of the property on the date of transfer. If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the 

property.

Treat the wages deducted as an amount received for the property. You may have a gain or 

loss to report if the property's adjusted basis on 

the date of transfer is different from its fair market value. Any gain or loss has the same character the exchanged property had in your 

hands. For more information, see chapter 8.

Child as an employee. You can deduct reasonable wages or other compensation you pay 

to your child for doing farmwork if a true employer-employee relationship exists between 

you and your child. Include these wages in the 

child's income. The child may have to file an income tax return. These wages may also be subject to social security and Medicare taxes if your 

child is age 18 or older. Wages paid to minor 

children become subject to social security and 

Medicare taxes in the month the dependent 

child turns 18 years of age. For more information, see Family Employees in chapter 13.

A Form W-2 should be issued to the 

child employee.

The fact that your child spends the wages to 

buy clothes or other necessities you normally 

furnish doesn't prevent you from deducting your 

child's wages as a farm expense.

The amount of wages paid to the child 

could cause a loss of the dependency 

exemption depending on how the child 

uses the money.

Spouse as an employee. 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 subject to 

social security and Medicare taxes. For more information, see Family Employees in chapter 13.

Nondeductible Pay

You can't deduct wages paid for certain household work, construction work, and maintenance 

of your home. However, those wages may be 

subject to the employment taxes discussed in 

chapter 13.

Household workers. Do not deduct amounts 

paid to persons engaged in household work, 

except to the extent their services are used in 

boarding or otherwise caring for farm laborers.

Construction labor. Do not deduct wages 

paid to hired help for the construction of new 

buildings or other improvements. These wages 

are part of the cost of the building or other improvement. You must capitalize them.

Maintaining your home. If your farm employee spends time maintaining or repairing 

your home, the wages and employment taxes 

you pay for that work are nondeductible personal expenses. For example, assume you have 

a farm employee for the entire tax year and the 

employee spends 5% of the time maintaining 

your home. The employee devotes the remaining time to work on your farm. You can't deduct 

5% of the wages and employment taxes you 

pay for that employee.

Employment Credits

Reduce your deduction for wages by the 

amount of any employment credits you claim 

such as the work opportunity credit (Form 

5884).

Repairs and Maintenance

You can deduct most expenses for the repair 

and maintenance of your farm property. Common items of repair and maintenance are repainting, sealing cracks or replacing broken 

windows on a farm building, and routine maintenance of trucks, tractors, and other farm machinery. However, expenses for improvements to 

depreciable property are generally capital expenditures. Amounts are paid for improvements 

if they are for the betterment of your property, 

are for a restoration of your property, such as 

the replacement of major components and 

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CAUTION

!

substantial structural parts, or if your expenditures adapt your property to a new or different 

use. For example, if you replace a few shingles 

on the barn roof, these expenses are generally 

deductible as repairs and maintenance. If you 

replace (not repair) the entire barn roof with a 

new roof, then this expense is generally a capital expenditure. For more information, see Capital Expenses, later.

Under certain conditions, you can elect to 

capitalize amounts paid for repair and maintenance. See Regulations section 1.263(a)-3(n) 

for more information.

Interest

There may be a limit on the amount you can deduct as farming business interest paid or accrued during the tax year related to your farming 

business, such as for farm mortgages and other 

farm obligations. However, a small business 

taxpayer is not subject to the business interest 

expense limitation and is not required to file 

Form 8990. A small business taxpayer is a taxpayer that is not a tax shelter (as defined in section 448(d)(3)) and has average annual gross 

receipts of $29 million or less for the 3 prior tax 

years under the gross receipts test of section 

448(c). Gross receipts include the aggregate 

gross receipts from all persons treated as a single employer, such as a controlled group of corporations, commonly controlled partnerships or 

proprietorships, and affiliated service groups.

The gross receipts test of section 448(c) applies only to corporations and partnerships, but 

for purposes of the business interest limitation 

the gross receipts test applies to individuals as 

if they were corporations or partnerships. Thus, 

any individual with a farming trade or business 

operating as a sole proprietorship is subject to 

the gross receipts test.

Certain businesses subject to the business 

interest expense limitation may elect out of the 

limitation. Certain farming businesses and 

specified agricultural or horticultural cooperatives (as defined in section 199A(g)(4)) qualify 

to make an election not to limit business interest 

expenses. This is an irrevocable election. If you 

make this election, you are required to use the 

alternative depreciation system (ADS), discussed later in chapter 7, to depreciate any 

farming property with a recovery period of 10 

years or more. Also, you are not entitled to the 

special depreciation allowance for that property. 

For an individual with more than one qualifying 

business, the election is made with respect to 

each business. If you are required to limit your 

business interest expense, the amount you cannot deduct for the tax year is generally carried 

forward to the next tax year. However, there are 

special rules for partnership treatment of disallowed business interest. See the Instructions for 

Form 8990 for more information.

Subject to the preceding rules, and assuming other limitations do not apply, you can deduct as a farm business expense interest paid 

or accrued during the tax year related to your 

farming business, such as for farm mortgages 

and other farm obligations.

Cash method. If you use the cash method of 

accounting, you can generally deduct interest 

Chapter 4 Farm Business Expenses Page 21
paid during the tax year. You can't deduct interest paid with funds received from the original 

lender through another loan, advance, or other 

arrangement similar to a loan. You can, however, deduct the interest when you start making 

payments on the new loan. For more information, see Cash Method in chapter 2.

Prepaid interest. Under the cash method, 

you generally can't deduct any interest paid before the year it is due. Interest paid in advance 

may be deducted only in the tax year in which it 

is due.

Accrual method. If you use an accrual method 

of accounting, you can deduct only interest that 

has accrued during the tax year. However, you 

can't deduct interest owed to a related person 

who uses the cash method until payment is 

made and the interest is includible in the gross 

income of that person. For more information, 

see Accrual Method in chapter 2.

Allocation of interest. If you use the proceeds 

of a loan for more than one purpose, you must 

allocate the interest on that loan to each use. 

Allocate the interest to the following categories.

• Trade or business interest.

• Passive activity interest.

• Investment interest.

• Portfolio interest.

• Personal interest.

You generally allocate interest on a loan the 

same way you allocate the loan proceeds. You 

allocate loan proceeds by tracing disbursements to specific uses.

The easiest way to trace disbursements to specific uses is to keep the 

proceeds of a particular loan separate 

from any other funds.

Secured loan. The allocation of loan proceeds and the related interest is generally not 

affected by the use of property that secures the 

loan.

Example. You secure a loan with property 

used in your farming business. You use the loan 

proceeds to buy a car for personal use. You 

must allocate interest expense on the loan to 

personal use (purchase of the car) even though 

the loan is secured by farm business property.

Allocation period. The period for which a 

loan is allocated to a particular use begins on 

the date the proceeds are used and ends on the 

earlier of the following dates.

• The date the loan is repaid.

• The date the loan is reallocated to another 

use.

More information. For more information on interest, see chapter 8 of Pub. 334.

Breeding Fees

You can generally deduct breeding fees as a 

farm business expense. However, if the breeder 

guarantees live offspring as a result of the 

breeding or other veterinary procedure, you 

must capitalize these costs as the cost basis of 

the offspring. Also, if you use an accrual method 

of accounting, you must capitalize breeding 

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fees and allocate them to the cost basis of the 

calf, foal, etc. For more information on who must 

use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2.

Fertilizer and Lime

You can deduct in the year paid or incurred the 

cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. You can 

also deduct the cost of applying these materials 

in the year you pay or incur it. However, see 

Prepaid Farm Supplies, earlier, for a rule that 

may limit your deduction for these materials.

If the benefits of the fertilizer, lime, or other 

materials last substantially more than 1 year, 

you generally capitalize their cost and deduct a 

part each year the benefits last. However, you 

can choose to deduct these expenses in the 

year paid or incurred. If you make this choice, 

you will need IRS approval if you later decide to 

capitalize the cost of previously deducted items. 

If you sell farmland on which fertilizer or lime 

has been applied and if the selling price of the 

land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. 

See section 180 for more information.

Farmland, for these purposes, is land used 

for producing crops, fruits, or other agricultural 

products or for sustaining livestock. It doesn't include land you have never used previously for 

producing crops or sustaining livestock. You 

can't deduct initial land preparation costs. (See 

Capital Expenses, later.)

Include government payments you receive 

for lime or fertilizer in income. See Fertilizer and 

Lime under Agricultural Program Payments in 

chapter 3.

Taxes

You can deduct as a farm business expense the 

real estate and personal property taxes on farm 

business assets, such as farm equipment, animals, farmland, and farm buildings. You can 

also deduct the social security and Medicare 

taxes you pay to match the amount withheld 

from the wages of farm employees and any federal unemployment tax you pay. For information 

on employment taxes, see chapter 13.

Allocation of taxes. The taxes on the part of 

your farm you use as your home (including the 

furnishings and surrounding land not used for 

farming) are nonbusiness taxes. You may be 

able to deduct these nonbusiness taxes as 

itemized deductions on Schedule A (Form 

1040). To determine the nonbusiness part, allocate the taxes between the farm assets and 

nonbusiness assets. The allocation can be 

done from the assessed valuations. If your tax 

statement doesn't show the assessed valuations, you can usually get them from the tax assessor.

State and local general sales taxes. State 

and local general sales taxes on nondepreciable farm business expense items are deductible 

as part of the cost of those items. Include state 

and local general sales taxes imposed on the 

purchase of assets for use in your farm business as part of the cost you depreciate. Also 

treat the taxes as part of your cost if they are imposed on the seller and passed on to you.

State and federal income taxes. Individuals 

can't deduct state and federal income taxes as 

farm business expenses. Individuals can deduct 

state and local income taxes only as an itemized deduction on Schedule A (Form 1040). For 

tax years after 2017 and before 2026, the 

Schedule A (Form 1040) deduction for combined state and local income and property taxes 

is limited to $10,000 ($5,000 if married filing 

separately). However, you can't deduct federal 

income tax.

Highway use tax. You can deduct the federal 

use tax on highway motor vehicles paid on a 

truck or truck tractor used in your farm business. 

For information on the tax itself, including information on vehicles subject to the tax, see the 

Instructions for Form 2290.

Self-employment tax. You cannot deduct the 

self-employment tax you pay as a farm business expense. However, you can deduct as an 

adjustment to income on Schedule 1 (Form 

1040), line 15, one-half of your self-employment 

tax in figuring your adjusted gross income. For 

more information, see chapter 12.

Insurance

You can generally deduct the ordinary and necessary cost of insurance for your farm business 

as a business expense. This includes premiums 

you pay for the following types of insurance.

• Fire, storm, crop, theft, liability, and other 

insurance on farm business assets.

• Health and accident insurance on your 

farm employees.

• Workers' compensation insurance set by 

state law that covers any claims for job-related bodily injuries or diseases suffered by 

employees on your farm, regardless of 

fault.

• Business interruption insurance.

• State unemployment insurance on your 

farm employees (deductible as taxes if 

they are considered taxes under state law).

Insurance to secure a loan. If you take out 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, you can't 

deduct the premiums as a business expense. In 

the event of death, the proceeds of the policy 

aren't taxed as income even if they are used to 

liquidate the debt.

Advance premiums. Deduct advance payments of insurance premiums only in the year to 

which they apply, regardless of your accounting 

method.

Example. On June 29, 2023, you paid a 

premium of $3,000 for fire insurance on your 

barn. The policy will cover a period of 3 years 

beginning on July 1, 2023. Only the cost for the 

6 months in 2023 is deductible as an insurance 

expense on your 2023 calendar year tax return. 

Deduct $500, which is the premium for 6 

Page 22 Chapter 4 Farm Business Expenses
months of the 36-month premium period, or 6/36 

of $3,000. In both 2024 and 2025, deduct 

$1,000 (12/36 of $3,000). Deduct the remaining 

$500 in 2026. Had the policy been effective on 

January 1, 2023, the deductible expense would 

have been $1,000 for each of the years 2023, 

2024, and 2025, based on one-third of the premium used each year.

Business interruption insurance. Use and 

occupancy and business interruption insurance 

premiums are deductible as a business expense. This insurance pays for lost profits if 

your business is shut down due to a fire or other 

cause. Report any proceeds in full on Schedule F, Part I.

Self-employed health insurance deduction. 

If you are self-employed, you can deduct as an 

adjustment to income on Schedule 1 (Form 

1040) your payments for medical, dental, and 

qualified long-term care insurance coverage for 

yourself (including Medicare premiums), your 

spouse, and your dependents when figuring 

your adjusted gross income on your Schedule 1 

(Form 1040). The insurance can also cover any 

child of yours under age 27 at the end of 2023, 

even if the child was not your dependent. Generally, this deduction can't be more than the net 

profit from the business under which the plan 

was established.

If you or your spouse is also an employee of 

another person, you can't take the deduction for 

any month in which you are eligible to participate in a subsidized health plan maintained by 

your employer or your spouse's employer.

Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Schedule 1 (Form 1040) to figure your 

deduction. Include the remaining part of the insurance payment in your medical expenses on 

Schedule A (Form 1040) if you itemize your deductions.

For more information, see Deductible Premiums in chapter 8 of Pub. 334.

Rent and Leasing

If you lease property for use in your farm business, you can generally deduct the rent you pay 

on Schedule F. However, you can't deduct rent 

you pay in crop shares if you deduct the cost of 

raising the crops as farm expenses.

Advance payments. Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method.

Farm home. If you rent a farm, don't deduct 

the part of the rental expense that represents 

the fair rental value of the farm home in which 

you live.

Lease or Purchase

If you lease a farm building or equipment, you 

must determine whether or not the agreement 

must be treated as a conditional sales contract 

rather than a lease. If the agreement is treated 

as a conditional sales contract, the payments 

under the agreement (so far as they don't represent interest or other charges) are payments for 

the purchase of the property. Do not deduct 

these payments as rent, but capitalize the cost 

of the property and recover this cost through 

depreciation.

Conditional sales contract. Whether an 

agreement is a conditional sales contract depends on the intent of the parties. Determine 

intent based on the provisions of the agreement 

and the facts and circumstances that exist when 

you make the agreement. No single test, or special combination of tests, always applies. However, in general, an agreement may be considered a conditional sales contract rather than a 

lease if any of the following is true.

• The agreement applies part of each payment toward an equity interest you will receive.

• You get title to the property after you make 

a stated amount of required payments.

• The amount you must pay to use the property for a short time is a large part of the 

amount you would pay to get title to the 

property.

• You pay much more than the current fair 

rental value of the property.

• You have an option to buy the property at a 

nominal price compared to the value of the 

property when you may exercise the option. Determine this value when you make 

the agreement.

• You have an option to buy the property at a 

nominal price compared to the total 

amount you have to pay under the agreement.

• The agreement designates part of the payments as interest, or part of the payments 

can be easily recognized as interest.

Example. You lease new farm equipment 

from a dealer who both sells and leases. The 

agreement includes an option to purchase the 

equipment for a specified price. The lease payments and the specified option price equal the 

sales price of the equipment plus interest. Under the agreement, you are responsible for 

maintenance, repairs, and the risk of loss. For 

federal income tax purposes, the agreement is 

a conditional sales contract. You can't deduct 

any of the lease payments as rent. You can deduct interest, repairs, insurance, depreciation, 

and other expenses related to the equipment.

Motor vehicle leases. Special rules apply to 

lease agreements that have a terminal rental 

adjustment clause. In general, this is a clause 

that provides for a rental price adjustment 

based on the amount the lessor is able to sell 

the vehicle for at the end of the lease. If your 

rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease 

if the agreement otherwise qualifies as a lease. 

For more information, see section 7701(h).

Leveraged leases. Special rules apply to 

leveraged leases of equipment (arrangements 

in which the equipment is financed by a nonrecourse loan from a third party). For more information, see Revenue Procedure 2001-28, 

which begins on page 1156 of Internal Revenue 

Bulletin 2001-19 at IRS.gov/pub/irs-irbs/

irb01-19.pdf.

Depreciation

If property you acquire to use in your farm business is expected to last more than 1 year, you 

generally can't deduct the entire cost in the year 

you acquire it. You must recover the cost over 

more than 1 year and deduct part of it each year 

on Schedule F as depreciation or amortization. 

However, you can choose to deduct part or all 

of the cost of certain qualifying property, up to a 

limit, as a section 179 deduction or special depreciation in the year you place it in service.

Depreciation, amortization, and the section 

179 deduction are discussed in chapter 7.

Business Use of Your Home

You can deduct expenses for the business use 

of your home if you use part of your home exclusively and regularly:

• As the principal place of business for any 

trade or business in which you engage;

• As a place to meet or deal with patients, 

clients, or customers in the normal course 

of your trade or business; or

• In connection with your trade or business, 

if you are using a separate structure that 

isn't attached to your home.

Your home office will qualify as your principal place of business for deducting expenses 

for its use if you meet both of the following requirements.

• You use it exclusively and regularly for the 

administrative or management activities of 

your trade or business.

• You have no other fixed location where you 

conduct substantial administrative or management activities of your trade or business.

If you use part of your home for business, 

you must divide the expenses of operating your 

home between personal and business use.

The IRS now provides a simplified method 

to determine your expenses for business use of 

your home. For more information, see Pub. 587.

Deduction limit. If your gross income from 

farming equals or exceeds your total farm expenses (including expenses for the business 

use of your home), you can deduct all your farm 

expenses. But if your gross income from farming is less than your total farm expenses, your 

deduction for certain expenses for the use of 

your home in your farming business is limited.

Your deduction for otherwise nondeductible 

expenses, such as utilities, insurance, and depreciation (with depreciation taken last), can't 

be more than the gross income from farming minus the following expenses.

• The business part of expenses you could 

deduct even if you didn't use your home for 

business (such as deductible mortgage interest, real estate taxes, and casualty and 

theft losses).

• Farm expenses other than expenses that 

relate to the use of your home. If you are 

self-employed, don't include your deduction for half of your self-employment tax.

Deductions over the current year's limit can 

be carried over to your next tax year. They are 

Chapter 4 Farm Business Expenses Page 23
subject to the deduction limit for the next tax 

year.

More information. See Pub. 587 for more information on deducting expenses for the business use of your home.

Telephone expense. You can't deduct the cost 

of basic local telephone service (including any 

taxes) for the first telephone line you have in 

your home, even if you have an office in your 

home. However, charges for business long-distance phone calls on that line, as well as the 

cost of a second line into your home used exclusively for your farm business, are deductible 

business expenses. Cell phone charges for 

calls relating to your farm business are deductible. If the cell phone you use for your farm business is part of a family cell phone plan, you 

must allocate and deduct only the portion of the 

charges attributable to farm business calls.

Truck and Car Expenses

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 

(subject to certain limits).

Standard mileage rate. Instead of using actual costs, under certain conditions you can use 

the standard mileage rate. The standard mileage rate for 2023 is 65.5 cents per mile. You 

can use the standard mileage rate for a car or a 

light truck, such as a van, pickup, or SUV, you 

own or lease.

You can't use the standard mileage rate if 

you operate five or more cars or light trucks at 

the same time. You aren't using five or more vehicles at the same time if you alternate using the 

vehicles (you use them at different times) for 

business.

Example. You own a car and four pickup 

trucks that are used in your farm business. Your 

farm employees use the trucks and you use the 

car for business. You can't use the standard 

mileage rate for the car or the trucks. This is because all five vehicles are used in your farm 

business at the same time. You must use actual 

expenses for all vehicles.

Business use percentage. You can claim 

75% of the use of a car or light truck as business use without any allocation 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. Once you make this 

choice, you may not change to another method 

later. The following are uses directly connected 

with the business of farming.

• Cultivating land.

• Raising or harvesting any agricultural or 

horticultural commodity.

• Raising, shearing, feeding, caring for, training, and managing animals.

• Driving to the feed or supply store.

If you keep records and they show that your 

business use was more than 75%, you may be 

able to claim more. See Recordkeeping requirements under Travel Expenses, later.

More information. For more information on 

deductible truck and car expenses and disposition of truck or car in reference, see chapter 4 of 

Pub. 463. If you pay your employees for the use 

of their truck or car in your farm business, see 

Reimbursements to employees under Travel Expenses next.

Travel Expenses

You can deduct ordinary and necessary expenses you incur while traveling away from home 

for your farm business. You can't deduct lavish 

or extravagant expenses. Usually, the location 

of your farm business is considered your home 

for tax purposes. You are traveling away from 

home if:

• Your duties require you to be absent from 

your farm substantially longer than an ordinary workday, and

• You need to get sleep or rest to meet the 

demands of your work while away from 

home.

If you meet these requirements and can 

prove the time, place, and business purpose of 

your travel, you can deduct your ordinary and 

necessary travel expenses.

The following are some types of deductible 

travel expenses.

• Air, rail, bus, and car transportation.

• Meals and lodging.

• Dry cleaning and laundry.

• Telephone and fax.

• Transportation between your hotel and 

your temporary work or business meeting 

location.

• Tips for any of the above expenses.

Meals. You can deduct only 50% of your nonentertainment business-related meal expenses. 

You can deduct the cost of your meals while 

traveling on business only if your business trip is 

overnight or long enough to require you to stop 

for sleep or rest to properly perform your duties. 

You can't deduct any of the cost of meals if it 

isn't necessary for you to rest. For information 

on entertainment expenses, see chapter 2 of 

Pub. 463.

The expense of a meal includes amounts 

you spend for your food, beverages, taxes, and 

tips relating to the meal. You can deduct either 

50% of the actual cost or 50% of a standard 

meal allowance that covers your daily meal and 

incidental expenses.

Note. No deduction is allowed for certain 

entertainment expenses, membership dues, 

and facilities used in connection with these activities for amounts paid or incurred after December 31, 2017. See section 274, as amended by the Tax Cuts and Jobs Act, section 

13304.

Recordkeeping requirements. You 

must be able to prove your deductions 

for travel by adequate records or other 

evidence that will support your own statement. 

Estimates or approximations don't qualify as 

proof of an expense.

RECORDS

You should keep an account book or similar 

record, supported by adequate documentary 

evidence, such as receipts, that together support each element of an expense. Generally, it is 

best to record the expense and get documentation of it at the time you pay it.

If you choose to deduct a standard meal allowance rather than the actual expense, you 

don't have to keep records to prove amounts 

spent for meals and incidental items. However, 

you must still keep records to prove the actual 

amount of other travel expenses, and the time, 

place, and business purpose of your travel.

More information. For detailed information on 

travel, recordkeeping, and the standard meal allowance, see Pub. 463.

Reimbursements to employees. You can 

generally deduct reimbursements you pay to 

your employees for travel and transportation expenses they incur in the conduct of your business. Employees may be reimbursed under an 

accountable or nonaccountable plan. Under an 

accountable plan, the employee must provide 

evidence of expenses. Under a nonaccountable 

plan, no evidence of expenses is required. If 

you reimburse expenses under an accountable 

plan, deduct them as travel and transportation 

expenses. If you reimburse expenses under a 

nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct 

them as wages. For more information, see 

chapter 8 of Pub. 334.

Marketing Quota Penalties

You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in 

excess of farm marketing quotas. However, if 

you don't pay the penalty, but instead the purchaser of your crop deducts it from the payment 

to you, include in gross income only the amount 

you received. Do not take a separate deduction 

for the penalty.

Tenant House Expenses

You can deduct the costs of maintaining houses 

and their furnishings for tenants or hired help as 

farm business expenses. These costs include 

repairs, utilities, insurance, and depreciation.

The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement 

isn't taxable income to the tenant.

Items Purchased for Resale

If you use the cash method of accounting, you 

ordinarily deduct the cost of livestock and other 

items purchased for resale only in the year of 

sale. You deduct this cost, including freight 

charges for transporting the livestock to the 

farm, on Schedule F, Part I. However, see 

Chickens, seeds, and young plants below.

Example. You use the cash method of accounting. In 2023, you buy 50 steers you will 

sell in 2024. You can't deduct the cost of the 

steers on your 2023 tax return. You deduct their 

cost on your 2024 Schedule F, Part I.

Page 24 Chapter 4 Farm Business Expenses
Chickens, seeds, and young plants. If you 

are a cash method farmer, you can deduct the 

cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the 

year paid if you do it consistently and it doesn't 

distort income. You can also deduct the cost of 

seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do 

this consistently and you don't figure your income on the crop method. However, see Prepaid Farm Supplies, earlier, for a rule that may 

limit your deduction for these items.

If you deduct the cost of chickens, seeds, 

and young plants as an expense, report their 

entire selling price as income. You also can't deduct the cost from the selling price.

You can't deduct the cost of seeds and 

young plants for Christmas trees and timber as 

an expense. Capitalize the cost of these seeds 

and plants, and later deduct, through depletion. 

For more information, see Depletion in chapter 7.

The cost of chickens and plants used as 

food for your family is never deductible.

Capitalize the cost of plants with a preproductive period of more than 2 years, unless you 

can elect out of the uniform capitalization rules. 

These rules are discussed in chapter 6.

Example. You use the cash method of accounting. In 2023, you buy 500 baby chicks to 

raise for resale in 2024. You also buy 50 bushels of winter wheat seed in 2023 that you sow in 

the fall. Unless you previously adopted the 

method of deducting these costs in the year you 

sell the chickens or the harvested crops, you 

can deduct the cost of both the baby chicks and 

the seed wheat in 2023.

Election to use crop method. If you use 

the crop method, you can delay deducting the 

cost of seeds and young plants until you sell 

them. You must get IRS approval to use the 

crop method. If you follow this method, deduct 

the cost from the selling price to determine your 

profit on Schedule F, Part I. For more information, see Crop method under Special Methods 

of Accounting in chapter 2.

Choosing a method. You can adopt either 

the crop method or the cash method for deducting the cost in the first year you buy egg-laying 

hens, pullets, chicks, or seeds and young 

plants.

Although you must use the same method for 

egg-laying hens, pullets, and chicks, you can 

use a different method for seeds and young 

plants. Once you use a particular method for 

any of these items, use it for those items until 

you get IRS approval to change your method. 

For more information, see Change in Accounting Method in chapter 2.

Other Expenses

The following list, while not all-inclusive, shows 

some expenses you can deduct as other farm 

expenses on Schedule F, Part II. These expenses must be for business purposes and

(1) paid, if you use the cash method of accounting; or (2) incurred, if you use an accrual 

method of accounting.

• Accounting fees.

• Advertising.

• Business travel and meals.

• Commissions.

• Consultant fees.

• Crop scouting expenses.

• Dues to cooperatives.

• Educational expenses (to maintain and improve farming skills).

• Farm-related attorney fees.

• Farm magazines.

• Ginning.

• Insect sprays and dusts.

• Litter and bedding.

• Livestock fees.

• Marketing fees.

• Milk assessment.

• Recordkeeping expenses.

• Service charges.

• Small tools expected to last 1 year or less.

• Stamps and stationery.

• Subscriptions to professional, technical, 

and trade journals that deal with farming.

• Tying material and containers.

• Utilities and Internet

De minimis safe harbor for tangible property. If you elected to use the de minimis safe 

harbor for tangible property for the tax year, you 

can deduct as a farm business expense on 

Schedule F amounts paid for tangible property 

qualifying under the de minimis safe harbor. For 

more information, see Capital Expenses, later.

Loan expenses. You prorate and deduct loan 

expenses, such as legal fees and commissions, 

you pay to get a farm loan over the term of the 

loan.

Tax preparation fees. You can deduct as a 

farm business expense on Schedule F the cost 

of preparing that part of your tax return relating 

to your farm business.

You can also deduct on Schedule F the 

amount you pay or incur in resolving tax issues 

relating to your farm business.

Capital Expenses

A capital expense is payment, or debt incurred, 

for the acquisition, production, or improvement 

of a unit of property. You include the expense in 

the basis of the asset. Uniform capitalization 

rules also require you to capitalize or include in 

inventory certain other expenses. See chapters 

2 and 6 for more information.

Capital expenses are generally not deductible, but they may be depreciable. However, you 

can elect to deduct certain capital expenses, 

such as the following.

• The cost of fertilizer, lime, etc. (See Fertilizer and Lime under Deductible Expenses, 

earlier.)

• Soil and water conservation expenses. 

(See chapter 5.)

• The cost of property that qualifies for a deduction under section 179. (See chapter 7.)

• Business start-up costs. (See Business 

start-up and organizational costs, later.)

• Forestation and reforestation costs. (See 

Forestation and reforestation costs, later.)

Generally, the costs of the following items, 

including the costs of material, hired labor, and 

installation, are capital expenses.

1. Land and buildings.

2. Additions, alterations, and improvements 

to buildings, etc.

3. Cars and trucks.

4. Equipment and machinery.

5. Fences.

6. Draft, breeding, sport, and dairy livestock.

7. Repairs to machinery, equipment, trucks, 

and cars that prolong their useful life, increase their value, or adapt them to different use.

8. Water wells, including drilling and equipping costs.

9. Land preparation costs, such as:

a. Clearing land for farming;

b. Leveling and conditioning land;

c. Purchasing and planting trees;

d. Building irrigation canals and ditches;

e. Laying irrigation pipes;

f. Installing drain tile;

g. Modifying channels or streams;

h. Constructing earthen, masonry, or 

concrete tanks, reservoirs, or dams; 

and

i. Building roads.

Business start-up and organizational costs. 

You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 

2004. The $5,000 deduction is reduced by the 

amount your total start-up or organizational 

costs exceed $50,000. Any remaining costs 

must be amortized. See chapter 7 for more information.

You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including 

extensions) for the tax year in which the active 

trade or business begins. However, if you timely 

filed your return for the year without making the 

election, you can still make the election by filing 

an amended return within 6 months of the due 

date of the return (excluding extensions). 

Clearly indicate the election on your amended 

return and write “Filed pursuant to section 

301.9100-2” at the top of the amended return. 

File the amended return at the same address 

you filed the original return. The election applies 

when figuring taxable income for the current tax 

year and all subsequent years.

You can choose to forgo the election by 

clearly electing to capitalize your start-up or organizational costs on an income tax return filed 

by the due date (including extensions) for the 

tax year in which the active trade or business 

begins. For more information about start-up and 

organizational costs, see chapter 7.

Chapter 4 Farm Business Expenses Page 25
Exception for tangible real and personal 

property under the de minimis safe harbor. 

If you elect the de minimis safe harbor for your 

farming business for the tax year, you’re not required to capitalize the de minimis costs of acquiring or producing certain real and tangible 

personal property and may deduct these 

amounts as farm expenses on Schedule F. For 

more information on electing and using the de 

minimis safe harbor, see chapter 8 of Pub. 334.

Crop production expenses. The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. However, except for certain taxpayers required to 

use an accrual method of accounting, the capitalization rules don't apply to plants with a preproductive period of 2 years or less. For more 

information, see Uniform Capitalization Rules in 

chapter 6.

Timber. Capitalize the cost of acquiring timber. 

Do not include the cost of land in the cost of the 

timber. You must generally capitalize direct 

costs incurred in reforestation. However, you 

can elect to deduct some forestation and reforestation costs. See Forestation and reforestation costs next. Reforestation costs include the 

following.

1. Site preparation costs, such as:

a. Girdling,

b. Applying herbicide,

c. Baiting rodents, and

d. Clearing and controlling brush.

2. The cost of seed or seedlings.

3. Labor and tool expenses.

4. Depreciation on equipment used in planting or seeding.

5. Costs incurred in replanting to replace lost 

seedlings.

You can choose to capitalize certain indirect reforestation costs.

These capitalized amounts are your basis 

for the timber. Recover your basis when you sell 

the timber or take depletion allowances when 

you cut the timber. See Depletion in chapter 7.

Forestation and reforestation costs. You 

can elect to deduct up to $10,000 ($5,000 if 

married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after 

October 22, 2004, for each qualified timber 

property. Any remaining costs can be amortized 

over an 84-month period. See chapter 7. If you 

make an election to deduct or amortize qualifying reforestation costs, you should create and 

maintain separate timber accounts for each 

qualified timber property. The accounts should 

include all reforestation treatments and the 

dates they were applied. Any qualified timber 

property that is subject to the deduction or amortization election can't be included in any other 

timber account for which depletion is allowed. 

The timber account should be maintained until 

the timber is disposed of. For more information, 

see Notice 2006-47, 2006-20 I.R.B. 892, available at IRS.gov/irb/2006-20_IRB/ar11.html.

You elect to deduct forestation and reforestation costs by claiming the deduction on the 

income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. If you are filing 

Form T (Timber), Forest Activities Schedule, 

also complete Form T (Timber), Part IV. If you 

aren't filing Form T (Timber), attach a statement 

to your return with the following information.

• The unique stand identification numbers.

• The total number of acres reforested during the tax year.

• The nature of the reforestation treatments.

• The total amounts of the qualified reforestation expenditures eligible to be amortized 

or deducted.

However, if you timely filed your return for 

the year without making the election, you can 

still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the 

election on your amended return and write 

“Filed pursuant to section 301.9100-2” at the 

top of the amended return. File the amended return at the same address you filed the original 

return.

For more information about forestation and 

reforestation costs, see chapter 7.

For more information about timber, the 

Agriculture Handbook Number 731, 

Form T (Timber), and the Hardwood 

Industry Audit Technique Guide.

Christmas tree cultivation. If you are in the 

business of planting and cultivating Christmas 

trees to sell when they are more than 6 years 

old, capitalize expenses incurred for planting 

and stump culture and add them to the basis of 

the standing trees. Recover these expenses as 

part of your adjusted basis when you sell the 

standing trees or as depletion allowances when 

you cut the trees. For more information, see 

Timber Depletion under Depletion in chapter 7.

You can deduct as business expenses the 

costs incurred for shearing and basal pruning of 

these trees. Expenses incurred for silviculture 

practices, such as weeding or cleaning, and 

noncommercial thinning are also deductible as 

business expenses.

Capitalize the cost of land improvements, 

such as road grading, ditching, and fire breaks, 

that have a useful life beyond the tax year. If the 

improvements don't have a determinable useful 

life, add their cost to the basis of the land. The 

cost is recovered when you sell or otherwise 

dispose of it. If the improvements have a determinable useful life, recover their cost through 

depreciation. Capitalize the cost of equipment 

and other depreciable assets, such as culverts 

and fences, to the extent you don't use them in 

planting Christmas trees. Recover these costs 

through depreciation.

Nondeductible 

Expenses

You can't deduct personal expenses and certain 

other items on your tax return even if they relate 

to your farm.

Personal, Living, and Family 

Expenses

You can't deduct certain personal, living, and 

family expenses as business expenses. These 

include rent and insurance premiums paid on 

property used as your home; life insurance premiums on yourself or your family; the cost of 

maintaining cars, trucks, or horses for personal 

use; allowances to minor children; attorneys' 

fees and legal expenses incurred in personal 

matters; and household expenses. Likewise, 

the cost of purchasing or raising produce or 

livestock consumed by you or your family isn't 

deductible.

Other Nondeductible Items

You can't deduct the following items on your tax 

return.

Loss of growing plants, produce, and 

crops. Losses of plants, produce, and crops 

raised for sale are generally not deductible. 

However, you may have a deductible loss on 

plants with a preproductive period of more than 

2 years. See chapter 11 for more information.

Repayment of loans. You can't deduct the repayment of a loan. However, if you use the proceeds of a loan for farm business expenses, 

you can deduct the interest on the loan. See Interest, earlier.

Estate, inheritance, legacy, succession, and 

gift taxes. You can't deduct estate, inheritance, 

legacy, succession, and gift taxes.

Loss of livestock. You can't deduct as a loss 

the value of raised livestock that die if you deducted the cost of raising them as an expense.

Losses from sales or exchanges between 

related persons. You can't deduct losses from 

sales or exchanges of property between you 

and certain related persons, including your 

spouse, brother, sister, ancestor, or lineal descendant. For more information, see chapter 2 

of Pub. 544.

Cost of raising unharvested crops. You 

can't deduct the cost of raising unharvested 

crops sold with land owned more than 1 year if 

you sell both at the same time and to the same 

person. Add these costs to the basis of the land 

to determine the gain or loss on the sale. For 

more information, see Section 1231 Gains and 

Losses in chapter 9.

Cost of unharvested crops bought with 

land. Capitalize the purchase price of land, including the cost allocable to unharvested crops. 

You can't deduct the cost of the crops at the 

time of purchase. However, you can deduct this 

cost in figuring net profit or loss in the tax year 

you sell the crops.

Cost related to gifts. You can't deduct costs 

related to your gifts of agricultural products or 

property held for sale in the ordinary course of 

your business. The costs aren't deductible in 

the year of the gift or any later year. For example, you can't deduct the cost of raising cattle or 

Page 26 Chapter 4 Farm Business Expenses
the cost of planting and raising unharvested 

wheat on parcels of land given as a gift to your 

children.

Club dues and membership fees. Generally, 

you can't deduct amounts you pay or incur for 

membership in any club organized for business, 

pleasure, recreation, or any other social purpose. This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline 

clubs, and clubs operated to provide meals under circumstances generally considered to be 

conducive to business discussions.

Exception. The following organizations 

won't be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to 

conduct entertainment activities for members or 

their guests or to provide members or their 

guests with access to entertainment facilities.

• Boards of trade.

• Business leagues.

• Chambers of commerce.

• Civic or public service organizations.

• Professional associations.

• Trade associations.

• Real estate boards.

Fines and penalties. Generally, no deduction 

is allowed for fines and penalties paid to a government or specified nongovernmental entity for 

the violation of any law except:

• Amounts that constitute restitution,

• Amount paid to come into compliance with 

the law,

• Amounts paid or incurred as the result of 

certain court orders in which no government or specified non-governmental 

agency is a party, and

• Amounts paid or incurred for taxes due.

On or after December 22, 2017, no deduction is allowed for the restitution amount or 

amount paid to come into compliance with the 

law unless the amounts are specifically identified in the settlement agreement or court order. 

Also, any amount paid or incurred as reimbursement to the government for the costs of any investigation or litigation are not eligible for the 

exceptions and are nondeductible.

See section 162(f), as amended by the Tax 

Cuts and Jobs Act, section 13306.

For the deductibility of penalites for exceeding marketing quotas, see Marketing Quota 

Penalties, discussed earlier.

Losses From Operating 

a Farm

If your deductible farm expenses are more than 

your farm income, you have a loss from the operation of your farm. The amount of the loss you 

can deduct when figuring your taxable income 

may be limited. To figure your deductible loss, 

you must apply the following limits.

• The at-risk limits.

• The passive activity limits.

The following discussions explain these limits.

If your deductible loss after applying these 

limits is more than your other income for the 

year, you may have a net operating loss. See 

Pub. 536.

If you don't carry on your farming activity to make a profit, your loss deduction 

may be limited by the not-for-profit 

rules. See Not-for-Profit Farming, later.

At-Risk Limits

The at-risk rules limit your deduction for losses 

from most business or income-producing activities, including farming. These rules limit the losses you can deduct when figuring your taxable 

income. The deductible loss from an activity is 

limited to the amount you have at risk in the activity.

You are at risk in any activity for:

1. The money and adjusted basis of property 

you contribute to the activity; and

2. Amounts you borrow for use in the activity 

if:

a. You are personally liable for repayment, or

b. You pledge property (other than property used in the activity) as security for 

the loan.

You aren't at risk, however, for amounts you 

borrow for use in a farming activity from a person who has an interest in the activity (other 

than as a creditor) or a person related to someone (other than you) having such an interest.

For more information, see Pub. 925.

Passive Activity Limits

A passive activity is generally any activity involving the conduct of any trade or business in 

which you don't materially participate. Generally, a rental activity is a passive activity.

If you have a passive activity, special rules 

limit the loss you can deduct in the tax year. You 

can generally deduct losses from passive activities only up to income from passive activities. 

Credits are similarly limited.

For more information, see Pub. 925.

Excess Business Loss 

Limitation

Noncorporate taxpayers may be subject to excess business loss limitations. The at-risk limits 

and the passive activity limits are applied before 

calculating the amount of any excess business 

loss. An excess business loss is the amount by 

which the total deductions attributable to all of 

your trades or businesses exceed your total 

gross income and gains attributable to those 

trades or businesses plus $289,000 (or 

$578,000 in the case of a joint return). Business 

gains and losses reported on Form 4797 and 

Form 8949 are included in the excess business 

loss calculation. This includes farming losses 

from casualty losses or losses by reason of disease or drought. Excess business losses that 

are disallowed are treated as a net operating 

loss carryover to the following tax year. See 

Form 461 and its instructions for details.

CAUTION

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Taxpayers with losses from a farming business must apply the excess business loss limitation before carrying any net operating losses 

back 2 years. See the Instructions for Form 

1045, Application for Tentative Refund.

If you incur both farming and nonfarming 

business losses that are more than the threshold amount you must allocate the threshold 

amount first to the farming losses to the extent 

you have a net operating loss.

Excess farm losses that are disallowed can 

be carried forward to the next tax year and treated as a net operating loss deduction from that 

year.

Net Operating Loss 

Limitation

If you have a 2023 net operating loss attributable to farming, you must carry it back two years, 

unless you elect to forgo the carryback. Farming 

businesses can elect to forgo the carryback and 

carry forward the farm net operating loss to a 

later year. See the Instructions for Form 1045 or 

Form 1138 for more information.

Not-for-Profit Farming

If you operate a farm for profit, you can deduct 

all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. 

However, if you don't carry on your farming activity, or other activity you engage or invest in, to 

make a profit, you report the income from the 

activity on Schedule 1 (Form 1040), line 8i. You 

can no longer deduct expenses of carrying on 

the activity, even if you itemize your deductions 

on Schedule A (Form 1040).

Expenses for activities you do as a hobby, or 

mainly for sport or recreation can not be deducted. This also applies to an investment activity 

intended only to produce tax losses for the investors.

The deductibility of not-for-profit losses applies to individuals, partnerships, estates, trusts, 

and S corporations. It doesn't apply to corporations other than S corporations.

In determining whether you are carrying on 

your farming activity for profit, all the facts are 

taken into account. No one factor alone is decisive. Among the factors to consider are 

whether:

• You operate your farm in a businesslike 

manner;

• The time and effort you spend on farming 

indicate you intend to make it profitable;

• You depend on income from farming for 

your livelihood;

• Your losses are due to circumstances beyond your control or are normal in the 

start-up phase of farming;

• You change your methods of operation in 

an attempt to improve profitability;

• You, or your advisors, have the knowledge 

needed to carry on the farming activity as a 

successful business;

• You were successful in making a profit in 

similar activities in the past;

Chapter 4 Farm Business Expenses Page 27
• You make a profit from farming in some 

years and the amount of profit you make; 

and

• You can expect to make a future profit from 

the appreciation of the assets used in the 

farming activity.

Presumption of profit. Your farming or other 

activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax 

years, including the current year. Activities that 

consist primarily of breeding, training, showing, 

or racing horses are presumed carried on for 

profit if they produced a profit in at least 2 of the 

last 7 tax years, including the current year. The 

activity must be substantially the same for each 

year within this period. You have a profit when 

the gross income from an activity is more than 

the deductions for it.

If a taxpayer dies before the end of the 

5-year (or 7-year) period, the period ends on 

the date of the taxpayer's death.

If your business or investment activity 

passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. This means the 

limits discussed here don't apply. You can take 

all your business deductions from the activity on 

Schedule F, even for the years that you have a 

loss. You can rely on this presumption in every 

case, unless the IRS shows it isn't valid.

If you fail the 3- (or 2-) years-of-profit test, 

you may still be considered to operate your farm 

for profit by considering the factors listed earlier.

Using the presumption later. If you are 

starting out in farming and don't have 3 (or 2) 

years showing a profit, you may want to take advantage of this presumption later, after you have 

had the 5 (or 7) years of experience allowed by 

the test. 

You can choose to do this by filing Form 

5213. Filing this form postpones any determination that your farming activity isn't carried on for 

profit until 5 (or 7) years have passed since you 

first started farming. You must file Form 5213 

within 3 years after the due date of your return 

for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving 

a written notice from the IRS proposing to disallow deductions attributable to the activity.

The benefit gained by making this choice is 

that the IRS won't immediately question 

whether your farming activity is engaged in for 

profit. Accordingly, it won't limit your deductions. 

Rather, you will gain time to earn a profit in 3 (or 

2) out of the first 5 (or 7) years you carry on the 

farming activity. If you show 3 (or 2) years of 

profit at the end of this period, your deductions 

aren't limited under these rules. If you don't 

have 3 (or 2) years of profit (and can't otherwise 

show that you operated your farm for profit), the 

limit applies retroactively to any year in the 

5-year (or 7-year) period with a loss.

Filing Form 5213 automatically extends the 

period of limitations on any year in the 5-year 

(or 7-year) period to 2 years after the due date 

of the return for the last year of the period. The 

period is extended only for deductions of the 

activity and any related deductions that might 

be affected.

Limit on deductions and losses. If your activity isn't carried on for profit, take deductions 

only in the following order, only to the extent stated in the three categories.

Category 1. Deductions you can take for 

personal as well as for business activities are 

allowed in full. For individuals, all nonbusiness 

deductions, such as those for home mortgage 

interest, taxes, and casualty losses (attributable 

to a federally declared disaster), belong in this 

category. See chapter 11 for more information. 

For the limits that apply to mortgage interest, 

see Pub. 936.

Category 2. Deductions that don't result in 

an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than the deductions you take (or could take) under the first 

category. Most business deductions, such as 

those for fertilizer, feed, insurance premiums, 

utilities, wages, etc., belong in this category.

Category 3. Business deductions that decrease the basis of property are allowed last, 

but only to the extent the gross income from the 

activity is more than deductions you take (or 

could take) under the first two categories. The 

deductions for depreciation, amortization, and 

the part of a casualty loss an individual could 

not deduct in category 1 belong in this category. 

Where more than one asset is involved, divide 

depreciation and these other deductions proportionally among those assets.

Partnerships and S corporations. If a partnership or S corporation carries on a 

not-for-profit activity, these limits apply at the 

partnership or S corporation level. They are reflected in the individual shareholder's or partner's distributive shares.

More information. For more information on 

not-for-profit activities, see Not-for-Profit Activities in chapter 9 of Pub. 334.

5.

Soil and Water 

Conservation 

Expenses

Introduction

If you are in the business of farming, you can 

choose to deduct certain expenses for:

• Soil or water conservation,

• Prevention of erosion of land used in farming, or

• Endangered species recovery.

Otherwise, these are capital expenses that 

must be added to the basis of the land. (See 

chapter 6 for information on determining basis.)

The deduction for conservation expenses 

cannot be more than 25% of your gross income 

from farming. See 25% Limit on Deduction, 

later.

Conservation expenses for land in a 

foreign country do not qualify for this 

special treatment.

Although some expenses are not deductible 

as soil and water conservation expenses, they 

may be deductible as ordinary and necessary 

farm expenses. These include interest and 

taxes, the cost of periodically clearing brush 

from productive land, the regular removal of 

sediment from a drainage ditch, and expenses 

paid or incurred primarily to produce an agricultural crop that may also conserve soil.

You must include in income most government payments for approved conservation practices. However, you can exclude some payments you receive under certain cost-sharing 

conservation programs. For more information, 

see Agricultural Program Payments in chapter 3.

To get the full deduction to which you 

are entitled, you should maintain your 

records to clearly distinguish between 

your ordinary and necessary farm business expenses and your soil and water conservation 

expenses.

Topics. This chapter discusses the following.

• Business of farming,

• Plan certification,

• Conservation expenses,

• Assessment by conservation district,

• 25% limit on deduction,

• When to deduct or capitalize, and

• Sale of a farm.

Business of Farming

For purposes of soil and water conservation expenses, 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 not in 

the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than 

for profit. You are not farming if you are engaged 

only in forestry or the growing of timber.

Farm defined. A farm includes livestock, dairy, 

poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards. A fish farm is an area where fish and 

other marine animals are grown or raised and 

artificially fed, protected, etc. It doesn't include 

an area where they are merely caught or harvested. A plant nursery is a farm for purposes of 

deducting soil and water conservation expenses.

Farm rental. If you own a farm and receive 

farm rental payments based on farm production, 

either in cash or crop shares, you are in the 

business of farming.

If you receive a fixed rental payment that is 

not based on farm production, you are in the 

business of farming only if you materially participate in operating or managing the farm.

CAUTION

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Page 28 Chapter 5 Soil and Water Conservation Expenses
If you get cash rental for a farm you 

own that is not used in farm production, 

you can't deduct soil and water conservation expenses for that farm.

Example. You own a farm in Iowa. You rent 

out the farm for $250 in cash per acre and don't 

materially participate in producing or managing 

production of the crops grown on the farm. You 

can't deduct your soil conservation expenses 

for this farm. You must capitalize the expenses 

and add them to the basis of the land.

For more information, see Material participation for landlords under Landlord Participation in 

Farming in chapter 12.

Plan Certification

You can deduct soil and water conservation expenses only if they are consistent with a plan 

approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. If no such plan exists, the expenses 

must be consistent with a soil conservation plan 

of a comparable state agency. Keep a copy of 

the plan with your books and records to support 

your deductions.

Conservation plan. A conservation plan includes the farming conservation practices approved for the area where your farmland is located. There are three types of approved plans.

• NRCS individual site plans. These plans 

are issued individually to farmers who request assistance from NRCS to develop a 

conservation plan designed specifically for 

their farmland.

• NRCS county plans. These plans include a 

listing of farm conservation practices approved for the county where the farmland is 

located. You can deduct expenses for conservation practices not included on the 

NRCS county plans only if the practice is a 

part of an individual site plan.

• Comparable state agency plans. These 

plans are approved by state agencies and 

can be approved individual site plans or 

county plans.

A list of NRCS conservation programs is 

available at NRCS.USDA.gov/programsinitiatives. Individual site plans can be obtained 

from NRCS offices and the comparable state 

agencies.

Conservation Expenses

You can deduct conservation expenses only for 

land you or your tenant are using, or have used 

in the past, for farming. These expenses include, but are not limited to, the following.

1. The treatment or movement of earth, such 

as:

a. Leveling,

b. Conditioning,

c. Grading,

d. Terracing,

e. Contour furrowing, and

CAUTION

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f. Restoration of soil fertility.

2. The construction, control, and protection 

of:

a. Diversion channels;

b. Drainage ditches;

c. Irrigation ditches;

d. Earthen dams; and

e. Watercourses, outlets, and ponds.

3. The eradication of brush.

4. The planting of windbreaks.

You can't deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. These expenses are added to the 

basis of the land.

If you choose to deduct soil and water 

conservation expenses, you must include as gross income any cost-sharing payments you receive for those expenses. 

See chapter 3 for information about payments 

eligible for the cost-sharing exclusion.

New farm or farmland. If you acquire a new 

farm or new farmland from someone who was 

using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made 

on land used in farming at the time the expenses were paid or incurred. You can deduct soil 

and water conservation expenses for this land if 

your use of it is substantially a continuation of its 

use in farming. The new farming activity doesn't 

have to be the same as the old farming activity. 

For example, if you buy land that was used for 

grazing cattle and then prepare it for use as an 

apple orchard, you can deduct your conservation expenses.

Land not used for farming. If your conservation expenses benefit both land that doesn’t 

qualify as land used for farming and land that 

does qualify, you must allocate the expenses 

between the two types of land. For example, if 

the expenses benefit 200 acres of your land, but 

only 120 acres of this land are used for farming, 

then you can deduct 60% (120 ÷ 200) of the expenses. You can use another method to allocate these expenses if you can clearly show 

that your method is more reasonable.

Depreciable conservation assets. You generally can't deduct your expenses for depreciable conservation assets. However, you can deduct certain amounts you pay or incur for an 

assessment for depreciable property that a soil 

and water conservation or drainage district levies against your farm. See Assessment for Depreciable Property, later.

You must capitalize expenses to buy, build, 

install, or improve depreciable structures or facilities. These expenses include those for materials, tile (including drainage tile), pipe, pumps 

(and other equipment), supplies, wages, fuel, 

hauling, and moving dirt when making or installing structures such as tanks, reservoirs, culverts, canals, dams, drainage systems, waste 

management systems or wells composed of 

masonry, concrete, tile (including drainage tile), 

CAUTION

!

metal, or wood. You recover your capital investment through annual allowances for depreciation.

You can deduct soil and water conservation 

expenses for nondepreciable earthen items. 

Nondepreciable earthen items include certain 

dams, ponds, and terraces described under 

Property Having a Determinable Useful Life in 

chapter 7.

Water well. You can't deduct the cost of 

drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. It is a capital expense. You recover your cost through depreciation. You must 

also capitalize your cost for drilling a test hole. If 

the test hole produces no water and you continue drilling, the cost of the test hole is added 

to the cost of the producing well. You can recover the total cost through depreciation deductions.

If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) 

is abandoned, you can deduct your unrecovered cost in the year of abandonment. Abandonment means that all economic benefits from 

the well are terminated. For example, filling or 

sealing a well excavation or casing so that all 

economic benefits from the well are terminated 

constitutes an abandonment.

Endangered species recovery expenses. If 

you are in the business of farming and meet 

other specific requirements, you can choose to 

deduct the conservation expenses discussed 

earlier as endangered species recovery expenses. Otherwise, these are capital expenses that 

must be added to the basis of the land.

The expenses must be paid or incurred for 

the purpose of achieving site-specific management actions recommended in a recovery plan 

approved under section 4(f) of the Endangered 

Species Act of 1973. See section 175 for more 

information.

Assessment by 

Conservation District

In some localities, a soil or water conservation 

or drainage district incurs expenses for soil or 

water conservation and levies an assessment 

against the farmers who benefit from the expenses. You can deduct as a conservation expense 

amounts you pay or incur for the part of an assessment that:

• Covers expenses you could deduct if you 

had paid them directly, or

• Covers expenses for depreciable property 

used in the district's business.

A water or drainage district assessment for 

repairs or maintenance of district property or for 

interest paid by the district for a loan to buy 

property may qualify as a business deduction. 

See Regulations section 1.164-4(b)(1).

Assessment for Depreciable 

Property

You can generally deduct as a conservation expense amounts you pay or incur for the part of a 

conservation or drainage district assessment 

Chapter 5 Soil and Water Conservation Expenses Page 29
that covers expenses for depreciable property. 

This includes items such as pumps, locks, concrete structures (including dams and weir 

gates), draglines, and similar equipment. The 

depreciable property must be used in the district's soil and water conservation activities. 

However, the following limits apply to these assessments.

• The total assessment limit.

• The yearly assessment limit.

After you apply these limits, the amount you 

can deduct is added to your other conservation 

expenses for the year. The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. See Table 5-1 for a brief summary 

of these limits.

To ensure your deduction is within the 

deduction limits, keep records to show 

the following.

• The total assessment against all members 

of the district for the depreciable property.

• Your deductible share of the cost to the 

district for the depreciable property.

• Your gross income from farming.

Total assessment limit. You can't deduct 

more than 10% of the total amount assessed to 

all members of the conservation or drainage 

district for the depreciable property. This applies 

whether you pay the assessment in one payment or in installments. If your assessment is 

more than 10% of the total amount assessed, 

both the following rules apply.

• The amount over 10% is a capital expense 

and is added to the basis of your land.

• If the assessment is paid in installments, 

each payment must be prorated between 

the conservation expense and the capital 

expense.

Yearly assessment limit. The maximum 

amount you can deduct in any 1 year is the total 

of 10% of your deductible share of the cost as 

explained earlier, plus $500. If the amount you 

TIP

pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is 

paid or incurred. If the amount you pay or incur 

is more, you can deduct in that year only 10% of 

your deductible share of the cost. You can deduct the remainder in equal amounts over the 

next 9 tax years. Your total conservation expense deduction for each year is also subject to 

the 25% of gross income from farming limit on 

the deduction, discussed later.

Example 1. This year, the soil conservation 

district levies, and you pay, an assessment of 

$2,400 against your farm. Of the assessment, 

$1,500 is for digging drainage ditches. You can 

deduct this part as a soil or conservation expense as if you had paid it directly. The remaining $900 is for depreciable equipment to be 

used in the district's irrigation activities. The total amount assessed by the district against all 

its members for the depreciable equipment is 

$7,000.

The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all 

its members for depreciable equipment, or 

$700. The $200 excess ($900 − $700) is a capital expense you must add to the basis of your 

farm.

To figure the maximum amount you can deduct for the depreciable equipment this year, 

multiply your deductible share of the total assessment ($700) by 10% (0.10). Add $500 to 

the result for a total of $570. Your deductible 

share, $700, is greater than the maximum 

amount deductible in 1 year, so you can deduct 

only $70 of the amount you paid or incurred for 

depreciable property this year (10% of $700). 

You can deduct the balance at the rate of $70 a 

year over the next 9 years.

You add $70 to the $1,500 portion of the assessment for drainage ditches. You can deduct 

$1,570 of the $2,400 assessment as a soil and 

water conservation expense this year, subject to 

the 25% of gross income from farming limit on 

the deduction, discussed later.

Example 2. Assume the same facts as in 

Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and 

$550 is for depreciable equipment. The total 

amount assessed by the district against all its 

members for depreciable equipment is $5,500. 

The total amount you can deduct for the depreciable equipment is limited to 10% of this 

amount, or $550.

The maximum amount you can deduct this 

year for the depreciable equipment is $555 

(10% of your deductible share of the total assessment, $55, plus $500). Since your deductible share is less than the maximum amount deductible in 1 year, you can deduct the entire 

$550 this year. You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of 

gross income from farming limit on the deduction, discussed below.

Sale or other disposal of land during 9-year 

period. If you dispose of the land during the 

9-year period for deducting conservation expenses subject to the yearly limit, any amounts you 

have not yet deducted because of this limit are 

added to the basis of the property.

Death of farmer during 9-year period. If a 

farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death.

25% Limit on Deduction

The total deduction for conservation expenses 

in any tax year is limited to 25% of your gross income from farming for that year.

Gross income from farming. Gross income 

from farming is the income you derive in the 

business of farming from the production of 

crops, fish, fruits, other agricultural products, or 

livestock. Gains from sales of draft, breeding, or 

dairy livestock are included. Gains from sales of 

assets such as farm machinery, or from the disposition of land, are not included.

Example. In 2023, you report gross income 

from farming for your single-member LLC 

(SMLLC) on Schedule F (Form 1040) of 

$85,000. Additionally, your gain from sales of 

cull raised breeding animals reported on Form 

4797, line 2(g), is $15,000. Therefore, your 

gross income from farming is $100,000 

($85,000 + $15,000). Thus, the applicable 25% 

limitation ($100,000 x 25% (0.25)) is $25,000 

for soil and water expenses in 2023.

The calculation of farm income for soil 

and water conservation expenses differs from the calculations for income 

averaging and estimated tax payments. For 

more information, see Income Averaging for 

Farmers in chapter 3 and Gross Income in 

chapter 15.

Carryover of deduction. If your deductible 

conservation expenses in any year are more 

than 25% of your gross income from farming for 

that year, you can carry the unused deduction 

over to later years. However, the deduction in 

TIP

Limits on Deducting an Assessment by a Conservation 

District for Depreciable Property

Total Limit on Deduction 

for Assessment for 

Depreciable Property

Yearly Limit on Deduction 

for Assessment for 

Depreciable Property

Yearly Limit for All 

Conservation Expenses

10% of: $500 + 10% of: 25% of:

Total assessment against all 

members of the district for the 

property.

Your deductible share of the 

cost to the district for the 

property.

Your gross income from 

farming.

• No one taxpayer can 

deduct more than 10% of 

the total assessment.

• Any amount over 10% is 

a capital expense and is 

added to the basis of 

your land.

• If an assessment is paid 

in installments, each 

payment must be 

prorated between the 

conservation expense 

and the capital expense.

• If the amount you pay or 

incur for any year is 

more than the limit, you 

can deduct for that year 

only 10% of your 

deductible share of the 

cost.

• You can deduct the 

remainder in equal 

amounts over the next 9 

tax years.

• Limit for all conservation 

expenses, including 

assessments for 

depreciable property.

• Amounts greater than 

25% can be carried to the 

following year and added 

to that year's expenses. 

The total is then subject 

to the 25% of gross 

income from farming limit 

in that year.

Table 5-1.

Page 30 Chapter 5 Soil and Water Conservation Expenses
any later year is limited to 25% of the gross income from farming for that year as well.

Example. In 2023, you have gross income 

of $32,000. During the year, you incurred 

$10,000 of deductible soil and water conservation expenses. However, your deduction is limited to 25% of $32,000, or $8,000. The $2,000 

excess ($10,000 − $8,000) is carried over to 

2024 and added to deductible soil and water 

conservation expenses made in that year. The 

total of the 2023 carryover plus 2024 expenses 

is deductible in 2024, subject to the limit of 25% 

of your gross income from farming in 2024. Any 

expenses over the limit in that year are carried 

to 2025 and later years.

Net operating loss (NOL). The deduction 

for soil and water conservation expenses, after 

applying the 25% limit, is included when figuring 

an NOL for the year. If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 

25% limit in the year to which it is carried.

When To Deduct or 

Capitalize

If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first 

year you pay or incur these expenses. If you 

choose not to deduct the expenses, you must 

capitalize them.

Change of method. If you want to change 

your method for the treatment of soil and water 

conservation expenses, or you want to treat the 

expenses for a particular project or a single 

farm in a different manner, you must get the approval of the IRS. To get this approval, submit a 

written request by the due date of your return for 

the first tax year you want the new method to 

apply. You or your authorized representative 

must sign the request. Do not use Form 3115 

for this request. Use the procedure outlined below.

Your request must include the following information.

• Your name and address.

• The first tax year the method or change of 

method is to apply.

• Whether the method or change of method 

applies to all your soil and water conservation expenses or only to those for a particular project or farm. If the method or change 

of method doesn't apply to all your expenses, identify the project or farm to which 

the expenses apply.

• The total expenses you paid or incurred in 

the first tax year the method or change of 

method is to apply.

• A statement that you will account separately in your books for the expenses to 

which this method or change of method relates.

Send your request to the following address.

Department of the Treasury

Internal Revenue Service Center

Cincinnati, OH 45999

For more information, see Change in

Accounting Method in chapter 2.

Sale of a Farm

If you sell your farm, you can't adjust the basis 

of the land at the time of the sale for any unused 

carryover of soil and water conservation expenses (except for deductions of assessments for 

depreciable property, discussed earlier). However, if you acquire another farm and return to 

the business of farming, you can start taking deductions again for the unused carryovers.

Gain on sale of farmland. If you held the land 

5 years or less before you sold it, gain on the 

sale of the land is treated as ordinary income up 

to the amount you previously deducted for soil 

and water conservation expenses. If you held 

the land less than 10 but more than 5 years, the 

gain is treated as ordinary income up to a specified percentage of the previous deductions. See 

Section 1252 property under Other Gains in 

chapter 9.

6.

Basis of Assets

Introduction

Your basis is the amount of your investment in 

property for tax purposes. Use basis to figure 

the gain or loss on the sale, exchange, or other 

disposition of property. Also use basis to figure 

depreciation, amortization, depletion, and casualty losses. You may have property that you use 

for both business or the production of income 

purposes and for personal purposes. You must 

allocate the basis of this property based on its 

use. Only the basis allocated to the business or 

the production of income use of the property 

can be depreciated.

Your original basis in property is adjusted 

(increased or decreased) by certain events. For 

example, if you make improvements to the property, increase your basis. If you take deductions 

for depreciation, or casualty losses, or claim 

certain credits, reduce your basis.

Keep accurate records of all items that 

affect the basis of your assets. For information on keeping records, see 

chapter 1.

RECORDS

Topics

This chapter discusses:

• Cost basis

• Adjusted basis

• Basis other than cost

Useful Items

You may want to see:

Publication

Sales and Other Dispositions of 

Assets

Basis of Assets

How To Depreciate Property

See chapter 16 for information about getting 

publications and forms.

Cost Basis

The basis of property you buy is usually its cost. 

Cost is the amount you pay in cash, debt obligations, other property, or services. Your cost includes amounts you pay for sales tax, freight, 

installation, and testing. The basis of real estate 

and business assets will include other items, 

discussed later. Basis generally does not include interest payments.

You may also have to capitalize (add to basis) certain other costs related to buying or producing property. Under the uniform capitalization rules, discussed later, you may have to 

capitalize direct costs and certain indirect costs 

of producing property.

Loans with low or no interest. If you buy 

property on a time-payment plan that charges 

little or no interest, the basis of your property is 

your stated purchase price minus the amount 

considered to be unstated interest. You generally have unstated interest if your interest rate is 

less than the applicable federal rate. See the 

discussion of unstated interest in Pub. 537, Installment Sales.

Real Property

Real property, also called real estate, is land 

and generally anything built on, growing on, or 

attached to land.

If you buy real property, certain fees and 

other expenses related to the purchase of the 

property are part of your cost basis in the property. Some of these expenses are discussed 

next.

Lump-sum purchase. If you buy improvements, such as buildings, and the land on which 

they stand for a lump sum, allocate your cost 

basis between the land and improvements. See 

Allocating the Basis, later.

Real estate taxes. If you pay the real estate 

taxes the seller owed on real property you 

bought, and the seller did not reimburse you, 

treat those taxes as part of your basis. If the 

seller reimburses you for the portion of real estate taxes from the time they owned the 

 544

 551

 946

Chapter 6 Basis of Assets Page 31
property, reduce your deductible real estate tax 

expense by the amount of the reimbursement.

If you reimburse the seller for taxes the seller 

paid for you, you can generally deduct that 

amount as a tax expense in the year of purchase. If you do not reimburse the seller for real 

estate taxes, you cannot deduct the amount 

paid on your behalf as a tax expense. In either 

case, do not include that amount in the basis of 

your property.

Settlement costs. Your basis includes the settlement fees and closing costs for buying the 

property. See Pub. 551 for a detailed list of 

items you can and cannot include in basis.

Do not include fees and costs for getting a 

loan on the property. Also, do not include 

amounts placed in escrow for the future payment of items such as taxes and insurance.

Points. If you pay points to get a loan (including a mortgage, second mortgage, home equity 

loan, or line of credit), do not add the points to 

the basis of the related property. You may be 

able to deduct the points currently or over the 

term of the loan.

Assumption of a mortgage. If you buy property and assume (or buy the property subject 

to) an existing mortgage, your basis includes 

the amount you pay for the property plus the 

amount of the mortgage that you assumed.

Example. If you buy a farm for $100,000 

cash and assume a mortgage of $400,000, your 

basis is $500,000.

Constructing assets. If you build property or 

have assets built for you, your expenses for this 

construction are part of your basis. Some of 

these expenses include the following costs.

• Land.

• Labor and materials.

• Architect's fees.

• Building permit charges.

• Payments to contractors.

• Payments for rental equipment.

• Inspection fees.

In addition, if you use your own employees, 

farm materials, and equipment to build an asset, do not deduct the following expenses.

• Employee wages paid for the construction 

work, reduced by any employment credits 

allowed.

• Depreciation on equipment you own while 

it is used in the construction.

• Operating and maintenance costs for 

equipment used in the construction.

• The cost of business supplies and materials used in construction.

You must capitalize these expenses by including them in the asset's basis.

Do not include the value of your own labor, or any other labor you did not pay 

for, in the basis of any property you 

construct.

Allocating the Basis

In some instances, the rules for determining basis apply to a group of assets acquired in the 

CAUTION

!

same transaction or to property that consists of 

separate items. To determine the basis of these 

assets or separate items, there must be an allocation of basis.

Land and buildings. Allocate the cost basis 

according to the respective fair market values 

(FMVs) of the land and improvements at the 

time of purchase. Figure the basis of each asset 

by multiplying the lump sum by a fraction. The 

numerator is the FMV of that asset, and the denominator is the FMV of the whole property at 

the time of purchase.

Fair market value (FMV). FMV is the price at 

which property would change hands between a 

willing buyer and a willing seller, neither having 

to buy or sell, and both having reasonable 

knowledge of all necessary facts. Sales of similar property on or about the same date may help 

in figuring the FMV of the property.

Group of assets acquired. If you buy multiple 

assets for a lump sum, allocate the amount you 

pay among the assets. Use this allocation to figure your basis for depreciation and gain or loss 

on a later disposition of any of these assets. You 

and the seller may agree in the sales contract to 

a specific allocation of the purchase price 

among the assets. If this allocation is based on 

the value of each asset and you and the seller 

have adverse tax interests, the allocation will 

generally be accepted.

Farming business acquired. If you buy a 

group of assets that make up a farming business, there are special rules you must use to allocate the purchase price among the assets. 

Generally, reduce the purchase price by any 

cash received. Allocate the remaining purchase 

price to the other business assets received in 

proportion to (but not more than) their FMVs 

and in a certain order. See Trade or Business 

Acquired under Allocating the Basis in Pub. 551 

for more information. Also, see the examples 

under Sale of a Farm in chapter 8.

Transplanted embryo. If you buy a cow that is 

pregnant with a transplanted embryo, allocate 

to the basis of the cow the part of the purchase 

price equal to the FMV of the cow without the 

implant. Allocate the rest of the purchase price 

to the basis of the calf. Neither the cost allocated to the cow nor the cost allocated to the calf 

is deductible as a current business expense, 

however, you may be able to take a deduction 

for depreciation for the cow.

Uniform Capitalization Rules

Under the uniform capitalization rules, you must 

include certain direct and indirect costs in the 

basis of property you produce or in your inventory costs, rather than claim them as a current 

year deduction. You recover these costs 

through depreciation, amortization, or cost of 

goods sold when you use, sell, or otherwise dispose of the property.

Any farming business that has average 

annual gross receipts of $29 million or 

less for the 3 preceding tax years and 

is not a tax shelter is not subject to the uniform 

capitalization rules.

TIP

Generally, you are subject to the uniform 

capitalization rules if you do either of the following.

1. Produce real property or tangible personal 

property.

2. Acquire property for resale.

You produce property if you construct, build, 

install, manufacture, develop, improve, or create 

the property.

You are not subject to the uniform capitalization rules if the property is produced for personal use.

In a farming business, you produce property 

if you raise or grow any agricultural or horticultural commodity, including plants and animals.

Plants. A plant produced in a farming business 

includes the following items.

• A fruit, nut, or other crop-bearing tree.

• An ornamental tree.

• A vine.

• A bush.

• Sod.

• The crop or yield of a plant that will have 

more than one crop or yield.

Animals. An animal produced in a farming 

business includes any stock, poultry or other 

bird, and fish or other sea life.

The direct and indirect costs of producing 

plants or animals include preparatory costs and 

preproductive period costs. Preparatory costs 

include the acquisition costs of the seed, seedling, plant, or animal. For plants, preproductive 

period costs include the costs of items such as 

irrigation, pruning, frost protection, spraying, 

and harvesting. For animals, preproductive period costs include the costs of items such as 

feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding.

Exceptions. In a farming business, the uniform 

capitalization rules do not apply to:

1. Any animal,

2. Any plant with a preproductive period of 2 

years or less, or

3. Any costs of replanting certain plants lost 

or damaged due to casualty.

Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to 

use an accrual method of accounting. See Accrual Method Required under Accounting Methods in chapter 2.

In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. This election cannot be made by a corporation, 

partnership, or tax shelter required to use an accrual method of accounting. This election also 

does not apply to any costs incurred for the 

planting, cultivation, maintenance, or development of any citrus or almond grove (or any part 

thereof) within the first 4 years the trees were 

planted.

TIP

Page 32 Chapter 6 Basis of Assets
If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and 

placed in service in any tax year during which 

the election is in effect. See chapter 7 for additional information on depreciation.

Example. You grow trees that have a preproductive period of more than 2 years. The 

trees produce an annual crop. You are an individual and the uniform capitalization rules apply 

to your farming business. You must capitalize 

the direct costs and an allocable part of indirect 

costs incurred due to the production of the 

trees. You are not required to capitalize the 

costs of producing the annual crop because its 

preproductive period is 2 years or less.

Preproductive period of more than 2 years. 

The preproductive period of plants grown in 

commercial quantities in the United States is 

based on their nationwide weighted average 

preproductive period. Plants producing the 

crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period 

of more than 2 years. Other plants (not shown in 

Table 6-1) may also have a nationwide weighted 

average preproductive period of more than 2 

years.

More information. For more information on 

the uniform capitalization rules that apply to 

property produced in a farming business, see 

Regulations section 1.263A-4.

Adjusted Basis

Before figuring gain or loss on a sale, exchange, 

or other disposition of property or figuring allowable depreciation, depletion, or amortization, 

you must usually make certain adjustments to 

the cost basis or basis other than cost (discussed later) of the property. The adjustments 

to the original basis are increases or decreases 

to the cost basis or other basis which result in 

the adjusted basis of the property.

Increases to Basis

Increase the basis of any property by all items 

properly added to a capital account. These include the cost of any improvements having a 

useful life of more than 1 year.

The following costs increase the basis of 

property.

• The cost of extending utility service lines to 

property.

• Legal fees, such as the cost of defending 

and perfecting title.

• Legal fees for seeking a decrease in an assessment levied against property to pay for 

local improvements.

• Assessments for items such as paving 

roads and building ditches that increase 

the value of the property assessed. Do not 

deduct these expenses as taxes. However, 

you can deduct as taxes amounts assessed for maintenance or repairs, or for 

meeting interest charges related to the improvements.

CAUTION

!

If you make additions or improvements to 

business property, depreciate the basis of each 

addition or improvement as separate depreciable property using the rules that would apply to 

the original property if you had placed it in service at the same time you placed the addition or 

improvement in service. See chapter 7 for more 

information.

Deducting vs. capitalizing costs. Do not add 

to your basis costs that you can deduct as current expenses. For example, amounts paid for 

incidental repairs or maintenance are deductible as business expenses and are not added to 

basis. However, you can elect either to deduct 

or to capitalize certain other costs. See Deducting vs. Capitalizing Costs under Increase to Basis in Pub. 551.

Note. Generally, you can deduct amounts 

paid for repairs and maintenance to your tangible property if the amounts paid are not otherwise required to be capitalized. However, you 

may elect to capitalize amounts paid for repair 

and maintenance consistent with the treatment 

on your books and records. If you make this 

election, it applies to all amounts paid for repair 

and maintenance to tangible property that you 

treat as capital expenditures on your books and 

records for the tax year. To make the election to 

treat repairs and maintenance as capital expenditures, attach a statement titled “Section 

1.263(a)-3(n) Election” to your timely filed return 

(excluding extensions). For more information on 

what to include in the statement, see Regulations section 1.263(a)-3(n). If you timely filed 

your return for the year without making the election, you can still make the election by filing an 

amended return within 6 months of the due date 

of the return (excluding extensions). Attach the 

statement to the amended return and enter 

“Filed pursuant to section 301.9100-2” on the 

statement. File the amended return at the same 

address you filed the original return.

Decreases to Basis

The following are some items that reduce the 

basis of property.

• Section 179 deduction.

• Deductions previously allowed or allowable 

for amortization, depreciation, and depletion.

• Residential energy efficient property credits. See Form 5695.

• Investment credit (part or all) taken.

• Casualty and theft losses and insurance 

reimbursements.

• Payments you receive for granting an 

easement.

• Exclusion from income of subsidies for energy conservation measures.

• Certain canceled debt excluded from income.

• Rebates from a manufacturer or seller.

• Patronage dividends received from a cooperative association as a result of a purchase of property. See Patronage Dividends in chapter 3.

• Gas-guzzler tax. See Form 6197.

Some of these items are discussed next. For a 

more detailed list of items that decrease basis, 

see section 1016 of the Internal Revenue Code 

and Pub. 551.

Depreciation and section 179 deduction. 

The adjustments you must make to the basis of 

the property if you take the section 179 deduction or depreciate the property are explained 

next. For more information on these deductions, 

see chapter 7.

Section 179 deduction. If you take the 

section 179 expense deduction for all or part of 

the cost of qualifying business property, decrease the basis of the property by the deduction.

Depreciation. Decrease the basis of property by the depreciation you deducted or could 

have deducted on your tax returns under the 

method of depreciation you chose. If you took 

less depreciation than you could have under the 

method chosen, decrease the basis by the 

amount you could have taken under that 

method. If you did not take a depreciation deduction, reduce the basis by the full amount of 

the depreciation you could have taken.

If you deducted more depreciation than you 

should have, decrease your basis by the 

amount you should have deducted plus the part 

of the excess depreciation you deducted that 

actually reduced your tax liability for any year.

See chapter 7 for information on figuring the 

depreciation you should have claimed.

In decreasing your basis for depreciation, 

take into account the amount deducted on your 

tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules.

Casualty and theft losses. If you have a 

casualty or theft loss, decrease the basis in your 

property by any insurance or other reimbursement and by any deductible loss not covered by 

insurance. See chapter 11 for information about 

figuring your casualty or theft loss.

Table 6-1. Plants With a Preproductive Period of More Than 2 Years

Plants producing the following crops or yields have a nationwide weighted average 

preproductive period of more than 2 years.

• Almonds

• Apples

• Apricots 

• Avocados

• Blueberries

• Cherries

• Chestnuts

• Coffee beans

• Currants

• Dates

• Figs

• Grapefruit

• Grapes

• Guavas

• Kiwifruit

• Kumquats

• Lemons

• Limes

• Macadamia nuts

• Mangoes

• Nectarines

• Olives

• Oranges

• Peaches

• Pears

• Pecans

• Persimmons

• Pistachio nuts 

• Plums

• Pomegranates

• Prunes

• Tangelos

• Tangerines

• Tangors

• Walnuts

Chapter 6 Basis of Assets Page 33
You must increase your basis in the property 

by the amount you spend on clean-up costs 

(such as debris removal) and repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. To 

make this determination, compare the repaired 

property to the property before the casualty. For 

more information on casualty and theft losses, 

see Pub. 547.

Easements. The amount you receive for granting an easement is usually considered to be 

proceeds from the sale of an interest in the real 

property. It reduces the basis of the affected 

part of the property. If the amount received is 

more than the basis of the part of the property 

affected by the easement, reduce your basis in 

that part to zero and treat the excess as a recognized gain. See Easements and rights-of-way 

in chapter 3.

Exclusion from income of subsidies for energy conservation measures. You can exclude from gross income any subsidy you received from a public utility company for the 

purchase or installation of an energy conservation measure for a dwelling unit. Reduce the basis of the property by the excluded amount.

Canceled debt excluded from income. If a 

debt you owe is canceled or forgiven, other than 

as a gift or bequest, you must generally include 

the canceled amount in your gross income for 

tax purposes. A debt includes any indebtedness for which you are liable or which attaches 

to property you hold.

You can exclude your canceled debt from income if the debt is any of the following.

1. Debt canceled in a bankruptcy case or 

when you are insolvent.

2. Qualified farm debt.

3. Qualified real property business debt (provided you are not a C corporation).

If you exclude canceled debt from income as 

described in (1) or (2), you may have to reduce 

the basis of your depreciable and nondepreciable property. If you exclude canceled debt described in (3), you must only reduce the basis of 

your depreciable property by the excluded 

amount.

For more information about canceled debt in 

a bankruptcy case, see Pub. 908, Bankruptcy 

Tax Guide. For more information about insolvency and canceled debt that is qualified farm 

debt, see chapter 3. For more information about 

qualified real property business debt, see Pub. 

334, Tax Guide for Small Business.

Basis Other Than Cost

There are times when you cannot use cost as 

basis. In these situations, the FMV or the adjusted basis of property may be used. Examples 

are discussed next.

Property changed from personal to business or rental use. When you hold property 

for personal use and then change it to business 

use or use it to produce rent, you must figure its 

basis for depreciation. An example of changing 

property from personal to business use would 

be changing the use of your pickup truck that 

you originally purchased for your personal use 

to use in your farming business.

The basis for depreciation is the lesser of:

• The FMV of the property on the date of the 

change, or

• Your adjusted basis on the date of the 

change.

If you later sell or dispose of this property, 

the basis you use will depend on whether you 

are figuring a gain or loss. The basis for figuring 

a gain is your adjusted basis in the property 

when you sell the property. Figure the basis for 

a loss starting with the smaller of your adjusted 

basis or the FMV of the property at the time of 

the change to business or rental use. Then 

make adjustments (increases and decreases) 

for the period after the change in the property's 

use, as discussed earlier under Adjusted Basis.

Property received for services. If you receive 

property for services, include the property's 

FMV in income. The amount you include in income becomes your basis. If the services were 

performed for a price agreed on beforehand, it 

will be accepted as the FMV of the property if 

there is no evidence to the contrary.

Example. Rocco Stowsa is an accountant 

and also operates a farming business. Rocco 

agreed to do some accounting work for his 

neighbor in exchange for a dairy cow. The accounting work and the cow are each worth 

$1,500. Rocco must include $1,500 in income 

for his accounting services. Rocco's basis in the 

cow is $1,500.

Taxable Exchanges

A taxable exchange is one in which the gain is 

taxable, or the loss is deductible. A taxable gain 

or deductible loss is also known as a recognized gain or loss. A taxable exchange occurs 

when you receive cash or get property that is 

not similar or related in use to the property exchanged. If you receive property in exchange 

for other property in a taxable exchange, the basis of the property you receive is usually its FMV 

at the time of the exchange.

Example. You trade a tract of farmland with 

an adjusted basis of $20,000 for a tractor that 

has an FMV of $60,000. You must report a taxable gain of $40,000 for the land. The tractor has 

a basis of $60,000.

Nontaxable Exchanges

A nontaxable exchange is an exchange in which 

you are not taxed on any gain and you cannot 

deduct any loss. A nontaxable gain or loss is 

also known as an unrecognized gain or loss. If 

you receive property in a nontaxable exchange, 

its basis is usually the same as the basis of the 

property you transferred.

Involuntary Conversions

If you receive property as a result of an involuntary conversion, such as a casualty, theft, or 

condemnation, figure the basis of the replacement property you receive using the basis of the 

converted property.

Similar or related property. If the replacement property is similar or related in service or 

use to the converted property, the replacement 

property's basis is the same as the old property's basis on the date of the conversion. However, make the following adjustments.

1. Decrease the basis by the following 

amounts.

a. Any loss you recognize on the involuntary conversion.

b. Any money you receive that you do 

not spend on similar property.

2. Increase the basis by the following 

amounts.

a. Any gain you recognize on the involuntary conversion.

b. Any cost of acquiring the replacement 

property.

Money or property not similar or related. If 

you receive money or property not similar or related in service or use to the converted property 

and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its 

cost decreased by the gain not recognized on 

the involuntary conversion.

Allocating the basis. If you buy more than 

one piece of replacement property, allocate 

your basis among the properties based on their 

respective costs.

Basis for depreciation. Special rules apply in 

determining and depreciating the basis of 

MACRS property acquired in an involuntary 

conversion. For more information, see Figuring 

the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation 

Under MACRS in chapter 7.

For more information about involuntary conversions, see chapter 11.

Like-Kind Exchanges

Generally, if you exchange real property you use 

in your business or hold for investment solely for 

other business or investment real property of a 

like kind, you do not recognize the gain or loss 

from the exchange. If you also receive 

non-like-kind property or money as part of the 

exchange, you do recognize gain, but only to 

the extent of the value of the other property or 

money you received in the exchange, and you 

do not recognize any loss.

For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer 

and the property you receive. There must also 

be an exchange of like-kind property. For more 

information, see Like-Kind Exchanges in chapter 8.

Page 34 Chapter 6 Basis of Assets
The basis of the property you receive is generally the same as the adjusted basis of the 

property you gave up.

Example. You trade farmland for another 

larger tract of farmland. Your adjusted basis in 

your farmland is $110,000. The FMV of the new 

tract of farmland is $150,000. Because this is a 

nontaxable exchange, you do not recognize any 

gain and your basis in the farmland you receive 

is $110,000, the same as the adjusted basis in 

the farmland you exchanged.

Note. An exchange of personal property, 

such as machinery or equipment, does not 

qualify as a like-kind exchange.

Exchange expenses. Exchange expenses are 

generally the closing costs that you pay. They 

include such items as brokerage commissions, 

attorney fees, and deed preparation fees. Add 

them to the basis of the like-kind property you 

receive.

Property plus cash. If you trade property in a 

like-kind exchange and also pay money, the basis of the property you receive is increased by 

the money you paid.

Example. Assume the same facts from the 

previous example except you pay an additional 

$20,000 in cash. Your adjusted basis in the 

newly acquired farming real estate is $130,000 

($110,000 adjusted basis of your old farmland 

plus the $20,000 cash you paid).

Special rules for related persons. If a 

like-kind exchange takes place directly or indirectly between related persons and either party 

disposes of the property within 2 years after the 

exchange, the exchange no longer qualifies for 

like-kind exchange treatment. Each person 

must report any gain or loss not recognized on 

the original exchange unless the loss is not deductible under the related-party rules. Each person reports it on the tax return filed for the year 

in which the later disposition occurred. If this 

rule applies, the basis of the property received 

in the original exchange will be its FMV. For 

more information, see chapter 8.

Basis for depreciation. Special rules apply in 

determining and depreciating the basis of 

MACRS property acquired in a like-kind transaction. For more information, see Figuring the 

Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7.

Partially Nontaxable Exchanges

A partially nontaxable exchange is an exchange 

in which you receive property that is not a 

like-kind property or money in addition to a 

like-kind property. The basis of the property you 

receive is the same as the adjusted basis of the 

property you gave up with the following adjustments.

1. Decrease the basis by the following 

amounts.

a. Any money you receive.

b. Any loss you recognize on the exchange.

2. Increase the basis by the following 

amounts.

a. Any additional costs you incur.

b. Any gain you recognize on the exchange.

If the other party to the exchange assumes your 

liabilities, treat the debt assumption as money 

you received in the exchange.

Example. You trade farmland (basis of 

$100,000) for another tract of farmland (FMV of 

$110,000) and $30,000 cash. You realize a gain 

of $40,000. This is the FMV of the land received 

plus the cash minus the basis of the land you 

traded ($110,000 + $30,000 − $100,000). Include your gain in income (recognize gain) only 

to the extent of the cash received. Your basis in 

the land you received is figured as follows.

Basis of land traded .............$100,000

Minus: Cash received (adjustment 

1a) .......................... − 30,000

$70,000

Plus: Gain recognized (adjustment 

2b) .......................... + 30,000

Basis of land received .......$100,000

Allocation of basis. If you receive like-kind 

and unlike properties in the exchange, allocate 

the basis first to the unlike property, other than 

money, up to its FMV on the date of the exchange. The rest is the basis of the like-kind 

property.

Example. You trade a tract of farmland with 

an adjusted basis of $100,000 for another tract 

of farmland that has an FMV of $92,500. You 

also receive $4,000 in cash and a pickup truck 

with an FMV of $11,000. Since only real property qualifies for like-kind exchange treatment, 

your receipt of the truck and cash means you 

must recognize gain on the exchange. You realize a gain of $7,500. This is the sum of the FMV 

of the tract of farmland you receive, the FMV of 

the truck you receive, and the cash you receive, 

minus the adjusted basis of the farmland you 

traded ($92,500 + $11,000 + $4,000 – 

$100,000). You include in income (recognize) 

all $7,500 of the gain because it is the lesser of 

the realized gain ($7,500) and the sum of the 

FMV of the unlike property and the cash received ($15,000). Your basis in the properties 

you received is figured as follows.

Adjusted basis old farmland ...... $100,000

Minus: Cash received (adjustment 

1a) .......................... − 4,000

$96,000

Plus: Gain recognized (adjustment 

2b) .......................... + 7,500

Total basis of properties 

received ................$103,500

Allocate the basis of $103,500 first to the unlike 

property, the truck ($11,000). This is the truck's 

FMV. The rest ($92,500) is the basis in the farmland.

Sale and Purchase

If you sell property and buy similar property in 

two mutually dependent transactions, you may 

have to treat the sale and purchase as a single 

nontaxable exchange.

Example. You own farmland with a barn. 

The properties have a combined adjusted basis 

of $70,000, and an FMV of $150,000. You are 

interested in another tract of farmland with a 

larger barn owned by your neighbor who is interested in exchanging the property with you. 

The total FMV of your neighbor's farmland and 

barn is $200,000. You want the new barn to 

have a larger basis for depreciation, so you arrange to sell your old farmland and barn to your 

neighbor for $150,000. Your neighbor then sells 

his farmland and barn to you for $200,000. 

However, you are treated as having exchanged 

the old property for the new property because 

the sale and purchase are reciprocal and mutually dependent. Your basis in the new property 

is $120,000 ($50,000 cash paid plus $70,000 

adjusted basis in your old property), which must 

be allocated between the farmland and the 

barn.

Property Received as a Gift

To figure the basis of property you receive as a 

gift, you must know the donor's adjusted basis 

(defined earlier) just before it was given to you. 

You must also know its FMV at the time it was 

given to you and any gift tax paid on it.

FMV equal to or greater than donor's adjusted basis. If the FMV of the property is equal 

to or greater than the donor's adjusted basis, 

your basis is the donor's adjusted basis when 

you received the gift. Increase your basis by all 

or part of any gift tax paid, depending on the 

date of the gift.

Also, for figuring gain or loss from a sale or 

other disposition of the property, or for figuring 

depreciation, depletion, or amortization deductions on business property, you must increase 

or decrease your basis (the donor's adjusted 

basis) by any required adjustments to basis 

while you held the property. See Adjusted Basis, earlier.

If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it 

due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid 

by the following fraction.

Net increase in value of the gift

Amount of the gift

The net increase in value of the gift is the 

FMV of the gift minus the donor's adjusted basis. The amount of the gift is its value for gift tax 

purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift.

Example. In 2022, you received a gift of 

property from your mother that had an FMV of 

$50,000. Her adjusted basis was $20,000. The 

amount of the gift for gift tax purposes was 

$34,000 ($50,000 minus the $16,000 annual 

Chapter 6 Basis of Assets Page 35
exclusion). She paid a gift tax of $6,880. Your 

basis, $26,054, is figured as follows.

Fair market value .................. $50,000

Minus: Adjusted basis .............. − 20,000

Net increase in value ............... $30,000

Gift tax paid ..................... $6,880

Multiplied by ($30,000 ÷ $34,000) ...... × 0.88

Gift tax due to net increase in value ..... $6,054

Adjusted basis of property to your 

mother .......................

+ 20,000

Your basis in the property ....... $26,054

Note. If you received a gift before 1977, 

your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. However, 

your basis cannot exceed the FMV of the gift 

when it was given to you.

FMV less than donor's adjusted basis. If the 

FMV of the property at the time of the gift is less 

than the donor's adjusted basis, your basis depends on whether you have a gain or a loss 

when you dispose of the property. Your basis for 

figuring gain is the donor's adjusted basis plus 

or minus any required adjustments to basis 

while you held the property. Your basis for figuring loss is its FMV when you received the gift 

plus or minus any required adjustments to basis 

while you held the property. (See Adjusted Basis, earlier.)

If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the 

FMV for figuring a loss and get a gain, you have 

neither gain nor loss on the sale or other disposition of the property.

Example. You received farmland as a gift 

from your parents when they retired from farming. At the time of the gift, the land had an FMV 

of $80,000. Your parents' adjusted basis was 

$100,000. After you received the land, no 

events occurred that would increase or decrease your basis.

If you sell the land for $120,000, you will 

have a $20,000 gain because you must use the 

donor's adjusted basis at the time of the gift 

($100,000) as your basis to figure a gain. If you 

sell the land for $70,000, you will have a 

$10,000 loss because you must use the FMV at 

the time of the gift ($80,000) as your basis to 

figure a loss.

If the sales price is between $80,000 and 

$100,000, you have neither gain nor loss. For 

instance, if the sales price was $90,000 and you 

tried to figure a gain using the donor's adjusted 

basis ($100,000), you would get a $10,000 loss. 

If you then tried to figure a loss using the FMV 

($80,000), you would get a $10,000 gain.

Business property. If you hold the gift as 

business property, your basis for figuring any 

depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis 

plus or minus any required adjustments to basis 

while you hold the property. For more information on depreciation, depletion or amortization, 

see chapter 7.

Property Transferred From a 

Spouse

The basis of property transferred to you or 

transferred in trust for your benefit by your 

spouse is the same as your spouse's adjusted 

basis. The same rule applies to a transfer by 

your former spouse if the transfer is incident to 

divorce. However, for property transferred in 

trust, adjust your basis for any gain recognized 

by your spouse or former spouse if the liabilities 

assumed plus the liabilities to which the property is subject are more than the adjusted basis 

of the property transferred.

The transferor must give you the records 

needed to determine the adjusted basis and 

holding period of the property as of the date of 

the transfer.

For more information, see Property Settlements in Pub. 504, Divorced or Separated Individuals.

Inherited Property

Your basis in property you inherited from a decedent is generally one of the following.

• The FMV of the property at the date of the 

decedent's death. If Form 706, United 

States Estate (and Generation-Skipping 

Transfer) Tax Return, you can use its appraised value.

• The FMV on the alternate valuation date if 

the personal representative for the estate 

elects to use alternate valuation. For information on the alternate valuation, see the 

Instructions for Form 706.

• The decedent's adjusted basis in land to 

the extent of the value that is excluded 

from the decedent's taxable estate as a 

qualified conservation easement.

If a federal estate tax return does not have to 

be filed, your basis in the inherited property is 

its appraised value at the date of death for state 

inheritance or transmission taxes.

Special-use valuation method. Under certain 

conditions, when a person dies, the executor or 

personal representative of that person's estate 

may elect to value qualified real property at 

other than its FMV. If so, the executor or personal representative values the qualified real 

property based on its use as a farm or other 

closely held business. If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the 

basis of the property for the qualified heirs. The 

qualified heirs should be able to get the necessary value from the executor or personal representative of the estate.

If you are a qualified heir who received special-use valuation property, increase your basis 

by any gain recognized by the estate or trust because of post-death appreciation. Post-death 

appreciation is the property's FMV on the date 

of distribution minus the property's FMV either 

on the date of the individual's death or on the alternate valuation date. Figure all FMVs without 

regard to the special-use valuation.

You may be liable for an additional estate tax 

if, within 10 years after the death of the decedent, you transfer the property or the property 

stops being used as a farm. This tax does not 

apply if you dispose of the property in a like-kind 

exchange or in an involuntary conversion in 

which all of the proceeds are reinvested in 

qualified replacement property. The tax also 

does not apply if you transfer the property to a 

member of your family and certain requirements 

are met.

You can elect to increase your basis in special-use valuation property if it becomes subject 

to the additional estate tax. To increase your basis, you must make an irrevocable election and 

pay interest on the additional estate tax figured 

from the date 9 months after the decedent's 

death until the date of payment of the additional 

estate tax. If you meet these requirements, increase your basis in the property to its FMV on 

the date of the decedent's death or the alternate 

valuation date. The increase in your basis is 

considered to have occurred immediately before the event that resulted in the additional estate tax.

You make the election by filing, with Form 

706-A, United States Additional Estate Tax Return, a statement that:

• Contains your (and the estate's) name, address, and taxpayer identification number;

• Identifies the election as an election under 

section 1016(c) of the Internal Revenue 

Code;

• Specifies the property for which you are 

making the election; and

• Provides any additional information required by the Form 706-A instructions.

For more information, see Form 706; Form 

706-A; and the related instructions.

Property Distributed From a 

Partnership or Corporation

The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership 

to the partner with respect to the partner's interest in the partnership and from a corporation to 

the shareholder with respect to the shareholder's ownership of stock in the corporation.

Partner's basis. Unless there is a complete 

liquidation of a partner's interest, the basis of 

property (other than money) distributed by a 

partnership to the partner is its adjusted basis 

to the partnership immediately before the distribution. However, the basis of the property to the 

partner cannot be more than the adjusted basis 

of his or her interest in the partnership reduced 

by any money received in the same transaction. 

For more information, see Partner's Basis for 

Distributed Property in Pub. 541, Partnerships.

Shareholder's basis. The basis of property 

distributed by a corporation to a shareholder is 

its FMV. For more information about corporate 

distributions, see Distributions to Shareholders 

in Pub. 542, Corporations.

Page 36 Chapter 6 Basis of Assets
7.

Depreciation, 

Depletion, and 

Amortization

What's New for 2023

Increased section 179 expense deduction 

dollar limits. The maximum amount you can 

elect to deduct for most section 179 property 

you placed in service in 2023 is $1,160,000. 

This limit is reduced by the amount by which the 

cost of the property placed in service during the 

tax year exceeds $2,890,000. Also, the maximum section 179 expense deduction for sport 

utility vehicles placed in service in tax years beginning in 2023 is $28,900. See Dollar Limits 

under Section 179 Expense Deduction, later.

Phase down of special depreciation allowance. The special depreciation allowance is 

80% for certain qualified property acquired after 

September 27, 2017, and placed in service after December 31, 2022, and before January 1, 

2024 (other than certain property with a long 

production period and certain aircraft). The special depreciation allowance is also 80% for certain specified plants bearing fruits and nuts 

planted or grafted after December 31, 2022, 

and before January 1, 2024. See Certain qualified property acquired after September 27, 

2017 and Certain specified plants under What 

Is Qualified Property, later.

What’s New for 2024

Phase down of special depreciation allowance. The special depreciation allowance is 

60% for certain qualified property acquired after 

September 27, 2017, and placed in service after December 31, 2023, and before January 1, 

2025 (other than certain property with a long 

production period and certain aircraft). For 

property with a long production period and certain aircraft placed in service after December 

31, 2023, and before January 1, 2025, the special depreciation allowance is 80%. The special 

depreciation allowance is also 60% for certain 

specified plants bearing fruits and nuts planted 

or grafted after December 31, 2023, and before 

January 1, 2025. See Certain qualified property 

acquired after September 27, 2017 and Certain 

specified plants under What Is Qualified Property, later.

Introduction

If you buy or make improvements to farm property, such as machinery, equipment, livestock, 

or a structure with a useful life of more than a 

year, you generally cannot deduct its entire cost 

in one year. Instead, you must spread the cost 

over the time you use the property and deduct 

part of it each year. For most types of property, 

this is called depreciation.

This chapter gives information on depreciation methods that generally apply to property 

placed in service after 1986. For information on 

depreciating pre-1987 property, see Pub. 534, 

Depreciating Property Placed in Service Before 

1987.

Topics

This chapter discusses:

• Overview of depreciation

• Section 179 expense deduction

• Special depreciation allowance

• Modified Accelerated Cost Recovery

System (MACRS)

• Listed property

• Basic information on cost depletion 

(including timber depletion) and 

percentage depletion

• Amortization of the costs of going into 

business, reforestation costs, the costs of 

pollution control facilities, and the costs of 

section 197 intangibles

Useful Items

You may want to see:

Publication

Travel, Gift, and Car Expenses

Depreciating Property Placed in 

Service Before 1987

Sales and Other Dispositions of 

Assets

Basis of Assets

How To Depreciate Property

Form (and Instructions)

(Timber), Forest Activities Schedule

Application for Change in 

Accounting Method

Depreciation and Amortization

Sales of Business Property

See chapter 16 for information about getting 

publications and forms.

It is important to keep good records for 

property you depreciate. Do not file 

these records with your return. Instead, 

you should keep them as part of the permanent 

records of the depreciated property. They will 

help you verify the accuracy of the depreciation 

of assets placed in service in the current and 

previous tax years. For general information on 

recordkeeping, see Pub. 583, Starting a Business and Keeping Records. For specific information on keeping records for section 179 property and listed property, see Pub. 946.

Overview of 

Depreciation

This overview discusses basic information on 

the following.

• What property can be depreciated.

 463 

 534 

 544 

 551 

 946 

 T

 3115

 4562

 4797

RECORDS

• What property cannot be depreciated.

• When depreciation begins and ends.

• Whether MACRS can be used to figure depreciation.

• What is the basis of your depreciable property.

• How to treat repairs and improvements.

• When you must file Form 4562.

• How you can correct depreciation claimed 

incorrectly.

What Property Can Be

Depreciated?

You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and 

furniture. You can also depreciate certain intangible property, such as copyrights, patents, and 

computer software. To be depreciable, the property must meet all the following requirements.

• It must be property you own.

• It must be used in your business or income-producing activity.

• It must have a determinable useful life.

• It must have a useful life that extends substantially beyond the year you place it in 

service.

Property You Own

To claim depreciation, you must usually be the 

owner of the property. You are considered as 

owning property even if it is subject to a debt.

Leased property. You can depreciate leased 

property only if you retain the incidents of ownership in the property (explained below). This 

means you bear the burden of exhaustion of the 

capital investment in the property. If you lease 

property from someone to use in your trade or 

business or for the production of income, you 

generally cannot depreciate its cost because 

you do not have the incidents of ownership. You 

can, however, depreciate any capital improvements you make to the leased property. See Additions and Improvements under Which Recovery Period Applies? in chapter 4 of Pub. 946.

You can generally depreciate the cost of 

property you lease to someone even if the lessee (the person leasing from you) has agreed to 

preserve, replace, renew, and maintain the 

property. However, you cannot depreciate the 

cost of the property if the lease provides that the 

lessee is to maintain the property and return to 

you the same property or its equivalent in value 

at the expiration of the lease in as good condition and value as when leased.

Incidents of ownership. Incidents of ownership in property include the following.

• The legal title to the property.

• The legal obligation to pay for the property.

• The responsibility to pay maintenance and 

operating expenses.

• The duty to pay any taxes on the property.

• The risk of loss if the property is destroyed, 

condemned, or diminished in value 

through obsolescence or exhaustion.

Life tenant. Generally, if you hold business or 

investment property as a life tenant, you can depreciate it as if you were the absolute owner of 

Chapter 7 Depreciation, Depletion, and Amortization Page 37
the property. See Certain term interests in property, later, for an exception.

Property Used in Your Business or 

Income-Producing Activity

To claim depreciation on property, you must use 

it in your business or income-producing activity. 

If you use property to produce income (investment use), the income must be taxable. You 

cannot depreciate property that you use solely 

for personal activities. However, if you use property for business or investment purposes and 

for personal purposes, you can deduct depreciation based only on the percentage of business 

or investment use.

Example 1. If you use your car for farm 

business, you can deduct depreciation based 

on its percentage of use in farming. If you also 

use it for investment purposes, you can depreciate it based on its percentage of investment 

use.

Example 2. If you use part of your home for 

business, you may be able to deduct depreciation on that part based on its business use. For 

more information, see Business Use of Your 

Home in chapter 4.

You may be able to use the simplified 

method to determine your business 

use of the home deduction. If you 

choose to use the simplified method, you cannot also deduct depreciation on the part of the 

home used for business. For more information 

about the simplified method, see Pub. 587, 

Business Use of Your Home.

Inventory. You can never depreciate inventory 

because it is not held for use in your business. 

Inventory is any property you hold primarily for 

sale to customers in the ordinary course of your 

business.

Livestock. Livestock purchased for draft, 

breeding, or dairy purposes can be depreciated 

only if they are not kept in an inventory account. 

Livestock you raise usually has no depreciable 

basis because the costs of raising them are deducted and not added to their basis. However, 

see Immature livestock under When Does Depreciation Begin and End, later, for a special 

rule.

Property Having a Determinable 

Useful Life

To be depreciable, your property must have a 

determinable useful life. This means it must be 

something that wears out, decays, gets used 

up, becomes obsolete, or loses its value from 

natural causes.

Irrigation systems and water wells. Irrigation 

systems and water wells used in a trade or business can be depreciated if their useful life can 

be determined. You can depreciate irrigation 

systems and water wells composed of masonry, 

concrete, tile (including drainage tile), metal, or 

wood. In addition, you can depreciate costs for 

moving dirt to construct irrigation systems and 

water wells composed of these materials. However, land preparation costs for center pivot irrigation systems are not depreciable.

TIP

Dams, ponds, and terraces. In general, you 

cannot depreciate earthen dams, ponds, and 

terraces unless the structures have a determinable useful life.

What Property Cannot Be 

Depreciated?

Certain property cannot be depreciated, even if 

the requirements explained earlier are met. This 

includes the following.

• Land. You can never depreciate the cost of 

land because land does not wear out, become obsolete, or get used up. The cost of 

land generally includes the cost of clearing, grading, planting, and landscaping. Although you cannot depreciate land, you 

can depreciate certain costs incurred in 

preparing land for business use. See chapter 1 of Pub. 946.

• Property placed in service and disposed of 

in the same year. Determining when property is placed in service is explained later.

• Equipment used to build capital improvements. You must add otherwise allowable 

depreciation on the equipment during the 

period of construction to the basis of your 

improvements.

• Intangible property such as section 197 intangibles. This property does not have a 

determinable useful life and generally cannot be depreciated. However, see Amortization, later. Special rules apply to computer software (discussed below).

• Certain term interests (discussed below).

Computer software. Computer software is 

generally not a section 197 intangible even if 

acquired in connection with the acquisition of a 

business, if it meets all of the following tests.

• It is readily available for purchase by the 

general public.

• It is subject to a nonexclusive license.

• It has not been substantially modified.

If the software meets the tests above, it can 

be depreciated and may qualify for the section 

179 expense deduction and the special depreciation allowance (if applicable), discussed 

later.

Certain term interests in property. You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, 

directly or indirectly, by a person related to you. 

This rule does not apply to the holder of a term 

interest in property acquired by gift, bequest, or 

inheritance. For more information, see chapter 1 

of Pub. 946.

Example. You retain a life interest in a dairy 

facility but transfer the remainder interest to 

your daughter. Your term interest in the dairy facility is not depreciable even though you may 

still be using it in your dairy operation.

When Does Depreciation

Begin and End?

You begin to depreciate your property when you 

place it in service for use in your trade or business or for the production of income. You stop 

depreciating property either when you have fully 

recovered your cost or other basis or when you 

retire it from service, whichever happens first.

Placed in Service

Property is placed in service when it is ready 

and available for a specific use, whether in a 

business activity, an income-producing activity, 

a tax-exempt activity, or a personal activity. 

Even if you are not using the property, it is in 

service when it is ready and available for its 

specific use.

Example. You bought a planter for use in 

your farm business. The planter was delivered 

in December 2022 after harvest was over. You 

begin to depreciate the planter in 2022 because 

it was ready and available for its specific use in 

2022, even though it will not be used until the 

spring of 2023.

If your planter comes unassembled in December 2022 and is put together in February 

2023, it is not placed in service until 2023. You 

begin to depreciate it in 2023.

If your planter was delivered and assembled 

in February 2023 but not used until April 2023, it 

is placed in service in February 2023, because 

this is when the planter was ready for its specified use. You begin to depreciate it in 2023.

Fruit or nut trees and vines. If you acquire an 

orchard, grove, or vineyard before the trees or 

vines have reached the income-producing 

stage, and they have a preproductive period of 

more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you meet the small business taxpayer exception or elect not to use 

these rules). See chapter 6 for information 

about the uniform capitalization rules. Your depreciation begins when the trees and vines 

reach the income-producing stage (that is, 

when they bear fruits, nuts, or grapes in quantities sufficient to commercially warrant harvesting). For information on claiming the special depreciation allowance for certain specified plants 

bearing fruits and nuts, see Certain specified 

plants, later.

Note. Any farming business that has average annual gross receipts of $29 million or less 

for the 3 preceding tax years and is not a tax 

shelter is not subject to the uniform capitalization rules.

Immature livestock. Depreciation for livestock 

begins when the livestock reaches the age of 

maturity. If you bought immature livestock for 

drafting purposes, depreciation begins when 

they can be worked. If you bought immature 

livestock for breeding or dairy purposes, depreciation begins when they can be bred. Your basis for depreciation is your initial cost for the immature livestock.

Idle Property

Continue to claim a deduction for depreciation 

on property used in your business or for the production of income even if it is temporarily idle. 

For example, if you stop using a machine because there is a temporary lack of a market for a 

Page 38 Chapter 7 Depreciation, Depletion, and Amortization
product made with that machine, continue to 

deduct depreciation on the machine.

Cost or Other Basis Fully 

Recovered

You stop depreciating property when you have 

fully recovered your cost or other basis. This 

happens when your section 179 and allowed or 

allowable depreciation deductions equal your 

cost or investment in the property.

Retired From Service

You stop depreciating property when you retire 

it from service, even if you have not fully recovered its cost or other basis. You retire property 

from service when you permanently withdraw it 

from use in a trade or business or from use in 

the production of income because of any of the 

following events.

• You sell or exchange the property.

• You convert the property to personal use.

• You abandon the property.

• You transfer the property to a supplies or 

scrap account.

• The property is destroyed.

For information on abandonment of property, 

see chapter 8. For information on destroyed 

property, see chapter 11, and Pub. 547, Casualties, Disasters, and Thefts.

Can You Use MACRS To 

Depreciate Your Property?

You must use the Modified Accelerated Cost 

Recovery System (MACRS) to depreciate most 

business and investment property placed in 

service after 1986. MACRS is explained later 

under Figuring Depreciation Under MACRS.

You cannot use MACRS to depreciate the 

following property.

• Property you placed in service before 

1987. Use the methods discussed in Pub. 

534.

• Certain property owned or used in 1986. 

See chapter 1 of Pub. 946.

• Intangible property.

• Films, videotapes, and recordings.

• Certain corporate or partnership property 

acquired in a nontaxable transfer.

• Property you elected to exclude from 

MACRS.

For more information, see chapter 1 of Pub. 

946.

What Is the Basis of Your 

Depreciable Property?

To figure your depreciation deduction, you must 

determine the basis of your property. To determine basis, you need to know the cost or other 

basis of your property.

Cost or other basis. The basis of property 

you buy is usually its cost plus amounts you 

paid for items such as sales tax, freight 

charges, and installation and testing fees. The 

cost includes the amount you pay in cash, debt 

obligations, other property, or services. For 

more information, see chapter 6.

There are times when you cannot use cost 

as basis. In these situations, the fair market 

value (FMV) or the adjusted basis of the property may be used.

Adjusted basis. To find your property's basis 

for depreciation, you may have to make certain 

adjustments (increases and decreases) to the 

basis of the property for events occurring between the time you acquired the property and 

the time you placed it in service.

Basis adjustment for depreciation allowed 

or allowable. After you place your property in 

service, you must reduce the basis of the property by the depreciation allowed or allowable, 

whichever is greater. Depreciation allowed is 

depreciation you actually deducted (from which 

you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.

If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of 

the property by the full amount of depreciation 

allowable.

If you deduct more depreciation than you 

should, you must reduce your basis by any 

amount deducted from which you received a tax 

benefit (the depreciation allowed).

For more information, see chapter 6.

How Do You Treat Repairs 

and Improvements?

If you improve depreciable property, you must 

treat the improvement as separate depreciable 

property. Improvement means an addition to or 

partial replacement of property that is a betterment to the property, restores the property, or 

adapts it to a new or different use. See Regulations section 1.263(a)-3.

You generally deduct the cost of repairing 

business property in the same way as any other 

business expense. However, if the cost is for a 

betterment to the property, restores the property, or adapts it to a new or different use, you 

must treat it as an improvement and depreciate 

it. See chapter 1 of Pub. 946 for more information.

Example. You repair a small section on a 

corner of the roof of a barn that you rent to others. You deduct the cost of the repair as a business expense. However, if you replace the entire roof, the new roof is considered to be an 

improvement because it increases the value 

and lengthens the life of the property. You depreciate the cost of the new roof.

Improvements to rented property. You can 

depreciate permanent improvements you make 

to business property you rent from someone 

else.

Example. You rent 100 acres from your 

landlord on a 5-year term. You install $25,000 of 

drainage tile. The recovery period for drainage 

tile is 15 years, not the term of the lease. You 

may be able to take a section 179 expense deduction, special depreciation allowance, or depreciation expense under MACRS for the drainage tile. See Section 179 Expense Deduction, 

Claiming the Special Depreciation Allowance, 

Figuring Depreciation Under MACRS, later.

Do You Have To File

Form 4562?

Use Form 4562 to claim your deduction for depreciation and amortization. You must complete 

and attach Form 4562 to your tax return if you 

are claiming any of the following.

• A section 179 expense deduction for the 

current year or a section 179 carryover 

from a prior year.

• Depreciation for property placed in service 

during the current year.

• Depreciation on any vehicle or other listed 

property, regardless of when it was placed 

in service.

• Amortization of costs that began in the current year.

For more information, see the Instructions 

for Form 4562.

How Do You Correct 

Depreciation Deductions?

If you deducted an incorrect amount of depreciation in any year, you may be able to make a 

correction by filing an amended return for that 

year. You can file an amended return to correct 

the amount of depreciation claimed for any 

property in any of the following situations.

• You claimed the incorrect amount because 

of a mathematical error made in any year.

• You claimed the incorrect amount because 

of a posting error made in any year, for example, omitting an asset from the depreciation schedule.

• You have not adopted a method of accounting for the property placed in service 

by you in tax years ending after December 

29, 2003.

• You claimed the incorrect amount on property placed in service by you in tax years 

ending before December 30, 2003.

Note. You have adopted a method of accounting if you used the same incorrect method of 

depreciation for two or more consecutively filed 

returns.

If you are not allowed to make the correction 

on an amended return, you may be able to 

change your accounting method to claim the 

correct amount of depreciation. See the Instructions for Form 3115.

Section 179 Expense 

Deduction

You can elect to recover all or part of the cost of 

certain qualifying property, up to a limit, by deducting it in the year you place the property in 

service. This is the section 179 expense deduction. You can elect the section 179 expense deduction instead of recovering the cost by taking 

depreciation deductions.

This part of the chapter explains the rules for 

the section 179 expense deduction. It explains 

what property qualifies for the deduction, what 

property does not qualify for the deduction, the 

Chapter 7 Depreciation, Depletion, and Amortization Page 39
limits that may apply, how to elect the deduction, and when you may have to recapture the 

deduction.

For more information, see chapter 2 of Pub. 

946.

What Property Qualifies?

To qualify for the section 179 expense deduction, your property must meet all the following 

requirements.

• It must be eligible property.

• It must be acquired primarily for business 

use.

• It must have been acquired by purchase.

Eligible Property

To qualify for the section 179 expense deduction, your property must be one of the following 

types of depreciable property.

1. Tangible personal property.

2. Other tangible property (except buildings 

and their structural components) used as:

a. An integral part of manufacturing, production, or extraction or of furnishing 

transportation, communications, electricity, gas, water, or sewage disposal 

services;

b. A research facility used in connection 

with any of the activities in (a) above; 

or

c. A facility used in connection with any 

of the activities in (a) for the bulk storage of fungible commodities.

3. Single-purpose agricultural (livestock) or 

horticultural structures.

4. Storage facilities (except buildings and 

their structural components) used in connection with distributing petroleum or any 

primary product of petroleum.

5. Qualified real property. (Special rules apply to qualified real property that you elect 

to treat as qualified section 179 real property. For more information, see chapter 2 

of Pub. 946, and section 179(f) of the Internal Revenue Code.)

6. Off-the-shelf computer software that is 

readily available for purchase by the general public, is subject to a nonexclusive 

lease, and has not been substantially 

modified.

Tangible personal property. Tangible personal property is any tangible property that is 

not real property. It includes the following property.

• Machinery and equipment.

• Property contained in or attached to a 

building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment.

• Gasoline storage tanks and pumps at retail 

service stations.

• Livestock, including horses, cattle, hogs, 

sheep, goats, and mink and other fur-bearing animals.

Facility used for the bulk storage of fungible commodities. A facility used for the bulk 

storage of fungible commodities is qualifying 

property for purposes of the section 179 expense deduction if it is used in connection with 

any of the activities listed earlier in item 2c under Eligible Property. Bulk storage means the 

storage of a commodity in a large mass before it 

is used.

Grain bins. A grain bin is an example of a 

storage facility that is qualifying section 179 

property. It is a facility used in connection with 

the production of grain or livestock for the bulk 

storage of fungible commodities.

Single-purpose agricultural or horticultural 

structures. A single-purpose agricultural (livestock) or horticultural structure is qualifying 

property for purposes of the section 179 expense deduction.

Agricultural structure. A single-purpose 

agricultural (livestock) structure is any building 

or enclosure specifically designed, constructed, 

and used for both the following reasons.

• To house, raise, and feed a particular type 

of livestock and its produce.

• To house the equipment, including any replacements, needed to house, raise, or 

feed the livestock.

For this purpose, livestock includes poultry.

Single-purpose structures are qualifying 

property if used, for example, to breed chickens 

or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or 

eggs. The facility must include, as an integral 

part of the structure or enclosure, equipment 

necessary to house, raise, and feed the livestock.

Horticultural structure. A single-purpose 

horticultural structure is either of the following.

• A greenhouse specifically designed, constructed, and used for the commercial production of plants.

• A structure specifically designed, constructed, and used for the commercial production of mushrooms.

Use of structure. A structure must be used 

only for the purpose that qualified it. For example, a hog barn will not be qualifying property if 

you use it to house poultry. Similarly, using part 

of your greenhouse to sell plants will make the 

greenhouse nonqualifying property.

If a structure includes work space, the work 

space can be used only for the following activities.

• Stocking, caring for, or collecting livestock 

or plants or their produce.

• Maintaining the enclosure or structure.

• Maintaining or replacing the equipment or 

stock enclosed or housed in the structure.

Note. Recent legislation has changed the 

treatment of qualified improvement property 

placed in service after December 31, 2017, to 

15-year property under MACRS. See chapter 3 

of Pub. 946 for more information.

Qualified real property. Qualified real 

property is any qualified improvement property 

described in section 168(e)(6), and any of the 

following improvements to nonresidential real 

property placed in service after the date such 

qualified real property was first placed in service.

• Roofs.

• Heating, ventilation, and air conditioning.

• Fire protection and alarms.

• Security systems.

Property Acquired by Purchase

To qualify for the section 179 expense deduction, your property must have been acquired by 

purchase. For example, property acquired by 

gift or inheritance does not qualify. Property acquired from a related person (that is, your 

spouse, ancestors, or lineal descendants) is not 

considered acquired by purchase. New or used 

equipment you acquired by purchase during the 

current tax year qualifies for the section 179 deduction.

Example. You are a farmer. You purchased 

two tractors, one from your sibling and one from 

your parent. You placed both tractors in service 

in the same year you bought them. The tractor 

purchased from your parent does not qualify for 

the section 179 expense deduction because 

you are a related person (as defined above). 

The tractor purchased from your sibling does 

qualify for the deduction because you are not a 

related person (as defined above).

What Property Does Not 

Qualify?

Land and improvements. Land and land improvements do not qualify as section 179 property. Land improvements include swimming 

pools, paved parking areas, wharves, docks, 

bridges, and nonagricultural fences. However, 

agricultural fences do qualify as section 179 

property. Similarly, field drainage tile also qualifies as section 179 property.

Excepted property. Even if the requirements 

explained in the preceding discussions are met, 

farmers cannot elect the section 179 expense 

deduction for the following property.

• Certain property you lease to others (if you 

are a noncorporate lessor).

• Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.

• Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used 

mainly in a taxable unrelated trade or business.

• Property used by governmental units or 

foreign persons or entities (except property 

used under a lease with a term of less than 

6 months).

How Much Can You Deduct?

Your section 179 expense deduction is generally the cost of the qualifying property. However, 

the total amount you can elect to deduct under 

section 179 is subject to a dollar limit and a 

business income limit. These limits apply to 

each taxpayer, not to each business. However, 

see Married individuals under Dollar Limits, 

later. Also, see the special rules for applying the 

Page 40 Chapter 7 Depreciation, Depletion, and Amortization
limits for partnerships and S corporations under 

Partnerships and S Corporations, later.

If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you 

do not deduct.

Use Part I of Form 4562 to figure your section 179 expense deduction.

Partial business use. When you use property 

for business and nonbusiness purposes, you 

can elect the section 179 expense deduction 

only if you use it more than 50% for business in 

the year you place it in service. If you used the 

property more than 50% for business, multiply 

the cost of the property by the percentage of 

business use. Use the resulting business cost 

to figure your section 179 expense deduction.

Trade-in of other property. If you buy qualifying property with cash and a trade-in, its cost for 

purposes of the section 179 expense deduction 

includes only the cash you paid.

Example. Adyo Farms traded real property 

X having a total adjusted basis of $6,800 for 

new real property Z costing $13,200. They received an $8,000 trade-in allowance for the old 

real property X, and paid $5,200 in cash for the 

new real property Z.

For purposes of the section 179 expense 

deduction, only the cash paid by Adyo qualifies 

for the section 179 expense deduction. Adyo's 

business costs that qualify for a section 179 expense deduction are $5,200. For information on 

the maximum amount you can elect to deduct, 

see Dollar Limits next.

Dollar Limits

The total amount you can elect to deduct under 

section 179 for most property placed in service 

in 2023 is $1,160,000. If you acquire and place 

in service more than one item of qualifying 

property during the year, you can allocate the 

section 179 expense deduction among the 

items in any way, as long as the total deduction 

is not more than $1,160,000. You cannot carry 

costs in excess of the $1,160,000 limit over to 

future years.

Reduced dollar limit for cost exceeding 

$2,890,000. If the cost of your qualifying section 179 property placed in service in 2023 is 

over $2,890,000, you must reduce the dollar 

limit (but not below zero) by the amount of cost 

over $2,890,000. If the cost of your section 179 

property placed in service during 2023 is 

$4,050,000 or more, you cannot take a section 

179 expense deduction and you cannot carry 

over any of the cost that is more than 

$4,050,000.

Example. This year, George Thomas 

placed in service machinery costing 

$2,990,000. Because this cost is $100,000 

more than $2,890,000, George must reduce the 

dollar limit to $1,060,000 ($1,160,000 − 

$100,000). George cannot carry over any of the 

costs that exceed the $1,060,000 reduced limit. 

The remaining cost of the machinery not allowed as a section 179 expense deduction is eligible for a depreciation expense under 

MACRS. See Figuring Depreciation Under 

MACRS, later.

Limits for sport utility vehicles. The total 

amount you can elect to deduct for certain sport 

utility vehicles and certain other vehicles placed 

in service in 2023 is $28,900. This rule applies 

to any 4-wheeled vehicle primarily designed or 

used to carry passengers over public streets, 

roads, and highways that is rated at more than 

6,000 pounds gross vehicle weight and not 

more than 14,000 pounds gross vehicle weight.

For more information, see chapter 2 of Pub. 

946.

Limits for passenger automobiles. For a 

passenger automobile that is placed in service 

in 2023, the total section 179 and depreciation 

deduction is limited. See Do the Passenger Automobile Limits Apply, later.

Married individuals. If you are married, how 

you figure your section 179 expense deduction 

depends on whether you file jointly or separately. If you file a joint return, you and your 

spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless 

of which of you purchased the property or 

placed it in service. If you and your spouse file 

separate returns, you are treated as one taxpayer for the dollar limit, including the reduction 

for costs over $2,890,000. You must allocate the 

dollar limit (after any reduction) equally between 

you, unless you both elect a different allocation. 

If the percentages elected by each of you do not 

total 100%, 50% will be allocated to each of 

you.

Joint return after separate returns. If you 

and your spouse elect to amend your separate 

returns by filing a joint return after the due date 

for filing your return, the dollar limit on the joint 

return is the lesser of the following amounts.

• The dollar limit (after reduction for any cost 

of section 179 property over $2,890,000).

• The total cost of section 179 property you 

and your spouse elected to expense on 

your separate returns.

Business Income Limit

The total cost you can deduct each year after 

you apply the dollar limit is limited to the taxable 

income from the active conduct of any trade or 

business during the year. Generally, you are 

considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.

Any cost not deductible in one year under 

section 179 because of this limit can be carried 

to the next year. See Carryover of disallowed 

deduction, later.

Taxable income. In general, figure taxable income for this purpose by totaling the net income 

and losses from all trades and businesses you 

actively conducted during the year. In addition 

to net income or loss from a sole proprietorship, 

partnership, or S corporation, net income or 

loss derived from a trade or business also includes the following items.

• Section 1231 gains (or losses) as discussed in chapter 9.

• Interest from working capital of your trade 

or business.

• Wages, salaries, tips, or other pay earned 

by you (or your spouse if you file a joint return) as an employee of any employer.

In addition, figure taxable income without regard to any of the following.

• The section 179 expense deduction.

• The self-employment tax deduction.

• Any net operating loss carryback or carryforward.

• Any unreimbursed employee business expenses.

Also, see chapter 2 of Pub. 946.

Two different taxable income limits. In addition to the business income limit for your section 

179 expense deduction, you may have a taxable income limit for some other deduction (for 

example, charitable contributions). You may 

have to figure the limit for this other deduction 

taking into account the section 179 expense deduction. If so, complete the following steps.

Step Action

1 Figure taxable income without the 

section 179 expense deduction or the 

other deduction.

2 Figure a hypothetical section 179 

expense deduction using the taxable 

income figured in Step 1.

3 Subtract the hypothetical section 179 

expense deduction figured in Step 2 

from the taxable income figured in Step 

1.

4 Figure a hypothetical amount for the 

other deduction using the amount 

figured in Step 3 as taxable income.

5 Subtract the hypothetical other 

deduction figured in Step 4 from the 

taxable income figured in 

Step 1.

6 Figure your actual section 179 expense 

deduction using the taxable income 

figured in Step 5.

7 Subtract your actual section 179 

expense deduction figured in Step 6 

from the taxable income figured in Step 

1.

8 Figure your actual other deduction using 

the taxable income figured in Step 7.

Example. On February 1, 2023, the XYZ 

farm corporation purchased and placed in service qualifying section 179 property that cost 

$500,000. It elects to expense the entire 

$500,000 cost under section 179. In June, the 

corporation gave a charitable contribution of 

$100,000. A corporation's limit on charitable 

contributions is figured after subtracting any 

section 179 expense deduction. The business 

income limit for the section 179 expense deduction is figured after subtracting any allowable 

charitable contributions. XYZ's taxable income 

figured without the section 179 expense deduction or the deduction for charitable contributions 

is $700,000. XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows.

Step 1. Taxable income figured without either deduction is $700,000.

Chapter 7 Depreciation, Depletion, and Amortization Page 41
Step 2. Using $700,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000.

Step 3. $200,000 ($700,000 − $500,000).

Step 4. Using $200,000 (from Step 3) as 

taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable 

income) is $20,000.

Step 5. $680,000 ($700,000 − $20,000).

Step 6. Using $680,000 (from Step 5) as 

taxable income, XYZ figures the actual section 179 expense deduction. Because the 

taxable income is at least $500,000, XYZ 

can take a $500,000 section 179 expense 

deduction.

Step 7. $200,000 ($700,000 − $500,000).

Step 8. Using $200,000 (from Step 7) as 

taxable income, XYZ's actual charitable 

contribution (limited to 10% of taxable income) is $20,000.

Carryover of disallowed deduction. You can 

carry over for an unlimited number of years the 

cost of any section 179 property you elected to 

expense but were unable to because of the 

business income limit.

The amount you carry over is used in determining your section 179 expense deduction in 

the next year. However, it is subject to the limits 

in that year. If you place more than one property 

in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Your selections must be shown in 

your books and records.

Example. Last year, Diana Reynolds 

placed in service a machine that cost $100,000 

and elected to deduct all $100,000 under section 179. The taxable income from Diana’s business (determined without regard to both a section 179 expense deduction for the cost of the 

machine and the self-employment tax deduction) was $80,000. Diana’s section 179 expense 

deduction was limited to $80,000. The $20,000 

cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year.

This year, Diana placed another machine in 

service that cost $110,000. Diana’s taxable income from business (determined without regard 

to both a section 179 expense deduction for the 

cost of the machine and the self-employment 

tax deduction) is $120,000. Diana can deduct 

the full cost of the machine ($110,000) but only 

$10,000 of the carryover from last year because 

of the business income limit. Diana can carry 

over the balance of $10,000 to next year.

Partnerships and S Corporations

The section 179 expense deduction limits apply 

both to the partnership or S corporation and to 

each partner or shareholder. The partnership or 

S corporation determines its section 179 expense deduction subject to the limits. It then allocates the deduction among its partners or 

shareholders.

If you are a partner in a partnership or shareholder of an S corporation, you add the amount 

allocated from the partnership or S corporation 

to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. To determine any reduction 

in the dollar limit for costs over $2,890,000, you 

do not include any of the cost of section 179 

property placed in service by the partnership or 

S corporation. After you apply the dollar limit, 

you apply the business income limit to any remaining section 179 costs. For more information, see chapter 2 of Pub. 946.

Example. In 2023, Partnership P placed in 

service section 179 property with a total cost of 

$2,990,000. P must reduce its dollar limit by 

$100,000 ($2,990,000 − $2,890,000). Its maximum section 179 expense deduction is 

$1,060,000 ($1,160,000 − $100,000), and it 

elects to expense that amount. Because P's 

taxable income from the active conduct of all its 

trades or businesses for the year was 

$2,000,000, it can deduct the full $1,060,000. P 

allocates $200,000 of its section 179 expense 

deduction and $500,000 of its taxable income 

to John, one of its partners.

John also conducts a business as a sole 

proprietor and, in 2023, placed in service in that 

business, section 179 property costing 

$800,000. John's taxable income from that 

business was $200,000. In addition to the 

$200,000 allocated from P, John elects to expense the $550,000 of the sole proprietorship's 

section 179 costs. However, John's deduction is 

limited to the business taxable income of 

$700,000 ($500,000 from P plus $200,000 from 

the sole proprietorship). John carries over 

$50,000 ($750,000 − $700,000) of the elected 

section 179 costs to 2024.

How Do You Elect the 

Deduction?

You elect to take the section 179 expense deduction by completing Part I of Form 4562.

If you elect the deduction for listed 

property, complete Part V of Form 4562 

before completing Part I.

File Form 4562 with either of the following.

• Your original tax return (whether or not you 

filed it timely).

• An amended return filed within the time 

prescribed by law. An election made on an 

amended return must specify the item of 

section 179 property to which the election 

applies and the part of the cost of each 

such item to be taken into account. The 

amended return must also include any resulting adjustments to taxable income.

Revoking an election. An election (or any 

specification made in the election) to take a 

section 179 expense deduction for 2023 can be 

revoked without IRS approval by filing an amended return. The amended return must be filed 

within the time prescribed by law. The amended 

return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of 

section 179 property for which the election pertains). Once made, the revocation is irrevocable.

CAUTION

!

When Must You Recapture 

the Deduction?

You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. In the year the 

business use drops to 50% or less, you include 

the recapture amount as ordinary income. You 

also increase the basis of the property by the 

recapture amount. Recovery periods for property are discussed later.

If you sell, exchange, or otherwise dispose of the property, do not figure the 

recapture amount under the rules explained in this discussion. Instead, use the rules 

for recapturing depreciation explained under 

Section 1245 Property in chapter 9.

If the property is listed property, do not 

figure the recapture amount under the 

rules explained in this discussion when 

the percentage of business use drops to 50% or 

less. Instead, use the rules for recapturing depreciation explained under Recapture of Excess 

Depreciation in chapter 5 of Pub. 946.

Figuring the recapture amount. To figure the 

amount to recapture, take the following steps.

1. Figure the allowable depreciation for the 

section 179 expense deduction you 

claimed. Begin with the year you placed 

the property in service and include the 

year of recapture.

2. Subtract the depreciation figured in (1) 

from the section 179 expense deduction 

you actually claimed. The result is the 

amount you must recapture.

Example. In January 2021, you are a calendar year taxpayer. You bought and placed in 

service section 179 property costing $10,000. 

The property is 3-year property and is depreciated under MACRS and a half-year convention. 

The property is not listed property. You elected 

a $5,000 section 179 expense deduction for the 

property and also elected not to claim a special 

depreciation allowance. You used the property 

only for business in 2021 and 2022. During 

2023, you used the property 40% for business 

and 60% for personal use. You figure the recapture amount as follows.

Section 179 expense deduction claimed 

(2021) ............................ $5,000

Minus: Allowable depreciation

(instead of section 179 expense deduction):

2021 ...................... $1,250

2022 ...................... 1,875 

2023 ($1,250 × 40% (business)) ... 500 3,625

2023 — Recapture amount ......... $1,375

You must include $1,375 in income for 2023.

Where to report recapture. Report any recapture of the section 179 expense deduction 

as ordinary income in Part IV of Form 4797 and 

include it in income on Schedule F (Form 1040).

Recapture for qualified section 179 GO 

Zone property. If any qualified section 179 GO 

CAUTION

!

CAUTION

!

Page 42 Chapter 7 Depreciation, Depletion, and Amortization
Zone property ceases to be used in the GO 

Zone in a later year, you must recapture the 

benefit of the increased section 179 expense 

deduction as “other income.”

Claiming the Special 

Depreciation Allowance

For qualified property (defined below) placed in 

service in 2023, you can take a special depreciation allowance depending on the date you acquired the qualified property. The allowance is 

an additional deduction you can take before you 

figure regular depreciation under MACRS. Figure the special depreciation allowance by multiplying the depreciable basis of the qualified 

property by the applicable percentage.

What Is Qualified Property?

For farmers, qualified property is certain property acquired after September 27, 2017, and 

certain specified plants.

Certain qualified property acquired after 

September 27, 2017. You can elect to take an 

80% special depreciation allowance for certain 

qualified property acquired after September 27, 

2017, and placed in service after December 31, 

2022, and before January 1, 2024 (other than 

certain property with a long production period 

and certain aircraft). For certain qualified property acquired after September 27, 2017, and 

placed in service after December 31, 2023, and 

before January 1, 2025 (other than certain property with a long production period and certain 

aircraft), you can elect to take a 60% special depreciation allowance.

You can elect to take a 100% special depreciation allowance for certain property with a 

long production period and certain aircraft acquired and placed in service after September 

27, 2017, and before January 1, 2024. For certain property with a long production period and 

certain aircraft acquired after September 27, 

2017, and placed in service after December 31, 

2023, and before January 1, 2025, you can 

elect to take an 80% special depreciation allowance.

Your property is qualified property if it meets 

the following requirements.

1. It is one of the following types of property.

a. Tangible property depreciated under 

MACRS with a recovery period of 20 

years or less.

b. Water utility property depreciated under MACRS.

c. Computer software defined in and depreciated under section 167(f)(1) of 

the Internal Revenue Code.

2. Qualified property can be either new property or certain used property.

3. It is not excepted property.

For more information, see chapter 3 of Pub. 

946.

Certain specified plants. You can elect to 

claim an 80% special depreciation allowance 

for the adjusted basis of certain specified plants 

(defined later) bearing fruits and nuts planted or 

grafted after December 31, 2022, and before 

January 1, 2024.. For certain specified plants 

bearing fruits and nuts planted or grafted after 

December 31, 2023, and before January 1, 

2025, you can elect to claim a 60% special allowance.

A specified plant is:

• Any tree or vine that bears fruits or nuts, 

and

• Any other plant that will have more than 

one yield of fruits or nuts and generally has 

a pre-productive period of more than 2 

years from planting and grafting to the time 

it begins bearing fruits or nuts.

Any property planted or grafted outside the 

United States does not qualify as a specified 

plant.

If you elect to claim the special depreciation 

allowance for any specified plant, the plant will 

not be treated as qualified property eligible for 

the special depreciation allowance in the subsequent tax year in which it is placed in service.

To make the election, attach a statement to 

your timely filed return (including extensions) for 

the tax year in which you plant or graft the 

specified plant(s) indicating you are electing to 

apply section 168(k)(5) and identifying the 

specified plant(s) for which you are making the 

election. Once made, the election cannot be revoked without IRS consent.

See section 168(k)(5) of the Internal Revenue Code.

How Can You Elect Not To 

Claim the Allowance?

You can elect, for any class of property, not to 

deduct the special depreciation allowance for all 

property in such class placed in service during 

the tax year. To make the election, attach a 

statement to your return indicating the class of 

property for which you are making the election.

Generally, you must make the election on a 

timely filed tax return (including extensions) for 

the year in which you place the property in service. However, if you timely filed your return for 

the year without making the election, you can 

still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Attach the 

election statement to the amended return. On 

the amended return, write “Filed pursuant to 

section 301.9100-2.”

Once made, the election may not be revoked without IRS consent.

If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative 

minimum tax adjustment for depreciation.

When Must You Recapture 

an Allowance?

When you dispose of property for which you 

claimed a special depreciation allowance, any 

gain on the disposition is generally recaptured 

(included in income) as ordinary income up to 

CAUTION

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the amount of the special depreciation allowance previously allowed or allowable. For more 

information, see chapter 3 of Pub. 946.

Figuring Depreciation 

Under MACRS

MACRS is used to recover the basis of most 

business and investment property placed in 

service after 1986. MACRS consists of two depreciation systems, the General Depreciation 

System (GDS) and the Alternative Depreciation 

System (ADS). Generally, these systems provide different methods and recovery periods to 

use in figuring depreciation deductions.

To be sure you can use MACRS to figure depreciation for your property, see 

Can You Use MACRS To Depreciate 

Your Property, earlier.

This part explains how to determine which 

MACRS depreciation system applies to your 

property. It also discusses the following information that you need to know before you can figure 

depreciation under MACRS.

• Property's recovery class.

• Placed-in-service date.

• Basis for depreciation.

• Recovery period.

• Convention.

• Depreciation method.

Finally, this part explains how to use this information to figure your depreciation deduction.

Which Depreciation System 

(GDS or ADS) Applies?

Your use of either GDS or ADS to depreciate 

property under MACRS determines what depreciation method and recovery period you use. 

You must generally use GDS unless you are 

specifically required by law to use ADS or you 

elect to use ADS.

Required use of ADS. You must use ADS for 

the following property.

• All property used predominantly in a farming business and placed in service in any 

tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect.

• Listed property used 50% or less in a 

qualified business use. See Additional 

Rules for Listed Property, later.

• Any tax-exempt use property.

• Any tax-exempt bond-financed property.

• Any property imported from a foreign country for which an Executive order is in effect 

because the country maintains trade restrictions or engages in other discriminatory acts.

• Any tangible property used predominantly 

outside the United States during the year.

Note. You must use ADS if you are required 

to file Form 8990 and you elect to expense 

farming interest expense.

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Chapter 7 Depreciation, Depletion, and Amortization Page 43
If you are required to use ADS to depreciate your property, you cannot 

claim the special depreciation allowance.

Electing ADS. Although your property may 

qualify for GDS, you can elect to use ADS. The 

election must generally cover all property in the 

same property class you placed in service during the year. However, the election for residential rental property and nonresidential real property can be made on a property-by-property 

basis. Once you make this election, you can 

never revoke it.

You make the election by completing line 20 

in Part III of Form 4562.

Which Property Class 

Applies Under GDS?

The following is a list of the nine property 

classes under GDS.

1. 3-year property.

2. 5-year property.

3. 7-year property.

4. 10-year property.

CAUTION

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5. 15-year property.

6. 20-year property.

7. 25-year property.

8. Residential rental property.

9. Nonresidential real property.

See Which Property Class Applies Under GDS? 

in chapter 4 of Pub. 946 for examples of the 

types of property included in each class.

What Is the 

Placed-in-Service Date?

You begin to claim depreciation when your 

property is placed in service for use either in a 

trade or business or for the production of income. The placed-in-service date for your property is the date the property is ready and available for a specific use. It is therefore not 

necessarily the date it is first used. If you converted property held for personal use to use in a 

trade or business or for the production of income, treat the property as being placed in 

service on the conversion date. See Placed in 

Service under When Does Depreciation Begin 

and End, earlier, for examples illustrating when 

property is placed in service.

Also, see Certain specified plants, earlier, 

for information on the placed-in-service date for 

specified plants bearing fruits and nuts for 

which you elect to claim the special depreciation allowance.

What Is the Basis for 

Depreciation?

The basis for depreciation of MACRS property 

is the property's cost or other basis multiplied 

by the percentage of business/investment use. 

Reduce that amount by any credits and deductions allocable to the property. The following are 

examples of some of the credits and deductions 

that reduce basis.

• Any deduction for section 179 property.

• Any deduction for removal of barriers to the 

disabled and the elderly.

• Any disabled access credit, enhanced oil 

recovery credit, and credit for employer-provided childcare facilities and 

services.

• Any special depreciation allowance.

• Basis adjustment for investment credit 

property under section 50(c) of the Internal 

Revenue Code.

For information about how to determine the cost 

or other basis of property, see What Is the Basis 

of Your Depreciable Property, earlier. Also, see 

chapter 6.

For additional credits and deductions that 

affect basis, see section 1016 of the Internal 

Revenue Code.

Which Recovery Period 

Applies?

The recovery period of property is the number 

of years over which you recover its cost or other 

basis. It is determined based on the depreciation system (GDS or ADS) used. See Table 7-1 

for recovery periods under both GDS and ADS 

for some commonly used assets. For a complete list of recovery periods, see the Table of 

Class Lives and Recovery Periods in Appendix 

B of Pub. 946.

House trailers for farm laborers. To depreciate a house trailer you supply as housing 

for those who work on your farm, use one of the 

following recovery periods if the house trailer is 

mobile (it has wheels and a history of movement).

• A 7-year recovery period under GDS.

• A 10-year recovery period under ADS.

However, if the house trailer is not mobile (its 

wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods.

• A 20-year recovery period under GDS.

• A 25-year recovery period under ADS.

Water wells. Water wells used to provide 

water for raising poultry and livestock are land 

improvements. If they are depreciable, use one 

of the following recovery periods.

• A 15-year recovery period under GDS.

• A 20-year recovery period under ADS.

The types of water wells that can be depreciated were discussed earlier in Irrigation 

Table 7-1. Farm Property Recovery Periods

Recovery Period in Years

Assets GDS ADS

Agricultural structures (single purpose) ............................... 10 15

Automobiles .................................................. 5 5

Calculators and copiers .......................................... 5 6

Cattle (dairy or breeding) ......................................... 5 7

Communication equipment1....................................... 7 10

Computer and peripheral equipment ................................. 5 5

Drainage facilities .............................................. 15 20

Farm buildings2................................................ 20 25

New farm machinery and equipment3................................. 5 10

Used farm machinery and equipment ................................. 7 10

Fences (agricultural) ............................................ 7 10

Goats and sheep (breeding) ....................................... 5 5

Grain bin .................................................... 7 10

Hogs (breeding) ............................................... 3 3

Horses (age when placed in service)

Breeding and working (12 years or less) ............................ 7 10

Breeding and working (more than 12 years) .......................... 3 10

Racing horses (more than 2 years) ................................ 3 12

Horticultural structures (single purpose) ............................... 10 15

Logging machinery and equipment4.................................. 5 6

Nonresidential real property ....................................... 395 40

Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) ... 7 10

Paved lots ................................................... 15 20

Residential rental property ........................................ 27.5 40

Tractor units (over-the-road) ....................................... 3 4

Trees or vines bearing fruits or nuts .................................. 10 20

Truck (heavy duty, unloaded weight 13,000 lbs. or more) ................... 5 6

Truck (actual weight less than 13,000 lbs.) ............................. 5 5

Water wells .................................................. 15 20

1

 Not including communication equipment listed in other classes.

2

 Not including single-purpose agricultural or horticultural structures.

3

 Not including grain bin, cotton ginning, asset fence, or other land improvement and the original use 

starts with you and placed in service after December 31, 2017.

4

 Used by logging and sawmill operators for cutting of timber.

5

 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993, 

the recovery period is 31.5 years.

Page 44 Chapter 7 Depreciation, Depletion, and Amortization
systems and water wells under Property Having 

a Determinable Useful Life.

Which Convention Applies?

Under MACRS, averaging conventions establish when the recovery period begins and ends. 

The convention you use determines the number 

of months for which you can claim depreciation 

in the year you place property in service and in 

the year you dispose of the property. Use one of 

the following conventions.

• The half-year convention.

• The mid-month convention.

• The mid-quarter convention.

For a detailed explanation of each convention, see Which Convention Applies? in chapter 4 of Pub. 946. Also, see the Instructions for 

Form 4562.

Which Depreciation Method 

Applies?

MACRS provides three depreciation methods 

under GDS and one depreciation method under 

ADS.

• The 200% declining balance method over 

a GDS recovery period.

• The 150% declining balance method over 

a GDS recovery period.

• The straight line method over a GDS recovery period.

• The straight line method over an ADS recovery period.

Depreciation Table. The following table lists 

the types of property you can depreciate under 

each method. The declining balance method is 

abbreviated as DB and the straight line method 

is abbreviated as SL.

Depreciation Table

System/Method Type of Property

GDS using 

150% DB

• All 15- and 20-year property

• Farm or Nonfarm 3-, 5-, 7-, and 

10-year property1

GDS using SL • Nonresidential real property

• Residential rental property

• Trees or vines bearing fruits or 

nuts

• All 3-, 5-, 7-, 10-, 15-, and 

20-year property1

ADS using SL • Property used predominantly outside the United 

States

• Farm property used when an 

election not to apply the 

uniform capitalization rules is in 

effect

• Tax-exempt property

• Tax-exempt bond-financed 

property

• Imported property2

• Any property for which you 

elect to use this method1

GDS using 

200% DB

• Nonfarm 3-, 5-, 7-, and

10-year property

• Farm 3-, 5-, 7-, and 10-year 

property placed in service after 

2017

1Elective method.

2See section 168(g)(6) of the Internal Revenue 

Code.

Property used in farming business. For 3-, 

5-, 7-, or 10-year property used in a farming 

business and placed in service after 2017, the 

150% declining balance method is no longer required. However, for 15- or 20-year property 

placed in service in a farming business, you 

must use the 150% declining balance method 

over a GDS recovery period or you can elect 

one of the following methods.

• The straight line method over a GDS recovery period.

• The straight line method over an ADS recovery period.

Real property. You can depreciate real property using the straight line method under either 

GDS or ADS.

Switching to straight line. If you use a declining balance method, you switch to the straight 

line method in the year it provides an equal or 

greater deduction. If you use the MACRS percentage tables, discussed later under How Is 

the Depreciation Deduction Figured, you do not 

need to determine in which year your deduction 

is greater using the straight line method. The tables have the switch to the straight line method 

built into their rates.

Fruit or nut trees and vines. Depreciate trees 

and vines bearing fruits or nuts under GDS using the straight line method over a 10-year recovery period.

ADS required for some farmers. If you elect 

not to limit interest expense, you must use ADS 

to depreciate any property with a recovery period of 10 years or more. See chapter 4 for a 

discussion of interest rules. If you elect not to 

apply the uniform capitalization rules to any 

plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use 

ADS for all property you place in service in any 

year the election is in effect. See chapter 6 for a 

discussion of the application of the uniform capitalization rules to farm property.

Electing a different method. As shown in the 

Depreciation Table, you can elect a different 

method for depreciation for certain types of 

property. You must make the election by the due 

date of the return (including extensions) for the 

year you placed the property in service. However, if you timely filed your return for the year 

without making the election, you can still make 

the election by filing an amended return within 6 

months of the due date of your return (excluding 

extensions). Attach the election to the amended 

return and write “Filed pursuant to section 

301.9100-2” on the election statement. File the 

amended return at the same address you filed 

the original return. Once you make the election, 

you cannot change it.

If you elect to use a different method for 

one item in a property class, you must 

apply the same method to all property 

in that class placed in service during the year of 

the election. However, you can make the election on a property-by-property basis for residential rental and nonresidential real property.

Straight line election. Instead of using the 

declining balance method, you can elect to use 

the straight line method over the GDS recovery 

period. Make the election by entering “S/L” under column (f) in Part III of Form 4562.

ADS election. As explained earlier under 

Which Depreciation System (GDS or ADS) Applies, you can elect to use ADS even though 

your property may come under GDS. ADS uses 

the straight line method of depreciation over the 

ADS recovery periods, which are generally longer than the GDS recovery periods. The ADS 

recovery periods for many assets used in the 

business of farming are listed in Table 7-1. Additional ADS recovery periods for other classes of 

property may be found in the Table of Class 

Lives and Recovery Periods in Appendix B of 

Pub. 946.

How Is the Depreciation 

Deduction Figured?

To figure your depreciation deduction under 

MACRS, you first determine the depreciation 

system, property class, placed-in-service date, 

basis amount, recovery period, convention, and 

depreciation method that applies to your property. Then you are ready to figure your depreciation deduction. You can figure it in one of two 

ways.

• You can use the percentage tables provided by the IRS.

• You can figure your own deduction without 

using the tables.

Figuring your own MACRS deduction 

will generally result in a slightly different 

amount than using the tables.

See Using the MACRS Percentage Tables 

and Figuring the Deduction Without Using the 

Tables under How is the Depreciation Deduction Figured in chapter 4 of Pub. 946, for details 

on how to figure your depreciation deduction 

under MACRS.

Figuring the Deduction for 

Property Acquired in a Nontaxable 

Exchange

If your property has a carryover basis because 

you acquired it in an exchange or involuntary 

conversion of other property or in a nontaxable 

transfer, you generally figure depreciation for 

the property as if the exchange, conversion, or 

transfer had not occurred.

Property acquired in a like-kind exchange 

or involuntary conversion. You must generally depreciate the carryover basis of MACRS 

property acquired in a like-kind exchange or involuntary conversion over the remaining recovery period of the property exchanged or involuntarily converted. You also generally continue to 

use the same depreciation method and 

CAUTION

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CAUTION

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Chapter 7 Depreciation, Depletion, and Amortization Page 45
convention used for the exchanged or involuntarily converted property. This applies only to 

acquired property with the same or a shorter recovery period and the same or more accelerated depreciation method than the property exchanged or involuntarily converted. The excess 

basis, if any, of the acquired MACRS property is 

treated as newly placed-in-service MACRS 

property.

Election out. You can elect not to use the 

above rules. The election, if made, applies to 

both the acquired property and the exchanged 

or involuntarily converted property. If you make 

the election, figure depreciation by treating the 

carryover basis and excess basis, if any, for the 

acquired property as if placed in service the 

later of the date you acquired it, or the time of 

the disposition of the exchanged or involuntarily 

converted property. For depreciation purposes, 

the adjusted basis of the exchanged or involuntarily converted property is treated as if it were 

disposed of at the time of the exchange or conversion.

When to make the election. You must 

make the election on a timely filed return (including extensions) for the year of replacement. 

Once made, the election may not be revoked 

without IRS consent.

For more information and special rules, see 

chapter 4 of Pub. 946.

Property acquired in a nontaxable transfer. 

You must depreciate MACRS property acquired 

by a corporation or partnership in certain nontaxable transfers over the property's remaining 

recovery period in the transferor's hands, as if 

the transfer had not occurred. You must continue to use the same depreciation method and 

convention as the transferor. You can depreciate the part of the property's basis in excess of 

its carried-over basis (the transferor's adjusted 

basis in the property) as newly purchased 

MACRS property. For information on the kinds 

of nontaxable transfers covered by this rule, see 

chapter 4 of Pub. 946.

How Do You Use General 

Asset Accounts?

To make it easier to figure MACRS depreciation, 

you can group separate assets into one or more 

general asset accounts (GAAs). You can then 

depreciate all the assets in each account as a 

single asset. Each account must include only 

assets of the same recovery period, depreciation method, and convention. You cannot include an asset if you use it in both a personal 

activity and a trade or business (or for the production of income) in the year in which you first 

placed it in service.

After you have set up a GAA, you generally 

figure the depreciation for it by using the applicable depreciation method, recovery period, 

and convention for the assets in the GAA. For 

each GAA, record the depreciation allowance in 

a separate depreciation reserve account.

There are additional rules for grouping assets in a GAA, figuring depreciation for a GAA, 

disposing of GAA assets, and terminating GAA 

treatment. Special rules apply in determining 

the basis and figuring the depreciation deduction for MACRS property in a GAA acquired in a 

like-kind exchange or involuntary conversion. 

For more details, see Regulations section 

1.168(i)-1 (as in effect for tax years beginning 

after December 31, 2013). Also, see chapter 4 

of Pub. 946.

When Do You Recapture

MACRS Depreciation?

When you dispose of property you depreciated 

using MACRS, any gain on the disposition is 

generally recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable for the 

property. For more information on depreciation 

recapture, see chapter 9. Also, see chapter 4 of 

Pub. 946.

Additional Rules for 

Listed Property

Listed property includes cars and other property 

used for transportation, property used for entertainment, and certain computers.

Deductions for listed property (other than 

certain leased property) are subject to the following special rules and limits.

• Deduction for employees.

• Business-use requirement.

• Passenger automobile limits and rules.

What Is Listed Property?

Listed property is any of the following.

• Passenger automobiles weighing 6,000 

pounds or less.

• Any other property used for transportation, 

unless it is an excepted vehicle.

• Property generally used for entertainment, 

recreation, or amusement.

• Certain aircraft.

Passenger automobiles. A passenger automobile is any 4-wheeled vehicle made primarily 

for use on public streets, roads, and highways 

and rated at 6,000 pounds or less of unloaded 

gross vehicle weight (6,000 pounds or less of 

gross vehicle weight for trucks and vans). It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile. 

Electric passenger automobiles are vehicles 

produced by an original equipment manufacturer and designed to run primarily on electricity.

Note. A truck or van that is a qualified nonpersonal use vehicle is not considered a passenger automobile. See Qualified nonpersonal use 

vehicles under Passenger Automobiles in chapter 5 of Pub. 946 for the definition of qualified 

nonpersonal use vehicles.

For most vehicles, the gross vehicle 

weight rating can generally be found on 

the driver door post of the vehicle.

Other property used for transportation. 

This includes trucks, buses, boats, airplanes, 

TIP

motorcycles, and other vehicles used for transporting persons or goods.

Excepted vehicles. Other property used 

for transportation does not include the following 

vehicles.

• Tractors and other special-purpose farm 

vehicles.

• Bucket trucks (cherry pickers), dump 

trucks, flatbed trucks, and refrigerated 

trucks.

• Combines, cranes and derricks, and forklifts.

• Any vehicle designed to carry cargo with a 

loaded gross vehicle weight of over 14,000 

pounds.

For more information, see chapter 5 of Pub. 

946.

What Is the Business-Use 

Requirement?

You can claim the section 179 expense deduction for listed property and depreciate listed 

property using GDS and a declining balance 

method, if the property meets the business-use 

requirement. To meet this requirement, listed 

property must be used predominantly (more 

than 50% of its total use) for qualified business 

use. To determine whether the business-use requirement is met, you must allocate the use of 

any item of listed property used for more than 

one purpose during the year among its various 

uses.

Do the Passenger 

Automobile Limits Apply?

The depreciation deduction (including the section 179 expense deduction) you can claim for a 

passenger automobile each year is limited. The 

passenger automobile limits are the maximum 

depreciation amounts you can deduct for a passenger automobile. They are based on the date 

you placed the vehicle in service. See chapter 5 

of Pub. 946 for tables that show the maximum 

depreciation deduction for passenger automobiles. Also, see the Instructions for Form 4562.

For information about deducting expenses 

for the business use of your passenger automobile, see chapter 4 of Pub. 463.

Deductions for passenger automobiles acquired in a trade-in. Special rules apply in figuring the depreciation for a passenger automobile received in a like-kind exchange or 

involuntary conversion. See chapter 5 of Pub. 

946 and Regulations section 1.168(i)-6(d)(3).

Depletion

Depletion is the using up of natural resources 

by mining, quarrying, drilling, or cutting. The depletion deduction allows an owner or operator to 

account for the reduction of a product's reserves.

Who Can Claim Depletion?

If you have an economic interest in mineral 

property or standing timber (defined below), you 

Page 46 Chapter 7 Depreciation, Depletion, and Amortization
can take a deduction for depletion. More than 

one person can have an economic interest in 

the same mineral deposit or timber.

You have an economic interest if both the 

following apply.

• You have acquired by investment any interest in mineral deposits or standing timber.

• You have a legal right to income from the 

extraction of the mineral or the cutting of 

the timber, to which you must look for a return of your capital investment.

A contractual relationship that allows you an 

economic or monetary advantage from products of the mineral deposit or standing timber is 

not, in itself, an economic interest. A production 

payment carved out of, or retained on the sale 

of, mineral property is not an economic interest.

Mineral property is each separate interest 

you own in each mineral deposit in each separate tract or parcel of land. You can treat two or 

more separate interests as one property or as 

separate properties. See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral 

interests.

Timber property is your economic interest in 

standing timber in each tract or block representing a separate timber account.

Figuring Depletion

There are two ways of figuring depletion.

• Cost depletion.

• Percentage depletion.

For mineral property, you must generally use the 

method that gives you the larger deduction. For 

standing timber, you must use cost depletion.

Cost Depletion

To figure cost depletion, you must first determine the following.

• The property's basis for depletion.

• The total recoverable units of mineral in the 

property's natural deposit.

• The number of units of mineral sold during 

the tax year.

You must estimate or determine recoverable 

units (tons, barrels, board feet, thousands of cubic feet, or other measure) using the current industry method and the most accurate and reliable information you can obtain.

Basis for depletion. To figure the property's 

basis for depletion, subtract all of the following 

from the property's adjusted basis.

1. Amounts recoverable through:

a. Depreciation deductions,

b. Deferred expenses (including deferred exploration and development 

costs), and

c. Deductions other than depletion.

2. The residual value of land and improvements at the end of operations.

3. The cost or value of land acquired for purposes other than mineral production.

Adjusted basis. The adjusted basis of your 

property is your original cost or other basis, plus 

certain additions and improvements, and minus 

certain deductions such as depletion allowed or 

allowable and casualty losses. Your adjusted 

basis can never be less than zero. See Pub. 551 

for more information on adjusted basis.

Total recoverable units. The total recoverable 

units is the sum of the following.

• The number of units of mineral remaining 

at the end of the year (including units recovered but not sold).

• The number of units of mineral sold during 

the tax year (determined under your 

method of accounting, as explained next).

You must estimate or determine recoverable 

units (tons, pounds, ounces, barrels, thousands 

of cubic feet, or other measure) of mineral products using the current industry method and the 

most accurate and reliable information you can 

obtain. You must include ores and minerals that 

are developed, in sight, blocked out, or assured. 

You must also include probable or prospective 

ores or minerals that are believed to exist based 

on good evidence.

Number of units sold. You determine the 

number of units sold during the tax year based 

on your method of accounting. Use the following table to make this determination.

IF you use... THEN the units sold 

during the year are...

the cash method of 

accounting

the units sold for which you 

receive payment during the 

tax year (regardless of the 

year of sale).

an accrual method of 

accounting

the units sold based on 

your inventories.

The number of units sold during the tax year 

does not include any units for which depletion 

deductions were allowed or allowable in earlier 

years.

Figuring the cost depletion deduction. 

Once you have figured your property's basis for 

depletion, the total recoverable units, and the 

number of units sold during the tax year, you 

can figure your cost depletion deduction by taking the following steps.

Step Action Result

 1 Divide your property's basis 

for depletion by total 

recoverable units.

Rate per unit.

 2 Multiply the rate per unit by 

units sold during the tax 

year.

Cost depletion 

deduction.

Cost depletion for ground water in Ogallala Formation. Farmers who extract ground 

water from the Ogallala Formation for irrigation 

are allowed cost depletion. Cost depletion is allowed when it can be demonstrated the ground 

water is being depleted and the rate of recharge 

is so low that, once extracted, the water would 

be lost to the taxpayer and immediately succeeding generations. To figure your cost depletion deduction, use the guidance provided in 

Revenue Procedure 66-11 in Cumulative Bulletin 1966-1.

Timber Depletion

Depletion takes place when you cut standing 

timber (including Christmas trees). You can figure your depletion deduction when the quantity 

of cut timber is first accurately measured in the 

process of exploitation.

Figuring the timber depletion deduction. To 

figure your cost depletion allowance, multiply 

the number of units of standing timber cut by 

your depletion unit.

Timber units. When you acquire timber 

property, you must make an estimate of the 

quantity of marketable timber that exists on the 

property. You measure the timber using board 

feet, log scale, cords, or other units. If you later 

determine that you have more or less units of 

timber, you must adjust the original estimate.

Depletion units. You figure your depletion 

unit each year by taking the following steps.

1. Determine your cost or the adjusted basis 

of the timber on hand at the beginning of 

the year.

2. Add to the amount determined in (1) the 

cost of any timber units acquired during 

the year and any additions to capital.

3. Figure the number of timber units to take 

into account by adding the number of timber units acquired during the year to the 

number of timber units on hand in the account at the beginning of the year and then 

adding (or subtracting) any correction to 

the estimate of the number of timber units 

remaining in the account.

4. Divide the result of (2) by the result of (3). 

This is your depletion unit.

When to claim timber depletion. Claim your 

depletion allowance as a deduction in the year 

of sale or other disposition of the products cut 

from the timber, unless you elect to treat the cutting of timber as a sale or exchange, as explained in chapter 8. Include allowable depletion for timber products not sold during the tax 

year the timber is cut as a cost item in the closing inventory of timber products for the year. 

The inventory is your basis for determining gain 

or loss in the tax year you sell the timber products.

Form T (Timber). Complete and attach Form 

T (Timber) to your income tax return if you are 

claiming a deduction for timber depletion, electing to treat the cutting of timber as a sale or exchange, or making an outright sale of timber. 

See the Instructions for Form T (Timber).

Example. You bought a farm that included 

standing timber. This year you determined that 

the standing timber could produce 300,000 

units when cut. At that time, the adjusted basis 

of the standing timber was $24,000. You then 

cut and sold 27,000 units. (You did not elect to 

treat the cutting of the timber as a sale or exchange.) your depletion for each unit for the 

year is $0.08 ($24,000 ÷ 300,000). Your deduction for depletion is $2,160 (27,000 × $0.08). If 

you had cut 27,000 units but sold only 20,000 

units during the year, your depletion for each 

unit would have remained at $0.08. However, 

Chapter 7 Depreciation, Depletion, and Amortization Page 47
your depletion deduction would have been 

$1,600 (20,000 × $0.08) for this year and you 

would have included the balance of $560 (7,000 

× $0.08) in the closing inventory for the year.

Percentage Depletion

You can use percentage depletion on certain 

mines, wells, and other natural deposits. You 

cannot use the percentage method to figure depletion for standing timber, soil, sod, dirt, or turf.

To figure percentage depletion, you multiply 

a certain percentage, specified for each mineral, by your gross income from the property 

during the year. You can find a complete list of 

the percentages in section 613(b) of the Internal 

Revenue Code.

Taxable income limit. The percentage depletion deduction cannot be more than 50% (100% 

for oil and gas property) of your taxable income 

from the property figured without the depletion 

deduction and the domestic production activities deduction.

The following rules apply when figuring your 

taxable income from the property for purposes 

of the taxable income limit.

• Do not deduct any net operating loss deduction from the gross income from the 

property.

• Corporations do not deduct charitable contributions from the gross income from the 

property.

• If, during the year, you disposed of an item 

of section 1245 property used in connection with the mineral property, reduce any 

allowable deduction for mining expenses 

by the part of any gain you must report as 

ordinary income that is allocable to the 

mineral property. See Regulations section 

1.613-5(b)(1) for information on how to figure the ordinary gain allocable to the property.

Amortization

Amortization is a method of recovering (deducting) certain capital costs over a fixed period of 

time. It is similar to the straight line method of 

depreciation. The amortizable costs discussed 

in this section include the startup costs of going 

into business, reforestation costs, the costs of 

pollution control facilities, and the costs of section 197 intangibles. See the Instructions for 

Form 4562 for more information on these topics.

Business Startup Costs

When you go into business, treat all costs you 

incur to get your business started as capital expenses. Capital expenses are a part of your basis in the business. Generally, you recover costs 

for particular assets through depreciation deductions. However, you generally cannot recover other costs until you sell the business or 

otherwise go out of business.

Startup costs are costs for creating an active 

trade or business or investigating the creation or 

acquisition of an active trade or business. 

Startup costs include any amounts paid or 

incurred in connection with any activity engaged 

in for profit and for the production of income before the trade or business begins, in anticipation 

of the activity becoming an active trade or business.

You can elect to currently deduct a limited 

amount of business startup costs paid or incurred after October 22, 2004. See Capital Expenses in chapter 4. If this election is made, any 

costs that are not currently deducted can be 

amortized.

Amortization period. The amortization period 

for business startup costs paid or incurred before October 23, 2004, is 60 months or more. 

For startup costs paid or incurred after October 

22, 2004, the amortization period is 180 

months. The period starts with the month your 

active trade or business begins.

Reporting requirements. To amortize your 

startup costs that are not currently deductible 

under the election to deduct, complete Part VI 

of Form 4562 and attach a statement containing 

any required information. See the Instructions 

for Form 4562.

Reforestation Costs

You can elect to currently deduct a limited 

amount of qualifying reforestation costs for each 

qualified timber property. See Capital Expenses 

in chapter 4. You can elect to amortize over 84 

months any amount not deducted. There is no 

annual limit on the amount you can elect to amortize. Reforestation costs are the direct costs 

of planting or seeding for forestation or reforestation.

Qualifying costs. Qualifying costs include 

only those costs you must otherwise capitalize 

and include in the adjusted basis of the property. They include costs for the following items.

• Site preparation.

• Seeds or seedlings.

• Labor.

• Tools.

• Depreciation on equipment used in planting and seeding.

If the government reimburses you for reforestation costs under a cost-sharing program, 

you can amortize these costs only if you include 

the reimbursement in your income.

Qualified timber property. Qualified timber 

property is property that contains trees in significant commercial quantities. It can be a woodlot 

or other site that you own or lease. The property 

qualifies only if it meets all the following requirements.

• It is located in the United States.

• It is held for the growing and cutting of timber you will either use in or sell for use in 

the commercial production of timber products.

• It consists of at least 1 acre planted with 

tree seedlings in the manner normally used 

in forestation or reforestation.

Qualified timber property does not include 

property on which you have planted shelter 

belts or ornamental trees, such as Christmas 

trees.

Amortization period. The 84-month amortization period starts on the first day of the first 

month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. You can claim amortization 

deductions for no more than 6 months of the 

first and last (eighth) tax years of the period.

How to make the election. To elect to amortize qualifying reforestation costs, enter your deduction in Part VI of Form 4562. Attach a statement containing any required information. See 

the Instructions for Form 4562.

Generally, you must make the election on a 

timely filed return (including extensions) for the 

year in which you incurred the costs. However, if 

you timely filed your return for the year without 

making the election, you can still make the election by filing an amended return within 6 months 

of the due date of your return (excluding extensions). Attach Form 4562 and the statement to 

the amended return and write “Filed pursuant to 

section 301.9100-2” on Form 4562. File the 

amended return at the same address you filed 

the original return.

Section 197 Intangibles

You must generally amortize over 15 years the 

capitalized costs of section 197 intangibles you 

acquired after August 10, 1993. You must amortize these costs if you hold the section 197 intangible in connection with your farming business or in an activity engaged in for the 

production of income. Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably 

over 15 years (180 months). You are not allowed any other depreciation or amortization 

deduction for an amortizable section 197 intangible.

Section 197 intangibles include the following 

assets.

• Goodwill.

• Patents.

• Copyrights.

• Designs.

• Formulas.

• Licenses.

• Permits.

• Covenants not to compete.

• Franchises.

• Trademarks.

See section 197 of the Internal Revenue Code 

for more information, including a complete list of 

assets that are section 197 intangibles and special rules.

Page 48 Chapter 7 Depreciation, Depletion, and Amortization
8.

Gains and 

Losses

Introduction

This chapter explains how to figure, and report 

on your tax return, your gain or loss on the disposition of your property or debt and whether 

such gain or loss is ordinary or capital. Ordinary 

gain is taxed at the same rates as wages and interest income, while net capital gain is generally 

taxed at a lower rate. This chapter discusses 

dispositions such as sales and exchanges (including like-kind exchanges and sales of capital 

and noncapital assets); hedging transactions; 

sale of livestock; cutting timber; sale of a farm; 

and cancellation of debt from foreclosures, repossessions, and abandonments.

Topics

This chapter discusses:

• Sales and exchanges

• Ordinary or capital gain or loss

Useful Items

You may want to see:

Publication

Tax Guide for Small Business

Selling Your Home

Sales and Other Dispositions of 

Assets

Investment Income and Expenses

Bankruptcy Tax Guide

Form (and Instructions)

Reduction of Tax Attributes Due to 

Discharge of Indebtedness (and 

Section 1082 Basis Adjustment)

Sh D (Frm 1040) Capital Gains and 

Losses

Sh F (Frm 1040) Profit or Loss From 

Farming

1099-Acquisition or Abandonment of 

Secured Property

1099-Cancellation of Debt

4797 Sales of Business Property

8824 Like-Kind Exchanges

8949 Sales and Other Dispositions of 

Capital Assets

8960 Net Investment Income 

Tax—Individuals, Estates, and Trusts

8995 Qualified Business Income 

Deduction Simplified Computation

 334

 523

 544

 550

 908

 982

 Sch D (Form 1040)

 Sch F (Form 1040)

 1099-A

 1099-C

 4797

 8824

 8949

 8960

 8995

Qualified Business Income 

Deduction

See chapter 16 for information about getting 

publications and forms.

Sales and Exchanges

If you sell, exchange, or otherwise dispose of 

your property, you usually have a gain or a loss. 

This section explains certain rules for determining whether any gain you have is taxable and 

whether any loss you have is deductible.

A sale is a transfer of property for money or 

a mortgage, a note, or other promise to pay 

money. An exchange is a transfer of property for 

other property or services.

Property sold or exchanged may include the 

sale of a portion of a MACRS asset. For details, 

see Partial Dispositions of MACRS Property in 

chapter 1 of Pub. 544.

Determining Gain or Loss

You usually realize a gain or loss when you sell 

or exchange property. If the amount you realize 

from a sale or exchange of property is more 

than its adjusted basis, you have a gain. If the 

adjusted basis of the property is more than the 

amount you realize, you have a loss.

Basis and adjusted basis. The basis of property you buy is usually its cost. The adjusted basis of the property is the basis plus certain additions and minus certain deductions. See 

chapter 6 for more information about basis and 

adjusted basis.

Amount realized. The amount you realize 

from a sale or exchange is the total of all money 

you receive plus the fair market value (FMV) 

(defined in chapter 6) of all property or services 

you receive. The amount you realize also includes any of your liabilities assumed by the 

buyer and any liabilities to which the property 

you transferred is subject, such as real estate 

taxes or a mortgage.

If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Pub. 544.

Amount recognized. Your gain or loss realized from a sale or exchange of certain property 

is usually a recognized gain or loss for tax purposes. A recognized gain is a gain you must include in gross income and report on your income tax return. A recognized loss is a loss you 

deduct from gross income. However, your gain 

or loss realized from the exchange of certain 

property may not be recognized for tax purposes. See Like-Kind Exchanges next. Also, a loss 

from the disposition of property held for personal use is not deductible.

Like-Kind Exchanges

Generally, if you exchange real property you use 

in your business or hold for investment solely for 

other business or investment real property of a 

like kind, you do not recognize the gain or loss 

from the exchange. However, if you also receive 

 8995-A non-like-kind property or money as part of the 

exchange, you recognize gain to the extent of 

the value of the other property or money you received in the exchange. You do not recognize 

any losses. In general, your gain or loss will not 

be recognized until you sell or otherwise dispose of the property you receive in the exchange. See Qualifying property, later, for details and exceptions.

The exchange of property for the same kind 

of property is the most common type of nontaxable exchange. To qualify for treatment as a 

like-kind exchange, the property traded and the 

property received must be both of the following 

(discussed later).

• Qualifying property.

• Like-kind property.

For more information on like-kind exchanges, 

see Pub. 544.

Multiple-party transactions. The like-kind exchange rules also apply to property exchanges 

that involve three- and four-party transactions. 

Any part of these multiple-party transactions 

can qualify as a like-kind exchange if it meets all 

the requirements described in this section.

Receipt of title from third party. If you receive property in a like-kind exchange and the 

other party who transfers the property to you 

does not give you the title, but a third party 

does, you can still treat this transaction as a 

like-kind exchange if it meets all the requirements.

Basis of property received. If you receive 

property in a like-kind exchange, generally the 

basis of the property will be the same as the basis of the property you gave up. See chapter 6 

for more information on basis.

Money paid. If, in addition to giving up 

like-kind property, you pay money in a like-kind 

exchange, the basis of the property received is 

the basis of the property given up, increased by 

the money paid.

Example. You own farmland with a barn. 

The combined adjusted basis of the properties 

is $70,000 and the FMV is $150,000. You are 

interested in another tract of farmland, with a 

larger barn, worth $200,000. You exchange your 

existing property and $50,000 in cash for the 

new property. Your basis in the new property is 

$120,000 ($70,000 adjusted basis in your old 

property plus $50,000 in cash paid).

Reporting the exchange. Report the exchange of like-kind property, even though no 

gain or loss is recognized, on Form 8824. The 

Instructions for Form 8824 explain how to report 

the details of the exchange.

If you have any recognized gain because 

you received money or unlike property, report it 

on Schedule D (Form 1040) or Form 4797, 

whichever applies. You may also have to report 

the recognized gain as ordinary income because of depreciation recapture on Form 4797. 

See chapter 9 for more information.

Qualifying property. In a like-kind exchange, 

both the real property you give up and the real 

property you receive must be held by you for 

investment or for productive use in your trade or 

Chapter 8 Gains and Losses Page 49
business. The nonrecognition rules for like-kind 

exchanges apply only to exchanges of real 

property (as defined in Treasury Regulations 

section 1.1031(a)-3). The following are examples of property that may qualify.

• Land and improvements to land.

• Unsevered natural products of land.

• Water and air space super adjacent to 

land.

• An intangible interest in real property including fee ownership; co-ownership; a 

leasehold; an option to acquire real property; an easement; and stock in a cooperative housing corporation.

• Real property that, on the date it is transferred in an exchange, is real property under the law of the state or local jurisdiction 

in which that property is located.

Nonqualifying property. The rules for 

like-kind exchanges do not apply to exchanges 

of the following property.

• Real property used for personal purposes, 

such as your home.

• Real property held primarily for sale.

• Any personal or intangible property.

You may have a nontaxable exchange under 

other rules. See Other Nontaxable Exchanges 

in chapter 1 of Pub. 544.

Special rule for stock in a mutual ditch, 

reservoir, or irrigation company. For purposes of real property, stock in a mutual ditch, reservoir, or irrigation company is treated as real 

property if both of the following conditions are 

met at the time of the trade.

1. The mutual ditch, reservoir, or irrigation 

company is an organization described in 

section 501(c)(12)(A) of the Internal Revenue Code (determined without regard to 

the percentage of its income that is collected from its members for the purpose of 

meeting losses and expenses).

2. The shares in the company have been recognized by the highest court of the state in 

which the company was organized or by 

applicable state statute as constituting or 

representing real property or an interest in 

real property.

Like-kind property. To qualify as a nontaxable 

exchange, the properties exchanged must be of 

like kind. Like-kind properties are properties of 

the same nature or character, even if they differ 

in grade or quality. Generally, real property exchanged for real property qualifies as an exchange of like-kind property. For example, an 

exchange of city property for farm property or 

improved property for unimproved property is a 

like-kind exchange.

Note. Whether you engaged in a like-kind 

exchange depends on an analysis of each asset involved in the exchange.

Partially nontaxable exchange. If, in addition 

to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. You are taxed on the gain you realize, 

but only to the extent of the money and the FMV 

of the unlike property you receive. If you realize 

a loss on the exchange, no loss is deductible. 

However, see Unlike property given up below.

Example 1. You trade farmland that cost 

$130,000 for $10,000 cash and other land to be 

used in farming with an FMV of $150,000. You 

have a realized gain of $30,000 ($150,000 FMV 

of new land + $10,000 cash − $130,000 basis of 

old farmland = $30,000 realized gain). However, 

only $10,000, the cash received, is recognized 

gain (included in income).

Example 2. Assume the same facts as in 

Example 1, except that, instead of money, you 

received a tractor with an FMV of $10,000. Your 

recognized gain is still limited to $10,000, the 

value of the tractor (the unlike property).

Example 3. Assume in Example 1 that the 

FMV of the land you received was only 

$115,000. You have a realized loss of $5,000 

($115,000 FMV + $10,000 cash – $130,000 basis of old farmland = $5,000 loss). However, 

your $5,000 loss is not recognized.

Unlike property given up. If, in addition to 

like-kind property, you give up unlike property, 

you must recognize gain or loss on the unlike 

property you give up. The gain or loss is the difference between the FMV of the unlike property 

and the adjusted basis of the unlike property.

Liabilities. If, in a like-kind exchange, you 

transfer property subject to debt, the debt transferred is considered the same as the receipt of 

unlike property. For purposes of figuring your realized gain, add any liabilities assumed by the 

other party to your amount realized. Subtract 

any liabilities of the other party that you assume 

from your amount realized. For more information, see Partial Nontaxable Exchanges in chapter 1 of Pub. 544.

Like-kind exchanges between related persons. Special rules apply to like-kind exchanges between related persons. These rules 

affect both direct and indirect exchanges. Under 

these rules, if either person disposes of the 

property within 2 years after the exchange, the 

exchange is disqualified from nonrecognition 

treatment. The gain or loss on the original exchange must be recognized as of the date of 

the later disposition. The 2-year holding period 

begins on the date of the last transfer of property that was part of the like-kind exchange.

Related persons. Under these rules, related persons include, for example, you and a 

member of your family (spouse, sibling, parent, 

child, etc.), you and a corporation in which you 

have more than 50% ownership, you and a partnership in which you directly or indirectly own 

more than a 50% interest of the capital or profits, and two partnerships in which you directly or 

indirectly own more than 50% of the capital interests or profits.

For the complete list of related persons, see 

Related persons in chapter 2 of Pub. 544.

If you transfer property using a qualified 

intermediary involving related persons, 

see Multiple-party transactions involving related persons in chapter 1 of Pub. 544.

CAUTION

!

Example. You own real property used in 

your business. Your sibling owns real property 

used in their business. In December 2022, you 

exchanged your property plus $15,000 for your 

sibling’s property. At that time, the FMV of your 

real property was $200,000 and its adjusted basis was $65,000. The FMV of your sibling’s real 

property was $215,000 and its adjusted basis 

was $70,000. You realized a gain of $135,000 

(the $215,000 FMV of the real property received, minus the $15,000 you paid, minus your 

$65,000 adjusted basis in the property). Your 

sibling realized a gain of $145,000 (the 

$200,000 FMV of your real property, plus the 

$15,000 you paid, minus their $70,000 adjusted 

basis in the property).

However, because this was a like-kind exchange and you received no cash or 

non-like-kind property in the exchange, you recognize no gain on the exchange. Your basis in 

the real property you received is $80,000 (the 

$65,000 adjusted basis of the real property 

given up plus the $15,000 you paid). Your sibling recognizes gain only to the extent of the 

money they received, $15,000. The basis in the 

real property received was $70,000 (the 

$70,000 adjusted basis of the real property exchanged minus the $15,000 received, plus the 

$15,000 gain recognized).

In 2023, you sold the real property you received to a third party for $220,000. Because 

you sold property you acquired from a related 

party (your sibling) within 2 years after the exchange with your sibling, that exchange is disqualified from nonrecognition treatment and the 

deferred gain must be recognized on your 2023 

return. On your 2023 tax return, you must report 

your $135,000 gain on the 2022 exchange. You 

must also report the gain on the 2023 sale on 

your 2023 return. Additionally, for 2023, your 

sibling must report a gain of $130,000, which is 

the $145,000 gain on the 2022 exchange, minus the $15,000 recognized in 2022. Your sibling’s adjusted basis in the property is increased 

to $200,000 ($70,000 basis plus the $130,000 

gain recognized).

Exceptions to the rules for related persons. The following property dispositions are 

excluded from these rules.

• Dispositions due to the death of either related person.

• Involuntary conversions.

• Dispositions where it is established to the 

satisfaction of the IRS that neither the exchange nor the disposition has, as a main 

purpose, the avoidance of federal income 

tax.

Multiple property exchanges. Under the 

like-kind exchange rules, you must generally 

make a property-by-property comparison to figure your recognized gain and the basis of the 

property you receive in the exchange. However, 

for exchanges of multiple properties, you do not 

make a property-by-property comparison if you 

do either of the following.

• Transfer and receive properties in two or 

more exchange groups.

• Transfer or receive more than one property 

within a single exchange group.

For more information, see Multiple Property 

Exchanges in chapter 1 of Pub. 544.

Page 50 Chapter 8 Gains and Losses
Deferred exchange. A deferred exchange for 

like-kind property may qualify for nonrecognition 

of gain or loss. A deferred exchange is an exchange in which you transfer property you use 

in business or hold for investment and later receive like-kind property you will use in business 

or hold for investment. The property you receive 

is replacement property. The transaction must 

be an exchange of property for property rather 

than a transfer of property for money used to 

buy replacement property. In addition, the replacement property will not be treated as 

like-kind property unless certain identification 

and receipt requirements are met.

For more information, see Deferred Exchange in chapter 1 of Pub. 544.

Transfer to Spouse

Generally, no gain or loss is recognized on a 

transfer of property from an individual to (or in 

trust for the benefit of) a spouse, or a former 

spouse if incident to divorce. This rule does not 

apply in the following situations.

• Your spouse or former spouse is a nonresident alien (unless special elections have 

been made).

• Certain transfers in trust.

• Certain stock redemptions under a divorce 

or separation instrument or a valid written 

agreement.

For more information and special rules for 

transfers of property incident to divorce, see 

Property Settlements in Pub. 504, Divorced or 

Separated Individuals.

Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. The 

recipient's basis in the property will be the same 

as the adjusted basis of the giver immediately 

before the transfer. This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater 

than either its FMV at the time of transfer or any 

consideration paid by the recipient. This rule 

applies for determining loss as well as gain. Any 

gain recognized on a transfer in trust increases 

the basis.

Ordinary or Capital Gain 

or Loss

Generally, you will have a capital gain or loss if 

you sell or exchange a capital asset (defined 

below). You may also have a capital gain if your 

section 1231 transactions result in a net gain. 

See Section 1231 Gains and Losses in

chapter 9.

To figure your net capital gain or loss, you 

must classify your gains and losses as either ordinary or capital, and your capital gains or losses as either short term or long term.

Your net capital gains may be taxed at a 

lower tax rate than ordinary income. See Capital 

Gains Tax Rates, later. Your deduction for a net 

capital loss may be limited. See Treatment of 

Capital Losses, later.

Capital Assets

Almost everything you own and use for personal 

purposes, pleasure, or investment is a capital 

asset.

The following items are examples of capital 

assets.

• A home owned and occupied by you and 

your family.

• Household furnishings.

• A car used for pleasure. If your car is used 

both for pleasure and for farm business, it 

is partly a capital asset and partly a noncapital asset, defined later.

• Stocks and bonds. However, there are special rules for gains on qualified small business stock. For more information on this 

subject, see Gains on Qualified Small 

Business Stock and Losses on Section 

1244 (Small Business) Stock in chapter 4 

of Pub. 550.

Personal-use property. Gain from a sale or 

exchange of personal-use property is a capital 

gain and is taxable. Loss from the sale or exchange of personal-use property is not deductible. You can deduct a loss relating to personal-use property only if it results from a 

casualty or theft. For information on casualties 

and thefts, see chapter 11.

Long and Short Term

Where you report a capital gain or loss depends 

on how long you own the asset before you sell 

or exchange it. The time you own an asset before disposing of it is the holding period.

If you hold a capital asset 1 year or less, the 

gain or loss resulting from its disposition is short 

term. Report it in Part I of Form 8949, and/or 

Schedule D (Form 1040), as applicable. If you 

hold a capital asset longer than 1 year, the gain 

or loss resulting from its disposition is long term. 

Report it in Part II of Form 8949 and/or Schedule D, as applicable. See the Instructions for 

Form 8949 and the Instructions for Schedule D 

(Form 1040) for more information, including 

when Form 8949 is required. Also see chapter 4 

of Pub. 544.

Holding period. To figure if you held property 

longer than 1 year, start counting on the day after the day you acquired the property. The day 

you disposed of the property is part of your 

holding period.

Example. If you bought an asset on June 

19, 2022, you should start counting on June 20, 

2022. If you sold the asset on June 19, 2023, 

your holding period is not longer than 1 year, 

but if you sold it on June 20, 2023, your holding 

period is longer than 1 year.

Livestock. See Holding period under Livestock, later.

Inherited property. If you inherit property, 

you are considered to have held the property 

longer than 1 year, regardless of how long you 

actually held it. This rule does not apply to livestock used in a farm business. See Holding period under Livestock, later.

Nonbusiness bad debt. A nonbusiness 

bad debt is a short-term capital loss, deductible 

in the year the debt becomes worthless. See 

chapter 4 of Pub. 550.

Nontaxable exchange. If you acquire an 

asset in exchange for another asset and your 

basis for the new asset is figured, in whole or in 

part, by using your basis in the old property, the 

holding period of the new property includes the 

holding period of the old property. That is, it begins on the same day as your holding period for 

the old property.

Gift. If you receive a gift of property and 

your basis in it is figured using the donor's basis, your holding period includes the donor's 

holding period.

Real property. To figure how long you held 

real property, start counting on the day after you 

received title to it or, if earlier, on the day after 

you took possession of it and assumed the burdens and privileges of ownership.

However, taking possession of real property 

under an option agreement is not enough to 

start the holding period. The holding period 

cannot start until there is an actual contract of 

sale. The holding period of the seller cannot 

end before that time.

Figuring Net Gain or Loss

The totals for short-term capital gains and losses and the totals for long-term capital gains 

and losses must be figured separately.

Net short-term capital gain or loss. Combine your short-term capital gains and losses. 

Do this by adding all of your short-term capital 

gains. Then add all of your short-term capital 

losses. Subtract the lesser total from the 

greater. The difference is your net short-term 

capital gain or loss.

Net long-term capital gain or loss. Follow 

the same steps to combine your long-term capital gains and losses. The result is your net 

long-term capital gain or loss.

Net gain. If the total of your capital gains is 

more than the total of your capital losses, the 

difference is taxable. However, part of your gain 

(but not more than your net capital gain) may be 

taxed at a lower rate than the rate of tax on your 

ordinary income. See Capital Gains Tax Rates, 

later.

Net loss. If the total of your capital losses is 

more than the total of your capital gains, the difference is deductible. But there are limits on 

how much loss you can deduct and when you 

can deduct it. See Treatment of Capital Losses 

next.

Treatment of Capital Losses

If your capital losses are more than your capital 

gains, you must claim the difference even if you 

do not have ordinary income to offset it. For taxpayers other than corporations, the yearly limit 

on the capital loss you can deduct is $3,000 

($1,500 if you are married and file a separate 

return). If your other income is low, you may not 

be able to use the full $3,000. The part of the 

Chapter 8 Gains and Losses Page 51
$3,000 you cannot use becomes part of your 

capital loss carryover (discussed next).

Capital loss carryover. Generally, you have a 

capital loss carryover if either of the following 

situations applies to you.

• Your net loss on Schedule D (Form 1040) 

is more than the yearly limit.

• Your taxable income is less than zero.

If either of these situations applies to you for 

2023, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Pub. 550 

to figure the amount you can carry over to 2024.

To figure your capital loss carryover 

from 2023 to 2024, you will need a 

copy of your 2023 Form 1040 or Form 

1040-SR and Schedule D (Form 1040).

Capital Gains Tax Rates

The tax rates that apply to a net capital gain are 

generally lower than the tax rates that apply to 

other income. These lower rates are called the 

maximum capital gains rates.

The term “net capital gain” means the 

amount by which your net long-term capital gain 

for the year is more than your net short-term 

capital loss.

See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Also 

see Pub. 550.

Noncapital Assets

Generally, noncapital assets include property 

such as inventory and depreciable property 

used in a trade or business. A list of properties 

that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Noncapital assets used in farming are discussed below.

Property held for sale in the ordinary 

course of your farm business. Property you 

hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is 

a noncapital asset. Gain or loss from sales or 

other dispositions of this property is reported on 

Schedule F (Form 1040) (not on Schedule D 

(Form 1040) or Form 4797). The treatment of 

this property is discussed in chapter 3.

Land and depreciable properties. Land and 

depreciable property you use in farming are not 

capital assets. Noncapital assets also include 

livestock held for draft, breeding, dairy, or sporting purposes. However, your gains and losses 

from sales and exchanges of your farmland and 

depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated 

as capital or ordinary gains and losses. The 

sales of these business assets are reported on 

Form 4797. See chapter 9 for more information.

Hedging

Hedging transactions are transactions that you 

enter into in the normal course of business primarily to manage the risk of interest rate or 

TIP

price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Ordinary property or obligations are those that cannot produce capital gain 

or loss if sold or exchanged.

A commodity futures contract is a standardized, exchange-traded contract for the sale or 

purchase of a fixed amount of a commodity at a 

future date for a fixed price. The holder of an 

option on a futures contract has the right (but 

not the obligation) for a specified period of time 

to enter into a futures contract to buy or sell at a 

particular price. A forward contract is much different from a futures contract because its terms 

are not standardized and it is not exchange traded.

Businesses may enter into commodity futures contracts or forward contracts and may 

acquire options on commodity futures contracts 

as either of the following.

• Hedging transactions.

• Transactions that are not hedging transactions.

Futures transactions with exchange-traded 

commodity futures contracts that are not hedging transactions generally result in capital gain 

or loss and are subject to the mark-to-market 

rules discussed in Pub. 550. There is a limit on 

the amount of capital losses you can deduct 

each year. Hedging transactions are not subject 

to the mark-to-market rules and the deduction 

for hedging losses is not limited.

If, as a farmer-producer, to protect yourself 

from the risk of unfavorable price fluctuations, 

you enter into commodity forward contracts, futures contracts, or options on futures contracts 

and the contracts cover an amount of the commodity within your range of production, the 

transactions are generally considered hedging 

transactions. They can take place at any time 

you have the commodity under production, 

have it on hand for sale, or reasonably expect to 

have it on hand.

The gain or loss on the termination of these 

hedges is generally ordinary gain or loss. Farmers who file their income tax returns on the cash 

method report any profit or loss on the hedging 

transaction on Schedule F, line 8.

Gains or losses from hedging transactions 

that hedge supplies of a type regularly used or 

consumed in the ordinary course of your trade 

or business may be ordinary gains or losses. 

Examples include fuel and feed.

If you have numerous transactions in 

the commodity futures market during 

the year, you must be able to show 

which transactions are hedging transactions. 

Clearly identify a hedging transaction on your 

books and records before the end of the day 

you entered into the transaction. It may be helpful to have separate brokerage accounts for 

your hedging and speculation transactions.

Retain the identification of each hedging 

transaction with your books and records. Also, 

identify the item(s) or aggregate risk that is being hedged in your records. Although the identification of the hedging transaction must be 

made before the end of the day it was entered 

into, you have 35 days after entering into the 

RECORDS

transaction to identify the hedged item(s) or 

risk.

For more information on the tax treatment of 

futures and options contracts, see Commodity 

Futures and Section 1256 Contracts Marked to 

Market in Pub. 550.

Accounting methods for hedging transactions. The accounting method you use for a 

hedging transaction must clearly reflect income. 

This means that your accounting method must 

reasonably match the timing of income, deduction, gain, or loss from a hedging transaction 

with the timing of income, deduction, gain, or 

loss from the item or items being hedged. There 

are requirements and limits on the method you 

can use for certain hedging transactions. See 

Regulations section 1.446-4(e) for those requirements and limits.

Hedging transactions must be accounted for 

under the rules stated above unless the transaction is subject to mark-to-market accounting 

under section 475 or you use an accounting 

method other than the following methods.

1. Cash method.

2. Farm-price method.

3. Unit-livestock-price method.

Once you adopt a method, you must apply it 

consistently and must have IRS approval before 

changing it.

Your books and records must describe the 

accounting method used for each type of hedging transaction. They must also contain any additional identification necessary to verify the application of the accounting method you used for 

the transaction. You must make the additional 

identification no more than 35 days after entering into the hedging transaction.

Example of a hedging transaction. You file 

your income tax returns on the cash method. 

On July 2, you anticipate a yield of 50,000 bushels of corn this year. The December futures 

price is $5.75 a bushel, but there are indications 

that by harvest time the price will drop. To protect yourself against a drop in the price, you enter into the following hedging transaction. You 

sell 10 December futures contracts of 5,000 

bushels each for a total of 50,000 bushels of 

corn at $5.75 a bushel.

The price did not drop as anticipated but 

rose to $6 a bushel. In November, you sell your 

crop at a local elevator for $6 a bushel. You also 

close out your futures position by buying 10 December contracts for $6 a bushel. You paid a 

broker's commission of $1,400 ($70 per contract) for the complete in-and-out position in the 

futures market.

The result is that the price of corn rose 25 

cents a bushel and the actual selling price is $6 

a bushel. Your loss on the hedge is 25 cents a 

bushel. In effect, the net selling price of your 

corn is $5.75 a bushel.

Report the results of your futures transactions and your sale of corn separately on 

Schedule F. See the Instructions for Schedule F 

(Form 1040).

The loss on your futures transactions is 

$13,900, figured as follows.

Page 52 Chapter 8 Gains and Losses
July 2—Sold December corn futures 

(50,000 bu. @ $5.75) ............... $287,500

November 6—Bought December corn 

futures (50,000 bu. @ $6 plus $1,400 

broker's commission) ...............

301,400

Futures loss................ ($13,900)

This loss is reported as a negative figure on 

Schedule F, Part I, line 8, as other income.

The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. × $6). Report it on Schedule F, Part I, line 2, as income 

from sales of products you raised.

Assume you were right and the price went 

down 25 cents a bushel. In effect, you would still 

net $5.75 a bushel, figured as follows.

Sold cash corn, per bushel ............ $5.50

Gain on hedge, per bushel ............ .25

Net price, per bushel ........... $5.75

The gain on your futures transactions would 

have been $11,100, figured as follows.

July 2—Sold December corn futures (50,000 

bu. @ $5.75) ...................... $287,500

November 6—Bought December corn 

futures (50,000 bu. @ $5.50 plus $1,400 

broker's commission) ................

276,400

Futures gain................ $11,100

The $11,100 is reported on Schedule F, Part I, 

line 8, as other income.

The proceeds from the sale of your corn at 

the local elevator, $275,000 (50,000 bu. x 

$5.50), are reported on Schedule F, Part I, 

line 2, as income from sales of products you 

raised.

Livestock

This part discusses the sale or exchange of livestock used in your farm business. Gain or loss 

from the sale or exchange of this livestock may 

qualify as a section 1231 gain or loss. However, 

any part of the gain that is ordinary income from 

the recapture of depreciation is not included as 

section 1231 gain. See chapter 9 for more information on section 1231 gains and losses and 

the recapture of depreciation under section 

1245.

The rules discussed here do not apply 

to the sale of livestock held primarily for 

sale to customers. The sale of this livestock is reported on Schedule F. See chapter 3 

for more information.

Also, special rules apply to sales or exchanges 

caused by weather-related conditions. See 

Sales Caused by Weather-Related Conditions 

in chapter 3 for more information.

Holding period. The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if 

you held the livestock for 12 months or more (24 

months or more for horses and cattle).

Livestock. For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and 

other mammals. Also, for section 1231 transactions, livestock does not include chickens, turCAUTION

!

keys, pigeons, geese, emus, ostriches, rheas, 

or other birds, fish, frogs, reptiles, etc.

Livestock used in farm business. If livestock is held primarily for draft, breeding, dairy, 

or sporting purposes, it is considered to be 

used in your farm business. The purpose for 

which an animal is held is ordinarily determined 

by a farmer's actual use of the animal. An animal is not held for draft, breeding, dairy, or 

sporting purposes merely because it is suitable 

for that purpose, or because it is held for sale to 

other persons for use by them for that purpose. 

However, a draft, breeding, dairy, or sporting 

purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, 

or unfitness of the animal.

Example 1. You discover an animal that 

you intend to use for breeding purposes is sterile. You dispose of it within a reasonable time. 

This animal was held for breeding purposes.

Example 2. You retire and sell your entire 

herd, including young animals that you would 

have used for breeding or dairy purposes had 

you remained in business. These young animals were held for breeding or dairy purposes. 

Also, if you sell young animals to reduce your 

breeding or dairy herd because of drought, 

these animals are treated as having been held 

for breeding or dairy purposes. See Sales 

Caused by Weather-Related Conditions in 

chapter 3.

Example 3. You are in the business of raising hogs for slaughter. Customarily, before selling your sows, you obtain a single litter of pigs 

that you will raise for sale. You sell the brood 

sows after obtaining the litter. Even though you 

hold these brood sows for ultimate sale to customers in the ordinary course of your business, 

they are considered to be held for breeding purposes.

Example 4. You are in the business of raising registered cattle for sale to others for use as 

breeding cattle. The business practice is to 

breed the cattle before sale to establish their fitness as registered breeding cattle. Your use of 

the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Such use does not demonstrate that you are holding the cattle for 

breeding purposes, but rather you are holding 

them primarily for sale to customers. However, 

those cattle you held as additions or replacements to your own breeding herd to produce 

calves are considered to be held for breeding 

purposes, even though they may not actually 

have produced calves. The same applies to hog 

and sheep breeders.

Example 5. You breed, raise, and train 

horses for racing purposes. Every year, you cull 

horses from your racing stable. In 2023, you decided that to prevent your racing stable from 

getting too large to be effectively operated, you 

must cull six horses that had been raced at public tracks in 2022. These horses are all considered held for sporting purposes.

Figuring gain or loss on the cash method. 

Farmers or ranchers who use the cash method 

of accounting figure their gain or loss on the 

sale of livestock used in their farming business 

as follows.

Raised livestock. Gain on the sale of 

raised livestock is generally the gross sales 

price reduced by any expenses of the sale. Expenses of sale include sales commissions, 

freight or hauling from farm to commission company, and other similar expenses. The basis of 

the animal sold is zero if the costs of raising it 

were deducted during the years the animal was 

being raised. However, if you are required to 

use the accrual accounting method, see Uniform Capitalization Rules in chapter 6.

Purchased livestock. The gross sales 

price minus your adjusted basis and any expenses of sale is the gain or loss.

Example. A farmer sold a breeding cow on 

January 8, 2023, for $1,250. Expenses of the 

sale were $125. The cow was bought July 2, 

2019, for $1,300. Depreciation (not less than 

the amount allowable) was $1,225.

Gross sales price .................... $1,250

Cost (basis) ................. $1,300

Minus: Depreciation deduction .... 1,225

Unrecovered cost

(adjusted basis) .............. $ 75

Expense of sale .............. 125 200

Gain realized ................ $1,050

Converted Wetland and

Highly Erodible Cropland

Special rules apply to dispositions of land converted to farming use after March 1, 1986. Any 

gain realized on the disposition of converted 

wetland or highly erodible cropland is treated as 

ordinary income. Any loss on the disposition of 

such property is treated as a long-term capital 

loss.

Converted wetland. This is generally land that 

was drained or filled to make the production of 

agricultural commodities possible. It includes 

converted wetland held by the person who originally converted it or held by any other person 

who used the converted wetland at any time after conversion for farming.

A wetland (before conversion) is land that 

meets all the following conditions.

• It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long 

enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants 

growing in water.

• It is saturated by surface or groundwater at 

a frequency and duration sufficient to support mostly plants that are adapted for life 

in saturated soil.

• It supports, under normal circumstances, 

mostly plants that grow in saturated soil.

Highly erodible cropland. This is cropland 

subject to erosion that you used at any time for 

farming purposes other than grazing animals. 

Generally, highly erodible cropland is land 

Chapter 8 Gains and Losses Page 53
currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Highly erodible cropland also 

includes land that would have an excessive 

average annual erosion rate in relation to the 

soil loss tolerance level, as determined by the 

Department of Agriculture.

Successor. Converted wetland or highly erodible cropland is also land held by any person 

whose basis in the land is figured by reference 

to the adjusted basis of a person in whose 

hands the property was converted wetland or 

highly erodible cropland.

Timber

Standing timber you held as investment property is a capital asset. Gain or loss from its sale 

is capital gain or loss reported on Form 8949 

and Schedule D (Form 1040), as applicable. If 

you held the timber primarily for sale to customers, it is not a capital asset. Gain or loss on its 

sale is ordinary business income or loss. It is reported on Schedule F, line 1 (if purchased timber) or line 2 (if raised timber).

Farmers who cut timber on their land and 

sell it as logs, firewood, or pulpwood usually 

have no cost or other basis for that timber if no 

allocation was made at the time of acquisition. 

Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc., are ordinary farm income and expenses reported on 

Schedule F.

Different rules apply if you owned the timber 

longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a 

cutting contract, discussed below.

Timber considered cut. Timber is considered 

cut on the date when, in the ordinary course of 

business, the quantity of felled timber is first 

definitely determined. This is true whether the 

timber is cut under contract or whether you cut it 

yourself.

Christmas trees. Evergreen trees, such as 

Christmas trees, that are more than 6 years old 

when severed from their roots and sold for ornamental purposes are included in the term “timber.” They qualify for both rules discussed below.

Election to treat cutting as a sale or exchange. Under the general rule, the cutting of 

timber results in no gain or loss. It is not until a 

sale or exchange occurs that gain or loss is realized. But if you owned or had a contractual 

right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in 

the year it is cut. Even though the cut timber is 

not actually sold or exchanged, you report your 

gain or loss on the cutting for the year the timber is cut. Any later sale results in ordinary business income or loss. See the example below.

To elect this treatment, you must:

1. Own or hold a contractual right to cut the 

timber for a period of more than 1 year before it is cut, and

2. Cut the timber for sale or use in your trade 

or business.

Making the election. You make the election on your return for the year the cutting takes 

place by including in income the gain or loss on 

the cutting and including a computation of your 

gain or loss. You do not have to make the election in the first year you cut timber. You can 

make it in any year to which the election would 

apply. If the timber is partnership property, the 

election is made on the partnership return. This 

election cannot be made on an amended return.

Once you have made the election, it remains 

in effect for all later years unless you revoke it.

Election under section 631(a) may be revoked. If you previously elected for any tax 

year ending before October 23, 2004, to treat 

the cutting of timber as a sale or exchange under section 631(a), you may revoke this election 

without the consent of the IRS for any tax year 

ending after October 22, 2004. The prior election (and revocation) is disregarded for purposes of making a subsequent election. See Form 

T (Timber), Forest Activities Schedule, for more 

information.

Gain or loss. Your gain or loss on the cutting of standing timber is the difference between 

its adjusted basis for depletion and its FMV on 

the first day of your tax year in which it is cut. 

The FMV becomes your basis in the cut timber, 

and a later sale of the cut timber, including any 

by-product or tree tops, will result in ordinary 

business income or loss.

Your adjusted basis for depletion of cut timber is based on the number of units (board feet, 

log scale, or other units) of timber cut during the 

tax year and considered to be sold or exchanged. Your adjusted basis for depletion is 

also based on the depletion unit of timber in the 

account used for the cut timber, and should be 

figured in the same manner as shown in section 

611 and Regulations section 1.611-3.

Depletion of timber is discussed in chapter 7.

Example. In April 2023, you owned 4,000 

MBF (1,000 board feet) of standing timber longer than 1 year. It had an adjusted basis for depletion of $40 per MBF. You are a calendar year 

taxpayer. On January 1, 2023, the timber had 

an FMV of $350 per MBF. It was cut in April for 

sale. On your 2023 tax return, you elect to treat 

the cutting of the timber as a sale or exchange. 

You report the difference between the FMV and 

your adjusted basis for depletion as a gain. This 

amount is reported on Form 4797 along with 

your other section 1231 gains and losses to figure whether it is treated as a capital gain or as 

ordinary gain. You figure your gain as follows.

FMV of timber January 1, 2023 ....... $1,400,000

Minus: Adjusted basis for depletion .... 160,000

Section 1231 gain............ $1,240,000

Outright sales of timber. Outright sales of 

timber by landowners qualify for capital gains 

treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). However, for outright sales, the date of disposal is 

not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of 

disposal, later).

Cutting contract. You must treat the disposal 

of standing timber under a cutting contract as a 

section 1231 transaction if all the following apply to you.

• You are the owner of the timber.

• You held the timber longer than 1 year before its disposal.

• You kept an economic interest in the timber.

You have kept an economic interest in 

standing timber if, under the cutting contract, 

the expected return on your investment is conditioned on the cutting of the timber.

The difference between the amount realized 

from the disposal of the timber and its adjusted 

basis for depletion is treated as gain or loss on 

its sale. Include this amount on Form 4797 

along with your other section 1231 gains or losses.

Date of disposal. The date of disposal is 

the date the timber is cut. However, for outright 

sales by landowners or if you receive payment 

under the contract before the timber is cut, you 

can elect to treat the date of payment as the 

date of disposal.

This election applies only to figure the holding period of the timber. It has no effect on the 

time for reporting gain or loss (generally when 

the timber is sold or exchanged).

To make this election, attach a statement to 

the tax return filed by the due date (including 

extensions) for the year payment is received. 

The statement must identify the advance payments subject to the election and the contract 

under which they were made.

If you timely filed your return for the year you 

received payment without making the election, 

you can still make the election by filing an 

amended return within 6 months after the due 

date for that year's return (excluding extensions). Attach the statement to the amended return and enter “Filed pursuant to section 

301.9100-2” at the top of the statement. File the 

amended return at the same address the original return was filed.

Owner. An owner is any person who owns 

an interest in the timber, including a sublessor 

and the holder of a contract to cut the timber. 

You own an interest in timber if you have the 

right to cut it for sale on your own account or for 

use in your business.

Tree stumps. Tree stumps are a capital asset if 

they are on land held by an investor who is not 

in the timber or stump business as a buyer, 

seller, or processor. Gain from the sale of 

stumps sold in one lot by such a holder is taxed 

as a capital gain. However, tree stumps held by 

timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Gain from the sale of 

stumps in lots or tonnage by such operators is 

taxed as ordinary income.

See Form T (Timber) and its separate instructions for more information about dispositions of timber.

Page 54 Chapter 8 Gains and Losses
Sale of a Farm

The sale of your farm may involve the sale of 

both nonbusiness property (your home) and 

business property (the land and buildings used 

in the farm operation and perhaps machinery 

and livestock). If any gain from the sale includes 

a gain from the sale of your home, you may be 

allowed to exclude the gain on your home. For 

more information, see Pub. 523.

The gain on the sale of your business property is taxable. A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Your taxable gain or 

loss on the sale of property used in your farm 

business is taxed under the rules for section 

1231 transactions. See chapter 9. Losses from 

personal-use property, other than casualty or 

theft losses, are not deductible. If you receive 

payments for your farm in installments, certain 

gains may be eligible to be taxed over the period of years the payments are received. See 

chapter 10 for information about installment 

sales.

When you sell your farm, the gain or loss on 

each asset is figured separately. The tax treatment of gain or loss on the sale of each asset is 

determined by the classification of the asset. 

Each of the assets sold must be classified as 

one of the following.

• Capital asset held 1 year or less.

• Capital asset held longer than 1 year.

• Property (including real estate) used in 

your business and held 1 year or less (including draft, breeding, dairy, and sporting 

animals held less than the holding periods 

discussed earlier under Livestock).

• Property (including real estate) used in 

your business and held longer than 1 year 

(including only draft, breeding, dairy, and 

sporting animals held for the holding periods discussed earlier).

• Property held primarily for sale or which is 

of the kind that would be included in inventory if on hand at the end of your tax year.

Allocation of consideration paid for a farm. 

The sale of a farm for a lump sum is considered 

a sale of each individual asset rather than a single asset. If the group of assets sold constitutes 

a trade or business, the residual method must 

be used. This method determines gain or loss 

from the transfer of each asset. It also determines the buyer's basis in the business assets. 

For more information, see Sale of a Business in 

chapter 2 of Pub. 544.

Property used in farm operation. The rules 

for excluding the gain on the sale of your home, 

described later under Sale of your home, do not 

apply to the property used for your farming business. Recognized gains and losses on business property must be reported on your return 

for the year of the sale. If the property was held 

longer than 1 year, it may qualify for section 

1231 treatment (see chapter 9).

Example. You sell your farm, including your 

main home, which you have owned since December 2006. You realize gain on the sale as 

follows.

Farm Farm

With Home Without

Home Only Home

Selling price .... $382,000 $158,000 $224,000

Cost (or other 

basis) ........

240,000 110,000 130,000

Gain ....... $142,000 $48,000 $94,000

You must report the $94,000 gain from the 

sale of the property used in your farm business. 

All or a part of that gain may have to be reported 

as ordinary income from the recapture of depreciation or soil and water conservation expenses. 

Treat the balance as section 1231 gain.

The $48,000 gain from the sale of your 

home is not taxable if you meet the requirements explained later under Sale of your home.

Partial sale. If you sell only part of your farm, 

you must report any recognized gain or loss on 

the sale of that part on your tax return for the 

year of the sale. You cannot wait until you have 

sold enough of the farm to recover its entire cost 

before reporting gain or loss. For a detailed discussion on installment sales, see Pub. 544.

Adjusted basis of the part sold. This is 

the properly allocated part of your original cost 

or other basis of the entire farm plus or minus 

necessary adjustments for improvements, depreciation, etc., on the part sold. If your home is 

on the farm, you must properly adjust the basis 

to exclude those costs from your farm asset 

costs, as discussed later under Sale of your 

home.

Example. You bought a 200-acre farm for 

$700,000. The farm included land and buildings. The purchase contract designated 

$600,000 of the purchase price to the land. You 

later sold 20 acres of land on which you had installed a fence. Your adjusted basis for the part 

of your farm sold is $60,000 (1/10 of $600,000), 

plus any unrecovered cost (cost not depreciated) of the fence on the 20 acres at the time of 

sale. Use this amount to determine your gain or 

loss on the sale of the 20 acres.

Assessed values for local property 

taxes. If you paid a flat sum for the entire farm 

and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use 

the assessed values for local property taxes for 

the year of purchase to allocate the costs.

Example. Assume that in the preceding example there was no breakdown of the $700,000 

purchase price between land and buildings. 

However, in the year of purchase, local taxes on 

the entire property were based on assessed 

valuations of $420,000 for land and $140,000 

for improvements, or a total of $560,000. The 

assessed valuation of the land is 3/4 (75%) of 

the total assessed valuation. Multiply the 

$700,000 total purchase price by 75% to figure 

basis of $525,000 for the 200 acres of land. The 

unadjusted basis of the 20 acres you sold would 

then be $52,500 (1/10 of $525,000).

Sale of your home. Your home is a capital asset and not property used in the trade or business of farming. If you sell a farm that includes a 

house you and your family occupy, you must determine the part of the selling price and the part 

of the cost or other basis allocable to your 

home. Your home includes the immediate surroundings and outbuildings relating to it that are 

not used for business purposes.

If you use part of your home for business, 

you must make an appropriate adjustment to 

the basis for depreciation allowed or allowable. 

For more information on basis, see chapter 6.

More information. For more information on 

selling your home, see Pub. 523.

Gain from condemnation. If you have a 

gain from a condemnation or sale of your home 

under threat of condemnation, you may use the 

preceding rules for excluding the gain, rather 

than the rules discussed under Postponing Gain 

in chapter 11. However, any gain that cannot be 

excluded (because it is more than the limit) may 

Worksheet for Foreclosures 

and Repossessions

Worksheet 8-1.

Keep for Your Records

Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt 

upon foreclosure or repossession. Complete this part only if you were personally 

liable for the debt. Otherwise, go to Part 2.

1. Enter the amount of outstanding debt immediately before the transfer of property 

reduced by any amount for which you remain personally liable after the transfer of 

property ...................................................

2. Enter the fair market value of the transferred property ..................

3. Ordinary income from cancellation of debt upon foreclosure or 

repossession.* Subtract line 2 from line 1. If zero or less, enter -0- ..........

Part 2. Figure your gain or loss from foreclosure or repossession.

4. If you completed Part 1, enter the smaller of line 1 or line 2. If you did not 

complete Part 1, enter the outstanding debt immediately before the transfer of 

property ..................................................

5. Enter any proceeds you received from the foreclosure sale ..............

6. Add lines 4 and 5 ...........................................

7. Enter the adjusted basis of the transferred property ...................

8. Gain or loss from foreclosure or repossession. Subtract line 7

 from line 6 ................................................

*

 The income may not be taxable. See Cancellation of debt, later.

Chapter 8 Gains and Losses Page 55
be postponed under the rules discussed under 

Postponing Gain in chapter 11.

Foreclosure or 

Repossession

If you do not make payments you owe on a loan 

secured by property, the lender may foreclose 

on the loan or repossess the property. The foreclosure or repossession is treated as a sale or 

exchange from which you may realize gain or 

loss. This is true even if you voluntarily return 

the property to the lender. You may also realize 

ordinary income from cancellation of debt if the 

loan balance is more than the FMV of the property.

Buyer's (borrower's) gain or loss. You figure 

and report gain or loss from a foreclosure or repossession in the same way as gain or loss 

from a sale or exchange. The gain or loss is the 

difference between your adjusted basis in the 

transferred property and the amount realized. 

See Determining Gain or Loss, earlier.

You can use Worksheet 8-1 to figure 

your gain or loss from a foreclosure or 

repossession.

Amount realized on a nonrecourse debt. 

If you are not personally liable for repaying the 

debt (nonrecourse debt) secured by the transferred property, the amount you realize includes 

the full amount of the debt canceled by the 

transfer. The full canceled debt is included in 

the amount realized even if the FMV of the 

property is less than the canceled debt.

Example 1. You paid $200,000 for land 

used in your farming business. You paid 

$15,000 down and borrowed the remaining 

$185,000 from a bank. You are not personally liable for the loan (nonrecourse debt), but pledge 

the land as security. The bank foreclosed on the 

loan 2 years after you stopped making payments. When the bank foreclosed, the balance 

due on the loan was $180,000 and the FMV of 

the land was $170,000. The amount you realized on the foreclosure was $180,000, the debt 

canceled by the foreclosure. You figure your 

gain or loss on Form 4797, Part I, by comparing 

the amount realized ($180,000) with your adjusted basis ($200,000). You have a $20,000 deductible loss.

Example 2. Assume the same facts as in 

Example 1, except the FMV of the land was 

$210,000. The result is the same. The amount 

you realized on the foreclosure is $180,000, the 

debt canceled by the foreclosure. Because your 

adjusted basis is $200,000, you have a deductible loss of $20,000, which you report on Form 

4797, Part I.

Amount realized on a recourse debt. If 

you are personally liable for the debt (recourse 

debt), the amount realized on the foreclosure or 

repossession includes the lesser of:

• The outstanding debt immediately before 

the transfer reduced by any amount for 

which you remain personally liable immediately after the transfer, or

• The FMV of the transferred property.

TIP

You are treated as receiving ordinary income 

from the canceled debt for the part of the debt 

that is more than the FMV. The amount realized 

does not include the canceled debt that is your 

income from cancellation of debt. See Cancellation of debt, later.

Example 3. Assume the same facts as in 

Example 1 earlier, except you are personally liable for the loan (recourse debt). In this case, the 

amount you realize is $170,000. This is the canceled debt ($180,000) up to the FMV of the land 

($170,000). You figure your gain or loss on the 

foreclosure by comparing the amount realized 

($170,000) with your adjusted basis ($200,000). 

You have a $30,000 deductible loss, which you 

figure on Form 4797, Part I. You are also treated 

as receiving ordinary income from cancellation 

of debt. That income is $10,000 ($180,000 − 

$170,000). This is the part of the canceled debt 

not included in the amount realized. You report 

this as other income on Schedule F, line 8.

Seller's (lender's) gain or loss on repossession. If you finance a buyer's purchase of your 

property in an installment sale and later acquire 

an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. For more information, see Repossession 

in Pub. 537, Installment Sales.

Cancellation of debt. If property that is repossessed or foreclosed upon secures a debt for 

which you are personally liable (recourse debt), 

you must generally report as ordinary income 

the amount by which the canceled debt is more 

than the FMV of the property. This income is 

separate from any gain or loss realized from the 

foreclosure or repossession. Report the income 

from cancellation of a business debt on Schedule F, line 8. Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040 or Form 1040-SR.

You can use Worksheet 8-1 to figure 

your income from cancellation of debt.

However, income from cancellation of debt 

is not taxed in certain situations. See Cancellation of Debt in chapter 3.

Abandonment

The abandonment of property is a disposition of 

property. You abandon property when you voluntarily and permanently give up possession 

and use of the property with the intention of 

ending your ownership, but without passing it 

on to anyone else.

Business or investment property. Loss from 

abandonment of business or investment property is deductible as a loss. Loss from abandonment of business or investment property that is 

not treated as a sale or exchange is generally 

an ordinary loss. If your adjusted basis is more 

than the amount you realize (if any), then you 

have a loss. If the amount you realize (if any) is 

more than your adjusted basis, then you have a 

gain. This rule also applies to leasehold improvements the lessor made for the lessee. 

However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss 

TIP

is figured as discussed earlier under Foreclosure or Repossession.

If the abandoned property is secured by 

debt, special rules apply. The tax consequences of abandonment of property that secures a 

debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). 

For more information, see chapter 3 of Pub. 

4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

The abandonment loss is deducted in the 

tax year in which the loss is sustained. Report 

the loss on Form 4797, Part II, line 10.

Personal-use property. You cannot deduct 

any loss from abandonment of your home or 

other property held for personal use.

Canceled debt. If the abandoned property secures a debt for which you are personally liable 

and the debt is canceled, you may realize ordinary income equal to the canceled debt. This 

income is separate from any loss realized from 

abandonment of the property. Report income 

from cancellation of a debt related to a business 

or rental activity as business or rental income. 

Report income from cancellation of a nonbusiness debt on Form 1040 or Form 1040-SR.

However, income from cancellation of debt 

is not taxed in certain circumstances. See Cancellation of debt, earlier, under Foreclosure or 

Repossession.

Forms 1099-A and 1099-C. A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should 

send you Form 1099-A showing the information 

you need to figure your loss from the foreclosure, repossession, or abandonment. However, 

if the lender cancels part of your debt and the 

lender must file Form 1099-C, the lender may 

include the information about the foreclosure, 

repossession, or abandonment on that form instead of Form 1099-A. The lender must file 

Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a 

financial institution, credit union, or federal government agency, or any organization that has a 

significant trade or business of lending money. 

For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2023, these forms should be sent to 

you by January 31, 2024.

Page 56 Chapter 8 Gains and Losses
9.

Dispositions of 

Property Used in 

Farming

Introduction

When you dispose of property used in your farm 

business, your taxable gain or loss is usually 

treated as ordinary income or capital gain (under the rules for section 1231 transactions). Ordinary income is taxed at the same rate as wages and interest. Capital gain is generally taxed 

at lower rates.

When you dispose of depreciable property 

(section 1245 property or section 1250 property) at a gain, you may have to recognize all or 

part of the gain as ordinary income under the 

depreciation recapture rules. Any gain remaining after applying the depreciation recapture 

rules is a section 1231 gain, which may be 

taxed as a capital gain. Similar rules apply to 

the sale of property on which soil and water 

conservation expenses have been deducted or 

government cost-sharing payments have been 

received.

Gains and losses from property used in 

farming are reported on Form 4797, Sales of 

Business Property. Table 9-1 contains examples 

of items reported on Form 4797 and refers to 

the part of that form on which they should first 

be reported.

Topics

This chapter discusses:

• Section 1231 gains and losses

• Depreciation recapture

• Other gains

Useful Items

You may want to see:

Publication

44 Sales and Other Dispositions

of Assets

Form (and Instructions)

4797 Sales of Business Property

See chapter 16 for information about getting 

publications and forms.

Section 1231 Gains and 

Losses

Section 1231 gains and losses are the taxable 

gains and losses from section 1231 transactions (explained below). Their treatment as ordinary income or loss or capital gains depends on 

whether you have a net gain or a net loss from 

 544

 4797

all of your section 1231 transactions in the tax 

year.

If you have a gain from a section 1231 transaction, first determine whether any of the gain is 

ordinary income under the depreciation (or 

other) recapture rules explained later. Do not 

take that gain into account as section 1231 

gain. Only gain in excess of the recapture 

amount is considered section 1231 gain. See 

Treatment as ordinary or capital, later.

Section 1231 transactions. Section 1231 

transactions are sales and exchanges of real or 

depreciable property used in trade or business 

and held the required holding period (based on 

type of asset, as discussed below). Gain or loss 

on the following transactions is subject to section 1231 treatment.

• Sale or exchange of cattle and horses. 

The cattle and horses must be held for 

draft, breeding, dairy, or sporting purposes 

and held for 24 months or longer.

• Sale or exchange of other livestock. 

This livestock must be held for draft, 

breeding, dairy, or sporting purposes and 

held for 12 months or longer. Other livestock includes hogs, mules, sheep, goats, 

donkeys, and other fur-bearing animals. 

Other livestock does not include poultry.

• Sale or exchange of depreciable real 

property or personal property. This 

property must be used in your business 

and held longer than 1 year. Generally, 

property held for the production of rents or 

royalties is considered to be used in a 

trade or business. This property must also 

be either real property or is of a kind that is 

subject to depreciation under section 167 

of the Internal Revenue Code. Examples of 

depreciable personal property include farm 

machinery and trucks. It also includes amortizable section 197 intangibles.

• Sale or exchange of real estate. This 

property must be used in your business 

and held longer than 1 year. Examples include your farm or ranch (including barns 

and sheds).

• Sale or exchange of unharvested 

crops. The crop and land must be sold, 

exchanged, or involuntarily converted at 

the same time and to the same person, 

and the land must have been held longer 

than 1 year. You cannot keep any right or 

option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). Growing crops sold with a 

leasehold on the land, even if sold to the 

same person in a single transaction, is not 

considered a section 1231 transaction.

• Distributive share of partnership gains 

and losses. Your distributive share must 

be from the sale or exchange of property 

listed above and held by the partnership for 

longer than 1 year (or for the required period for certain livestock). You will receive 

Schedule K-1 (Form 1065) showing the appropriate classification of any gains or losses distributed to you.

• Cutting or disposal of timber. Special 

rules apply if you owned the timber longer 

than 1 year and elect to treat timber cutting 

as a sale or exchange, or you enter into a 

cutting contract, as described in chapter 8 

under Timber.

• Condemnation. The condemned property 

(defined in chapter 11) must have been 

held longer than 1 year. It must be business property or a capital asset held in 

connection with a trade or business or a 

transaction entered into for profit, such as 

investment property. It cannot be property 

held for personal use.

• Casualty or theft. The casualty or theft 

must have affected business property, 

Table 9-1. Where To First Report Certain Items on Form 4797

Type of property

Held 1 year 

or less

Held more than 

1 year

1 Depreciable trade or business property:

a Sold or exchanged at a gain .................... Part II Part III (1245, 1250)

b Sold or exchanged at a loss .................... Part II Part I

2 Farmland held less than 10 years for which soil or water 

expenses were deducted:

a Sold at a gain .............................. Part II Part III (1252)

b Sold at a loss .............................. Part II Part I

3 All other farmland used in a trade or business Part II Part I

4 Disposition of cost-sharing payment property described in 

section 126

Part II Part III (1255)

5 Cattle and horses used in a trade or business for draft, 

breeding, dairy, or sporting purposes:

Held less 

than 24 mos.

Held 24 mos. 

or more

a Sold at a gain .............................. Part II Part III (1245)

b Sold at a loss .............................. Part II Part I

c Raised cattle and horses sold at a gain ............ Part II Part I

6 Livestock other than cattle and horses used in a trade or 

business for draft, breeding, dairy, or sporting purposes:

Held less 

than 12 mos.

Held 12 mos.

 or more

a Sold at a gain .............................. Part II Part III (1245)

b Sold at a loss .............................. Part II Part I

c Raised livestock sold at a gain .................. Part II Part I

7

Real or tangible trade or business property which was 

deducted under the de minimis safe harbor ............

Held 1 year 

or less

Held more than 

1 year

Part II Part II 

Chapter 9 Dispositions of Property Used in Farming Page 57
property held for the production of rents or 

royalties, or investment property (such as 

notes and bonds). You must have held the 

property longer than the required holding 

period. However, if your casualty or theft 

losses are more than your casualty or theft 

gains, the net casualty or theft loss is fully 

deductible and is not combined with other 

section 1231 transactions in the section 

1231 computation. Section 1231 does not 

apply to personal casualty gains and losses. See chapter 11 for information on how 

to treat those gains and losses.

If the property is not held for the required holding period, the transaction 

is not subject to section 1231 treatment, and any gain or loss is ordinary income 

reported in Part II of Form 4797. See Table 9-1.

Treatment as ordinary or capital. To determine the treatment of section 1231 gains and 

losses, combine all of your section 1231 gains 

and losses for the year.

• If you have a net section 1231 loss, it is an 

ordinary loss.

• If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured 

section 1231 losses from previous years, 

explained next. The rest, if any, is 

long-term capital gain.

Nonrecaptured section 1231 losses. 

Your nonrecaptured section 1231 losses are 

your net section 1231 losses for the previous 5 

years that have not been applied against a net 

section 1231 gain. Therefore, if in any of your 5 

preceding tax years you had section 1231 losses, a net gain for the current year from the sale 

of section 1231 assets is ordinary gain to the 

extent of your prior losses. These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period.

Example. In 2023, you have a $20,000 net 

section 1231 gain. To figure how much you have 

to report as ordinary income and long-term capital gain, you must first determine your section 

1231 gains and losses from the previous 5-year 

period. From 2018 through 2022, you had the 

following section 1231 gains and losses.

Year Amount

2018 -0-

2019 -0-

2020 ($25,000)

2021 -0-

2022 $18,000

You used this information to figure how to report your net section 1231 gain for 2023 as 

shown below.

CAUTION

!

1. Net section 1231 gain (2023) ..... $20,000

2. Net section 1231 loss 

(2020) .............. ($25,000)

3. Net section 1231 gain 

(2022) .............. $18,000

4. Remaining net section

1231 loss from

prior 5 years .........

($7,000)

5. Gain treated as 

ordinary income ............... $7,000

6. Gain treated as long-term 

capital gain .............. $13,000

Your remaining net section 1231 loss from 

2020 is completely recaptured in 2023.

Property held for sale to customers. A sale, 

exchange, or involuntary conversion of property 

held mainly for sale to customers is not a section 1231 transaction. If you will get back all, or 

nearly all, of your investment in the property by 

selling it rather than by using it up in your business, it is property held mainly for sale to customers.

Property deducted under the de minimis 

safe harbor for tangible property. If you deducted the cost of a property under the de minimis safe harbor for tangible property (currently 

$2,500 or less), then upon its sale or disposition, this property is not treated as a capital asset or as property used in the trade or business 

under section 1231. Generally, any gain on the 

disposition of this property is treated as ordinary 

income reported on Part II of Form 4797.

Depreciation Recapture

If you dispose of depreciable property (section 

1245 or section 1250 property) or amortizable 

property at a gain, you may have to treat all or 

part of the gain (even if it is otherwise nontaxable) as ordinary income. Any remaining gain is 

section 1231 gain (discussed earlier).

To figure any gain that must be reported as ordinary income, you must keep 

permanent records of the facts necessary to figure the depreciation or amortization 

allowed or allowable on your property. For more 

information on depreciation recapture, see 

chapter 3 of Pub. 544. Also see Pub. 946.

Section 1245 Property

A gain on the disposition of section 1245 property is treated as ordinary income to the extent 

of depreciation allowed or allowable. Any recognized gain that is more than the part that is ordinary income is a section 1231 gain.

Section 1245 property includes any property 

that is or has been subject to an allowance for 

depreciation or amortization and that is any of 

the following types of property.

1. Personal property (either tangible or intangible).

2. Other tangible property (except buildings 

and their structural components) used as 

any of the following. See Buildings and 

structural components, later.

RECORDS

a. An integral part of manufacturing, production, or extraction, or of furnishing 

certain services.

b. A research facility in any of the activities in (a).

c. A facility in any of the activities in (a) 

above, for the bulk storage of fungible 

commodities (discussed later).

3. Where applicable, that part of real property (not included in (2)) with an adjusted 

basis reduced by (but not limited to) the 

following.

a. Amortization of certified pollution control facilities.

b. The section 179 expense deduction.

c. Deduction for clean-fuel vehicles and 

certain refueling property.

d. Expenditures to remove architectural 

and transportation barriers to the 

handicapped and elderly.

e. Certain reforestation expenditures (as 

described under Reforestation Costs 

in chapter 7).

4. Single-purpose agricultural (livestock) or 

horticultural structures.

5. Storage facilities (except buildings and 

their structural components) used in distributing petroleum or any primary product 

of petroleum.

Buildings and structural components. Section 1245 property does not include buildings 

and structural components. The term “building” 

includes a house, barn, warehouse, or garage. 

The term “structural component” includes walls, 

floors, windows, doors, central air conditioning 

systems, light fixtures, etc.

Do not treat a structure that is essentially 

machinery or equipment as a building or structural component. Also, do not treat a structure 

that houses property used as an integral part of 

an activity as a building or structural component 

if the structure's use is so closely related to the 

property's use that the structure can be expected to be replaced when the property it initially 

houses is replaced.

The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is 

closely related to the use of the property it 

houses. Structures such as oil and gas storage 

tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property.

Facility for bulk storage of fungible commodities. This is a facility used mainly for the 

bulk storage of fungible commodities. Bulk storage means storage of a commodity in a large 

mass before it is used. For example, if a facility 

is used to store oranges that have been sorted 

and boxed, it is not used for bulk storage. To be 

fungible, a commodity must be such that each 

of its parts is essentially interchangeable, and 

each of its parts is indistinguishable from another part.

Page 58 Chapter 9 Dispositions of Property Used in Farming
Gain Treated as Ordinary Income

The gain treated as ordinary income on the 

sale, exchange, or involuntary conversion of 

section 1245 property, including a sale and 

leaseback transaction, is the lesser of the following amounts.

1. The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property.

2. The gain realized on the disposition (the 

amount realized from the disposition minus the adjusted basis of the property).

See chapter 3 of Pub. 544 for more information 

on dispositions of section 1245 property.

Use Part III of Form 4797 to figure the ordinary income part of the gain.

Depreciation claimed on other property or 

claimed by other taxpayers. Depreciation 

and amortization include the amounts you 

claimed on the section 1245 property as well as 

the following depreciation and amortization 

amounts.

• Amounts you claimed on property you exchanged for, or converted to, your section 

1245 property in an applicable like-kind exchange or involuntary conversion. For details on exchanges of property that are not 

taxable, see Like-Kind Exchanges in chapter 8.

• Amounts a previous owner of the section 

1245 property claimed if your basis is determined with reference to that person's 

adjusted basis (for example, the donor's 

depreciation deductions on property you 

received as a gift).

Depreciation and amortization. Depreciation 

and amortization deductions that must be recaptured as ordinary income include (but are 

not limited to) the following items. See Depreciation Recapture in chapter 3 of Pub. 544 for 

more details.

1. Ordinary depreciation deductions.

2. The section 179 expense deduction (see 

chapter 7).

3. Any special depreciation allowance.

4. Amortization deductions for any of the following costs.

a. Acquiring a lease.

b. Lessee improvements.

c. Pollution control facilities.

d. Reforestation expenses.

e. Section 197 intangibles.

f. Qualified disaster expenses.

g. Franchises, trademarks, and trade 

names acquired before August 11, 

1993.

Example. You file your returns on a calendar year basis. In February 2021, you bought 

and placed in service for 100% use in your 

farming business a light-duty truck (5-year property) that cost $30,000. You used the half-year 

convention and your MACRS deductions for the 

truck were $6,000 in 2021 and $9,600 in 2022. 

You did not claim the section 179 expense deduction for the truck. You sold it in May 2023 for 

$21,000. The MACRS deduction in 2023, the 

year of sale, is $2,880 (1/2 of $5,760). Figure the 

gain treated as ordinary income as follows.

1. Amount realized .................. $21,000

2. Cost (February 2021) ....... $30,000

3. Depreciation allowed or 

allowable (MACRS deductions: 

$6,000 + $9,600 + $2,880) ...

18,480

4. Adjusted basis (subtract line 3

from line 2) .....................

$11,520

5. Gain realized (subtract line 4

from line 1) ..................... $9,480

6. Gain treated as ordinary income

(lesser of line 3 or line 5)........

$9,480

Depreciation allowed or allowable. You generally use the greater of the depreciation allowed or allowable when figuring the part of 

gain to report as ordinary income. If, in prior 

years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased 

even though a greater amount would have been 

allowed under another proper method. If you did 

not take any deductions in prior years for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight 

line method. This treatment applies only when 

figuring what part of the gain is treated as ordinary income under the rules for section 1245 

depreciation recapture. For more information on 

depreciation allowed or allowable, see chapter 7. For information on adjustments to basis 

for depreciation allowed or allowable, see chapter 6.

Disposition of plants. If you elect not to use 

the uniform capitalization rules (see chapter 6), 

you must treat any plant that would have been 

subject to the uniform capitalization rules as 

section 1245 property. If you have a gain on the 

property's disposition, you must recapture the 

pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. For section 1231 

transactions, show these expenses as depreciation on Form 4797, Part III, line 22. For plant 

sales that are reported on Schedule F (Form 

1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. You can use the farm-price method 

discussed in chapter 2 to figure these expenses.

Example. You sold your apple orchard in 

2023 for $80,000. Your adjusted basis at the 

time of sale was $60,000. You bought the orchard in 2016, but the trees did not produce a 

crop until 2019. Your pre-productive expenses 

were $6,000. You elected not to use the uniform 

capitalization rules. You must treat $6,000 of the 

gain as ordinary income in addition to recapturing depreciation allowed or allowable on the orchard. This amount would be reported on Form 

4797, Part III, as ordinary income.

See Uniform Capitalization Rules in 

chapter 6 for more information regarding electing out of, or being exempt 

from, using the uniform capitalization rules.

Section 1250 Property

Section 1250 property includes all real property 

subject to an allowance for depreciation that is 

not and never has been section 1245 property. 

It includes buildings and structural components 

that are not section 1245 property (discussed 

earlier). It includes a leasehold of land or section 1250 property subject to an allowance for 

depreciation. A fee simple interest in land is not 

section 1250 property because, like land, it is 

not depreciable.

Gain on the disposition of section 1250 

property is treated as ordinary income to the extent of additional depreciation allowed or allowable. To determine the additional depreciation 

on section 1250 property, see Depreciation Recapture in chapter 3 of Pub. 544.

Use Part III of Form 4797 to figure the ordinary income part of the gain.

You will not have additional depreciation if 

any of the following apply to the property disposed of.

• You figured depreciation for the property 

using the straight line method or any other 

method that does not result in depreciation 

that is more than the amount figured by the 

straight line method and you have held the 

property longer than 1 year.

• You chose the alternate ACRS (straight 

line) method for the property, which was a 

type of 15-, 18-, or 19-year real property 

covered by the section 1250 rules.

• The property was nonresidential real property placed in service after 1986 (or after 

July 31, 1986, if the choice to use MACRS 

was made) and you held it longer than 1 

year. These properties are depreciated using the straight line method.

Installment Sale

If you report the sale of property under the installment method, any depreciation recapture 

under section 1245 or 1250 is taxable as ordinary income in the year of sale. This applies 

even if no payments are received in that year. If 

the gain is more than the depreciation recapture 

income, report the rest of the gain using the 

rules of the installment method. For this purpose, include the recapture income in your installment sale basis to determine your gross 

profit on the installment sale.

If you dispose of more than one asset in a 

single transaction, you must separately figure 

the gain on each asset so that it may be properly reported. To do this, allocate the selling 

price and the payments you receive in the year 

of sale to each asset. Report any depreciation 

recapture income in the year of sale before using the installment method for any remaining 

gain.

For more information on installment sales, 

see chapter 10.

CAUTION

!

Chapter 9 Dispositions of Property Used in Farming Page 59
Other Dispositions

See chapter 3 of Pub. 544 for the tax treatment 

of the following transfers of depreciable property.

• By gift.

• At death.

• In like-kind exchanges.

• In involuntary conversions.

Also, see Pub. 544 for information on how to 

handle a single transaction involving multiple 

properties.

Other Gains

This section discusses gain on the disposition 

of farmland for which you were allowed either of 

the following.

• Deductions for soil and water conservation 

expenditures (section 1252 property).

• Exclusions from income for certain 

cost-sharing payments (section 1255 property).

Section 1252 property. If you disposed of 

farmland you held more than 1 year and less 

than 10 years at a gain and you were allowed 

deductions for soil and water conservation expenses for the land, as discussed in chapter 5, 

you must treat part of the gain as ordinary income and treat the balance as section 1231 

gain.

Exceptions. Do not treat gain on the following transactions as gain on section 1252 property.

• Disposition of farmland by gift.

• Transfer of farm property at death (except 

for income in respect of a decedent).

For more information, see Regulations section 

1.1252-2.

Amount to report as ordinary income. 

You report as ordinary income the lesser of the 

following amounts.

• Your gain (determined by subtracting the 

adjusted basis from the amount realized 

from a sale, exchange, or involuntary conversion, or the fair market value for all other 

dispositions).

• The total deductions allowed for soil and 

water conservation expenses multiplied by 

the applicable percentage, discussed next.

Applicable percentage. The applicable 

percentage is based on the length of time you 

held the land. If you dispose of your farmland 

within 5 years after the date you acquired it, the 

percentage is 100%. If you dispose of the land 

within the 6th through 9th years after you acquired it, the applicable percentage is reduced 

by 20% a year for each year or part of a year 

you hold the land after the 5th year. If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire 

gain is a section 1231 gain.

Example. You acquired farmland on January 19, 2015. You incurred $15,000 of soil and 

water conservation expenditures for the land 

that were fully deductible. On October 5, 2023, 

you sold the land at a $30,000 gain. The applicable percentage is 40% because you sold the 

land within the 8th year after you acquired it. 

You treat $6,000 (40% of $15,000) of the 

$30,000 gain as ordinary income and the 

$24,000 balance as a section 1231 gain.

Section 1255 property. If you receive certain 

cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part 

of any gain as ordinary income and treat the 

balance as a section 1231 gain. If you chose 

not to exclude these payments, you will not 

have to recognize ordinary income under this 

provision.

Amount to report as ordinary income. 

You report as ordinary income the lesser of the 

following amounts.

• The applicable percentage of the total excluded cost-sharing payments.

• The gain on the disposition of the property.

You do not report ordinary income under this 

rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 

1256, and 1257. However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section.

Applicable percentage. The applicable 

percentage of the excluded cost-sharing payments to be reported as ordinary income is 

based on the length of time you hold the property after receiving the payments. If the property 

is held less than 10 years after you receive the 

payments, the percentage is 100%. After 10 

years, the percentage is reduced by 10% a 

year, or part of a year, until the rate is 0%.

Form 4797, Part III. Use Form 4797, Part III, to 

figure the ordinary income part of a gain from 

the sale, exchange, or involuntary conversion of 

section 1252 property and section 1255 property.

10.

Installment 

Sales

Introduction

An installment sale is a sale of property where 

you receive at least one payment after the tax 

year of the sale. If you realize a gain on an installment sale, you may be able to report part of 

your gain when you receive each payment. This 

method of reporting gain is called the installment method. You can’t use the installment 

method to report a loss. You can choose to report all of your gain in the year of sale.

Installment obligation. The buyer’s obligation 

to make future payments to you can be in the 

form of a deed of trust, note, land contract, 

mortgage, or other evidence of the buyer’s debt 

to you.

Topics

This chapter discusses:

• The general rules that apply to using the 

installment method, and

• Installment sale of a farm.

Useful Items

You may want to see:

Publication

Selling Your Home

Installment Sales

Accounting Periods and Methods

Sales and Other Dispositions of 

Assets

Basis of Assets

Form (and Instructions)

Sales of Business Property

Installment Sale Income

Asset Acquisition Statement Under 

Section 1060

Sales and Other Dispositions of 

Capital Assets

See chapter 16 for information about getting 

publications and forms.

Installment Sale of a 

Farm

The installment sale of a farm for one overall 

price under a single contract isn’t the sale of a 

single asset. It generally includes the sale of 

real property and personal property reportable 

on the installment method. It may also include 

the sale of property for which you must maintain 

an inventory, which can’t be reported on the installment method. See Inventory, later. The selling price must be allocated to determine the 

amount received for each class of asset.

Note. You may be required to report the 

sale of your farm on Form 8594. For more information, see Form 8594 and its instructions.

The tax treatment of the gain or loss on the 

sale of each class of asset is determined by its 

classification as a capital asset, as property 

used in the business, or as property held for 

sale and by the length of time the asset was 

held. (See chapter 8 for a discussion of capital 

assets and chapter 9 for a discussion of property used in the business.) Separate computations must be made to figure the gain or loss for 

each class of asset sold. See Sale of a Farm in 

chapter 8.

 523

 537

 538

 544

 551

 4797

 6252

 8594 

 8949 

Page 60 Chapter 10 Installment Sales
If you report the sale of property on the 

installment method, any depreciation 

recapture under section 1245 or 1250 

is generally taxable as ordinary income in the 

year of sale. See Depreciation recapture, later. 

This applies even if no payments are received in 

that year.

Related parties. If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the 

sale using the installment method. If you sell 

property to a related person and the related person disposes of the property before you receive 

all payments with respect to the sale, you may 

have to treat the amount realized by the related 

person as received by you when the related 

person disposes of the property. The definition 

of related parties differs based on which of 

these applies. For more information, see Related Person under Sale to a Related Person in 

Pub. 537.

Installment Method

An installment sale is a sale of property where 

you receive at least one payment after the tax 

year of the sale. A farmer who isn’t required to 

maintain an inventory can use the installment 

method to report gain from the sale of property 

used or produced in farming. See Inventory, 

later, for information on the sale of farm property 

where inventory items are included in the assets sold.

If a sale qualifies as an installment sale, the 

gain must be reported under the installment 

method unless you elect out of using the installment method.

Electing out of the installment method. If 

you elect not to use the installment method, you 

generally report the entire gain in the year of 

sale, even though you don’t receive all the sale 

proceeds in that year.

To make this election, don’t report your sale 

on Form 6252. Instead, report it on Schedule F 

(Form 1040), Schedule D (Form 1040), Form 

4797, or all three.

You may also need to file Form 8949 along 

with Schedule D (Form 1040), Capital Gains 

and Losses. For more information, see Form 

8949 and its instructions.

When to elect out. Make this election by 

the due date, including extensions, for filing 

your tax return for the year the sale takes place.

However, if you timely file your tax return for 

the year the sale takes place without making the 

election, you can still make the election by filing 

an amended return within 6 months of the due 

date of the return (excluding extensions). Enter 

“Filed pursuant to section 301.9100-2” at the 

top of the amended return. File the amended return at the same address you filed the original 

return. If you electronically filed your Form 1040 

or 1040-SR, you may electronically file the Form 

1040-X.

Revoking the election. Once made, the 

election can be revoked only with IRS approval. 

An approved revocation is retroactive.

CAUTION

!

The taxpayer can’t revoke the election if either of the following applies.

• One of the purposes is to avoid federal income tax.

• The tax year in which any payment was received has closed.

To revoke the election, you must obtain a private letter ruling from the IRS. The procedures 

and user fees for obtaining a private letter ruling 

are published annually in the first revenue procedure issued each calendar year. For 2023, go 

to IRS.gov/irb/2023-1_IRB#RP-2023-1.

Send your request for a private letter ruling, 

including the applicable user fee, to the IRS following the instructions in section 7 of Revenue 

Procedure 2023-1. A schedule of the current 

user fees is available in Appendix A of Revenue 

Procedure 2023-1, starting on page 85.

Inventory. If you aren’t required to maintain 

(keep a record of beginning and ending) inventories under your method of accounting, you 

can report gain from the sale of farm inventory 

using the installment method. Complete Form 

6252 to figure the amount of installment gain to 

report each year from the sale of farm inventory 

and carry that amount to line 8 of Schedule F 

(Form 1040).

If you are required to maintain inventories 

under your method of accounting, you can’t report gain from the sale of farm inventory using 

the installment method. All gain or loss on the 

sale of farm inventory must be reported in the 

year of sale, even if you receive payment in later 

years. If inventory items are included in an installment sale, you may have an agreement 

stating which payments are for inventory and 

which are for the other assets being sold. If you 

don’t, each payment must be allocated between 

the inventory and the other assets sold.

More information. See Inventory under 

Sale of a Business in Pub. 537 for more information.

Sale at a loss. If your sale results in a loss, you 

can’t use the installment method. If the loss is 

on an installment sale of business assets, you 

can deduct it only in the tax year of sale.

Figuring Installment Sale 

Income

Each payment on an installment sale usually 

consists of the following three parts.

• Interest income.

• Return of your adjusted basis in the property.

• Gain on the sale.

In each year you receive a payment, you must 

include in income both the interest part and the 

part that is your gain on the sale. Don’t include 

in income the part that is the return of your basis 

in the property. Basis is the amount of your investment in the property for installment sale 

purposes.

Interest income. You must report interest as 

ordinary income. Interest generally isn’t included in a down payment. However, you may 

have to treat part of each later payment as interest, even if it isn’t called interest in your agreement with the buyer. Interest provided in the 

agreement is called stated interest. If the agreement doesn’t provide for enough stated interest, 

there may be unstated interest or original issue 

discount (OID). See Unstated interest, later.

You must continue to report the interest 

income on payments you receive in 

subsequent years as interest income 

whether it’s stated or unstated.

Adjusted basis and installment sale income 

(gain on sale). After you have determined how 

much of each payment to treat as interest, you 

treat the rest of each payment as if it were made 

up of two parts.

• A tax-free return of your adjusted basis in 

the property.

• Your gain (referred to as “installment sale 

income” on Form 6252).

Figuring adjusted basis and gross profit 

percentage for installment sale purposes. 

You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale 

purposes. When you have completed the worksheet, you will also have determined the gross 

profit percentage necessary to figure your installment sale income (gain) for this year.

1. Selling price. The selling price is the total 

cost of the property to the buyer and includes the following.

• Any money you’re to receive.

• The fair market value (FMV) of any 

property you’re to receive (FMV is 

discussed under Property used as a 

payment, later).

• Any existing mortgage or other debt 

the buyer pays, assumes, or takes the 

property subject to (a note, a mortgage, or any other liability, such as a 

lien, accrued interest, or taxes you 

owe on the property).

• Any of your selling expenses the 

buyer pays.

Don’t include stated interest, unstated 

interest, any amount recomputed or recharacterized as interest, or OID in the 

selling price.

2. Adjusted basis. Your adjusted basis in 

property immediately before the installment sale is your original basis increased 

or reduced as a result of various events 

while you own the property.

• Some events, such as adding rooms 

or making permanent improvements, 

increase basis. Others, such as deductible casualty losses or depreciation previously allowed or allowable, 

decrease basis.

• The way you figure your original basis 

depends on how you acquire the 

property. The basis of property you 

buy is generally its cost. The basis of 

property you inherit, receive as a gift, 

build yourself, or receive in a tax-free 

exchange is figured differently. See 

chapter 6 and Pub. 551 for more information.

• Generally, your adjusted basis in 

raised farm products, such as grain or 

market livestock, is zero.

3. Selling expenses. Selling expenses relate to the sale of the property. Review the 

CAUTION

!

Chapter 10 Installment Sales Page 61
closing statement for fees, which may 

qualify as selling expenses. These may include appraisal fees, attorney fees, closing 

fees, document preparation fees, escrow 

fees, mortgage satisfaction fees, notary 

fees, points paid by the seller to obtain financing for the buyer, real estate broker’s 

commission, recording fees (if paid by the 

seller), costs of removing title clouds, settlement fees, title search fees, and transfer 

or stamp taxes charged by city, county, or 

state governments.

4. Depreciation recapture. If the property 

you sold was depreciable property:

• You may need to recapture part of the 

gain on the sale as ordinary income, 

and

• See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Pub. 537.

5. Adjusted basis for installment sale 

purposes. Your adjusted basis for installment sale purposes is the total of the following three items.

• Adjusted basis.

• Selling expenses.

• Depreciation recapture.

6. Gross profit. Gross profit is the total gain 

you report on the installment method.

• To figure your gross profit, subtract 

your adjusted basis for installment 

sale purposes from the selling price.

• If the property you sold was your 

home, subtract from the gross profit 

any gain you can exclude. See Pub. 

523 for more information.

7. Contract price. Contract price equals:

• The selling price, minus

• The amount of any mortgages, debts, 

and other liabilities assumed or taken 

by the buyer, plus

• The amount, if any, by which the 

mortgages, debts, and other liabilities 

assumed or taken by the buyer exceed your adjusted basis for installment sale purposes.

8. Gross profit percentage. A certain percentage of each payment (after subtracting interest) is reported as installment sale 

income. This percentage is called the 

gross profit percentage and is figured by 

dividing your gross profit from the sale by 

the contract price.

• The gross profit percentage generally 

remains the same for each payment 

you receive. However, see Example 

under Selling price reduced, later, for 

a situation where the gross profit percentage changes.

Example. You sell property at a contract 

price of $60,000 and your gross profit is 

$15,000. Your gross profit percentage is 25% 

($15,000 ÷ $60,000). After subtracting interest 

from each payment, you report 25% of each 

payment, including the down payment, as installment sale income from the sale for the tax 

year you receive the payment. The remainder 

(balance) of each payment is the tax-free return 

of your adjusted basis.

Amount to report as installment sale income. Multiply the payments you receive each 

year (less interest) by the gross profit percentage. The result is your installment sales income 

for the tax year. In certain circumstances, you 

may be treated as having received a payment, 

even though you received nothing directly. A receipt of property or the assumption of a mortgage on the property sold may be treated as a 

payment. For a detailed discussion, see Payments Received or Considered Received, later.

Selling price reduced. If the selling price 

is reduced at a later date, the gross profit on the 

sale will also change. You must then refigure the 

gross profit percentage for the remaining payments. Refigure your gross profit using Worksheet 10-2. You will spread any remaining gain 

over future installments.

Figuring Adjusted Basis and Gross Profit Percentage

Keep for Your Records

1. Enter the selling price for the property .........................

2. Enter your adjusted basis for the property .............

3. Enter your selling expenses ..........................

4. Enter any depreciation recapture .....................

5. Add lines 2, 3, and 4. 

This is your adjusted basis 

for installment sale purposes ..............................

6. Subtract line 5 from line 1. If zero or less, enter -0-.

This is your gross profit .....................................

If the amount entered on line 6 is zero, stop here. You can’t use 

the installment method.

7. Enter the contract price for the property .......................

8. Divide line 6 by line 7. This is your gross 

profit percentage ..........................................

Worksheet 10-1. 

New Gross Profit Percentage — Selling Price Reduced

Keep for Your Records

1. Enter the reduced selling 

price for the property .................................

2. Enter your adjusted 

basis for the 

property ................................

3. Enter your selling 

expenses ...............................

4. Enter any depreciation 

recapture ...............................

5. Add lines 2, 3, and 4 .................................

6. Subtract line 5 from line 1. 

This is your adjusted

gross profit .........................................

7. Enter any installment sale 

income reported in 

prior year(s) .........................................

8. Subtract line 7 from line 6 .............................

9. Future installments ...................................

10. Divide line 8 by line 9. 

This is your new

gross profit percentage* ............................

* Apply this percentage to all future payments to determine how much of each of those payments is installment sale 

income.

Worksheet 10-2. 

Page 62 Chapter 10 Installment Sales
Example. In 2021, you sold land with a basis of $40,000 for $100,000. Your gross profit 

was $60,000. You received a $20,000 down 

payment and the buyer’s note for $80,000. The 

note provides for monthly payments of $1,953 

each, figured at 8% interest, amortized over 4 

years, beginning in January 2022. Your gross 

profit percentage was 60%. You received the 

down payment of $20,000 in 2021 and total 

payments of $23,436 in 2022, of which $17,675 

was principal and $5,761 was interest according to the amortization schedule. You reported a 

gain of $12,000 on the down payment received 

in 2021 and $10,605 ($17,675 x 60% (0.60)) in 

2022.

In January 2023, you and the buyer agreed 

to reduce the purchase price to $85,000; and 

payments during 2023, 2024, and 2025 are reduced to $1,483 a month amortized over the remaining 3 years.

The new gross profit percentage, 47.32%, is 

figured in Example — Worksheet 10-2.

New Gross Profit

Percentage — Selling Price Reduced

Example —

Worksheet 10-2.

Keep for Your Records

1. Enter the reduced selling 

price for the property ..........

85,000

2. Enter your adjusted 

basis for the 

property ............

40,000

3. Enter your selling 

expenses ...........

-0-

4. Enter any depreciation 

recapture ...........

-0-

5. Add lines 2, 3, and 4 .......... 40,000

6. Subtract line 5 from line 1. 

This is your adjusted

gross profit ...............

45,000

7. Enter any installment sale 

income reported in 

prior year(s) ...............

22,605

8. Subtract line 7 from line 6 ........ 22,395

9. Future installments ........... 47,325

10. Divide line 8 by line 9. 

This is your new

gross profit percentage* .......

47.32%

* Apply this percentage to all future payments to determine 

how much of each of those payments is installment sale 

income.

You will report installment sale income of 

$6,878 (47.32% of $14,535) in 2023, $7,449 

(47.32% of $15,742) in 2024, and $8,067 

(47.32% of $17,048) in 2025.

Form 6252. Use Form 6252 to report an installment sale in the year it takes place and to report 

payments received, or considered received because of related party resales, in later years. Attach it to your tax return for each year.

Disposition of Installment 

Obligation

A disposition generally includes a sale, exchange, cancellation, bequest, distribution, or 

transmission of an installment obligation. An installment obligation is the buyer’s note, deed of 

trust, or other evidence that the buyer will make 

future payments to you.

If you’re using the installment method and 

you dispose of the installment obligation, you 

will generally have a gain or loss to report. It’s 

considered gain or loss on the sale of the property for which you received the installment obligation.

Cancellation. If an installment obligation is 

canceled or otherwise becomes unenforceable, 

it’s treated as a disposition other than a sale or 

exchange. Your gain or loss is the difference between your basis in the obligation and its FMV 

at the time you cancel it. If the parties are related, the FMV of the obligation is considered to 

be no less than its full face value.

Transfer due to death. The transfer of an installment obligation (other than to a buyer) as a 

result of the death of the seller isn’t a disposition. Any unreported gain from the installment 

obligation isn’t treated as gross income to the 

decedent. No income is reported on the decedent’s return due to the transfer. Whoever receives the installment obligation as a result of 

the seller’s death is taxed on the installment 

payments the same as the seller would’ve been 

had the seller lived to receive the payments.

However, if the installment obligation is canceled, becomes unenforceable, or is transferred 

to the buyer because of the death of the holder 

of the obligation, it’s a disposition. The estate 

must figure its gain or loss on the disposition. If 

the holder and the buyer were related, the FMV 

of the installment obligation is considered to be 

no less than its full face value.

More information. For more information, 

see Disposition of an Installment Obligation in 

Pub. 537.

Sale of depreciable property. You generally 

can’t report gain from the sale of depreciable 

property to a related person on the installment 

method. However, see Related parties under Installment Sale of a Farm, earlier.

You generally can’t use the installment 

method to report any depreciation recapture income. However, you can report any gain greater 

than the recapture income on the installment 

method.

The recapture income reported in the year of 

sale is included in your installment sale basis to 

determine your gross profit on the installment 

sale.

Figure your depreciation recapture income 

(including the section 179 deduction and the 

section 179A deduction recapture) in Part III of 

Form 4797. As instructed on the form, transfer 

the depreciation recapture income to Part II of 

Form 4797 as ordinary income in the year of 

sale.

If you sell depreciable business property, prepare Form 4797 first in order to 

figure the amount to enter on Form 

6252, Part I, line 12. See the Form 6252 instructions for details.

For more information on the section 179 deduction, see Section 179 Expense Deduction in 

chapter 7. For more information on depreciation 

recapture, see Depreciation Recapture in chapter 9.

TIP

Payments Received or 

Considered Received

You must figure your gain each year on the payments you receive, or are treated as receiving, 

from an installment sale.

In certain situations, you’re considered to 

have received a payment, even though the 

buyer doesn’t pay you directly. These situations 

occur when the buyer assumes or pays any of 

your debts, such as a loan, or pays any of your 

expenses, such as a sales commission. However, as discussed later, the buyer’s assumption 

of your debt is treated as a recovery of basis, 

rather than as a payment, in many cases.

Buyer pays seller’s expenses. If the buyer 

pays any of your expenses related to the sale of 

your property, it’s considered a payment to you 

in the year of sale. Include these expenses in 

the selling and contract prices when figuring the 

gross profit percentage.

Buyer assumes mortgage. If the buyer assumes or pays off your mortgage, or otherwise 

takes the property subject to the mortgage, the 

following rules apply.

Mortgage less than basis. If the buyer assumes a mortgage that isn’t more than your installment sale basis in the property, it isn’t considered a payment to you. It’s considered a 

recovery of your basis. The contract price is the 

selling price minus the mortgage.

Example. You sell property with an adjusted basis of $19,000. You have selling expenses 

of $1,000. The buyer assumes your existing 

mortgage of $15,000 and agrees to pay you 

$10,000 (a cash down payment of $2,000 and 

$2,000 (plus 8% interest) in each of the next 4 

years).

The selling price is $25,000 ($15,000 + 

$10,000). Your gross profit is $5,000 ($25,000 − 

$20,000 installment sale basis). The contract 

price is $10,000 ($25,000 − $15,000 mortgage). 

Your gross profit percentage is 50% ($5,000 ÷ 

$10,000). You report half of each $2,000 payment received as gain from the sale. You also 

report all interest you receive as ordinary income.

Mortgage more than basis. If the buyer 

assumes a mortgage that is more than your installment sale basis in the property, you recover 

your entire basis. The part of the mortgage 

greater than your basis is treated as a payment 

received in the year of sale.

To figure the contract price, subtract the 

mortgage from the selling price. This is the total 

amount (other than interest) you will receive directly from the buyer. Add to this amount the 

payment you’re considered to have received 

(the difference between the mortgage and your 

installment sale basis). The contract price is 

then the same as your gross profit from the 

sale.

If the mortgage the buyer assumes is 

equal to or more than your installment 

sale basis, the gross profit percentage 

will always be 100%.

TIP

Chapter 10 Installment Sales Page 63
Example. The selling price for your property is $90,000. The buyer will pay you $10,000 

annually (plus 8% interest) over the next 3 years 

and assume an existing mortgage of $60,000. 

Your adjusted basis in the property is $44,000. 

You have selling expenses of $6,000, for a total 

installment sale basis of $50,000. The part of 

the mortgage that is more than your installment 

sale basis is $10,000 ($60,000 − $50,000). This 

amount is included in the contract price and 

treated as a payment received in the year of 

sale. The contract price is $40,000:

Selling price $90,000 

Minus: Mortgage (60,000)

Amount actually received $30,000 

Add difference:

Mortgage $60,000

Minus: Installment sale basis (50,000) 10,000 

Contract price $40,000 

Your gross profit on the sale is also $40,000:

Selling price $90,000 

Minus: Installment sale basis (50,000)

Gross profit $40,000 

Your gross profit percentage is 100%. Report 100% of each payment (less interest) as 

gain from the sale. Treat the $10,000 excess of 

the mortgage over your installment sale basis 

as a payment and report 100% of it as gain in 

the year of sale.

Buyer assumes other debts. If the buyer assumes any other debts, such as a loan or back 

taxes, it may be considered a payment to you in 

the year of sale.

If the buyer assumes the debt instead of 

paying it off, only part of it may have to be treated as a payment. Compare the debt to your installment sale basis in the property being sold. 

If the debt is less than your installment sale basis, none of it is treated as a payment. If it’s 

more, only the difference is treated as a payment. If the buyer assumes more than one debt, 

any part of the total that is more than your installment sale basis is considered a payment. 

These rules are the same as the rules discussed earlier under Buyer assumes mortgage. 

However, they apply only to the following types 

of debt the buyer assumes.

• Those acquired from ownership of the 

property you’re selling, such as a mortgage, a lien, overdue interest, or back 

taxes.

• Those acquired in the ordinary course of 

your business, such as a balance due for 

inventory you purchased.

If the buyer assumes any other type of debt, 

such as a personal loan or your legal fees relating to the sale, it’s treated as if the buyer had 

paid off the debt at the time of the sale. The 

value of the assumed debt is then considered a 

payment to you in the year of sale.

Property used as a payment. If you receive 

property rather than money from the buyer, it’s 

still considered a payment in the year received. 

However, see Trading property for like-kind 

property, later. Generally, the amount of the 

payment is the property’s FMV on the date you 

receive it.

Exception. If the property the buyer gives 

you is payable on demand or readily tradable 

(see examples later), the amount you should 

consider as payment in the year received is:

• The FMV of the property on the date you 

receive it if you use the cash method of accounting;

• The face amount of the obligation on the 

date you receive it if you use an accrual 

method of accounting; or

• The stated redemption price at maturity 

less any OID or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. See Unstated interest, later.

Examples. If you receive a note from the 

buyer as payment, and the note stipulates that 

you can demand payment from the buyer at any 

time, the note is payable on demand. If you receive marketable securities from the buyer as 

payment, and you can sell the securities on an 

established securities market (such as the New 

York Stock Exchange) at any time, the securities are readily tradable. In these examples, 

use the above rules to determine the amount 

you should consider as payment in the year received.

Debt not payable on demand. Any evidence of debt you receive from the buyer that 

isn’t payable on demand isn’t considered a payment. This is true even if the debt is guaranteed 

by a third party, including a government agency.

Fair market value (FMV). This is the price 

at which property would change hands between 

a willing buyer and a willing seller, neither being 

under any compulsion to buy or sell and both 

having a reasonable knowledge of all the necessary facts.

Third-party note. If the property the buyer 

gives you is a third-party note (or other obligation of a third party), you’re considered to have 

received a payment equal to the note’s FMV. 

Because the FMV of the note is itself a payment 

on your installment sale, any payments you later 

receive from the third party aren’t considered 

payments on the sale. The excess of the note’s 

face value over its FMV is interest. Exclude this 

interest in determining the selling price of the 

property. However, see Exception under Property used as a payment, earlier.

Example. You sold real estate in an installment sale. As part of the down payment, the 

buyer assigned to you a $50,000, 8% third-party 

note. The FMV of the third-party note at the time 

of the sale was $30,000. This amount, not 

$50,000, is a payment to you in the year of sale. 

The third-party note had an FMV equal to 60% 

of its face value ($30,000 ÷ $50,000), so 60% of 

each principal payment you receive on this note 

is a nontaxable return of capital. The remaining 

40% is interest taxed as ordinary income.

Bond. A bond or other evidence of debt 

you receive from the buyer that is payable on 

demand or readily tradable in an established 

securities market is treated as a payment in the 

year you receive it. For more information on the 

amount you should treat as a payment, see Exception under Property used as a payment, earlier.

If you receive a government or corporate 

bond for a sale before October 22, 2004, and 

the bond has interest coupons attached or can 

be readily traded in an established securities 

market, you’re considered to have received payment equal to the bond’s FMV. However, see 

Exception under Property used as a payment, 

earlier.

Buyer’s note. The buyer’s note (unless 

payable on demand) isn’t considered payment 

on the sale. However, its full face value is included when figuring the selling price and the contract price. Payments you receive on the note 

are used to figure your gain in the year received.

Sale to a related person. If you sell depreciable property to a related person and the sale is 

an installment sale, you may not be able to report the sale using the installment method. For 

information on these rules, see the Instructions 

for Form 6252 and Related parties under Installment Sale of a Farm, earlier.

Trading property for like-kind property. If 

you trade business or investment real property 

solely for other business or investment real 

property of a like kind, you can postpone reporting the gain from the trade. These trades are 

known as like-kind exchanges. The property 

you receive in a like-kind exchange is treated as 

if it were a continuation of the property you gave 

up. A trade isn’t a like-kind exchange if the property you trade or the property you receive is 

property you hold primarily for sale to customers. See Like-Kind Exchanges in chapter 8 for a 

discussion of like-kind property.

If, in addition to like-kind property, you receive an installment obligation in the exchange, 

the following rules apply to determine installment sale income each year.

• The contract price is reduced by the FMV 

of the like-kind property received in the 

trade.

• The gross profit is reduced by any gain on 

the trade that can be postponed.

• Like-kind property received in the trade 

isn’t considered payment on the installment obligation.

Unstated interest. An installment sale contract may provide that each deferred payment 

on the sale will include interest or that there will 

be an interest payment in addition to the principal payment. Interest provided in the contract is 

called stated interest.

If an installment sale contract doesn’t provide for adequate stated interest, section 483 

provides that part of the stated principal amount 

of the contract may be recharacterized as interest. This interest is called unstated interest.

If section 1274 applies to the contract, this 

interest is called original issue discount (OID).

Generally, if a buyer gives a debt in consideration for personal-use property, the unstated 

interest rules don’t apply to the buyer. Therefore, the buyer can’t deduct the unstated interest. The seller must report the unstated interest 

as income. Personal-use property is any property in which substantially all of its use by the 

buyer isn’t in connection with a trade or business or an investment activity.

If the debt is subject to section 483 rules and 

is also subject to the below-market loan rules, 

Page 64 Chapter 10 Installment Sales
such as a gift loan, compensation-related loan, 

or corporation-shareholder loan, then both parties are subject to the below-market loan rules 

rather than the unstated interest rules.

Unstated interest reduces the stated selling 

price of the property and the buyer’s basis in the 

property. It increases the seller’s interest income and the buyer’s interest expense.

In general, an installment sale contract provides for adequate stated interest if the stated 

interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR).

The AFRs are published monthly in the 

Internal Revenue Bulletin (IRB). You 

can access the IRBs at IRS.gov/

Guidance.

More information. For more information, 

see Unstated Interest and Original Issue Discount (OID) in Pub. 537.

Example

On January 3, 2023, you sold your farm, including the home, farmland, and buildings. You received $50,000 down and the buyer’s note for 

$200,000. In addition, the buyer assumed an 

outstanding $50,000 mortgage on the farmland. 

The total selling price was $300,000. The note 

payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2023. Your selling expenses were 

$15,000.

Adjusted basis and depreciation. The adjusted basis and depreciation claimed on each asset sold are as follows:

Seller’s Depreciation Adjusted

 Basis Claimed Basis

Home* $33,743 $0 $33,743

Farmland 73,610 0 73,610

Buildings 66,630 31,500 35,130

* Owned and used as main home for at least 2 of the 5 years 

prior to the sale.

Adjusted basis for installment sale purposes. To determine the adjusted basis for installment sale purposes, prorate the selling expense 

based on the relative FMV of each asset and 

add it to the adjusted basis (see above).

Selling

Expense

Adjusted

Basis

Adjusted 

Basis for

Installment

Sale

Home* $3,000 $33,743 $36,743 

Farmland 8,250 73,610 81,860 

Buildings 3,750 35,130 38,880 

$15,000 $142,483 $157,483

* Owned and used as main home for at least 2 of the 5 years 

prior to the sale.

Depreciation recapture. The buildings are 

section 1250 property. There may be specific 

rules for depreciation recapture of buildings 

(1250 property) using the straight-line method. 

See chapter 9 for more information on depreciation recapture.

Special rules may apply when you sell section 1250 assets depreciated under the 

straight-line method. See the Unrecaptured 

Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). As payments 

are received on the installment sale, unrecognized 1250 gain must be recognized before any 

section 1231 gain is recognized. See chapter 3 

of Pub. 544 for more information on section 

1250 assets.

Gross profit. The following table shows each 

asset reported on the installment method, its 

selling price, adjusted basis for installment sale, 

gain, and gross profit.

Selling Adjusted Gross

Price Basis Gain Profit

Home $60,000 $36,743 $23,257 $0

Farmland 165,000 81,860 83,140 83,140

Buildings 75,000 38,880 36,120 36,120

$300,000 $157,483 $142,517 $119,260

Home. The gain on the home ($23,257) is 

excluded from your income because it qualifies 

for the exclusion of gain from the sale of a principal residence. Therefore, don’t include that 

gain when you figure your gross profit percentage.

Section 1231 gains. The gain on the farmland 

and buildings is reported as section 1231 gains. 

See Section 1231 Gains and Losses in chapter 9.

Contract price and gross profit percentage. 

The contract price is $250,000. This is calculated by subtracting the $50,000 mortgage assumed from the $300,000 selling price.

Gross profit percentage for the sale is 

47.704% ($119,260 gross profit ÷ $250,000 

contract price). The gross profit percentage for 

each asset is figured as follows:

Percent

Home 0

Farmland ($83,140 ÷ $250,000) 33.256

Buildings ($36,120 ÷ $250,000) 14.448

Total 47.704

Figuring the gain to report on the installment method. One hundred percent (100%) 

of each payment is reported on the installment 

method. The total amount received on the sale 

in 2023 is $75,000 ($50,000 down payment + 

$25,000 payment on July 1). The installment 

sale part of the total payments received in 2023 

is also $75,000. Figure the gain to report for 

each asset by multiplying its gross profit percentage times $75,000.

Income

Home $0

Farmland (33.256% × $75,000) 24,942

Buildings (14.448% × $75,000) 10,836

Total installment income for 2023 $35,778

Reporting the sale. Report the installment 

sale on three separate Forms 6252. One form 

should be filed for each component of the sale. 

Then, report the amounts from Form 6252 on 

Form 4797 and Schedule D (Form 1040). Attach a separate page to each Form 6252 that 

shows the computations in the example.

If you sell depreciable business property, prepare Form 4797 first in order to 

figure the amount to enter on Form 

6252.

Section 1231 gains. The gains on the 

farmland and buildings are section 1231 gains. 

They are combined with any other section 1231 

gains and losses. A net section 1231 gain is 

capital gain and a net section 1231 loss is an 

ordinary loss.

Installment income for years after 2023. 

You figure installment income for the years after 

2023 by applying the same gross profit percentages to the payments you receive each year. If 

you receive $50,000 during the year, the entire 

$50,000 is considered received on the installment sale (100% × $50,000). You realize income as follows:

Income

Home $0

Farmland (33.256% × $50,000) 16,628

Buildings (14.448% × $50,000) 7,224

Total installment income $23,852

In this example, no gain is ever recognized 

from the sale of your home. You will combine 

your section 1231 gains from this sale with section 1231 gains and losses from other sales in 

each of the later years to determine whether to 

report them as ordinary or capital gains. The interest received with each payment will be included in full as ordinary income.

Note. Refer to Pub. 523 to determine 

whether or not the sale of the personal residence will result in a taxable event.

Summary. The installment income (rounded to the nearest dollar) from the sale of the 

farm is reported as follows:

Selling price $300,000

Minus: Adjusted basis for installment 

reporting

(157,483)

Minus: Excluded gain from home (23,257)

Gross profit $119,260

Gain reported in 2023 (year of sale) $35,778

Gain reported in 2024:

$50,000 × 47.704% 23,852

Gain reported in 2025:

$50,000 × 47.704% 23,852

Gain reported in 2026:

$50,000 × 47.704% 23,852

Gain reported in 2027:

$25,000 × 47.704% 11,926

Total gain reported $119,260

TIP

Chapter 10 Installment Sales Page 65
11.

Casualties, 

Thefts, and 

Condemnations

Reminder

Special rules for qualified disaster losses. 

Special rules apply to federally declared disaster area losses. A federally declared disaster is 

a disaster that occurred in an area declared by 

the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

See Disaster Area Losses, later, and Pub. 

547, Casualties, Disasters, and Thefts, for more 

information on the special relief. Also, see 

IRS.gov/DisasterTaxRelief for more information.

Introduction

This chapter explains the tax treatment of casualties, thefts, and condemnations. A casualty 

occurs when property is damaged, destroyed, 

or lost due to a sudden, unexpected, or unusual 

event. A theft occurs when property is stolen. A 

condemnation occurs when private property is 

legally taken for public use without the owner's 

consent. A casualty, theft, or condemnation may 

result in a deductible loss or taxable gain on 

your federal income tax return. You may have a 

deductible loss or a taxable gain even if only a 

portion of your property was affected by a casualty, theft, or condemnation.

An involuntary conversion occurs when you 

receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, 

or certain other events discussed in this chapter.

If an involuntary conversion results in a gain 

and you buy qualified replacement property 

within the specified replacement period, you 

can postpone reporting the gain on your income 

tax return. For more information, see Postponing Gain, later.

Topics

This chapter discusses:

• Casualties and thefts

• How to figure a loss or gain

• Other involuntary conversions

• Postponing gain

• Disaster area losses

• Reporting gains and losses

• Drought involving property connected with 

a trade or business or a transaction 

entered into for profit

Useful Items

You may want to see:

Publication

Selling Your Home

Taxable and Nontaxable Income

Net Operating Losses (NOLs) for 

Individuals, Estates, and Trusts

Corporations

Sales and Other Dispositions of 

Assets

Casualties, Disasters, and Thefts

Casualty, Disaster, and Theft Loss 

Workbook (Personal-Use Property)

usiness Casualty, Disaster, and 

Theft Loss Workbook

Disaster Relief

Form (and Instructions)

c(o) Itemized

Deductions

c(o) Capital Gains and 

Losses

c(o) Profit or Loss From 

Farming

Casualties and Thefts

Sales of Business Property

See chapter 16 for information about getting 

publications and forms.

Casualties and Thefts

For tax years 2018 through 2025, personal casualty and theft losses of an individual are deductible only to the extent they're attributable to a federally declared 

disaster. An exception to the rule limiting the deduction for personal casualty and theft losses to 

federal disaster losses applies where you have 

personal casualty gains to the extent the losses 

don't exceed your gains.

If your property is destroyed, damaged, or 

stolen, you may have a deductible loss. If the insurance or other reimbursement is more than 

the adjusted basis of the destroyed, damaged, 

or stolen property, you may have a taxable gain.

Casualty. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

• A sudden event is one that is swift, not 

gradual or progressive.

• An unexpected event is one that is ordinarily unanticipated and unintended.

• An unusual event is one that isn't a 

day-to-day occurrence and that isn't typical 

of the activity in which you were engaged.

Deductible losses. Deductible casualty 

losses can result from a number of different 

causes, including the following.

• Airplane crashes.

 523

 525

 536

 542

 544

 547

 584

 584-B

 976

 Sch A (Form 1040)

 Sch D (Form 1040)

 Sch F (Form 1040)

 4684

 4797

CAUTION

!

• Car, truck, or farm equipment accidents not 

resulting from your willful act or willful negligence.

• Earthquakes.

• Fires (but see Nondeductible losses next 

for exceptions).

• Floods.

• Freezing.

• Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster, as discussed under 

Disaster Area Losses in Pub. 547.

• Lightning.

• Storms, including hurricanes and tornadoes.

• Terrorist attacks.

• Vandalism.

• Volcanic eruptions.

Note. For tax years 2018 through 2025, if 

you are an individual and you have a loss of 

personal-use property caused by one the 

events listed above, or other casualties or 

thefts, this loss is deductible only if it is attributable to a federally declared disaster. See Pub. 

547 for more information.

Example. The event causing you to suffer a 

personal casualty loss occurred before January 

1, 2018, but the casualty loss was not sustained 

until January 1, 2018, or later. If this loss was 

not attributed to a federally declared disaster, it 

is not deductible.

Nondeductible losses. A casualty loss 

isn't deductible if the damage or destruction is 

caused by the following.

• Accidentally breaking articles such as 

glassware or china under normal conditions.

• A family pet (explained below).

• A fire if you willfully set it, or pay someone 

else to set it.

• A car, truck, or farm equipment accident if 

your willful negligence or willful act caused 

it. The same is true if the willful act or willful 

negligence of someone acting for you 

caused the accident.

• Progressive deterioration (explained below).

Family pet. Loss of property due to damage by a family pet isn't deductible as a casualty loss unless the requirements discussed 

above under Casualty are met.

Example. You keep your horse in your yard. 

The ornamental fruit trees in your yard were 

damaged when your horse stripped the bark 

from them. Some of the trees were completely 

girdled and died. Because the damage wasn't 

unexpected or unusual, the loss isn't deductible.

Progressive deterioration. Loss of property due to progressive deterioration isn't deductible as a casualty loss. This is because the 

damage results from a steadily operating cause 

or a normal process, rather than from a sudden 

event. Examples of damage due to progressive 

deterioration include damage from rust, corrosion, or termites. However, weather-related conditions or disease may cause another type of involuntary conversion. See Other Involuntary 

Conversions, later.

Page 66 Chapter 11 Casualties, Thefts, and Condemnations
Theft. A theft is the taking and removing of 

money or property with the intent to deprive the 

owner of it. The taking of property must be illegal under the law of the state where it occurred 

and it must have been done with criminal intent. 

You don't need to show a conviction for theft.

Theft includes the taking of money or property by the following means.

• Blackmail.

• Burglary.

• Embezzlement.

• Extortion.

• Kidnapping for ransom.

• Larceny.

• Robbery.

• Threats.

• Timber trespass.

The taking of money or property through fraud 

or misrepresentation is theft if it is illegal under 

state or local law.

Decline in market value of stock. You 

can't deduct as a theft loss the decline in market 

value of stock acquired on the open market for 

investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. However, you may be 

able to deduct it as a capital loss on Schedule D 

(Form 1040) if the stock is sold or exchanged or 

becomes completely worthless. You report a 

capital loss on Schedule D (Form 1040). For 

more information about stock sales, worthless 

stock, and capital losses, see chapter 4 of Pub. 

550.

Mislaid or lost property. The simple disappearance of money or property isn't a theft. 

However, an accidental loss or disappearance 

of property can qualify as a casualty if it results 

from an identifiable event that is sudden, unexpected, or unusual.

Example. A car door is accidentally slammed on your hand, breaking the setting of your 

diamond ring. The diamond falls from the ring 

and is never found. The loss of the diamond is a 

casualty.

Farm Property Losses

You can deduct certain casualty or theft losses 

that occur in the business of farming. The following is a discussion of some losses you can 

deduct and some you can't deduct.

Livestock or produce bought for resale. 

Casualty or theft losses of livestock or produce 

bought for resale are deductible if you report 

your income on the cash method. If you report 

your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. You can't take a 

separate deduction.

Livestock, plants, produce, and crops 

raised for sale. Losses of livestock, plants, 

produce, and crops raised for sale are generally 

not deductible if you report your income on the 

cash method. You have already deducted the 

cost of raising these items as farm expenses, so 

their basis is equal to zero.

For plants with a preproductive period of 

more than 2 years, you may have a deductible 

loss if you have a tax basis in the plants. You 

usually have a tax basis if you capitalized the 

expenses associated with these plants under 

the uniform capitalization rules. The uniform 

capitalization rules are discussed in chapter 6.

If you report your income on an accrual 

method, casualty or theft losses are deductible 

only if you included the items in your inventory 

at the beginning of your tax year. You get the 

deduction by omitting the item from your inventory at the close of your tax year. You can't take 

a separate casualty or theft deduction.

Income loss. A loss of future income isn't deductible.

Example. A severe flood destroyed your 

crops. Because you are a cash method taxpayer and already deducted the cost of raising 

the crops as farm expenses, this loss isn't deductible, as explained above under Livestock, 

plants, produce, and crops raised for sale. You 

estimate that the crop loss will reduce your farm 

income by $25,000. This loss of future income 

is also not deductible.

Loss of timber. If you sell timber downed as a 

result of a casualty, you may have a reportable 

gain. If you use the proceeds to buy qualified replacement property, you can postpone reporting 

the gain. See Timber loss in the section Postponing Gain, later.

Property used in farming. Casualty and theft 

losses of property used in your farm business 

usually result in deductible losses. If a fire or 

storm destroyed your barn, or you lose by casualty or theft farm equipment or an animal you 

bought for draft, breeding, dairy, or sport, you 

may have a deductible loss. See How To Figure 

a Loss, later.

Raised draft, breeding, dairy, or sporting 

animals. Generally, losses of raised draft, 

breeding, dairy, or sporting animals don't 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 you use inventories to determine your income and you included the animals in your inventory.

When you include livestock in inventory, its 

last inventory value is its basis. When you lose 

an inventoried animal held for draft, breeding, 

dairy, or sport by casualty or theft during the 

year, decrease ending inventory by the amount 

you included in inventory for the animal. You 

can't take a separate deduction.

How To Figure a Loss

How you figure a deductible casualty or theft 

loss depends on whether the loss was to farm 

or personal-use property and whether the property was stolen or partly or completely destroyed.

Farm property. Farm property is the property 

you use in your farming business. If your farm 

property was completely destroyed or stolen, 

your loss is figured as follows:

Your adjusted basis in the property

MINUS

Any salvage value

MINUS

Any insurance or other reimbursement you 

receive or expect to receive

You can use the schedules in Pub. 

584-B to list your stolen, damaged, or 

destroyed business property and to figure your loss.

If your farm property was partially damaged, 

use the following steps to figure your casualty 

loss.

1. Determine your adjusted basis in the property before the casualty or theft.

2. Determine the decrease in fair market 

value of the property as a result of the 

casualty or theft.

3. From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive 

or expect to receive.

Personal-use property. For tax years 2018 

through 2025, personal casualty and theft losses of an individual are deductible only to the 

extent they're attributable to a federally declared 

disaster. An exception to the rule limiting the deduction for personal casualty and theft losses to 

federal disaster losses applies where you have 

personal casualty gains to the extent the losses 

don't exceed your gains.

Personal-use property is property used by 

you or your family members for personal purposes and not used in your farm business or for income-producing purposes. The following items 

are examples of personal-use property.

• Your main home.

• Furniture and electronics used in your main 

home and not used in a home office or for 

business purposes.

• Clothing and jewelry.

• An automobile used for nonbusiness purposes.

You figure the casualty or theft loss on this property by taking the following steps.

1. Determine your adjusted basis in the property before the casualty or theft.

2. Determine the decrease in fair market 

value of the property as a result of the 

casualty or theft.

3. From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive 

or expect to receive.

You must apply the deduction limits, discussed 

later, to determine your deductible loss.

You can use Pub. 584 to list your stolen 

or damaged personal-use property and 

figure your loss. It includes schedules 

to help you figure the loss on your home, its 

contents, and your motor vehicles.

Adjusted basis. Adjusted basis is your basis (usually cost) increased or decreased by 

various events, such as improvements and 

TIP TIP

Chapter 11 Casualties, Thefts, and Condemnations Page 67
casualty losses. For more information about adjusted basis, see chapter 6.

Decrease in fair market value (FMV). 

The decrease in FMV is the difference between 

the property's value immediately before the 

casualty or theft and its value immediately afterward. FMV is defined in chapter 10 under Payments Received or Considered Received.

Appraisal. To figure the decrease in FMV 

because of a casualty or theft, you generally 

need a competent appraisal. But other measures, such as the cost of cleaning up or making 

repairs and certain safe harbor methods, can be 

used to establish decreases in FMV.

An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent 

appraiser. The appraiser must recognize the effects of any general market decline that may occur along with the casualty. This information is 

needed to limit any deduction to the actual loss 

resulting from damage to the property.

Note. Several factors are important in evaluating the accuracy of an appraisal. See Pub. 

547 for additional details regarding appraisals.

Cost of cleaning up or making repairs. 

The cost of cleaning up after a casualty isn't 

part of a casualty loss. Neither is the cost of repairing damaged property after a casualty. But 

you can use the cost of cleaning up or making 

repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions.

• The repairs are actually made.

• The repairs are necessary to bring the 

property back to its condition before the 

casualty.

• The amount spent for repairs isn't excessive.

• The repairs fix the damage only.

• The value of the property after the repairs 

is not, due to the repairs, more than the 

value of the property before the casualty.

Landscaping. The cost of restoring landscaping to its original condition after a casualty 

may indicate the decrease in FMV. You may be 

able to measure your loss by what you spend 

on the following.

• Removing destroyed or damaged trees 

and shrubs, minus any salvage you receive.

• Pruning and other measures taken to preserve damaged trees and shrubs.

• Replanting necessary to restore the property to its approximate value before the 

casualty.

Safe harbor methods for individual taxpayers to determine casualty and theft losses. Revenue Procedure 2018-08, 2018-2 

I.R.B. 286, available at IRS.gov/IRB/

2018-02_IRB#RP-2018-08, provides safe harbor methods that you may use to figure the 

amount of your casualty and theft losses of your 

personal-use residential real property and personal belongings. If you qualify for and use a 

safe harbor method described in Revenue Procedure 2018-08, the IRS won't challenge your 

determination. The use of a safe harbor method 

described in Revenue Procedure 2018-08 isn't 

mandatory. For more information about this safe 

harbor method, see Pub. 547.

Related expenses. The incidental expenses due to a casualty or theft, such as expenses 

for the treatment of personal injuries, temporary 

housing, or a rental car, aren't part of your casualty or theft loss. However, they may be deductible as farm business expenses if the damaged 

or stolen property is farm property.

Separate computations for more than one 

item of property. Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for 

each item of property. Then, combine the losses 

to determine your total loss.

Example. A fire on your farm damaged a 

tractor and the barn in which it was stored. The 

tractor had an adjusted basis of $3,300. Its FMV 

was $28,000 just before the fire and $10,000 

immediately afterward. The barn had an adjusted basis of $28,000. Its FMV was $55,000 just 

before the fire and $25,000 immediately afterward. You received insurance reimbursements 

of $2,100 on the tractor and $26,000 on the 

barn. Figure your deductible casualty loss separately for the two items of property.

Tractor Barn

1) Adjusted basis ......... $3,300 $28,000 

2) FMV before fire ......... $28,000 $55,000 

3) FMV after fire .......... 10,000 25,000 

4) Decrease in FMV 

(line 2 − line 3) .........

$18,000 $30,000 

5) Loss (lesser of line 1 or 

line 4) ............... $3,300 $28,000 

6) Minus: Insurance ....... 2,100 26,000 

7) Deductible casualty loss ... $1,200 $2,000

8) Total deductible casualty loss .... $3,200

You spent $10,800 restoring the tractor to its 

pre-casualty condition and $30,000 restoring 

the barn to its pre-casualty condition. Your adjusted basis in the tractor after the casualty is 

$10,800 ($3,300 – $2,100 – $1,200 + $10,800). 

Your adjusted basis in the barn after the casualty is $30,000 ($28,000 – $26,000 – $2,000 + 

$30,000).

Exception for personal-use real property. In figuring a casualty loss on personal-use 

real property, the entire property (including any 

improvements, such as buildings, trees, and 

shrubs) is treated as one item. Figure the loss 

using the smaller of the following.

• The decrease in FMV of the entire property.

• The adjusted basis of the entire property.

Example. You bought a farm in 2000 for 

$300,000. The adjusted basis of the residential 

part is now $64,000. In 2023, a tornado, which 

was a federally declared disaster, blew down 

shade trees and three ornamental trees planted 

at a cost of $3,750 on the residential part. The 

adjusted basis of the residential part includes 

the $3,750. The FMV of the residential part immediately before the tornado was $120,000, 

and $112,500 immediately after the tornado. 

The trees weren’t covered by insurance. Your 

adjusted gross income (AGI) for 2023 is 

$55,000.

1) Adjusted basis ................ $64,000

2) FMV before the tornado .......... $120,000

3) FMV after the tornado ............ 112,500

4) Decrease in FMV (line 2 − line 3) .... $7,500

5) Loss before insurance

(lesser of line 1 or line 4) .......... $7,500

6) Minus: Insurance .............. -0- 

7) Loss before applying limits .... $7,500

As explained later under Deduction Limits on Losses of 

Personal-Use Property, you have to reduce the $7,500 

amount by the applicable limit or limits. As this loss is not 

a qualified disaster loss, the applicable limits would 

be $100 and 10% of your AGI. Because this loss is not 

attributed to a qualified disaster, your deductible loss 

would be figured as follows.

8) Subtract $100 ................. 100

9) Loss after $100 rule ............. $7,400

10) Subtract 10% of $55,000 AGI ...... 5,500

11) Casualty loss deduction ...... $1,900

You never replaced the trees. Your adjusted 

basis in the residential part of your property after the casualty is $62,100 ($64,000 - $1,900).

Insurance and other reimbursements. If you 

receive an insurance or other type of reimbursement, you must subtract the reimbursement 

when you figure your business or personal loss. 

You don't have a casualty or theft loss to the extent you are reimbursed.

If you expect to be reimbursed for part or all 

of your loss, you must subtract the expected reimbursement when you figure your loss. You 

must reduce your loss even if you don't receive 

payment until a later tax year.

Don't subtract from your loss any insurance payments you receive for living 

expenses if you lose the use of your 

main home or are denied access to it because 

of a casualty. You may have to include a portion 

of these payments in your income. See Insurance payments for living expenses in Pub. 547 

for details.

Reimbursement received after deducting loss. If you figure your casualty or theft loss 

using your expected reimbursement, you may 

have to adjust your tax return for the tax year in 

which you get your actual reimbursement.

Actual reimbursement less than expected. If you later receive less reimbursement 

than you expected, include that difference as a 

loss with your other losses (if any) on your return for the year in which you can reasonably 

expect no more reimbursement.

Actual reimbursement more than expected. If you later receive more reimbursement 

than you expected after you have claimed a deduction for the loss, you may have to include the 

extra reimbursement in your income for the year 

you receive it. However, if any part of your original deduction didn't reduce your tax for the earlier year, don't include that part of the reimbursement in your income. Don't refigure your 

tax for the year you claimed the deduction. See 

Recoveries in Pub. 525 to find out how much 

extra reimbursement to include in income.

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Page 68 Chapter 11 Casualties, Thefts, and Condemnations
If the total of all the reimbursements 

you receive is more than your adjusted 

basis in the destroyed or stolen property, you will have a gain on the casualty or 

theft. See Figuring a Gain in Pub. 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or 

theft.

Actual reimbursement same as expected. If you later receive exactly the reimbursement you expected to receive, you don't have to 

include any of the reimbursement in your income and you can't deduct any additional loss.

Lump-sum reimbursement. If you have a 

casualty or theft loss of several assets at the 

same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to 

the FMV of each asset at the time of the loss. 

Figure the gain or loss separately for each asset 

that has a separate basis.

Disaster assistance. Food, medical supplies, and other forms of assistance you receive 

don't reduce your casualty loss, unless they are 

replacements for lost or destroyed property. Excludable cash gifts you receive also do not reduce your casualty loss if there are no restrictions on how you can use the money.

Generally, disaster relief grants received under the Robert T. Stafford Disaster Relief and 

Emergency Assistance Act aren't included in 

your income. See Federal disaster relief grants, 

later, under Disaster Area Losses.

Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster aren't taxable income to you. 

See Qualified disaster relief payments, later, under Disaster Area Losses.

Adjustments to basis. If you have a casualty 

or theft loss, you must decrease your basis in 

the property by any insurance or other reimbursement you receive and by any deductible 

loss. The result is your adjusted basis in the 

property. If you make either of the basis adjustments described above, amounts you spend on 

repairs to restore your property to its pre-casualty condition increase your adjusted basis. See 

Adjusted Basis in chapter 6 for more information.

Example. You built a new grain storage facility for $50,000. This is the basis in your grain 

storage facility because that is the total cost you 

incurred to build it. During the year, a tornado 

damaged your grain storage facility and your allowable casualty loss deduction was $2,000. In 

addition, your insurance company reimbursed 

you $8,000 for the damage and you spent 

$12,000 to restore the grain storage facility to its 

pre-casualty condition. Your adjusted basis in 

the grain storage facility after the casualty is 

$52,000 ($50,000 – $2,000 – $8,000 + 

$12,000).

Deduction Limits on Losses 

of Personal-Use Property

Casualty and theft losses of personal-use property may be deducted using Form 4684. For 

more information see the Instructions for Form 

CAUTION

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4684. This deduction will be entered on Schedule A (Form 1040) as an itemized deduction but 

you can increase your standard deduction by 

qualified disaster losses if you elect not to itemize your deductions. See Increased standard 

deduction reporting, later.

For tax years 2018 through 2025, casualty 

and theft losses of personal-use property are 

deductible only to the extent they're attributable 

to a federally declared disaster.

An exception to the rule above, limiting the 

personal casualty and theft loss deduction to 

losses attributable to a federally declared disaster, applies if you have personal casualty gains 

for the tax year. In this case, you may reduce 

your personal casualty gains by any casualty 

losses not attributable to a federally declared 

disaster. Any excess gain is used to reduce losses from a federally declared disaster.

There are two limits on the deduction for 

casualty or theft loss of personal-use property. 

You figure these limits on Form 4684.

$100 rule. You must reduce each casualty or 

theft loss on personal-use property by $100. 

This rule applies after you have subtracted any 

reimbursement.

10% rule. You must further reduce the total of 

all your casualty or theft losses on personal-use 

property by 10% of your AGI. Apply this rule after you reduce each loss by $100. AGI is reported on line 11 of Form 1040 or 1040-SR.

Example. In June, you discovered that your 

house had been burglarized. Your loss after insurance reimbursement was $2,000. Your AGI 

for the year you discovered the burglary is 

$57,000. Figure your theft loss deduction as follows:

1) Loss after insurance ............... $2,000

2) Subtract $100 .................... 100

3) Loss after $100 rule ................ $1,900

4) Subtract 10% (0.10) × $57,000 AGI ..... $5,700

5) Theft loss deduction .......... -0-

You don't have a theft loss deduction because your loss ($1,900) is less than 10% of 

your AGI ($5,700).

Please note this theft loss was not attributed to a major disaster declared by 

the President under section 401 of the 

Stafford Act and therefore would not be a deductible loss.

If you have personal casualty losses 

that were attributable to a major disaster declared by the President under 

section 401 of the Stafford Act, your net casualty loss from this qualified disaster doesn’t 

have to exceed 10% of your AGI to qualify for 

the deduction. However, this disaster must meet 

the following requirements:

• It must have been declared by the President during the period between January 1, 

2020, and February 25, 2021.

• It must have an incident period that began 

on or after December 28, 2019, or on or 

before December 27, 2020, and ended no 

later than January 25, 2021.

CAUTION

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CAUTION

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Also, the $100 limit per casualty is increased to 

$500. For more information, see the Instructions 

for Form 4684.

If you have a casualty or theft gain in 

addition to a loss, you will have to make 

a special computation before you figure 

your 10% limit. See 10% Rule in Pub. 547.

When Loss Is Deductible

Generally, you can deduct casualty losses that 

aren't reimbursable only in the tax year in which 

they occur. You can generally deduct theft losses that aren't reimbursable only in the year you 

discover your property was stolen.

Example. In November 2022, engine parts 

were stolen from Frank’s stored tractor. Frank 

didn’t know that the theft occurred until March 

2023, when he attempted to start the tractor. 

Any theft loss to which Frank is entitled as a deduction will be deductible in the 2023 tax year.

Losses in federally declared disaster areas 

are subject to different rules. See Disaster Area 

Losses, later, for an exception.

If you aren't sure whether part of your casualty or theft loss will be reimbursed, don't deduct that part until the tax year when you become reasonably certain that it won’t be 

reimbursed.

Leased property. If you lease property from 

someone else, you can deduct a loss on the 

property in the year your liability for the loss is 

determined. This is true even if the loss occurred or the liability was paid in a different year. 

You aren't entitled to a deduction until your liability under the lease can be determined with 

reasonable accuracy. Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned.

Example. Robert leased a tractor from First 

Implement, Inc., for use in his farm business. 

The tractor was destroyed by a tornado in June 

2022. The loss wasn’t insured. First Implement 

billed Robert for the FMV of the tractor on the 

date of the loss. Robert disagreed with the bill 

and refused to pay it. First Implement later filed 

suit in court against Robert. In 2023, Robert and 

First Implement agreed to settle the suit for 

$20,000, and the court entered a judgment in 

favor of First Implement. Robert paid $20,000 in 

June 2023. He can claim the $20,000 as a loss 

on his 2023 tax return.

Net operating loss (NOL). If your deductions, 

including casualty or theft loss deductions, are 

more than your income for the year, you may 

have an NOL. See Pub. 536 for more information.

Generally, an NOL arising in a tax year 

beginning in 2018 or later may not be 

carried back and instead must be carried forward indefinitely. However, farming losses arising in tax years beginning in 2018 or 

later may be carried back two years and carried 

forward indefinitely.

CAUTION

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CAUTION

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Chapter 11 Casualties, Thefts, and Condemnations Page 69
Proof of Loss

To deduct a casualty or theft loss, you must be 

able to prove that there was a casualty or theft. 

You must have records to support the amount 

you claim for the loss.

Casualty loss proof. For a casualty loss, your 

records should show all the following information.

• That you were the owner of the property or, 

if you leased the property from someone 

else, that you were contractually liable to 

the owner for the damage.

• The type of casualty (car accident, fire, 

storm, etc.) and when it occurred.

• That the loss was a direct result of the 

casualty.

• Whether a claim for reimbursement exists 

for which there is a reasonable expectation 

of recovery.

Theft loss proof. For a theft loss, your records 

should show all the following information.

• That you were the owner of the property.

• That your property was stolen.

• When you discovered your property was 

missing.

• Whether a claim for reimbursement exists 

for which there is a reasonable expectation 

of recovery.

Figuring a Gain

A casualty or theft may result in a taxable gain. 

If you receive an insurance payment or other reimbursement that is more than your adjusted 

basis in the destroyed, damaged, or stolen 

property, you have a gain from the casualty or 

theft. You generally report your gain as income 

in the year you receive the reimbursement. 

However, depending on the type of property you 

receive, you may not have to report your gain. 

See Postponing Gain, later.

Your gain is figured as follows:

• The amount you receive, minus

• Your adjusted basis in the property at the 

time of the casualty or theft.

Even if the decrease in FMV of your property 

is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain.

Amount you receive. The amount you receive 

includes any money plus the value of any property you receive, minus any expenses you have 

in obtaining reimbursement. It also includes any 

reimbursement used to pay off a mortgage or 

other lien on the damaged, destroyed, or stolen 

property.

Example. A tornado severely damaged 

your barn. The adjusted basis of the barn was 

$25,000. Your insurance company reimbursed 

you $40,000 for the damaged barn. However, 

you had legal expenses of $2,000 to collect that 

insurance. Your insurance minus your expenses 

to collect the insurance is more than your adjusted basis in the barn, so you have a gain.

1) Insurance reimbursement .......... $40,000

2) Legal expenses ................. 2,000

3) Amount received 

(line 1 − line 2) .................. $38,000

4) Adjusted basis .................. 25,000

5) Gain on casualty (line 3 − line 4).... $13,000

The adjusted basis of the barn after the 

casualty is $0 ($25,000 + $13,000 – $38,000) if 

you recognized gain and did not repair the barn.

Other Involuntary

Conversions

In addition to casualties and thefts, other events 

cause involuntary conversions of property. 

Some of these are discussed in the following 

paragraphs.

Gain or loss from an involuntary conversion 

of your property is usually recognized for tax 

purposes. You report the gain or deduct the loss 

on your tax return for the year you realize it. 

However, depending on the type of property you 

receive, you may not have to report your gain on 

the involuntary conversion. See Postponing 

Gain, later.

Condemnation

Condemnation is the process by which private 

property is legally taken for public use without 

the owner's consent. The property may be 

taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take 

property. The owner receives a condemnation 

award (money or property) in exchange for the 

property taken. A condemnation is a forced 

sale, the owner being the seller and the condemning authority being the buyer.

Threat of condemnation. Treat the sale of 

your property under threat of condemnation as 

a condemnation, provided you have reasonable 

grounds to believe that your property will be 

condemned.

Main home condemned. If you have a gain 

because your main home is condemned, you 

generally can exclude the gain from your income as if you had sold or exchanged your 

home. For information on this exclusion, see 

Pub. 523. If your gain is more than the amount 

you can exclude, but you buy replacement property, you may be able to postpone reporting the 

excess gain. See Postponing Gain, later. (You 

can't deduct a loss from the condemnation of 

your main home.)

More information. For information on how to 

figure the gain or loss on condemned property, 

see chapter 1 in Pub. 544. Also, see Postponing 

Gain, later, to find out if you can postpone reporting the gain.

Irrigation Project

The sale or other disposition of property located 

within an irrigation project to conform to the 

acreage limits of federal reclamation laws is an 

involuntary conversion.

Livestock Losses

Diseased livestock. If your livestock die from 

disease, or are destroyed, sold, or exchanged 

because of disease, even though the disease 

isn't of epidemic proportions, treat these occurrences as involuntary conversions. If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier 

under Farm Property Losses. Otherwise, figure 

the gain or loss from these conversions using 

the rules discussed under Determining Gain or 

Loss in chapter 8. If you replace the livestock, 

you may be able to postpone reporting the gain. 

See Postponing Gain below.

Reporting dispositions of diseased livestock. If you choose to postpone reporting 

gain on the disposition of diseased livestock, 

you must attach a statement to your return explaining that the livestock were disposed of because of disease. You must also include other 

information on this statement. See How To 

Postpone Gain, later, under Postponing Gain.

Weather-related sales of livestock. If you 

sell or exchange livestock (other than poultry) 

held for draft, breeding, or dairy purposes solely 

because of drought, flood, or other weather-related conditions, treat the sale or exchange as 

an involuntary conversion. Only livestock sold in 

excess of the number you normally would sell 

under usual business practice, in the absence 

of weather-related conditions, are considered 

involuntary conversions. Figure the gain or loss 

using the rules discussed under Determining 

Gain or Loss in chapter 8. If you replace the 

livestock, you may be able to postpone reporting the gain. See Postponing Gain below.

Example. It is your usual business practice 

to sell five of your dairy animals during the year. 

This year, you sold 20 dairy animals because of 

drought. The sale of 15 animals is treated as an 

involuntary conversion.

If you don't replace the livestock, you 

may be able to report the gain in the 

following year's income. This rule also 

applies to other livestock (including poultry). 

See Sales Caused by Weather-Related Conditions in chapter 3.

Tree Seedlings

If, because of an abnormal drought, the failure 

of planted tree seedlings is greater than normally anticipated, you may have a deductible 

loss. Treat the loss as a loss from an involuntary 

conversion. The loss equals the previously capitalized reforestation costs you had to duplicate 

on replanting. You deduct the loss on the return 

for the year the seedlings died.

Postponing Gain

Don't report a gain if you receive reimbursement 

in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. Your basis in the 

new property is generally the same as your adjusted basis in the property it replaces.

TIP

Page 70 Chapter 11 Casualties, Thefts, and Condemnations
You must generally report the gain on your 

stolen, destroyed, or other involuntarily converted property if you receive money or unlike 

property as reimbursement. However, you can 

choose to postpone reporting the gain if you 

purchase replacement property similar or related in service or use to your destroyed, stolen, 

or other involuntarily converted property within a 

specific replacement period.

If you have a gain on damaged property, you 

can postpone reporting the gain if you spend an 

amount at least equal to the reimbursement to 

restore the property.

To postpone reporting all the gain, the cost 

of your replacement property must be at least 

as much as the reimbursement you receive. If 

the cost of the replacement property is less than 

the reimbursement, you must include the gain in 

your income up to the amount of the unspent reimbursement. For more information about postponing gain on the replacement of damaged 

property, see Code section 1033.

Example 1. In 1985, you constructed a 

barn to store farm equipment at a cost of 

$35,000. In 1990, you added a grain bin to the 

barn at a cost of $15,000. In May of this year, 

the property was worth $70,000. In June, the 

barn and grain storage facility were destroyed 

by a tornado. At the time of the tornado, you had 

an adjusted basis of $0 in the property. You received $70,000 from the insurance company. 

You had a gain of $70,000 ($70,000 – $0).

You spent $65,000 to rebuild the barn and 

grain bin. Since this is less than the insurance 

proceeds received, you must include $5,000 

($70,000 – $65,000) in your income. You 

choose to postpone the remaining $65,000 

gain.

Example 2. In 1993, you bought a cabin in 

the mountains for your personal use at a cost of 

$48,000. You made no further improvements or 

additions to it. When a storm destroyed the 

cabin this January, the cabin was worth 

$250,000. You received $146,000 from the insurance company in March. You had a gain of 

$98,000 ($146,000 − $48,000).

You spent $144,000 to rebuild the cabin. 

Since this is less than the insurance proceeds 

received, you must include $2,000 ($146,000 − 

$144,000) in your income. You choose to postpone reporting the remaining $96,000 gain.

Buying replacement property from a related 

person. You can't postpone reporting a gain 

from a casualty, theft, or other involuntary conversion if you buy the replacement property 

from a related person (discussed later). This 

rule applies to the following taxpayers.

1. C corporations.

2. Partnerships in which more than 50% of 

the capital or profits interest is owned by C 

corporations.

3. Individuals, partnerships (other than those 

in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which 

there are realized gains is more than 

$100,000.

For involuntary conversions described in (3) 

above, gains can't be offset by any losses when 

determining whether the total gain is more than 

$100,000. If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. If the property is owned 

by an S corporation, the $100,000 limit applies 

to the S corporation and each shareholder.

Exception. This rule doesn’t apply if the related person acquired the property from an unrelated person within the period of time allowed 

for replacing the involuntarily converted property.

Related persons. Under this rule, related 

persons include, for example, a parent and 

child, a brother and sister, a corporation and an 

individual who owns more than 50% of its outstanding stock, and two partnerships in which 

the same C corporations own more than 50% of 

the capital or profits interests. For more information on related persons, see Nondeductible 

Loss under Sales and Exchanges Between Related Persons in chapter 2 of Pub. 544.

Death of a taxpayer. If a taxpayer dies after 

realizing a gain, but before buying replacement 

property, the gain must be reported for the year 

in which the decedent realized the gain. The executor of the estate or the person succeeding to 

the funds from the involuntary conversion can't 

postpone reporting the gain by buying replacement property.

Replacement Property

You must buy replacement property for the specific purpose of replacing your property. Your replacement property must be similar or related in 

service or use to the property it replaces. You 

don't have to use the same funds you receive as 

reimbursement for your old property to acquire 

the replacement property. If you spend the 

money you receive for other purposes, and borrow money to buy replacement property, you 

can still choose to postpone reporting the gain if 

you meet the other requirements. Property you 

acquire by gift or inheritance doesn’t qualify as 

replacement property.

Owner-user. If you are an owner-user, similar 

or related in service or use means that replacement property must function in the same way as 

the property it replaces. Examples of property 

that functions in the same way as the property it 

replaces are a home that replaces another 

home, a dairy cow that replaces another dairy 

cow, and farm land that replaces other farm 

land. A grinding mill that replaces a tractor 

doesn’t qualify. Neither does a draft animal that 

replaces a breeding or dairy cow.

Soil or other environmental contamination. 

If, because of soil or other environmental contamination, it isn't feasible for you to reinvest 

your insurance money or other proceeds from 

destroyed or damaged livestock in property 

similar or related in service or use to the livestock, you can treat other property (including 

real property) used for farming purposes as 

property similar or related in service or use to 

the destroyed or damaged livestock.

Weather-related conditions. If, because of 

drought, flood, or other weather-related conditions, it isn't feasible for you to reinvest the insurance money or other proceeds in property 

similar or related in service or use to the livestock, you can treat other property (excluding 

real property) used for farming purposes as 

property similar or related in service or use to 

the livestock you disposed of.

Example. Each year, you normally sell 25 

cows from your beef herd. However, this year 

you had to sell 50 cows. This is because a severe drought significantly reduced the amount 

of hay and pasture yield needed to feed your 

herd for the rest of the year. Because, as a result of the severe drought, it isn't feasible for you 

to use the proceeds from selling the extra cows 

to buy new cows, you can treat other property 

(excluding real property) used for farming purposes as property similar or related in service or 

use to the cows you sold.

Standing crop destroyed by casualty. If a 

storm or other casualty destroyed your standing 

crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement 

property. The costs of planting and raising a 

new crop qualify as replacement costs for the 

destroyed crop only if you use the crop method 

of accounting (discussed in chapter 2). In that 

case, the costs of bringing the new crop to the 

same level of maturity as the destroyed crop 

qualify as replacement costs to the extent they 

are incurred during the replacement period.

Timber loss. Standing timber (not land) you 

bought with the proceeds from the sale of timber downed as a result of a casualty, such as 

high winds, earthquakes, or volcanic eruptions, 

qualifies as replacement property. If you bought 

the standing timber within the replacement period, you can postpone reporting the gain.

Business or income-producing property located in a federally declared disaster area. 

If your destroyed business or income-producing 

property was located in a federally declared disaster area, any tangible replacement property 

you acquire for use in any business is treated as 

similar or related in service or use to the destroyed property. For more information, see Disaster Area Losses in Pub. 547.

Substituting replacement property. Once 

you have acquired qualified replacement property and have designated it as replacement 

property in a statement attached to your tax return, you can't substitute other qualified replacement property. This is true even if you acquire 

the other property within the replacement period. However, if you discover that the original 

replacement property wasn’t qualified replacement property, you can, within the replacement 

period, substitute the new qualified replacement 

property.

Basis of replacement property. You must reduce the cost basis of your replacement property by the amount of postponed gain. In this 

way, tax on the gain is postponed until you dispose of the replacement property. Amounts 

paid for replacement property that exceed the 

Chapter 11 Casualties, Thefts, and Condemnations Page 71
amount of the gain postponed can be depreciated.

Example. In 2023, you sold 50 cows with a 

$0 basis due to severe drought. This is more 

than the 25 cows you normally sell each year. 

The proceeds from the sale of the additional 25 

cows are $31,250. Because of the severe 

drought, it isn’t feasible for you to use these proceeds to buy replacement cows. Instead, you 

use the proceeds to buy a hay baler for 

$40,000. You choose to postpone reporting the 

$31,250 gain ($31,250 – $0) from the sale of the 

cows. Therefore, the basis of the hay baler is 

$8,750 ($40,000 – $31,250).

Replacement Period

To postpone reporting your gain, you must buy 

replacement property within a specified period 

of time. This is the replacement period.

The replacement period begins on the date 

your property was damaged, destroyed, stolen, 

sold, or exchanged. The replacement period 

generally ends 2 years after the close of the first 

tax year in which you realize any part of your 

gain from the involuntary conversion.

Example. You are a calendar year taxpayer. 

Farm equipment that cost $2,200 was stolen 

from your farm. You discovered the theft when 

you returned to your farm on November 11, 

2022. Your insurance company investigated the 

theft and didn’t settle your claim until January 3, 

2023, when they paid you $3,000. You first realized a gain from the reimbursement for the theft 

during 2023, so you have until December 31, 

2025, to replace the property.

Main home in disaster area. For your main 

home (or its contents) located in a federally declared disaster area, the replacement period 

ends 4 years after the close of the first tax year 

in which you realize any part of your gain from 

the involuntary conversion. See Disaster Area 

Losses, later.

Weather-related sales of livestock in an 

area eligible for federal assistance. For the 

sale or exchange of livestock due to drought, 

flood, or other weather-related conditions in an 

area eligible for federal assistance, the replacement period ends 4 years after the close of the 

first tax year in which you realize any part of 

your gain from the sale or exchange. The IRS 

may extend the replacement period on a regional basis if the weather-related conditions 

continue for longer than 3 years.

For information on extensions of the replacement period because of persistent drought, see 

Notice 2006-82, 2006-39 I.R.B. 529, available 

at IRS.gov/IRB/2006-39_IRB/ar11.html. For a 

list of counties for which exceptional, extreme, 

or severe drought was reported during the 12 

months ending August 31, 2023, see Notice 

2023–67, available at IRS.gov.

Condemnation. The replacement period for a 

condemnation begins on the earlier of the following dates.

• The date on which you disposed of the 

condemned property.

• The date on which the threat of condemnation began.

The replacement period generally ends 2 years 

after the close of the first tax year in which any 

part of the gain on the condemnation is realized. But see Main home in disaster area, earlier, for an exception.

Business or investment real property. If 

real property held for use in a trade or business 

or for investment (not including property held 

primarily for sale) is condemned, the replacement period ends 3 years after the close of the 

first tax year in which any part of the gain on the 

condemnation is realized.

Extension. You can apply for an extension of 

the replacement period. Send your written application to the Internal Revenue Service Center 

where you file your tax return. See your tax return instructions for the address. Include all the 

details about your need for an extension. Make 

your application before the end of the replacement period. However, you can file an application within a reasonable time after the replacement period ends if you can show a good 

reason for the delay. You will get an extension of 

the replacement period if you can show reasonable cause for not making the replacement 

within the regular period.

How To Postpone Gain

You postpone reporting your gain by reporting 

your choice on your tax return for the year you 

have the gain. You have the gain in the year you 

receive insurance proceeds or other reimbursements that result in a gain.

Required statement. You should attach a 

statement to your return for the year you have 

the gain. This statement should include all the 

following information.

• The date and details of the casualty, theft, 

or other involuntary conversion.

• The insurance or other reimbursement you 

received.

• How you figured the gain.

Replacement property acquired before 

return filed. If you acquire replacement property before you file your return for the year you 

have the gain, your statement should also include detailed information about all the following items.

• The replacement property.

• The postponed gain.

• The basis adjustment that reflects the postponed gain.

• Any gain you are reporting as income.

Replacement property acquired after return filed. If you intend to buy replacement 

property after you file your return for the year 

you realize gain, your statement should also say 

that you are choosing to replace the property 

within the required replacement period.

You should then attach another statement to 

your return for the year in which you buy the replacement property. This statement should contain detailed information on the replacement 

property. If you acquire part of your replacement 

property in one year and part in another year, 

you must attach a statement to each year's 

return. Include in the statement detailed information on the replacement property bought in 

that year.

Reporting weather-related sales of livestock. If you choose to postpone reporting the 

gain on weather-related sales or exchanges of 

livestock, show all the following information on a 

statement attached to your return for the tax 

year in which you first realize any of the gain.

• Evidence of the weather-related conditions 

that forced the sale or exchange of the livestock.

• The gain realized on the sale or exchange.

• The number and kind of livestock sold or 

exchanged.

• The number of livestock of each kind you 

would have sold or exchanged under your 

usual business practice.

Show all the following information and the 

preceding information on the return for the year 

in which you replace the livestock.

• The dates you bought the replacement 

property.

• The cost of the replacement property.

• Description of the replacement property 

(for example, the number and kind of the 

replacement livestock).

Amended return for changes regarding replacement property. You must file an amended return (Form 1040-X) for the tax year of the 

gain in either of the following situations.

• You don't acquire replacement property 

within the replacement period, plus extensions. On this amended return, you must 

report the gain and pay any additional tax 

due.

• You acquire replacement property within 

the required replacement period, plus extensions, but at a cost less than the 

amount you receive from the casualty, 

theft, or other involuntary conversion. On 

this amended return, you must report the 

part of the gain that can't be postponed 

and pay any additional tax due.

Disaster Area Losses

Personal casualty and theft losses of an individual are subject to special rules for those personal casualty and theft losses attributable to 

federally declared disasters that occur during 

tax years beginning after 2017.

Personal casualty and theft losses are subject to the $100 per casualty and 10% of your 

AGI limitations. In this case you reduce your 

personal casualty gains by any casualty losses 

not attributable to a federally declared disaster. 

Net qualified disaster losses (disaster losses 

reduced by any excess personal casualty gains) 

are subject to the $500 per casualty limitation 

but are not subject to the 10% of your AGI limitation.

Page 72 Chapter 11 Casualties, Thefts, and Condemnations
For tax years 2018 through 2025, personal casualty and theft losses of an individual are deductible only to the extent they're attributable to a federally declared 

disaster. An exception to the rule limiting the deduction for personal casualty and theft losses to 

federal disaster losses applies where you have 

personal casualty gains to the extent the losses 

don't exceed your gains.

A list of the areas warranting public or 

individual assistance (or both) under 

the Act is available at the Federal 

Emergency Management Agency (FEMA) web 

site at FEMA.gov/Disasters.

Qualified disaster losses. A qualified disaster loss is an individual's casualty or theft loss 

of personal-use property that is attributable to a 

major disaster that was declared by the President during the period between January 1, 

2020, and February 25, 2021. However, in order 

to qualify, this disaster must have an incident 

period that began on or after December 28, 

2019, or on or before December 27, 2020, and 

must have ended no later than January 26, 

2021. The definition of a qualified disaster loss 

does not extend to any major disaster which 

has been declared only by reason of COVID-19.

A qualified disaster loss also includes an individual’s casualty or theft loss of personal-use 

property that is attributable to:

• A major disaster declared by the President 

under section 401 of the Stafford Act in 

2016;

• Hurricane Harvey;

• Tropical Storm Harvey;

• Hurricane Irma;

• Hurricane Maria;

• The California wildfires in 2017 and January 2018; and

• A major disaster that was declared by the 

President under section 401 of the Stafford 

Act and that occurred in 2018 and before 

December 21, 2019, and continued until 

no later than January 19, 2020 (except 

those attributable to the California wildfires 

in January 2018 that received prior relief).

See IRS.gov/DisasterTaxRelief for date-specific declarations associated with these disasters and for more information.

Casualty and theft losses of personal-use 

property may be claimed as a qualified disaster 

loss on your Form 4684 for the year in which the 

loss was sustained. This deduction will be entered on Schedule A (Form 1040) as an itemized deduction but you can increase your standard deduction by qualified disaster losses if you 

elect not to itemize your deductions. See Increased standard deduction reporting, later.

Moreover, your net casualty loss from these 

disasters does not need to exceed 10% of your 

AGI to qualify for the deduction, but the $100 

limit per casualty is increased to $500.

Disaster year. The disaster year is the tax year 

in which you sustained the loss attributable to a 

federally declared disaster. Generally, a disaster 

loss is sustained in the year the disaster occurred. A disaster loss may also be sustained in a 

year after the disaster occurred. For example, if 

a claim for reimbursement exists for which there 

is a reasonable prospect of recovery, no part of 

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ceived is sustained until it can be ascertained 

with reasonable certainty whether you will be 

reimbursed.

When to deduct the loss. You must generally 

deduct a casualty loss in the disaster year. 

However, if you have a deductible loss from a 

disaster that occurred in an area warranting 

public or individual assistance (or both), you 

can choose to deduct that loss on your return or 

amended return for the tax year immediately 

preceding the disaster year. If you make this 

choice, the loss is treated as having occurred in 

the preceding year.

Claiming a qualifying disaster loss on 

the previous year's return may result in 

a lower tax for that year, often producing or increasing a cash refund.

You must make an election to deduct a 2023 

disaster loss on your 2022 return on or before 

the date that is 6 months after the regular due 

date for filing your original return (without extensions) for the disaster year. For calendar year 

individual taxpayers, the deadline for electing to 

take a 2023 disaster loss on your 2022 tax return is October 15, 2024.

If you claimed a deduction for a disaster loss 

in the disaster year and you wish to deduct the 

loss in the preceding year, you must file an 

amended return to remove the previously deducted loss on or before you file the return or 

amended return for the preceding year that includes the disaster loss deduction. For more information, see Pub. 547.

Increased standard deduction reporting. If 

you have a net qualified disaster loss on Form 

4684, line 15, and you aren’t itemizing your deductions, you can claim an increased standard 

deduction using Schedule A (Form 1040) by doing the following.

1. Enter the amount from Form 4684, line 15, 

on the dotted line next to line 16 on Schedule A and the description “Net Qualified 

Disaster Loss.”

2. Enter on the dotted line next to line 16 your 

standard deduction amount and the description “Standard Deduction Claimed 

With Qualified Disaster Loss.”

3. Combine these two amounts and enter on 

line 16 of Schedule A and Form 1040 or 

1040-SR, line 12.

The AMT adjustment for the standard 

deduction is made retroactively inapplicable to net qualified disaster losses. 

See Taxpayers who also file the 2023 Form 

6251, Alternative Minimum Tax for Individuals, 

in the Instructions for Form 4684 for more information.

Federal disaster relief grants. Don't include 

post-disaster relief grants received under the 

Robert T. Stafford Disaster Relief and Emergency Assistance Act in your income if the grant 

payments are made to help you meet necessary expenses or serious needs for medical, 

dental, housing, personal property, transportation, or funeral expenses. Don't deduct casualty 

losses or medical expenses to the extent they 

are specifically reimbursed by these disaster relief grants. If the casualty loss was specifically 

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reimbursed by the grant and you received the 

grant after the year in which you deducted the 

casualty loss, see Reimbursement received after deducting loss, earlier. Unemployment assistance payments under the Act are taxable 

unemployment compensation.

Qualified disaster relief payments. Qualified 

disaster relief payments aren't included in the 

income of individuals to the extent any expenses compensated by these payments aren't otherwise compensated for by insurance or other 

reimbursement. These payments aren't subject 

to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). No withholding applies to these payments.

Qualified disaster relief payments include 

payments you receive (regardless of the 

source) for the following expenses.

• Reasonable and necessary personal, family, living, or funeral expenses incurred as a 

result of a federally declared disaster.

• Reasonable and necessary expenses incurred for the repair or rehabilitation of a 

personal residence due to a federally declared disaster. (A personal residence can 

be a rented residence or one you own.)

• Reasonable and necessary expenses incurred for the repair or replacement of the 

contents of a personal residence due to a 

federally declared disaster.

Qualified disaster relief payments include 

amounts paid by a federal, state, or local government in connection with a federally declared 

disaster to individuals affected by the disaster. 

These payments must be made from a governmental fund, be based on individual or family 

needs, and not be compensation for services. 

Payments to businesses generally don't qualify.

Qualified disaster relief payments don't 

include:

• Payments for expenses otherwise paid for 

by insurance or other reimbursements; or

• Income replacement payments, such as 

payments of lost wages, lost business income, or unemployment compensation.

Qualified disaster mitigation payments. 

Qualified disaster mitigation payments made 

under the Robert T. Stafford Disaster Relief and 

Emergency Assistance Act or the National 

Flood Insurance Act (as in effect on April 15, 

2005) aren’t included in income. These are payments you, as a property owner, received to reduce the risk of future damage to your property. 

You can't increase your basis in property, or 

take a deduction or credit, for expenditures 

made with respect to those payments.

Sale of property under hazard mitigation 

program. Generally, if you sell or otherwise 

transfer property, you must recognize any gain 

or loss for tax purposes unless the property is 

your main home. You report the gain or deduct 

the loss on your tax return for the year you realize it. (You can't deduct a loss on personal-use 

property unless the loss resulted from a casualty, as discussed earlier.) However, if you sell 

or otherwise transfer property to the federal 

government, a state or local government, or an 

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Chapter 11 Casualties, Thefts, and Condemnations Page 73
Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. 

See Postponing Gain, earlier, for the rules that 

apply.

Other federal assistance programs. For 

more information about other federal assistance 

programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3.

Postponed tax deadlines. The IRS may postpone for up to 1 year certain tax deadlines of 

taxpayers who are affected by a federally declared disaster. The tax deadlines the IRS may 

postpone include those for filing income, excise, 

and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA.

If any tax deadline is postponed, the IRS will 

publicize the postponement in your area and 

publish a news release and, where necessary, a 

revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal 

Revenue Bulletin (IRB). Go to IRS.gov/

DisasterTaxRelief to find out if a tax deadline 

has been postponed for your area.

Who is eligible. If the IRS postpones a tax 

deadline, the following taxpayers are eligible for 

the postponement.

• Any individual whose main home is located 

in a covered disaster area (defined next).

• Any business entity or sole proprietor 

whose principal place of business is located in a covered disaster area.

• Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting 

in a covered disaster area.

• Any individual, business entity, or sole proprietorship whose records are needed to 

meet a postponed tax deadline, provided 

those records are maintained in a covered 

disaster area. The main home or principal 

place of business doesn’t have to be located in the covered disaster area.

• Any estate or trust that has tax records 

necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area.

• The spouse on a joint return with a taxpayer who is eligible for postponements.

• Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to 

meet a postponed tax deadline are located 

in the covered disaster area.

• Any individual visiting the covered disaster 

area who was killed or injured as a result of 

the disaster.

• Any other person determined by the IRS to 

be affected by a federally declared disaster.

Covered disaster area. This is an area of 

a federally declared disaster area in which the 

IRS has decided to postpone tax deadlines for 

up to 1 year.

Abatement of interest and penalties. The 

IRS may abate the interest and penalties on the 

underpaid income tax for the length of any postponement of tax deadlines.

Reporting Gains

and Losses

You will have to file one or more of the following 

forms to report your gains or losses from involuntary conversions.

Form 4684. Use this form to report your gains 

and losses from casualties and thefts.

Form 4797. Use this form to report involuntary 

conversions (other than from casualty or theft) 

of property used in your trade or business and 

capital assets held in connection with a trade or 

business or a transaction entered into for profit. 

Also use this form if you have a gain from a 

casualty or theft on trade, business, or income-producing property held for more than 1 

year and you have to recapture some or all of 

your gain as ordinary income.

Form 8949. Use this form to report gain from 

an involuntary conversion (other than from 

casualty or theft) of personal-use property.

Schedule A (Form 1040). Use this form to deduct your losses from casualties and thefts of 

personal-use property and income-producing 

property that you reported on Form 4684.

Schedule D (Form 1040). Use this form to 

carry over the following gains.

• Net gain shown on Form 4797 from an involuntary conversion of business property 

held for more than 1 year.

• Net gain shown on Form 4684 from the 

casualty or theft of personal-use property.

Also use this form to figure the overall gain 

or loss from transactions reported on Form 

8949.

Schedule F (Form 1040). Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale on line 32 

(Other expenses) if you use the cash method of 

accounting and haven’t otherwise deducted 

these losses.

12.

Self-Employment 

Tax

What's New for 2023

Maximum net earnings. The maximum net 

self-employment earnings subject to the social 

security part (12.4%) of the self-employment tax 

is $160,200 for 2023, up from $147,000 for 

2022. There is no maximum limit on earnings 

subject to the Medicare part (2.9%) or, if applicable, the Additional Medicare Tax (0.9%).

The maximum net self-employment earnings 

subject to the social security part of the self-employment tax for 2024 will be discussed in the 

2023 Pub. 334.

Introduction

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals 

who work for themselves. It is similar to the social security and Medicare taxes withheld from 

the pay of most wage earners.

You usually have to pay SE tax if you are 

self-employed. You are usually self-employed if 

you operate your own farm on land you either 

own or rent. You have to figure SE tax on 

Schedule SE (Form 1040).

Farmers who have employees may have to 

pay the employer's share of social security and 

Medicare taxes, as well. See chapter 13 for information on employment taxes.

If your self-employment income exceeds a 

certain threshold amount, you may also be subject to a 0.9% Additional Medicare Tax on the 

income that is more than that amount. You figure this tax using Form 8959. For more information about the Additional Medicare Tax, including the threshold amounts, see the Instructions 

for Form 8959.

SE tax rate. The SE tax rate is 15.3%. The rate 

consists of two parts: 12.4% for social security 

(old-age, survivors, and disability insurance) 

and 2.9% for Medicare (hospital insurance).

Topics

This chapter discusses:

• Why pay SE tax

• How to pay SE tax

• Who must pay SE tax

• Figuring SE earnings

• Landlord participation in farming

• Methods for figuring net earnings

• Reporting SE tax

Useful Items

You may want to see:

Publication

41 Partnerships

Form (and Instructions)

1040 U.S. Individual Income Tax Return

1040-SR U.S. Tax Return for Seniors

Sh F (Frm 1040) Profit or Loss From 

Farming

Sch SE (Form 1040) Self-Employment 

Tax

1065 U.S. Return of Partnership Income

Sch K-1 (Form 1065) Partner's Share of 

Income, Deductions, Credits, etc.

8959 Additional Medicare Tax

 541

 1040

 1040-SR

 Sch F (Form 1040)

 Sch SE (Form 1040)

 1065

 Sch K-1 (Form 1065)

 8959

Page 74 Chapter 12 Self-Employment Tax
See chapter 16 for information about getting 

publications and forms.

Why Pay SE Tax?

Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your 

coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

How to become insured under social security. You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the 

required number of credits (also called “quarters of coverage”).

Earning credits in 2023. You can earn a maximum of four credits per year. For 2023, you 

earn one credit for each $1,640 of combined 

wages and self-employment earnings subject to 

social security tax. You need $6,560 ($1,640 × 

4) of combined wages and self-employment 

earnings subject to social security tax to earn 

four credits in 2023. It doesn’t matter whether 

the income is earned in 1 quarter or is spread 

over 2 or more quarters.

For an explanation of the number of credits 

you must have to be insured and the benefits 

available to you and your family under the social 

security program, consult your nearest Social 

Security Administration (SSA) office or go to the 

SSA website at SSA.gov.

Making false statements to get or to increase social security benefits may 

subject you to penalties.

The SSA time limit for posting self-employment earnings. Generally, the SSA will give 

you credit only for self-employment earnings reported on a tax return filed within 3 years, 3 

months, and 15 days after the tax year you 

earned the income.

If you file your tax return or report a 

change in your self-employment earnings after the SSA time limit for posting 

self-employment earnings, the SSA may 

change its records, but only to remove or reduce the amount. The SSA won't change its records to increase your self-employment earnings after the SSA time limit listed above.

How To Pay SE Tax

To pay SE tax, you must have a social security 

number (SSN) or an individual taxpayer identification number (ITIN). This section explains how 

to:

• Obtain an SSN or ITIN, and

• Pay your SE tax using estimated tax.

An ITIN doesn’t entitle you to social security benefits. Obtaining an ITIN 

doesn’t change your immigration or 

employment status under U.S. law.

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Obtaining a SSN. If you have never had an 

SSN, apply for one using Form SS-5, Application for a Social Security Card. The application 

is also available in Spanish. You can get this 

form at any SSA office or by calling 

800-772-1213, or by going to SSA.gov/forms.

If you have an SSN from the time you were 

an employee, you must use that number. Don’t 

apply for a new one.

Replacing a lost social security card. If 

you have a number but lost your card, file Form 

SS-5. You will get a new card showing your original number, not a new number. In some areas, 

you may be able to request a replacement card 

online.

Name change. If your name has changed 

since you received your social security card, 

complete Form SS-5 to report a name change.

You can find more information about 

obtaining a SSN, replacing a lost card, 

or requesting a name change at 

SSA.gov.

Obtaining an ITIN. The IRS will issue you an 

ITIN, for tax use only, if you are a nonresident or 

resident alien and you don’t have, and aren’t eligible to get, an SSN. To apply for an ITIN, file 

Form W-7, Application for IRS Individual Taxpayer Identification Number. You can download 

Form W-7 from the IRS website at IRS.gov. For 

more information on ITINs, see Pub. 1915. Form 

W-7 and Pub. 1915 are also available in Spanish.

If you were assigned an ITIN before 

2013, or if you have an ITIN that you 

haven't included on a tax return in the 

last 3 consecutive years, you may need to renew it. For more information, see the Instructions for Form W-7 or go to IRS.gov/ITIN.

Paying estimated tax. Estimated tax is the 

method used to pay tax (including SE tax) on income not subject to withholding. You generally 

have to make estimated tax payments if you expect to owe tax, including SE tax, of $1,000 or 

more when you file your return. Use Form 

1040-ES, Estimated Tax for Individuals, to figure 

and pay the tax.

However, if at least two-thirds of your gross 

income for the current tax year or the prior tax 

year is from farming and you file your tax return 

and pay all the tax due by March 1, you don’t 

have to pay any estimated tax. For example, if 

at least two-thirds of your gross income for 2022 

or 2023 is from farming and you file your 2023 

Form 1040 and pay all the tax due by March 1, 

2024, you don’t have to make any estimated tax 

payments for 2023. For more information about 

estimated tax for farmers, the definition of “farming income,” and exceptions to what constitutes 

farming income, see chapter 15.

Penalty for underpayment of estimated 

tax. You may have to pay a penalty if you don’t 

pay enough estimated tax by its due date.

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Who Must Pay SE Tax?

You must pay SE tax and file Schedule SE 

(Form 1040) if your net earnings from self-employment were $400 or more.

The SE tax rules apply no matter how 

old you are and even if you are already 

receiving social security or Medicare 

benefits.

Aliens. Generally, resident aliens must pay SE 

tax under the same rules that apply to U.S. citizens. Nonresident aliens aren’t subject to SE 

tax unless an international social security 

agreement determines that they are covered 

under the U.S. social security system. Residents of the U.S. Virgin Islands, Puerto Rico, 

Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to 

SE tax, as they are considered U.S. residents 

for SE tax purposes. For more information on 

aliens, see Pub. 519, U.S. Tax Guide for Aliens, 

and the Instructions for Schedule SE (Form 

1040).

Are you self-employed? You are self-employed if you carry on a trade or business (such 

as running a farm) as a sole proprietor, an independent contractor, or a member of a partnership, or are otherwise in business for yourself. A 

trade or business is generally an activity carried 

on for a livelihood or in good faith to make a 

profit.

Share farmer. You are a self-employed farmer 

under an income-sharing arrangement if both 

the following apply.

1. You produce a crop or raise livestock on 

land belonging to another person.

2. Your share of the crop or livestock, or the 

proceeds from their sale, depends on the 

amount produced.

Your net farm profit or loss from the income-sharing arrangement is reported on 

Schedule F (Form 1040) and included in your 

self-employment earnings.

If you produce a crop or livestock on land 

belonging to another person and are to receive 

a specified rate of pay, a fixed sum of money, or 

a fixed quantity of the crop or livestock, and not 

a share of the crop or livestock or their proceeds, you may be either self-employed or an 

employee of the landowner. This will depend on 

whether the landowner has the right to direct or 

control your performance of services.

Example. A share farmer produces a crop 

on land owned by another person on a 50-50 

crop-share basis. Under the terms of their 

agreement, the share farmer furnishes the labor 

and half the cost of seed and fertilizer. The landowner furnishes the machinery and equipment 

used to produce and harvest the crop, and half 

the cost of seed and fertilizer. The share farmer 

is provided a house in which to live. The landowner and the share farmer decide on a cropping plan.

The share farmer is a self-employed farmer 

for purposes of the agreement to produce the 

crops, and the share farmer's part of the profit 

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Chapter 12 Self-Employment Tax Page 75
or loss from the crops is reported on Schedule F (Form 1040) and included in self-employment earnings.

The tax treatment of the landowner is discussed later under Landlord Participation in 

Farming.

Contract farming. Under typical contract farming arrangements, the grower receives a fixed 

payment per unit of crops or finished livestock 

delivered to the processor or packing company. 

Because the grower typically furnishes labor 

and assumes some production risk, the payments are reported on Schedule F (Form 1040) 

and are therefore subject to SE tax.

4-H Club or FFA project. If an individual participates in a 4-H Club or National FFA Organization (FFA) project, any net income received 

from sales or prizes related to the project may 

be subject to income tax. Report the net income 

as “Other income” on Schedule 1 (Form 1040), 

line 8z. If necessary, attach a statement showing the gross income and expenses. The net income may not be subject to SE tax if the project 

is primarily for educational purposes and not for 

profit, and is completed by the individual under 

the rules and economic restrictions of the sponsoring 4-H or FFA organization. Such a project 

is generally not considered a trade or business. 

For information on the filing requirements and 

other tax information for dependents, see Pub. 

929.

Partners in a partnership. Generally, you are 

self-employed if you are a member of a partnership that carries on a trade or business.

Limited partner. If you are a limited partner, your partnership income is generally not 

subject to SE tax. However, guaranteed payments you receive for services you perform for 

the partnership are subject to SE tax and 

should be reported to you in box 14 of your 

Schedule K-1 (Form 1065).

Community property. If you are a partner 

and your distributive share of any income or 

loss from a trade or business carried on by the 

partnership is community property, treat your 

share as your self-employment earnings. Don’t 

treat any of your share as self-employment 

earnings of your spouse.

Business owned and operated by spouses. 

If you and your spouse jointly own and operate 

a farm as an unincorporated business and 

share in the profits and losses, you are partners 

in a partnership whether or not you have a formal partnership agreement. You must file Form 

1065 instead of Schedule F (Form 1040). However, you and your spouse may still report income using Schedule F (Form 1040) instead of 

Form 1065 if either of the following applies.

• You and your spouse elect to be treated as 

a qualified joint venture. See Qualified joint 

venture (QJV), later.

• You and your spouse wholly own the unincorporated farming business as community 

property and you treat the business as a 

sole proprietorship. See Community income, later.

If your spouse is your employee, not 

your partner, you must withhold and 

pay social security and Medicare taxes 

for him or her. For more information about employment taxes, see chapter 13.

Qualified joint venture (QJV). If you and 

your spouse each materially participate as the 

only members of a jointly owned and operated 

farm, and you file a joint tax return for the tax 

year, you can make a joint election to be treated 

as a QJV instead of a partnership for the tax 

year. Making this election will allow you to avoid 

the complexity of Form 1065 but still give each 

spouse credit for social security earnings on 

which retirement benefits are based. For an explanation of “material participation,” see the instructions for Schedule C, line G, and the instructions for Schedule F, line E.

Only businesses that are owned and 

operated by spouses as co-owners 

(and not in the name of a state law entity) qualify for the election. Thus, a business 

owned and operated by spouses through a limited liability company does not qualify for the 

election of a QJV.

To make this election, you must divide all 

items of income, gain, loss, deduction, and 

credit attributable to the business between you 

and your spouse in accordance with your respective interests in the venture. Each of you 

must file a separate Schedule F and a separate 

Schedule SE. For more information, see Qualified Joint Ventures in the Instructions for Schedule SE (Form 1040).

Community income. If you and your 

spouse wholly own an unincorporated business 

as community property under the community 

property laws of a state, foreign country, or U.S. 

territory, you can treat your wholly owned, unincorporated business as a sole proprietorship, 

instead of a partnership. Any change in your reporting position will be treated as a conversion 

of the entity.

Report your income and deductions as follows.

• If only one spouse participates in the business, all of the income from that business 

is the self-employment earnings of the 

spouse who carried on the business.

• If both spouses participate, the income and 

deductions are allocated to the spouses 

based on their distributive shares.

• If you and your spouse elected to treat the 

business as a QJV, see Qualified joint venture (QJV), earlier.

States with community property laws include 

Arizona, California, Idaho, Louisiana, Nevada, 

New Mexico, Texas, Washington, and Wisconsin. See Pub. 555 for more information about 

community property laws.

Figuring 

Self-Employment 

Earnings

Farmer. If you are self-employed as a farmer, 

use Schedule F (Form 1040) to figure your 

self-employment earnings.

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Partnership income or loss. If you are a 

member of a partnership that carries on a trade 

or business, the partnership should report your 

self-employment earnings in box 14, code A, of 

your Schedule K-1 (Form 1065). Box 14 of 

Schedule K-1 may also provide amounts for 

gross farming or fishing income (code B) and 

gross nonfarm income (code C). Use these 

amounts if you use the farm or nonfarm optional 

method to figure net earnings from self-employment (see Methods for Figuring Net Earnings, 

later).

If you are a general partner, you may need to 

reduce these reported earnings by amounts you 

claim as a section 179 deduction, unreimbursed 

partnership expenses, or depletion on oil and 

gas properties.

If the amount reported is a loss, include only 

the deductible amount when you figure your total self-employment earnings.

For more information, see the Partner's Instructions for Schedule K-1 (Form 1065).

For general information on partnerships, see 

Pub. 541.

More than one business. If you have self-employment earnings from more than one trade, 

business, or profession, you must generally 

combine the net profit or loss from each to determine your total self-employment earnings. A 

loss from one business reduces your profit from 

another business. However, don’t combine 

earnings from farm and nonfarm businesses if 

you are using one of the optional methods (discussed later) to figure net earnings.

Community property. If any of the income 

from a farm or business, other than a partnership, is community property under state law, it is 

included in the self-employment earnings of the 

spouse carrying on the trade or business.

Payments for lost income. Include in self-employment earnings any payments you receive 

from insurance or other sources to replace income lost because you reduced or stopped 

farming activities. These include USDA payments under the Dairy Margin Coverage (DMC) 

Program, which provides dairy producers with 

payments when dairy margins are below the 

margin coverage levels. Go to USDA.gov for additional information about other USDA programs. Even if you aren’t farming when you receive the payment, it is included in 

self-employment earnings if it relates to your 

farm business (even though it is temporarily inactive). A connection exists if it is clear the payment would not have been made but for your 

conduct of your farm business.

Gain or loss. A gain or loss from the disposition of property that is neither stock in trade nor 

held primarily for sale to customers isn’t included in self-employment earnings. It doesn’t 

matter whether the disposition is a sale, exchange, or involuntary conversion. For example, 

gains or losses from the disposition of the following types of property aren’t included in 

self-employment earnings.

• Investment property.

• Depreciable property or other fixed assets 

used in your trade or business.

• Livestock held for draft, breeding, sport, or 

dairy purposes, and not held primarily for 

Page 76 Chapter 12 Self-Employment Tax
sale, regardless of how long the livestock 

was held, or whether it was raised or purchased. Livestock does not include poultry.

• Unharvested standing crops sold with land 

held more than 1 year.

• Timber, coal, or iron ore held for more than 

1 year if an economic interest was retained, such as a right to receive coal royalties.

A gain or loss from the cutting of timber isn’t 

included in self-employment earnings if the cutting is treated as a sale or exchange. For more 

information on electing to treat the cutting of 

timber as a sale or exchange, see Timber in 

chapter 8.

Wages and salaries. Wages and salaries received for services performed as an employee 

and covered by social security or railroad retirement aren’t included in self-employment earnings.

Wages paid in kind to you for agricultural labor performed as an employee, such as commodity wages, aren’t included in self-employment earnings.

Retired partner. Retirement income received 

by a partner from his or her partnership under a 

written plan isn’t included in self-employment 

earnings if all the following apply.

• The retired partner performs no services 

for the partnership during the year.

• The retired partner is owed only the retirement payments.

• The retired partner's share (if any) of the 

partnership capital was fully paid to the retired partner.

• The payments to the retired partner are 

lifelong periodic payments.

Conservation Reserve Program (CRP) payments. Under the CRP, if you own or operate 

highly erodible or other specified cropland, you 

may enter into a long-term contract with the 

USDA, agreeing to convert to a less intensive 

use of that cropland. You must include the annual rental payments and any one-time incentive payment you receive under the program on 

Schedule F, lines 4a and 4b. Cost-share payments you receive may qualify for the cost-sharing exclusion. See Cost-Sharing Exclusion (Improvements), earlier, in chapter 3. CRP 

payments are reported to you on Form 1099-G.

Individuals who are receiving social security retirement or disability benefits 

may exclude CRP payments when calculating SE tax. See the Instructions for Schedule SE (Form 1040).

Self-employed health insurance deduction. 

You can’t deduct the self-employed health insurance deduction you report on Schedule 1 (Form 

1040), line 17, from self-employment earnings 

on Schedule SE (Form 1040).

Landlord Participation in 

Farming

As a general rule, income and deductions from 

rentals and from personal property leased with 

real estate aren’t included in determining 

self-employment earnings. However, income 

TIP

and deductions from farm rentals, including 

government commodity program payments received by a landowner who rents land, are included if the rental arrangement provides that 

the landowner will, and does, materially participate in the production or management of production of the farm products on the land.

Material participation for landlords. You materially participate if you have an arrangement 

with your tenant for your participation and you 

meet one or more of the following tests.

1. You do at least three of the following.

a. Pay, using cash or credit, at least half 

the direct costs of producing the crop 

or livestock.

b. Furnish at least half the tools, equipment, and livestock used in the production activities.

c. Advise or consult with your tenant on 

something like deciding what crops to 

plant, the type of seed or fertilizer to 

use, or when and at what price the 

crops should be sold.

d. Inspect the production activities periodically.

2. You regularly and frequently make, or take 

an important part in making, management 

decisions substantially contributing to or 

affecting the success of the enterprise, for 

example, decisions about when and where 

to plant or spray, when to harvest, what 

standards to follow, and what records to 

keep.

3. You work 100 hours or more spread over a 

period of 5 weeks or more in activities connected with agricultural production.

4. You do things that, considered in their totality, show you are materially and significantly involved in the production of the 

farm commodities.

These tests may be used as general guides for 

determining whether you are a material participant.

Crop shares. Rent paid in the form of crop 

shares is included in self-employment earnings 

for the year you sell, exchange, give away, or 

use the crop shares if you meet one of the four 

material participation tests (discussed above) at 

the time the crop shares are produced. Feeding 

such crop shares to livestock is considered using them. Your gross income for figuring your 

self-employment earnings includes the fair market value of the crop shares when they are used 

as feed.

Example. Nancy agrees to produce a crop 

on G. Cohen's cotton farm, with each receiving 

half the proceeds. Cohen agrees to furnish all 

the necessary equipment, and it is understood 

that Cohen will advise Nancy on when to plant, 

spray, and pick the cotton. It is also understood 

that he will inspect the crop every few days to 

determine whether Nancy is properly taking 

care of the crop. Under their arrangement, it is 

further understood that Nancy will furnish all labor needed to grow and harvest the crop. Cohen provides the advice, makes inspections, 

and furnishes the equipment; Nancy furnishes 

all labor needed to grow and harvest the crop.

The management decisions made by Cohen 

in connection with the care of the cotton crop 

and his regular inspection of the crop establish 

that Cohen participates materially in the cotton 

production operations. The income Cohen receives from the cotton farm is included in Cohen’s self-employment earnings.

Methods for Figuring Net 

Earnings

There are three ways to figure net earnings from 

self-employment.

1. The regular method.

2. The farm optional method.

3. The nonfarm optional method.

You must use the regular method to the extent 

you don’t use one or both of the optional methods. See Figure 12-1 to see if you are eligible to 

use an optional method.

Why use an optional method? You may want 

to use the optional methods (discussed later) 

when you have a loss or a small net profit and 

any one of the following applies.

• You want to receive credit for social security benefit coverage.

• You incurred child or dependent care expenses for which you could claim a credit. 

(An optional method may increase your 

earned income, which could increase your 

credit.)

• You are entitled to the earned income 

credit. (An optional method may increase 

your earned income, which could increase 

your credit.)

• You are entitled to the additional child tax 

credit. (An optional method may increase 

your earned income, which could increase 

your credit.)

Effects of using an optional method. Using 

an optional method could increase your SE tax. 

Paying more SE tax may result in you getting 

higher social security disability or retirement 

benefits.

Using the optional methods may also decrease your adjusted gross income (AGI) due to 

the deduction for one-half of SE tax on Form 

1040, which may affect your eligibility for credits, deductions, or other items that are subject to 

an AGI limit. Figure your AGI with and without 

using the optional methods to see if the optional 

methods will benefit you.

If you use either or both optional methods, 

you must figure and pay the SE tax due under 

these methods even if you would have had a 

smaller SE tax or no SE tax using the regular 

method.

The optional methods may be used only to 

figure your SE tax. To figure your income tax, include your actual self-employment earnings in 

gross income, regardless of which method you 

use to determine SE tax.

Chapter 12 Self-Employment Tax Page 77
Regular Method

To figure net earnings using the regular method, 

multiply your self-employment earnings by 

92.35% (0.9235). For your net earnings figured 

using the regular method, see line 4a of your 

Schedule SE (Form 1040).

Net earnings figured using the regular 

method are also called actual net earnings.

Farm Optional Method

Use the farm optional method only for self-employment earnings from a farming business. You 

can use this method if you meet either of the following tests.

1. Your gross farm income is $9,840 or less.

2. Your net farm profits are less than $7,103.

Gross farm income. Your gross farm income 

is the total of the amounts from:

• Schedule F (Form 1040), line 9; and

• Box 14, code B, of Schedule K-1 (Form 

1065) (from farm partnerships).

Net farm profits. Net farm profits are generally 

the total of the amounts from:

• Schedule F (Form 1040), line 34; and

• Box 14, code A of Schedule K-1 (Form 

1065) (from farm partnerships).

If you received social security retirement or disability benefits, you must subtract the amount of 

any CRP payments included on your Schedule F, line 4b, or listed in box 20, Code AQ, of 

Schedule K-1. You may also need to adjust the 

amount reported on Schedule K-1 if you are a 

general partner or if it is a loss. For more information, see Partnership income or loss, earlier.

Figuring farm net earnings. If you meet either of the two tests explained above, use Table 12-1 to figure your net earnings from 

self-employment under the farm optional 

method.

Table 12-1. Figuring Farm Net 

Earnings

IF your gross farm 

income is...

THEN your net 

earnings are 

equal to...

$9,840 or less two-thirds of your 

gross farm income.

more than $9,840 $6,560.

Optional method can reduce or eliminate 

SE tax. If your gross farm income is $9,840 or 

less and your farm net earnings figured under 

the farm optional method are less than your actual farm net earnings, you can use the farm optional method to reduce or eliminate your SE 

tax. Your actual farm net earnings are your farm 

net earnings figured using the regular method, 

explained earlier.

Example. Your gross farm income is $540 

and your net farm profit is $460. Consequently, 

your net earnings figured under the farm optional method are $360 (2/3 of $540) and your 

actual net earnings are $425 (92.35% of $460). 

You owe no SE tax if you use the optional 

method because your net earnings under the 

farm optional method are less than $400.

Nonfarm Optional Method

This is an optional method available for determining net earnings from nonfarm self-employment, much like the farm optional method.

If you are also engaged in a nonfarm business, you may be able to use this method to figure your nonfarm net earnings. You can use this 

method even if you don’t use the farm optional 

method for determining your farm net earnings 

and even if you have a net loss from your nonfarm business. For more information about the 

nonfarm optional method, see Pub. 334.

You can’t combine farm and nonfarm 

self-employment earnings to figure 

your net earnings under either of the 

optional methods.

CAUTION

!

Figure 12-1. Can I Use the Optional Methods?

No

Yes

Yes

Yes

Yes

No

No

No

Yes

Yes No

No

START here to determine if 

you can use the nonfarm 

optional method.

Are your net nonfarm prots 

less than $7,103?

Are your net nonfarm prots 

less than 72.189% of your 

gross nonfarm income?

Were your actual net earnings 

from self-employment $400 or 

more in at least 2 of the 3 tax 

years before this year?

Have you previously used this 

method less than 5 years? 

(Note: There is a 5-year 

lifetime limit.)

You can use the nonfarm 

optional method.* See 

Pub. 334.

You can’t 

use the 

nonfarm 

optional 

method.

START here to determine if 

you can use the farm 

optional method.

Is your gross farm income 

$9,840 or less?

You can 

use the 

farm 

optional 

method.* 

See Table 

12-1.

Are your net farm prots 

less than $7,103?

You can’t use the 

farm optional method.

*If you use both optional methods, see Using Both Optional Methods, later, for limits on the amount to report.

Page 78 Chapter 12 Self-Employment Tax
Using Both Optional 

Methods

If you use both optional methods, you must add 

the net earnings figured under each method to 

arrive at your total net earnings from self-employment. You can report less than your total 

actual farm and nonfarm net earnings but not 

less than actual nonfarm net earnings. If you 

use both optional methods, you can report no 

more than $6,560 as your combined net earnings from self-employment.

Reporting SE Tax

Use Schedule SE (Form 1040) to figure and report your SE tax. Then, enter the SE tax on 

Schedule 2 (Form 1040), line 4, and attach 

Schedule SE to Form 1040 or 1040-SR.

If you have to pay SE tax, you must file 

Form 1040 or 1040-SR (with Schedule SE attached) even if you don’t otherwise have to file a federal income tax return.

SE tax deduction. You can deduct half of your 

SE tax in figuring your AGI. This deduction only 

affects your income tax. It doesn’t affect either 

your net earnings from self-employment or your 

SE tax.

To deduct the tax, enter on Schedule 1 

(Form 1040), line 15, the amount from line 13 of 

Schedule SE (Form 1040).

Joint return. Even if you file a joint return, you 

can’t file a joint Schedule SE. This is true 

whether one spouse or both spouses have 

self-employment earnings. Your spouse isn’t 

considered self-employed just because you are. 

If both of you have self-employment earnings, 

each of you must complete a separate Schedule SE. Attach both schedules to the joint return. If you and your spouse operate a business 

as a partnership, see Business owned and operated by spouses and Qualified joint venture 

(QJV), earlier, under Who Must Pay SE Tax.

13.

Employment 

Taxes

What's New for 2023

Social security and Medicare tax for 2023. 

The rate of social security tax on taxable wages, 

including qualified sick leave wages and qualified family leave wages paid in 2023 for leave 

taken after March 31, 2021, and before October 

1, 2021, is 6.2% each for the employer and employee or 12.4% for both. Qualified sick leave 

wages and qualified family leave wages paid in 

CAUTION

!

2023 for leave taken after March 31, 2020, and 

before April 1, 2021, aren't subject to the employer share of social security tax; therefore, the 

tax rate on these wages is 6.2%. The social security wage base limit is $160,200.

The Medicare tax rate is 1.45% (0.0145) 

each for the employee and employer, unchanged from 2022. There is no wage base limit 

for Medicare tax.

2023 withholding tables. The federal income 

tax withholding tables are now included in Pub. 

15-T, Federal Income Tax Withholding Methods.

Qualified small business payroll tax credit 

for increasing research activities. For tax 

years beginning before January 1, 2023, a 

qualified small business may elect to claim up 

to $250,000 of its credit for increasing research 

activities as a payroll tax credit. The Inflation 

Reduction Act of 2022 (the IRA) increases the 

election amount to $500,000 for tax years beginning after December 31, 2022. The payroll 

tax credit election must be made on or before 

the due date of the originally filed income tax return (including extensions). The portion of the 

credit used against payroll taxes is allowed in 

the first calendar quarter beginning after the 

date that the qualified small business filed its income tax return. The election and determination 

of the credit amount that will be used against 

the employer's payroll taxes are made on Form 

6765, Credit for Increasing Research Activities. 

The amount from Form 6765, line 44, must then 

be reported on Form 8974, Qualified Small 

Business Payroll Tax Credit for Increasing Research Activities.

Starting in the first quarter of 2023, the payroll tax credit is first used to reduce the employer share of social security tax up to 

$250,000 per quarter and any remaining credit 

reduces the employer share of Medicare tax for 

the quarter. Any remaining credit, after reducing 

the employer share of social security tax and 

the employer share of Medicare tax, is then carried forward to the next quarter. Form 8974 is 

used to determine the amount of the credit that 

can be used in the current quarter. The amount 

from Form 8974, line 12 or, if applicable, line 17, 

is reported on Form 943, line 12a. For more information about the payroll tax credit, see the 

Instructions for Form 8974 and go to IRS.gov/

ResearchPayrollTC.

Credit for COBRA premium assistance payments. The COBRA premium assistance 

credit lines have been “Reserved for future use” 

on Form 943 because the first quarter of 2022 

was the last quarter in which most employers 

may have been eligible to claim the COBRA 

premium assistance credit. Section 9501 of the 

American Rescue Plan Act of 2021 (the ARP) 

provided for COBRA premium assistance in the 

form of a full reduction in the premium otherwise 

payable by certain individuals and their families 

who elected COBRA continuation coverage due 

to a loss of coverage as the result of a reduction 

in hours or an involuntary termination of employment (assistance eligible individuals). This 

COBRA premium assistance was available for 

periods of coverage beginning on or after April 

1, 2021, through periods of coverage beginning 

on or before September 30, 2021. A premium 

payee was entitled to the COBRA premium assistance credit at the time an eligible individual 

elected coverage. Therefore, due to the COBRA 

notice and election period requirements (generally, employers had 60 days to provide notice 

and assistance eligible individuals had 60 days 

to elect coverage), the first quarter of 2022 was 

the last quarter in which most employers may 

have been eligible to claim the COBRA premium assistance credit.

Pub. 51 discontinued after 2023. Pub. 51, 

Agricultural Employer's Tax Guide, will no longer be available after 2023. Instead, information 

specific to agricultural employers will be included in Pub. 15, Employer's Tax Guide, beginning with the Pub. 15 for use in 2024. Beginning 

in 2024, there will be a new Pub. 15 (sp) that is 

a Spanish-language version of Pub. 15. References to Pub. 51 were retained throughout this 

chapter because this chapter is for tax year 

2023. If you need information specific to tax 

year 2024, you will use Pub. 15 or Pub. 15 (sp) 

in 2024.

What’s New for 2024

Social security and Medicare tax for 2024. 

The employee and employer tax rates for social 

security and the maximum amount of wages 

subject to social security tax for 2024 will be 

discussed in Pub. 15 (for use in 2024).

The Medicare tax rate for 2024 will also be 

discussed in Pub. 15 (for use in 2024). There is 

no limit on the amount of wages subject to Medicare tax.

Reminders

The COVID-19 related credit for qualified 

sick and family leave wages is limited to 

leave taken after March 31, 2020, and before October 1, 2021. Generally, the credit for 

qualified sick and family leave wages, as enacted under the Families First Coronavirus Response Act (FFCRA) and amended and extended by the COVID-related Tax Relief Act of 

2020, for leave taken after March 31, 2020, and 

before April 1, 2021, and the credit for qualified 

sick and family leave wages under sections 

3131, 3132, and 3133 of the Internal Revenue 

Code, as enacted under the ARP, for leave 

taken after March 31, 2021, and before October 

1, 2021, have expired. However, employers that 

pay qualified sick and family leave wages in 

2023 for leave taken after March 31, 2020, and 

before October 1, 2021, are eligible to claim a 

credit for qualified sick and family leave wages 

in 2023.

For more information about the credit for 

qualified sick and family leave wages, see the 

Instructions for Form 943, and go to IRS.gov/

PLC.

An employer who receives a refund of 

payroll taxes resulting from qualified 

sick and family leave credit reported on 

a 2022 Form 943 generally won't receive that 

refund until the 2023 calendar year. Even 

though that credit isn't received until 2023, income reported in 2022 must be increased by 

the refundable and nonrefundable portions of 

the qualified sick and family leave credit reported on their 2022 Form 943. For more information, see the instructions for the income tax 

TIP

Chapter 13 Employment Taxes Page 79
return or the Form 1040 schedule you file for 

your business.

Advance payment of COVID-19 credits 

ended. Although you may pay qualified sick 

and family leave wages in 2023 for leave taken 

after March 31, 2020, and before October 1, 

2021, you may no longer request an advance 

payment of any credit on Form 7200, Advance 

Payment of Employer Credits Due to COVID-19.

Additional employment tax information for 

farmers. See Pub. 51 for more detailed guidance on employment taxes for tax year 2023 for 

employers of agricultural workers. See Pub. 15 

for more detailed guidance on employment 

taxes for tax year 2024 for employers of agricultural workers. For the latest information about 

developments related to Pub. 15, such as legislation enacted after it was published, go to 

IRS.gov/Pub15. For general tax information relevant to agricultural employers, go to IRS.gov/

AgricultureTaxCenter. For general information 

about employment taxes, go to IRS.gov/

EmploymentTaxes. For information about employer responsibilities under the Affordable 

Care Act, go to IRS.gov/ACA. For information 

about COVID-19 tax relief, go to IRS.gov/

Coronavirus.

You may have nonfarm employees as 

well as farm employees, for example, 

workers at a retail farm market. See 

Pub.15 for employment tax rules for wages and 

noncash wages paid to these employees as 

they may differ from those discussed in this 

chapter.

Certification program for professional employer organizations (PEOs). The Stephen 

Beck, Jr., Achieving a Better Life Experience 

Act of 2014 required the IRS to establish a voluntary certification program for PEOs. PEOs 

handle various payroll administration and tax reporting responsibilities for their business clients 

and are typically paid a fee based on payroll 

costs. To become and remain certified under 

the certification program, certified professional 

employer organizations (CPEOs) must meet 

various requirements described in sections 

3511 and 7705 and related published guidance. 

Certification as a CPEO may affect the employment tax liabilities of both the CPEO and its 

customers. A CPEO is generally treated for employment tax purposes as the employer of any 

individual who performs services for a customer 

of the CPEO and is covered by a contract described in section 7705(e)(2) between the 

CPEO and the customer (CPEO contract), but 

only for wages and other compensation paid to 

the individual by the CPEO. To become a 

CPEO, the organization must apply through the 

IRS Online Registration System. For more information or to apply to become a CPEO, go to 

IRS.gov/CPEO.

CPEOs must generally file Form 943 and 

Schedule R (Form 943), Allocation Schedule for 

Aggregate Form 943 Filers, electronically. For 

more information about a CPEO's requirement 

to file electronically, see Revenue Procedure 

2023-18, 2023-13 I.R.B. 605, available at 

IRS.gov/irb/2023-13_IRB#REV-PROC-2023-18.

Work opportunity tax credit for qualified 

tax-exempt organizations hiring qualified 

veterans. Qualified tax-exempt organizations 

that hire eligible unemployed veterans may be 

CAUTION

!

able to claim the work opportunity tax credit 

against their payroll tax liability using Form 

5884-C. For more information, go to IRS.gov/

WOTC.

Correcting a previously filed Form 943. If 

you discover an error on a previously filed Form 

943, or if you otherwise need to amend a previously filed Form 943, make the correction using 

Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or 

Claim for Refund. Form 943-X is filed separately 

from Form 943. For more information, see the 

Instructions for Form 943-X, section 9 of Pub. 

51, or go to IRS.gov/

CorrectingEmploymentTaxes.

Federal tax deposits must be made by electronic funds transfer (EFT). You must use 

EFT to make all federal tax deposits. Generally, 

an EFT is made using the Electronic Federal 

Tax Payment System (EFTPS). If you don't want 

to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or 

other trusted third party to make electronic deposits on your behalf. Also, you may arrange for 

your financial institution to initiate a same-day 

wire payment on your behalf. EFTPS is a free 

service provided by the Department of the 

Treasury. Services provided by your tax professional, financial institution, payroll service, or 

other third party may have a fee.

Note. An exception applies to the EFT requirement for making your federal tax deposits. 

If your liability is less than $2,500 (Form 943, 

line 13), you may pay in full with a check or 

money order with a timely filed return. See the 

Instructions of Form 943 for more information.

For more information on making federal tax 

deposits, see section 7 of Pub. 51. To get more 

information about EFTPS or to enroll in EFTPS, 

go to EFTPS.gov or call one of the following 

numbers.

• 800-555-4477

• 800-244-4829 (Spanish)

• 303-967-5916 if you're outside the United 

States (toll call)

To contact EFTPS using Telecommunications Relay Services (TRS) for people who are 

deaf, hard of hearing, or have a speech disability, dial 711 and then provide the TRS assistant 

the 800-555-4477 number above or 

800-733-4829. Additional information about 

EFTPS is also available in Pub. 966.

Electronic filing and payment. Businesses 

can enjoy the benefits of filing tax returns and 

paying their federal taxes electronically. 

Whether you rely on a tax professional or handle your own taxes, the IRS offers you convenient and secure programs to make filing and 

paying easier. Spend less time worrying about 

taxes and more time running your business. 

Use e-file and EFTPS to your benefit.

• For e-file, go to IRS.gov/EmploymentEfile 

for additional information. A fee may be 

charged to file electronically.

• For EFTPS, go to EFTPS.gov or call 

EFTPS at one of the numbers provided under the Note, earlier.

• For electronic filing of Form W-2, Wage 

and Tax Statement, go to SSA.gov/

employer. You may be required to file 

Forms W-2 electronically. For details, see 

the General Instructions for Forms W-2 

and W-3.

Note. For employers in Puerto Rico, references 

to Form W-2 also apply to Form 499R-2/W-2PR 

and references to Form W-3 also apply to Form 

W-3 (PR), unless otherwise specified.

Important Dates for 2024

You should take the actions indicated by the 

dates listed. The dates listed here aren't 

adjusted for Saturdays, Sundays, and legal 

holidays (see the TIP next). Pub. 509, Tax 

Calendars (for use in 2024), adjusts the dates 

for Saturdays, Sundays, and legal holidays. Due 

dates for deposits of withheld federal income 

taxes, social security taxes, and Medicare taxes 

aren't listed here. Also, the due dates for forms 

required for health coverage reporting aren't 

listed here. For these dates, see Pub. 509.

If any date shown next for filing a return, furnishing a form, or depositing 

taxes falls on a Saturday, Sunday, or legal holiday, the due date is the next business 

day. The term “legal holiday” means any legal 

holiday in the District of Columbia. Legal holidays in the District of Columbia are provided in 

section 11 of Pub. 15. A statewide legal holiday 

delays a filing or furnishing due date only if the 

IRS office where you’re required to file a return 

or furnish a form is located in that state. However, a statewide legal holiday doesn't delay the 

due date of federal tax deposits. For any due 

date, you will meet the “file” or “furnish” date requirement if the envelope containing the tax return or form is properly addressed, contains sufficient postage, and is postmarked by the U.S. 

Postal Service on or before the due date, or 

sent by an IRS-designated private delivery service (PDS) on or before the due date. Go to 

IRS.gov/PDS for the current list of PDSs. For 

the IRS mailing address to use if you're using a 

PDS, go to IRS.gov/PDSstreetAddresses.

Fiscal year taxpayers. The due dates listed 

next apply whether you use a calendar or a fiscal year.

By January 31. 

• File Form 943 with the IRS. If you deposited all Form 943 taxes when due, you may 

file Form 943 by February 10.

• File Form 940, Employer's Annual Federal 

Unemployment (FUTA) Tax Return, with 

the IRS. If you deposited all the FUTA tax 

when due, you may file Form 940 by February 10.

• File Copy A of all paper and electronic 

Forms W-2 with Form W-3, Transmittal of 

Wage and Tax Statements, with the Social 

Security Administration (SSA). If filing electronically, the SSA generates Form W-3 

automatically based on your Forms W-2. 

For more information on reporting Form 

W-2 information to the SSA electronically, 

go to the SSA’s Employer W-2 Filing Instructions & Information webpage at 

SSA.gov/employer.

• Furnish each employee with a completed 

Form W-2.

• File Copy A of all paper and electronic 

Forms 1099-NEC, Nonemployee Compensation, that report nonemployee 

TIP

Page 80 Chapter 13 Employment Taxes
compensation with Form 1096, Annual 

Summary and Transmittal of U.S. Information Returns, with the IRS. For information 

on filing information returns electronically 

with the IRS, see Pub. 1220. Other Forms 

1099, including Forms 1099-MISC, Miscellaneous Information, have different due 

dates. For details about filing Forms 1099 

and for information about required electronic filing, see the General Instructions 

for Certain Information Returns for general 

information, and the separate, specific instructions for each information return you 

file (for example, the Instructions for Forms 

1099-MISC and 1099-NEC).

• Furnish each recipient to whom you paid 

$600 or more in nonemployee compensation with a completed Form 1099-NEC.

• File Form 945, Annual Return of Withheld 

Federal Income Tax, with the IRS to report 

any nonpayroll income tax withheld. If you 

deposited all Form 945 taxes when due, 

you may file Form 945 by February 10.

By February 15. Ask for a new Form W-4, Employee’s Withholding Certificate, or Formulario 

W-4(SP) from each employee who claimed exemption from federal income tax withholding 

last year.

On February 16. Any Form W-4 claiming exemption from withholding for the previous year 

has now expired. Begin withholding for any employee who previously claimed exemption from 

withholding but hasn't given you a new Form 

W-4 for the current year. If the employee doesn't 

give you a new Form W-4, withhold taxes as if 

they had checked the box for Single or Married 

filing separately in Step 1(c) and made no entries in Step 2, Step 3, or Step 4 of the 2024 

Form W-4. If the employee furnishes a new 

Form W-4 claiming exemption from withholding 

after February 15, you may apply the exemption 

to future wages, but don't refund taxes withheld 

while the exempt status wasn't in place.

By April 30, July 31, October 31, and January 31. Deposit FUTA taxes. Deposit FUTA 

tax due if the undeposited amount is over $500.

Before December 1. Provide employees an 

opportunity to submit a new Form W-4 if their filing status, other income, deductions, or credits 

have changed or will change for the next year.

Introduction

You’re generally required to withhold federal income tax from the wages of your employees. 

You may be required to withhold social security 

and Medicare taxes from your employees' wages and pay the employer's share of these 

taxes under the Federal Insurance Contributions Act (FICA). You may also have to pay federal unemployment tax under the Federal Unemployment Tax Act (FUTA). You must also 

withhold Additional Medicare Tax from wages 

you pay to an employee in excess of $200,000 

in a calendar year. This chapter includes information about these taxes.

You must also pay self-employment tax on 

your net earnings from farming. See chapter 12 

for information on self-employment tax.

Topics

This chapter discusses:

• Farm employment;

• Family employees;

• Crew leaders;

• Social security and Medicare taxes;

• Federal income tax withholding;

• Required notice to employees about the 

earned income credit (EIC);

• Reporting and paying social security, 

Medicare, and withheld federal income 

taxes; and

• FUTA tax.

Useful Items

You may want to see:

Publication

Employer's Tax Guide

Employer's Supplemental Tax Guide

Employer's Tax Guide to Fringe 

Benefits

Federal Income Tax Withholding 

Methods

Agricultural Employer's Tax Guide

Household Employer's Tax Guide

Form (and Instructions)

age and Tax Statement

Employee's Withholding Certificate

Request for Taxpayer Identification 

Number and Certification

Employer's Annual Federal 

Unemployment (FUTA) Tax Return

Employer's Annual Federal Tax 

Return for Agricultural Employees

Adjusted Employer's Annual 

Federal Tax Return for Agricultural 

Employees or Claim for Refund

See chapter 16 for information about getting 

publications and forms.

Farm Employment

In general, you’re an employer of farmworkers if 

your employees do any of the following types of 

work.

• Raising or harvesting agricultural or horticultural products on a farm, including raising and feeding of livestock and raising 

bees for pollination and the production of 

honey.

• Operating, managing, conserving, improving, or maintaining your farm and its tools 

and equipment, if the major part of such 

service is performed on a farm.

• Services performed in salvaging timber, or 

clearing land of brush and other debris, left 

by a hurricane (also known as hurricane labor), if the major part of such service is 

performed on a farm.

• Handling, processing, or packaging any 

agricultural or horticultural commodity in its 

unmanufactured state if you produced 

 15

 15-A

 15-B

 15-T

 51

 926

 W-2

 W-4

 W-9

 940

 943

 943-X

more than half of the commodity (for a 

group of up to 20 unincorporated operators, all of the commodity).

• Work related to cotton ginning, turpentine, 

gum resin products, or the operation and 

maintenance of irrigation facilities.

For more information, see sections 2 of Pub. 15.

Generally, a worker who performs services 

for you is your employee if you have the right to 

control what will be done and how it will be 

done. This is so even when you give the employee freedom of action. What matters is that 

you have the right to control the details of how 

the services are performed. You’re responsible 

for withholding and paying employment taxes 

for your employees. You’re also required to file 

employment tax returns. These requirements 

don't apply to amounts that you pay to independent contractors, as discussed later under 

Nonemployee compensation. See sections 1 

and 2 of Pub. 15-A for more information on how 

to determine whether an individual providing 

services is an independent contractor or an employee.

If you employ a family of workers, each 

worker subject to your control (not just the head 

of the family) is an employee.

Special rules apply to crew leaders. See 

Crew Leaders, later.

Employer identification number (EIN). If 

you’re required to report employment taxes or 

give tax statements to employees, you must 

have an EIN. If you don't have an EIN, you may 

apply for one online by going to IRS.gov/EIN. 

You may also apply for an EIN by faxing or mailing Form SS-4 to the IRS. Be aware that you 

may already have an EIN if you have previously 

had farm employees; previously had nonfarm 

employees in a different business; you file Form 

2290, Heavy Highway Vehicle Use Tax Return; 

or your farm business is structured as a partnership, limited liability company, S corporation, or 

C corporation.

Employee's social security number (SSN). 

An employee who doesn't have an SSN and is 

legally eligible to work in the United States 

should submit Form SS-5, Application for a Social Security Card, to the SSA. Form SS-5 is 

available from any SSA office or by calling 

800-772-1213. It is also available from the 

SSA's website at SSA.gov/online/ss-5.pdf.

The employee must furnish evidence of age, 

identity, and U.S. citizenship or lawful immigration status permitting employment with the Form 

SS-5.

Form I-9. You must verify that each new employee is legally eligible to work in the United 

States. This includes completing the U.S. Citizenship and Immigration Services (USCIS) 

Form I-9, Employment Eligibility Verification. 

You can get Form I-9 at USCIS.gov/Forms. For 

more information, go to the USCIS website at 

USCIS.gov/I-9-Central or call 800-375-5283 or 

800-767-1833 (TTY). Employers and employees in Puerto Rico ONLY may use the Spanish 

version of Form I-9.

You may use the Social Security Number 

Verification Service (SSNVS) at SSA.gov/

employer/ssnv.htm to verify that an employee 

Chapter 13 Employment Taxes Page 81
name matches an SSN. A person may have a 

valid SSN but not be authorized to work in the 

United States. You may use E-Verify at EVerify.gov to confirm the employment eligibility 

of newly hired employees. Some states may require employers to also use E-Verify; check with 

the appropriate agency in your state.

Form W-4. You should give each new employee a Form W-4 (IRS.gov/W4) as soon as 

you hire the employee. For Spanish-speaking 

employees, you may use Formulario W-4(SP), 

which is the Spanish translation of Form W-4. 

Have the employee complete and return Form 

W-4 to you before the first payday. If the employee doesn't return the completed form, you 

must withhold federal income tax as if the employee had checked the box for Single or Married filing separately in Step 1(c) and made no 

entries in Step 2, Step 3, or Step 4 of Form W-4.

New hire reporting. You’re required to report 

any new employee to a designated state new 

hire registry. A new employee is an employee 

who hasn’t previously been employed by you or 

was previously employed by you but has been 

separated from such prior employment for at 

least 60 consecutive days. Many states accept 

a copy of Form W-4 with employer information 

added. Go to the Office of Child Support Enforcement website at acf.hhs.gov/css/

employers for more information.

Family Employees

Generally, the wages you pay to family members who are your employees are subject to 

employment taxes. However, certain exemptions may apply to wages paid to your child, 

spouse, or parent.

Exemptions for your child. Payments for the 

services of your child under age 18 who works 

for you in your trade or business (including a 

farm) aren't subject to social security and Medicare taxes. However, see Nonexempt services 

of a child or spouse, later. Payments for the 

services of your child under age 21 employed 

by you in other than a trade or business, such 

as payments for household services in your 

home, also aren't subject to social security or 

Medicare taxes. Payments for the services of 

your child under age 21 employed by you, 

whether or not in your trade or business, aren't 

subject to FUTA tax. Although not subject to social security, Medicare, or FUTA tax, the child's 

wages may still be subject to federal income tax 

withholding.

Exemptions for your spouse. Payments for 

the services of your spouse who works for you 

in your trade or business are subject to federal 

income tax withholding and social security and 

Medicare taxes, but not FUTA tax.

Payments for the services of your spouse 

employed by you in other than a trade or business, such as payments for household services 

in your home, aren't subject to social security, 

Medicare, or FUTA taxes.

Nonexempt services of a child or spouse. 

Payments for the services of your child or 

spouse are subject to federal income tax withholding as well as social security, Medicare, and 

FUTA taxes if they work for any of the following 

entities.

• A corporation, even if it is controlled by 

you.

• A partnership, even if you’re a partner. This 

doesn't apply to wages paid to your child if 

each partner is a parent of the child.

• An estate or trust, even if it is the estate of 

a deceased parent.

In these situations, the child or spouse is considered to work for the corporation, partnership, 

or estate, not you.

Exemptions for your parent. Payments for 

the services of your parent employed by you in 

your trade or business are subject to federal income tax withholding and social security and 

Medicare taxes. Social security and Medicare 

taxes don't apply to wages paid to your parent 

for services not in your trade or business, but 

they do apply to payments for household services in your home if both of the following conditions are satisfied.

• You have a child (including an adopted 

child or stepchild) living in your home who 

is under age 18 or has a physical or mental 

condition that requires care by an adult for 

at least 4 continuous weeks in the calendar 

quarter services were performed.

• You’re a widow or widower; or divorced 

and not remarried; or have a spouse in the 

home who, because of a physical or mental condition, can't care for your child for at 

least 4 continuous weeks in the calendar 

quarter services were performed.

Wages you pay to your parent aren't subject 

to FUTA tax, regardless of the type of services 

provided.

Qualified joint venture (QJV). If spouses 

elect to be treated as a QJV instead of a partnership, either spouse may report and pay the 

employment taxes due on the wages paid to 

employees using the EIN of that spouse's sole 

proprietorship. For more information about 

QJVs, see chapter 12.

Crew Leaders

If farmworkers are provided by a crew leader, 

the crew leader may be the employer of the 

workers.

Social security and Medicare taxes. For social security and Medicare tax purposes, the 

crew leader is the employer of the workers if 

both of the following requirements are met.

• The crew leader pays (either on their own 

behalf or on behalf of the farmer) the workers for their farm labor.

• The crew leader hasn't entered into a written agreement with the farmer under which 

the crew leader is designated as an employee of the farmer.

If both requirements are met, the crew 

leader isn't considered the employee of the 

farmer for services performed by the crew 

leader in furnishing farmworkers and as a member of the crew.

Federal income tax withholding. If the crew 

leader is the employer for social security and 

Medicare tax purposes, the crew leader is the 

employer for federal income tax withholding 

purposes.

Federal unemployment (FUTA) tax. For 

FUTA tax purposes, the crew leader is the employer of the workers if, in addition to the earlier 

requirements, either of the following requirements is met.

• The crew leader is registered under the Migrant and Seasonal Agricultural Worker 

Protection Act.

• Substantially all crew members operate or 

maintain mechanized equipment provided 

by the crew leader as part of the service to 

the farmer.

The farmer is the employer of workers furnished by a crew leader in all other situations. In 

addition, the farmer is the employer of workers 

furnished by a registered crew leader if the 

workers are the employees of the farmer under 

the common-law test. For example, some farmers employ individuals to recruit farmworkers 

exclusively for them. Although these individuals 

may be required to register under the Migrant 

and Seasonal Agricultural Worker Protection 

Act, the workers are employed directly by the 

farmer. The farmer is the employer in these cases. For information about common-law employees, see section 1 of Pub. 15-A. For information about the Migrant and Seasonal 

Agricultural Worker Protection Act, which protects migrant and seasonal agricultural workers 

by establishing employment standards related 

to wages, housing, transportation, and disclosures and recordkeeping, and which requires 

farm labor contractors to register with the U.S. 

Department of Labor (DOL), see the DOL website at dol.gov/whd/regs/compliance/

whdfs49.htm.

Social Security and 

Medicare Taxes

All cash wages that you pay to farmworkers are 

subject to social security and Medicare taxes 

for any calendar year for which you meet either 

of the following tests.

• You pay an employee cash wages of $150 

or more in a year for farmwork (count all 

wages paid on a time, piecework, or other 

basis). The $150 test applies separately to 

each farmworker that you employ. If you 

employ a family of workers, each member 

is treated separately. Don't count wages 

paid by other employers.

• The total (cash and noncash) wages that 

you pay to all farmworkers is $2,500 or 

more.

If the $2,500-or-more test for the group isn't 

met, the $150-or-more test for an individual still 

applies. Similarly, if the $150-or-more test is not 

met for any individual, the $2,500-or-more test 

for the group still applies.

Exceptions. Annual cash wages of less than 

$150 you pay to a seasonal farmworker aren't 

subject to social security and Medicare taxes, 

even if you pay $2,500 or more to all your 

Page 82 Chapter 13 Employment Taxes
farmworkers. However, these wages count toward the $2,500 test for determining whether 

other farmworkers' wages are subject to social 

security and Medicare taxes.

A seasonal farmworker is a worker who:

• Works as a hand-harvest laborer,

• Is paid piece rates in an operation usually 

paid on this basis in the region of employment,

• Commutes daily from their permanent 

home to the farm, and

• Worked in agriculture less than 13 weeks 

in the preceding calendar year.

See Family Employees, earlier, for certain 

exemptions from social security and Medicare 

taxes that apply to your child, spouse, and parent.

Religious exemption. An exemption from 

social security and Medicare taxes is available 

to members of a recognized religious group or 

division opposed to public insurance. This exemption is available only if both the employee 

and the employer are members of the group or 

division. These employees are still subject to 

federal income tax. For more information, see 

Pub. 517.

Cash wages. Only cash wages paid to farmworkers are subject to social security and Medicare taxes. Cash wages include checks, money 

orders, and any kind of money or cash.

Only cash wages subject to social security 

and Medicare taxes are credited to your employees for social security benefit purposes. 

Payments not subject to these taxes, such as 

certain commodity wages (discussed next), 

don't contribute to your employees' social security coverage. For information about social security benefits, go to SSA.gov or call the SSA at 

800-772-1213.

Noncash wages (including commodity wages). Noncash wages include food, lodging, 

clothing, transportation passes, farm products, 

or other goods or commodities. Noncash wages 

paid to farmworkers, including commodity wages, aren't subject to social security and Medicare taxes. However, they are subject to these 

taxes if the substance of the transaction is a 

cash payment. For information on lodging provided as a condition of employment, see Pub. 

15-B.

Report the value of noncash wages in box 1 

of Form W-2 together with cash wages. Don't 

show noncash wages in box 3 or in box 5 (unless the substance of the transaction is a cash 

payment).

Tax rates and social security wage limit. For 

2023, the employer and the employee will pay 

the following taxes.

• The employer and employee each pay 

6.2% of cash wages for social security tax 

(old-age, survivors, and disability insurance). The tax rate for qualified sick leave 

wages and qualified family leave wages 

paid in 2023 for leave taken after March 

31, 2021, and before October 1, 2021, is 

6.2% each for the employer and employee 

or 12.4% for both. Qualified sick leave wages and qualified family leave wages paid 

in 2023 for leave taken after March 31, 

2020, and before April 1, 2021, aren't subject to the employer share of social security 

tax; therefore, the tax rate on these wages 

is 6.2%.

• The employer and employee each pay 

1.45% of cash wages for Medicare tax 

(hospital insurance).

• The employee pays 0.9% of cash wages in 

excess of $200,000 for Additional Medicare Tax.

Wage limit. The limit on wages subject to 

the social security tax for 2023 is $160,200. 

There is no limit on wages subject to the Medicare tax. All covered wages are subject to the 

Medicare tax. Additionally, all wages in excess 

of $200,000 are subject to Additional Medicare 

Tax withholding.

Paying employee's share. If you would rather 

pay the employee's share of social security and 

Medicare taxes without deducting it from their 

wages, you may do so. It is additional income to 

the employee, thus it is subject to income tax 

withholding. You must include it in box 1 of the 

employee's Form W-2, but don't count it as social security and Medicare wages (boxes 3 and 

5 of Form W-2) or as wages for FUTA tax purposes.

Example. Gabrielle operates a small family 

fruit farm. She employs day laborers in the picking season to enable her to timely get her crop 

to market. She doesn't deduct the employees' 

share of social security and Medicare taxes 

from their pay; instead, she pays it on their behalf. When she prepares her employees' Forms 

W-2, she adds each employee's share of social 

security and Medicare taxes that she paid to the 

employee's wage income (box 1 of Form W-2), 

but doesn't include it in box 3 (social security 

wages) or box 5 (Medicare wages and tips).

For 2023, Gabrielle paid Dan $1,000 during 

the year. She enters $1,076.50 in box 1 of Dan’s 

Form W-2 ($1,000 wages plus $76.50 social security and Medicare taxes paid for Dan). She 

enters $1,000.00 in boxes 3 and 5 of Dan's 

Form W-2.

Additional Medicare Tax. In addition to withholding Medicare tax at 1.45%, you must also 

withhold a 0.9% Additional Medicare Tax from 

wages you pay to an employee in excess of 

$200,000 in a calendar year. You’re required to 

begin withholding Additional Medicare Tax in 

the pay period in which you pay wages in excess of $200,000 to an employee and continue 

to withhold it each pay period until the end of 

the calendar year. Additional Medicare Tax is 

only imposed on the employee. There is no employer share of Additional Medicare Tax. All wages that are subject to Medicare tax are subject 

to Additional Medicare Tax withholding if paid in 

excess of the $200,000 withholding threshold.

For more information on what wages are 

subject to Medicare tax, see the chart, Special 

Rules for Various Types of Services and Payments, in section 15 of Pub. 15. For more information on Additional Medicare Tax, go to 

IRS.gov/ADMTfaqs.

Federal Income Tax 

Withholding

If the cash wages you pay to farmworkers are 

subject to social security and Medicare taxes, 

they are also subject to federal income tax withholding. Although noncash wages are subject to 

federal income tax, withhold income tax on 

these noncash wages only if you and the employee agree to do so. The amount to withhold 

is figured on gross wages without taking out social security and Medicare taxes, union dues, 

etc.

Form W-4. Generally, the amount of federal income tax you withhold is based on the employee's filing status and other information reported 

on the employee's Form W-4. Don't withhold 

federal income tax from the wages of an employee who, by writing “Exempt” on Form W-4, 

certifies that they had no federal income tax liability last year and anticipates no liability for the 

current year.

You should give each new employee a Form 

W-4 as soon as you hire the employee. For 

Spanish-speaking employees, you may use 

Formulario W-4(SP) which is the Spanish translation of Form W-4. Have the employee complete and return Form W-4 to you before the first 

payday. If the employee doesn't return the completed form, you must withhold federal income 

tax as if the employee had checked the box for 

Single or Married filing separately in Step 1(c) 

and made no entries in Step 2, Step 3, or Step 

4 of Form W-4.

You should make the 2024 Form W-4 available to your employees and encourage them to 

check their income tax withholding for 2024. 

Those employees who owed a large amount of 

tax or received a large refund for 2023 may 

want to submit a new Form W-4. You can't accept substitute Forms W-4 developed by employees. Advise your employees to use the IRS 

Tax Withholding Estimator available at IRS.gov/

W4App to determine accurate withholding.

Form W-2. By January 31, you must furnish 

each employee a Form W-2 showing total wages for the previous year and total federal income tax, social security tax, and Medicare tax 

withheld. However, if an employee stops working for you and asks for the form earlier, you 

must give it to the employee within 30 days of 

the later of the following dates.

• The date the employee asks for the form.

• The date you make your final payment of 

wages to the employee.

Compensation paid to H-2A visa holders. 

Report compensation of $600 or more paid to 

foreign agricultural workers who entered the 

country on H-2A visas in box 1 of Form W-2. 

Compensation paid to H-2A workers for agricultural labor performed in connection with this 

visa isn't subject to social security and Medicare taxes, and therefore shouldn't be reported 

as wages subject to social security tax (line 2), 

Medicare tax (line 4), or Additional Medicare 

Tax (line 6) on Form 943, and shouldn't be reported as social security wages (box 3) or Medicare wages (box 5) on Form W-2. On Form 

Chapter 13 Employment Taxes Page 83
W-2, don't check box 13 (Statutory employee), 

as H-2A workers aren't statutory employees.

An employer isn’t required to withhold federal income tax from compensation paid to an 

H-2A worker for agricultural labor performed in 

connection with this visa unless the worker asks 

for withholding and the employer agrees. In this 

case, the worker must give the employer a completed Form W-4. Federal income tax withheld 

should be reported on Form 943, line 8, and in 

box 2 of Form W-2.

These reporting rules apply when the H-2A 

worker provides their taxpayer identification 

number (TIN) to the employer. However, if an 

H-2A visa worker didn't provide the employer 

with a TIN, the employee is subject to backup 

withholding. The employer must report the wages and backup withholding on Form 

1099-MISC. The employer must also report the 

backup withholding on Form 945, line 2.

For more information, see the Instructions 

for Forms 1099-MISC and 1099-NEC and the 

Instructions for Form 945. For more information 

on foreign agricultural workers on H-2A visas, 

go to IRS.gov/H2A.

Required notice to employees about the 

earned income credit (EIC). You must provide notification about the EIC to each employee who worked for you at any time during 

the year and from whom you didn't withhold any 

federal income tax. However, you don't have to 

notify employees who claim exemption from 

federal income tax withholding on Form W-4. 

You meet the notification requirement by giving 

each employee any of the following.

• Form W-2, which contains the EIC notification on the back of Copy B.

• A substitute Form W-2 with the exact EIC 

wording shown on the back of Copy B of 

Form W-2.

• Notice 797, Possible Federal Tax Refund 

Due to the Earned Income Credit (EIC).

• Your own written statement with the exact 

wording of Notice 797. For more information, see Pub. 15 and Notice 1015, Have 

You Told Your Employees About the 

Earned Income Credit (EIC).

How to figure withholding. You can use one 

of several methods to determine the amount to 

withhold. The methods are described in Pub. 

15-T, which contains tables showing the correct 

amount of federal income tax you should withhold. Section 9 of Pub. 15 also contains additional information about federal income tax withholding.

Nonemployee compensation. Generally, you 

don't have to withhold federal income tax on 

payments for services to individuals who aren't 

your employees. However, you may be required 

to report these payments on Form 1099-NEC 

and to withhold under the backup withholding 

rules. For example, persons who haven’t furnished their TINs to you are subject to withholding on payments required to be reported on 

Form 1099-NEC. For more information, see the 

Instructions for Forms 1099-MISC and 

1099-NEC. For backup withholding on H-2A 

visa holders, see Compensation paid to H-2A 

visa holders, earlier.

Example. You contract Sean Black to complete custom corn chopping on your farm. Because Sean Black is a contracted individual and 

not an employee, you will issue him a Form 

1099-NEC to report the compensation paid for 

the custom corn chopping services.

Example. You rent a barn from Valerie 

Brown for the operation of your business. Because you pay more than $600 annually for the 

rental, you will need to issue a Form 1099-MISC 

to Valerie Brown to report the rent you paid to 

her.

Reporting and Paying 

Social Security, 

Medicare, and Withheld 

Federal Income Taxes

You must withhold federal income, social security, and Medicare taxes required to be withheld 

from the salaries and wages of your employees. 

You’re liable for the payment of these taxes to 

the federal government whether or not you collect them from your employees. If, for example, 

you withhold less than the correct tax from an 

employee's wages, you’re still liable for the full 

amount. You must also pay the employer's 

share of social security and Medicare taxes. 

There is no employer share of Additional Medicare Tax.

Form 943. Report withheld federal income tax, 

social security tax, and Medicare tax on Form 

943. Your 2023 Form 943 is due by January 31, 

2024 (or February 12, 2024, if you made deposits on time in full payment of the taxes due for 

the year).

Deposits. Generally, you must deposit both the 

employer and employee share of social security 

and Medicare taxes and federal income tax 

withheld during the year. However, you may 

make payments with Form 943 instead of depositing them if you accumulate less than a 

$2,500 tax liability (“Total taxes after adjustments and nonrefundable credits” line on Form 

943) during the year and you pay in full with a 

timely filed return. See the Instructions for Form 

943 for more information on making a payment 

with your return.

For more information on deposit rules, see 

section 7 of Pub. 51.

Electronic deposit requirement. You 

must use EFT to make all federal tax deposits. 

See Federal tax deposits must be made by 

electronic funds transfer (EFT), earlier.

Trust fund recovery penalty. If you’re responsible for withholding, accounting for, depositing, 

or paying federal income, social security, and 

Medicare taxes (that is, trust fund taxes) and 

willfully fail to do so, you can be held liable for 

a penalty equal to the withheld tax not paid. The 

trust fund recovery penalty won't apply to any 

amount of trust fund taxes an employer holds 

back in anticipation of any credits they are entitled to.

A responsible person can be an officer of a 

corporation, a partner, a sole proprietor, or an 

employee of any form of business. A trustee or 

agent with authority over the funds of the business can also be held responsible for the penalty. Willfully means voluntarily, consciously, and 

intentionally. Paying other expenses of the business instead of the taxes due is acting willfully.

Consequences of treating an employee as 

an independent contractor. If you classify an 

employee as an independent contractor and 

you have no reasonable basis for doing so, you 

may be held liable for employment taxes for that 

worker. See Pub. 15-A for more information.

Federal Unemployment 

(FUTA) Tax

You must pay FUTA tax if you meet either of the 

following tests.

• You paid cash wages of $20,000 or more 

to farmworkers in any calendar quarter during the current or preceding calendar year.

• You employed 10 or more farmworkers for 

some part of at least 1 day (whether or not 

all at the same time) during any 20 or more 

different calendar weeks during the current 

or preceding calendar year.

These rules don't apply to exempt services of 

your spouse, your parents, or your children under age 21. See Family Employees, earlier.

Alien farmworkers. Wages paid to aliens admitted on a temporary basis to the United 

States to perform farmwork (also known as 

H-2A visa workers) are exempt from FUTA tax. 

However, include your employment of these 

workers and the wages you paid them to determine whether you meet either of the above 

tests.

Commodity wages. Payments in kind for farm 

labor aren't cash wages. Don't count them to 

figure whether you’re subject to FUTA tax or to 

figure how much tax you owe.

Tax rate and credit. The gross FUTA tax rate 

is 6.0% of the first $7,000 cash wages you pay 

to each employee during the year. However, 

you’re given a credit of up to 5.4% of the first 

$7,000 cash wages you pay to each employee 

for the state unemployment tax you pay. If your 

state tax rate (experience rate) is less than 

5.4%, you may still be allowed the full 5.4% 

credit.

If all of the taxable FUTA wages you paid 

were excluded from state unemployment tax, 

the full 6.0% rate applies. See the Instructions 

for Form 940 for additional information.

More information. For more information on 

FUTA tax, see section 10 of Pub. 51.

Reporting and Paying FUTA 

Tax

The FUTA tax is imposed on you as the employer. It must not be collected or deducted 

from the wages of your employees.

Form 940. Report FUTA tax on Form 940. The 

2023 Form 940 is due by January 31, 2024 (or 

Page 84 Chapter 13 Employment Taxes
February 12, 2024, if you timely deposited the 

full amount of your 2023 FUTA tax).

Deposits. If at the end of any calendar quarter 

you owe, but haven't yet deposited, more than 

$500 in FUTA tax for the year, you must make a 

deposit by the end of the following month. If the 

undeposited tax is $500 or less at the end of a 

quarter, you don't have to deposit it. You can 

add it to the tax for the next quarter. If the total 

undeposited tax is more than $500 at the end of 

the next quarter, a deposit will be required. If the 

total undeposited tax at the end of the 4th quarter is $500 or less, you can either make a deposit or pay it with your return by the January 

31, 2024, due date.

Electronic deposit requirement. You 

must use EFT to make all federal tax deposits. 

See Federal tax deposits must be made by 

electronic funds transfer (EFT), earlier.

14.

Fuel Excise Tax 

Credits and 

Refunds

Introduction

You may be eligible to claim a credit on your income tax return for the federal excise tax on 

certain fuels. You may also be eligible to claim a 

quarterly refund of the fuel taxes during the 

year, instead of waiting to claim a credit on your 

income tax return.

Whether you can claim a credit or refund depends on whether the fuel was taxed and the 

purpose (nontaxable use) for which you used 

the fuel. The nontaxable uses of fuel for which a 

farmer may claim a credit or refund are generally the following.

• Use on a farm for farming purposes.

• Off-highway business use.

• Uses other than as a fuel in a propulsion 

engine, such as home use.

Table 14-1 presents an overview of credits 

and refunds that may be claimed for fuels used 

for the nontaxable uses listed above. See Pub. 

510, Excise Taxes, for more information.

Topics

This chapter discusses:

• Fuels used in farming

• Dyed diesel fuel and dyed kerosene

• Fuels used in off-highway business use

• Fuels used for household purposes

• How to claim a credit or refund

• Including the credit or refund in income

Useful Items

You may want to see:

Publication

Excise Taxes

Form (and Instructions)

Quarterly Federal Excise Tax Return

Credit for Federal Tax Paid on Fuels

Claim for Refund of Excise Taxes

See chapter 16 for information about getting 

publications and forms.

Fuels Used in Farming

Owners, operators, and tenants of farms and 

certain other persons may be eligible to claim a 

credit or refund of excise taxes on fuel used in 

the trade or business of farming, when used on 

a farm in the United States for farming purposes. See Table 14-1 for a list of available fuel excise tax credits and refunds. Fuel is used on a 

farm for farming purposes only if used in carrying on a trade or business of farming, on a farm 

in the United States, and for farming purposes.

Farm. A farm includes livestock, dairy, fish, 

poultry, fruit, fur-bearing animals, truck farms, 

orchards, plantations, ranches, nurseries, 

ranges, and feed yards for finishing cattle. It 

also includes structures such as greenhouses 

used primarily for raising agricultural or horticultural commodities. A fish farm is an area where 

fish are grown or raised and not merely caught 

or harvested.

Dyed versus undyed diesel. Diesel is 

undyed when sold for highway use vehicles and 

 510

 720

 4136

 8849

excise tax is collected at the time of sale. The 

diesel is dyed when the intended use is for nontaxable purposes, such as farming, and no excise tax is collected at the time of sale. When 

undyed diesel is used in farming or any other 

qualifying purpose, the taxpayer may recover 

the excise tax paid by claiming a credit or filing 

for a refund (see Table 14-1).

Dyed diesel fuel and dyed kerosene. If 

you purchase dyed diesel fuel or dyed kerosene 

for a nontaxable use, you must use it only on a 

farm for farming purposes or for other nontaxable purposes. For example, you shouldn't use 

dyed diesel fuel in a truck that is used both on 

the farm for farming purposes and on the highway, even though the highway use is in connection with farm business. Excise tax applies to 

the fuel used by the truck on the highways. In 

this situation, undyed (taxed) fuel should be 

purchased for the truck. You should keep fuel 

records of the use of the truck on the farm for 

farming purposes, and for other uses. You may 

be eligible for a credit or refund for the excise 

tax on fuel used on the farm for farming purposes.

Penalty. A penalty is imposed on any person 

who knowingly uses, sells, or alters dyed diesel 

fuel or dyed kerosene for any purpose other 

than a nontaxable use. The penalty is the 

greater of $1,000 or $10 per gallon of the dyed 

diesel fuel or dyed kerosene involved. After the 

first violation, the $1,000 portion of the penalty 

increases depending on the number of violations. For more information on this penalty, see 

Pub. 510.

Farming purposes. As the owner, tenant, or 

operator and the ultimate purchaser of fuel that 

you purchased, you use the fuel on a farm for 

Fuel Excise Tax Credits and Refunds at a Glance

Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed.

Fuel Used

On a Farm for Farming 

Purposes

Off-Highway 

Business Use

Household Use or 

Use Other Than as 

a Fuel1

Gasoline Credit only Credit or refund None

Aviation gasoline Credit only None None

Undyed diesel fuel 

and undyed 

kerosene

Credit or refund Credit or refund2 Credit or refund2

Kerosene for use in 

aviation

Credit or refund None None 

Dyed diesel fuel 

and dyed kerosene

None None None

Other Fuels 

(including 

alternative fuels)3

Credit or refund Credit or refund None

1

 For a use other than as fuel in a propulsion engine.

2

 Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending 

with undyed diesel fuel to be used for heating purposes. See Regulations section 48.6427-10(b)(1) for the 

definition of a blocked pump.

3

 Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. It includes 

the alternative fuels: liquefied petroleum gas (LPG), “P” Series fuels, compressed natural gas (CNG), 

liquefied hydrogen, Fischer-Tropsch process liquid fuel from coal (including peat), liquid fuel derived from 

biomass, liquefied natural gas (LNG), liquefied gas derived from biomass, and compressed gas derived 

from biomass.

Table 14-1.

Chapter 14 Fuel Excise Tax Credits and Refunds Page 85
farming purposes if you use it in any of the following ways.

1. To cultivate the soil or to raise or harvest 

any agricultural or horticultural commodity.

2. To raise, shear, feed, care for, train, or 

manage livestock, bees, poultry, fur-bearing animals, or wildlife.

3. To operate, manage, conserve, improve, 

or maintain your farm and its tools and 

equipment.

4. To handle, dry, pack, grade, or store any 

raw agricultural or horticultural commodity. 

For this use to qualify, you must have produced more than half the commodity so 

treated during the tax year. The 

more-than-one-half test applies separately 

to each commodity. Commodity means a 

single raw product. For example, apples 

and peaches are two separate commodities.

5. To plant, cultivate, care for, or cut trees or 

to prepare (other than sawing logs into 

lumber, chipping, or other milling) trees for 

market, but only if these activities are incidental to your farming operations. Your 

tree operations are incidental only if they 

are minor in nature when compared to the 

total farming operations.

If any other person, such as a neighbor or 

custom operator (independent contractor), performs a service for you on your farm for any of 

the purposes included in list item (1) or (2) 

above, you are considered to be the ultimate 

purchaser who used the fuel on a farm for farming purposes. Therefore, you can still claim the 

credit or refund for the fuel so used. However, 

see Custom application of fertilizer and pesticide, later. If the other person performs any 

other services for you on your farm for purposes 

not included in list item (1) or (2) above, no one 

can claim the credit or refund for fuel used on 

your farm for those other services.

Fuel not used for farming. You don’t use 

fuel on a farm for farming purposes when you 

use it in any of the following ways.

• Off the farm, such as on the highway or in 

noncommercial aviation, even if the fuel is 

used in transporting livestock, feed, crops, 

or equipment.

• For personal use, such as lawn mowing.

• In processing, packaging, freezing, or canning operations.

• In processing crude gum into gum spirits of 

turpentine or gum resin or in processing 

maple sap into maple syrup or maple 

sugar.

Buyer of fuel, including undyed diesel 

fuel or undyed kerosene. If doubt exists 

whether the owner, tenant, or operator of the 

farm bought the fuel, determine who actually 

bore the cost of the fuel. For example, if the 

owner of a farm and his or her tenant equally 

share the cost of gasoline used on the farm, 

each can claim a credit for the tax on half the 

fuel used.

Undyed diesel fuel, undyed kerosene, 

and other fuels (including alternative fuel). 

Usually, the farmer is the only person who can 

make a claim for credit or refund for the tax on 

undyed diesel fuel, undyed kerosene, or other 

fuels (including alternative fuel) used for farming 

purposes. However, see Custom application of 

fertilizer and pesticide next. Also see Dyed diesel fuel and dyed kerosene, earlier.

Example. Farm owner Haleigh Blue hired 

custom operator Tyler Steele to cultivate the soil 

on Haleigh’s farm. Tyler purchased 200 gallons 

of undyed diesel fuel to perform the work on Haleigh's farm. In addition, Haleigh hired contractor Lee Brown to pack and store the farm’s apple crop. Lee bought 25 gallons of undyed 

diesel fuel to use in packing the apples. Haleigh 

can claim the credit for the 200 gallons of 

undyed diesel fuel used by Tyler on the farm because it qualifies as fuel used on the farm for 

farming purposes. No one can claim a credit for 

the 25 gallons used by Lee because that fuel 

wasn’t used for a farming purpose included in 

list item (1) or (2) above.

In the above example, both Tyler Steele and 

Lee Brown could have purchased dyed (untaxed) diesel fuel for their tasks.

Custom application of fertilizer and pesticide. Fuel used on a farm for farming purposes includes fuel used in the application (including aerial application) of fertilizer, pesticides, or 

other substances. Generally, the applicator is 

treated as having used the fuel on a farm for 

farming purposes and therefore claims the 

credit or refund. For applicators using highway 

vehicles, only the fuel used on the farm is exempt. Fuel used traveling on the highway to and 

from the farm is taxable. Fuel used by an aerial 

applicator for the direct flight between the airfield and one or more farms is treated as used 

for a farming purpose. For aviation gasoline, the 

aerial applicator makes the claim as the ultimate purchaser. For kerosene used in aviation, 

the ultimate purchaser may make the claim or 

waive the right to make the claim to the registered ultimate vendor. A sample waiver is included as Model Waiver L in the appendix of Pub. 

510.

A registered ultimate vendor is the person 

who sells undyed diesel fuel, undyed kerosene, 

or kerosene for use in aviation to the user (ultimate purchaser) of the fuel for use on a farm for 

farming purposes. To claim a credit or refund of 

tax, the ultimate vendor must be registered with 

the IRS at the time the claim is made. However, 

registered ultimate vendors can’t make claims 

for undyed diesel fuel and undyed kerosene 

sold for use on a farm for farming purposes.

All-terrain vehicles (ATVs). Fuel used in 

ATVs on a farm for farming purposes, discussed 

earlier, is eligible for a credit or refund of excise 

taxes on the fuel. Fuel used in ATVs for nonfarming purposes isn’t eligible for a credit or refund of the taxes. If ATVs are used both for 

farming and nonfarming purposes, only that 

portion of the fuel used for farming purposes is 

eligible for the credit or refund.

Fuels Used in 

Off-Highway Business 

Use

You may be eligible to claim a credit or refund 

for the excise tax on fuel used in an off-highway 

business use.

Off-highway business use. This is any use of 

fuel in a trade or business or in an income-producing activity. The use must not be in a highway vehicle registered or required to be registered for use on public highways. Off-highway 

business use generally doesn’t include any use 

in a recreational motorboat.

Examples. Off-highway business use includes the use of fuels in a trade or business in 

any of the following ways.

• In stationary machines such as generators, 

compressors, power saws, and similar 

equipment.

• For cleaning.

• In forklift trucks, bulldozers, and earthmovers.

Off-highway nonbusiness (taxable) use of 

fuel includes use in minibikes, snowmobiles, 

power lawn mowers, chain saws, and other yard 

equipment. For more information, see Pub. 510.

Claiming a Credit or Refund of Excise Taxes

This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a 

nontaxable use.

Credit Refund

Which form to use Form 4136, Credit for Federal 

Tax Paid on Fuels

Form 8849, Claim for Refund of 

Excise Taxes; and Schedule 1 

(Form 8849), Nontaxable Use 

of Fuels

Type of form Annual Quarterly

When to file With your income tax return By the last day of the quarter 

following the last quarter 

included in the claim

Amount of tax Any amount $750 or more1

1

 You may carry over an amount less than $750 to the next quarter.

Table 14-2.

Page 86 Chapter 14 Fuel Excise Tax Credits and Refunds
Fuels Used for 

Household Purposes or 

Other Than as a Fuel for 

Propulsion Engines

You may be eligible to claim a credit or refund 

for the excise tax on undyed diesel fuel or kerosene used for home heating, lighting, and cooking. This also applies to diesel fuel and kerosene used in a home generator to produce 

electricity for home use. Home use of a fuel 

doesn’t include use in a propulsion engine and 

it's also not considered an off-highway business 

use.

How To Claim a Credit or 

Refund

You may be able to claim a credit or refund of 

the excise tax on fuels you use for nontaxable 

uses. The basic rules for claiming credits and 

refunds are listed in Table 14-2.

Keep at your principal place of business all records needed to enable the 

IRS to verify that you are the person 

entitled to claim a credit or refund and the 

amount you claimed. You don’t have to use any 

special form, but the records should establish 

the following information.

• The total number of gallons bought and 

used during the period covered by your 

claim.

• The date of each purchase.

• The names and addresses of suppliers 

and amounts bought from each during the 

period covered by your claim.

• The nontaxable use for which you used the 

fuel.

• The number of gallons used for each nontaxable use.

It's important that your records separately show 

the number of gallons used for each nontaxable 

use that qualifies as a claim. For more information about recordkeeping, see Pub. 583, Starting a Business and Keeping Records.

Credit or refund. A credit is an amount that 

reduces the tax on your income tax return when 

you file it at the end of the year. If you meet certain requirements, you may claim a refund during the year instead of waiting until you file your 

income tax return.

Credit only. You can claim the following 

taxes only as a credit on your income tax return.

• Tax on gasoline and aviation gasoline you 

used on a farm for farming purposes.

• Tax on fuels (including undyed diesel fuel 

or undyed kerosene) you used for nontaxable uses if the total for the tax year is less 

than $750.

• Tax on fuel you didn’t iinclude in any claim 

for refund previously filed for any quarter of 

the tax year.

RECORDS

Claiming a Credit

You make a claim for a fuel tax credit on Form 

4136 and attach it to your income tax return. 

Don’t claim a credit for any excise tax for which 

you have filed a refund claim.

How to claim a credit. How you claim a credit 

depends on whether you are an individual, partnership, corporation, S corporation, trust, or 

farmers' cooperative association.

Individuals. You claim the credit on the 

“Credit for federal tax on fuels” line of your Form 

1040 or 1040-SR. If you wouldn’t otherwise 

have to file an income tax return, you must do 

so to get a fuel tax credit.

Partnerships. Partnerships claim the credit 

by including a statement on Schedule K-1 

(Form 1065), Partner's Share of Income, Deductions, Credits, etc., showing each partner's 

share of the number of gallons of each fuel sold 

or used for a nontaxable use, the type of use, 

and the applicable credit per gallon. Each partner claims the credit on his or her income tax return for the partner's share of the fuel used by 

the partnership.

Other entities. Corporations, S corporations, farmers' cooperative associations, and 

trusts make the claim on the appropriate line of 

their income tax return.

When to claim a credit. You can claim a fuel 

tax credit on your income tax return for the year 

you used the fuel.

You may be able to make a fuel tax 

claim on an amended income tax return for the year you used the fuel. A 

claim for credit or refund of an overpayment 

must generally be filed within the later of:

• 3 years from the date the original return 

was filed, or

• 2 years from the date the tax was paid.

Claiming a Refund

If eligible, you can claim a refund of excise taxes 

using Schedule 1 (Form 8849); if you file Form 

720, you can use its Schedule C to claim a refund for the quarter; if you file Form 4136, you 

can use it to claim a refund for your tax year by 

attaching it to your tax return. Don't claim a refund on any of these forms for any amount that 

you have filed, or will file, a claim for refund on 

another form.

You can use Schedule 1 (Form 8849) to file 

a claim for a refund for any quarter of your tax 

year for which you can claim $750 or more. This 

amount is the excise tax on all fuels used for a 

nontaxable use during that quarter or any prior 

quarter (for which no other claim has been filed) 

during the tax year.

If you can’t claim at least $750 at the end of 

a quarter, you carry the amount over to the next 

quarter of your tax year to determine if you can 

claim at least $750 for that quarter. If you can’t 

claim at least $750 at the end of the fourth quarter of your tax year, you must claim a credit on 

your income tax return using Form 4136. Only 

one claim can be filed for a quarter.

TIP

You can’t claim a refund for excise tax 

on gasoline and aviation gasoline used 

on a farm for farming purposes. You 

must claim a credit on your income tax return for 

the tax.

How to file a quarterly claim. File the claim 

for refund by completing Schedule 1 (Form 

8849) and attaching it to Form 8849. Send it to 

the address shown in the instructions. If you file 

Form 720, you can use its Schedule C for your 

refund claims. See the Instructions for Form 

720.

When to file a quarterly claim. You must file 

a quarterly claim by the last day of the first quarter following the last quarter included in the 

claim. If you don’t file a timely refund claim for 

the fourth quarter of your tax year, you will have 

to claim a credit for that amount on your income 

tax return, as discussed earlier.

In most situations, the amount claimed 

as a credit or refund will be less than 

the amount of fuel tax paid, because 

the Leaking Underground Storage Tank (LUST) 

tax of $0.001 per gallon is generally not subject 

to credit or refund.

Including the Credit or 

Refund in Income

Include any credit or refund of excise taxes on 

fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) 

as an expense deduction that reduced your income tax liability.

Which year you include a credit or refund in 

gross income depends on whether you use the 

cash or an accrual method of accounting.

Cash method. If you use the cash method 

and file a claim for refund, include the refund 

amount in gross income for the tax year in 

which you receive the refund. If you claim a 

credit on your income tax return, include the 

credit amount in gross income for the tax year in 

which you file Form 4136. If you file an amended return and claim a credit, include the credit 

amount in gross income for the tax year in 

which you receive the credit.

Example. Morgan Brown, a farmer who 

uses the cash method, filed a 2023 Form 1040 

on March 3, 2024. On the Schedule F, Morgan 

deducted the total cost of gasoline (including 

$110 of excise taxes) used on the farm for farming purposes. Then, on Form 4136, Morgan 

claimed the $110 as a credit, then reports the 

$110 as other income on line 8 of the 2023 

Schedule F.

Accrual method. If you use an accrual 

method, include the amount of credit or refund 

in gross income for the tax year in which you 

used the fuels. It doesn’t matter whether you 

filed for a quarterly refund or claimed the entire 

amount as a credit.

Example. Amy Johnson, a farmer who 

uses the accrual method, files a 2023 Form 

1040 on April 15, 2024. On Schedule F, Amy 

CAUTION

!

CAUTION

!

Chapter 14 Fuel Excise Tax Credits and Refunds Page 87
deducts the total cost of gasoline (including 

$155 of excise taxes) used on the farm for farming purposes during 2023. On Form 4136, Amy 

claims the $155 as a credit, then reports the 

$155 as other income on line 8 of 2023 Schedule F.

15.

Estimated Tax

Introduction

Estimated tax is the method used to pay tax on 

income that is not subject to withholding. See 

Pub. 505 for the general rules and requirements 

for paying estimated tax. If you are a qualified 

farmer, defined below, you are subject to the 

special rules covered in this chapter for paying 

estimated tax.

Topics

This chapter discusses:

• Special estimated tax rules for qualified 

farmers

• Estimated tax penalty

Useful Items

You may want to see:

Publication

Tax Withholding and Estimated Tax

Form (and Instructions)

U.S. Individual Income Tax Return

U.S. Tax Return for Seniors

stimated Tax for Individuals

Underpayment of Estimated Tax 

by Farmers and Fishermen

See chapter 16 for information about getting 

publications and forms.

Special Estimated Tax 

Rules for Qualified 

Farmers

Special rules apply to the payment of estimated 

tax by individuals who are qualified farmers. If 

you are not a qualified farmer, as defined next, 

see Pub. 505 for the estimated tax rules that apply.

Qualified Farmer

An individual is a qualified farmer for 2023 if at 

least two-thirds of their gross income from all 

sources for 2022 or 2023 was from farming. See 

 505

 1040

 1040-SR

 1040-ES

 2210-F

Gross Income next for information on how to figure your gross income from all sources, and see 

Gross Income From Farming, later, for information on how to figure your gross income from 

farming. See also Percentage From Farming, 

later, for information on how to determine the 

percentage of your gross income from farming.

Gross Income

Gross income is all income you receive in the 

form of money, goods, property, and services 

that is not exempt from income tax. On a joint 

return, you must add your spouse's gross income to your gross income. To decide whether 

two-thirds of your gross income was from farming, use as your gross income the total of the 

following income (not loss) amounts from your 

tax return.

• Wages, salaries, tips, etc.

• Taxable interest.

• Ordinary dividends.

• Taxable refunds, credits, or offsets of state 

and local income taxes.

• Gross business income from Schedule C 

(Form 1040).

• Capital gains from Schedule D (Form 

1040). Losses are not netted against 

gains.

• Gains on sales of business property from 

Form 4797.

• Taxable IRA distributions, pensions, annuities, and social security benefits.

• Gross rental income from Schedule E 

(Form 1040).

• Gross royalty income from Schedule E 

(Form 1040).

• Taxable net income from an estate or trust 

reported on Schedule E (Form 1040).

• Income from a Real Estate Mortgage Investment Conduit reported on Schedule E 

(Form 1040).

• Gross farm rental income from Form 4835.

• Gross farm income from Schedule F (Form 

1040).

• Your distributive share of gross income 

from a partnership, or limited liability company treated as a partnership, from Schedule K-1 (Form 1065).

• Your pro rata share of gross income from 

an S corporation, from Schedule K-1 (Form 

1120-S).

• Unemployment compensation.

• Other income not included with any of the 

items listed above.

The calculation of farm income for soil 

and water conservation expenses differs from the calculations for income 

averaging and estimated tax payments. See Income Averaging for Farmers and Estimated 

Tax, earlier.

Gross Income From Farming

Gross income from farming is income from cultivating the soil or raising agricultural commodities. It includes the following amounts.

• Income from operating a stock, dairy, poultry, bee, fruit, or truck farm.

• Income from a plantation, ranch, nursery, 

range, orchard, or oyster bed.

• Crop shares for the use of your land.

TIP

• Gains from sales of draft, breeding, dairy, 

or sporting livestock.

Gross income from farming is the total of the 

following amounts from your tax return.

• Gross farm income from Schedule F (Form 

1040).

• Gross farm rental income from Form 4835.

• Gross farm income from Schedule E (Form 

1040), Parts II and III.

• Gains from the sale of livestock used for 

draft, breeding, sport, or dairy purposes reported on Form 4797.

• Gains from the sale of depreciable farm 

equipment reported on Form 4797.

For more information about income from 

farming, see chapter 3.

Farm income does not include:

• Wages you receive as a farm employee,

• Income you receive from contract grain 

harvesting and hauling with workers and 

machines you furnish, and

• Gains you receive from the sale of farmland.

Percentage From Farming

Figure your gross income from all sources, discussed earlier. Then, figure your gross income 

from farming, discussed earlier. Divide your 

farm gross income by your total gross income to 

determine the percentage of gross income from 

farming.

Example 1. You had the following total 

gross income and farm gross income amounts 

in 2023.

Gross Income

Total Farm

Taxable interest ......... $3,000

Dividends ............. 500

Rental income (Sch E) .... 41,500

Farm income (Sch F) ..... 75,000 $75,000

Gain (Form 4797) ....... 5,000 5,000

Total ............ $125,000 $80,000

Schedule D showed gain from the sale of 

dairy cows carried over from Form 4797 

($5,000) in addition to a loss from the sale of 

corporate stock ($2,000). However, that loss is 

not netted against the gain to figure your total 

gross income or gross farm income. Your gross 

farm income is 64% of your total gross income 

($80,000 ÷ $125,000 = 0.64). Because your 

gross farm income is less than two-thirds of 

your total gross income, you are not a qualified 

farmer and the general estimated tax rules apply.

CAUTION

!

Page 88 Chapter 15 Estimated Tax
Special Rules for Qualified 

Farmers

The following special estimated tax rules apply 

if you are a qualified farmer for 2023.

• You do not have to pay estimated tax if you 

file your 2023 tax return and pay all the tax 

due by March 1, 2024.

• You do not have to pay estimated tax if 

your 2023 income tax withholding (including any amount applied to your 2023 estimated tax from your 2022 return) will be at 

least 662/3% (0.6667) of the total tax 

shown on your 2023 tax return or 100% of 

the total tax shown on your 2022 return.

• If you must pay estimated tax, you are required to make only one estimated tax payment (your required annual payment) by 

January 15, 2024, using special rules to 

figure the amount of the payment. See Required Annual Payment next for details.

Figure 15-1 presents an overview of the special estimated tax rules that apply to qualified 

farmers.

Example 2. Assume the same facts as in 

Example 1. Your gross farm income is 64% of 

your total income. Therefore, based on your 

2023 income, you don’t qualify to use the special estimated tax rules for qualified farmers. 

However, you do qualify if at least two-thirds of 

your 2022 gross income was from farming.

Example 3. Assume the same facts as in 

Example 1, except that your farm income from 

Schedule F was $90,000 instead of $75,000. 

This made your total gross income $140,000 

($3,000 + $500 + $41,500 + $90,000 + $5,000) 

and your farm gross income $95,000 ($90,000 

+ $5,000). You qualify to use the special estimated tax rules for qualified farmers, because 

67.9% (at least two-thirds) of your gross income 

is from farming ($95,000 ÷ $140,000 = 0.679).

If your farm income falls below 

two-thirds for the previous year and 

current year, you may no longer meet 

the Qualified Farmer Designation.

Required Annual Payment

If you are a qualified farmer and must pay estimated tax for 2023, use the worksheet on Form 

1040-ES to figure the amount of your required 

annual payment. Apply the following special 

rules for qualified farmers to the worksheet.

• On line 12a, multiply line 11c by 662/3% 

(0.6667).

• On line 12b, enter 100% of the tax shown 

on your 2022 tax return regardless of the 

amount of your adjusted gross income. For 

this purpose, the “tax shown on your 2022 

tax return” is the amount on line 16 of your 

2022 return modified by certain adjustments. For more information, see chapter 2 

of Pub. 505.

Estimated Tax Penalty 

for 2023

If you do not pay all your required estimated tax 

for 2023 by January 15, 2024, or file your 2023 

return and pay any tax due by March 1, 2024, 

you may owe a penalty. Use Form 2210-F to 

CAUTION

!

determine if you owe a penalty. See the Instructions for Form 2210-F. Also, see the Instructions 

for Form 2210-F for information on how to request a waiver of the penalty.

If you receive a penalty notice, do not 

ignore it, even if you think it is wrong. 

You may get a penalty notice even if 

you filed your return on time, attached Form 

2210-F, and met the gross income from farming 

requirement. If you receive a penalty notice for 

underpaying estimated tax and you think it is 

wrong, write to the address on the notice. Explain why you think the notice is wrong. Include 

a computation like the one in Example 1 (earlier), showing that you met the gross income 

from farming requirement.

16.

How To Get Tax 

Help

If you have questions about a tax issue; need 

help preparing your tax return; or want to download free publications, forms, or instructions, go 

to IRS.gov to find resources that can help you 

right away.

Preparing and filing your tax return. After 

receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 

1099-NEC, etc.); unemployment compensation 

statements (by mail or in a digital format) or 

other government payment statements (Form 

1099-G); and interest, dividend, and retirement 

statements from banks and investment firms 

(Forms 1099), you have several options to 

choose from to prepare and file your tax return. 

You can prepare the tax return yourself, see if 

you qualify for free tax preparation, or hire a tax 

professional to prepare your return.

Free options for tax preparation. Go to 

IRS.gov to see your options for preparing and 

filing your return online or in your local community, if you qualify, which include the following.

• Free File. This program lets you prepare 

and file your federal individual income tax 

return for free using brand-name tax-preparation-and-filing software or Free File fillable forms. However, state tax preparation 

may not be available through Free File. Go 

to IRS.gov/FreeFile to see if you qualify for 

free online federal tax preparation, e-filing, 

and direct deposit or payment options.

• VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to 

people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help 

preparing their own tax returns. Go to 

IRS.gov/VITA, download the free IRS2Go 

app, or call 800-906-9887 for information 

on free tax return preparation.

CAUTION

!

Figure 15-1. Estimated Tax for Farmers

Start Here:

Yes

Yes No

No No No

Yes Yes Yes

No Will you owe $1,000 or 

more after subtracting 

income tax withholding 

and refundable credits

from your total tax? (Do

not subtract any 

estimated tax payments.)

Was at least 662⁄3 %

of all your gross 

income in 2022 or

2023 from farming?

Follow the general 

estimated tax rules.

Will your 2023

income tax 

withholding and 

credits be at 

least 662⁄3 % of 

the tax shown 

on your 2023

return?

Will your 2023

income tax 

withholding and 

credits be at 

least 100% of 

the tax shown 

on your 2022 

return?

Will you le your 

income tax 

return and pay 

the tax in full by 

March 1, 2024?

You must pay 

your estimated 

tax (your 

required annual 

payment) by 

January 15, 

2024.

You do not have to 

pay estimated tax.

Note. See Special Rules for Qualified Farmers, later, for a detailed description of the special 

estimated tax rules that apply to qualied farmers.

Chapter 16 How To Get Tax Help Page 89
• TCE. The Tax Counseling for the Elderly 

(TCE) program offers free tax help for all 

taxpayers, particularly those who are 60 

years of age and older. TCE volunteers 

specialize in answering questions about 

pensions and retirement-related issues 

unique to seniors. Go to IRS.gov/TCE, 

download the free IRS2Go app, or call 

888-227-7669 for information on free tax 

return preparation.

• MilTax. Members of the U.S. Armed 

Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to 

MilitaryOneSource (MilitaryOneSource.mil/

MilTax).

Also, the IRS offers Free Fillable Forms, 

which can be completed online and then 

filed electronically regardless of income.

Using online tools to help prepare your return. Go to IRS.gov/Tools for the following.

• The Earned Income Tax Credit Assistant 

(IRS.gov/EITCAssistant) determines if 

you’re eligible for the earned income credit 

(EIC).

• The Online EIN Application (IRS.gov/EIN) 

helps you get an employer identification 

number (EIN) at no cost.

• The Tax Withholding Estimator (IRS.gov/

W4app) makes it easier for you to estimate 

the federal income tax you want your employer to withhold from your paycheck. 

This is tax withholding. See how your withholding affects your refund, take-home pay, 

or tax due.

• The First-Time Homebuyer Credit Account 

Look-up (IRS.gov/HomeBuyer) tool provides information on your repayments and 

account balance.

• The Sales Tax Deduction Calculator 

(IRS.gov/SalesTax) figures the amount you 

can claim if you itemize deductions on 

Schedule A (Form 1040).

Getting answers to your tax questions. On IRS.gov, you can get 

up-to-date information on current 

events and changes in tax law.

• IRS.gov/Help: A variety of tools to help you 

get answers to some of the most common 

tax questions.

• IRS.gov/ITA: The Interactive Tax Assistant, 

a tool that will ask you questions and, 

based on your input, provide answers on a 

number of tax law topics.

• IRS.gov/Forms: Find forms, instructions, 

and publications. You will find details on 

the most recent tax changes and interactive links to help you find answers to your 

questions.

• You may also be able to access tax law information in your electronic filing software.

Need someone to prepare your tax return? 

There are various types of tax return preparers, 

including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If 

you choose to have someone prepare your tax 

return, choose that preparer wisely. A paid tax 

preparer is:

• Primarily responsible for the overall substantive accuracy of your return,

• Required to sign the return, and

• Required to include their preparer tax identification number (PTIN).

Although the tax preparer always signs the return, you're ultimately responsible for providing 

all the information required for the preparer to 

accurately prepare your return. Anyone paid to 

prepare tax returns for others should have a 

thorough understanding of tax matters. For 

more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on 

IRS.gov.

Coronavirus. Go to IRS.gov/Coronavirus for 

links to information on the impact of the coronavirus, as well as tax relief available for individuals and families, small and large businesses, 

and tax-exempt organizations.

Employers can register to use Business 

Services Online. The Social Security Administration (SSA) offers online service at SSA.gov/

employer for fast, free, and secure online W-2 

filing options to CPAs, accountants, enrolled 

agents, and individuals who process Form W-2, 

Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

IRS social media. Go to IRS.gov/SocialMedia 

to see the various social media tools the IRS 

uses to share the latest information on tax 

changes, scam alerts, initiatives, products, and 

services. At the IRS, privacy and security are 

our highest priority. We use these tools to share 

public information with you. Don’t post your social security number (SSN) or other confidential 

information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide 

short, informative videos on various tax-related 

topics in English, Spanish, and ASL.

• Youtube.com/irsvideos.

• Youtube.com/irsvideosmultilingua.

• Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal 

(IRSVideos.gov) contains video and audio presentations for individuals, small businesses, 

and tax professionals.

Online tax information in other languages. 

You can find information on IRS.gov/

MyLanguage if English isn’t your native language.

Free Over-the-Phone Interpreter (OPI) Service. The IRS is committed to serving our multilingual customers by offering OPI services. The 

OPI Service is a federally funded program and 

is available at Taxpayer Assistance Centers 

(TACs), other IRS offices, and every VITA/TCE 

return site. The OPI Service is accessible in 

more than 350 languages.

Accessibility Helpline available for taxpayers with disabilities. Taxpayers who need information about accessibility services can call 

833-690-0598. The Accessibility Helpline can 

answer questions related to current and future 

accessibility products and services available in 

alternative media formats (for example, braille, 

large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. 

For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to 

receive certain types of written correspondence 

in the following formats.

• Standard Print.

• Large Print.

• Braille.

• Audio (MP3).

• Plain Text File (TXT).

• Braille Ready File (BRF).

Disasters. Go to Disaster Assistance and 

Emergency Relief for Individuals and 

Businesses to review the available disaster tax 

relief.

Getting tax forms and publications. Go to 

IRS.gov/Forms to view, download, or print all 

the forms, instructions, and publications you 

may need. Or, you can go to IRS.gov/

OrderForms to place an order.

Getting tax publications and instructions in 

eBook format. You can also download and 

view popular tax publications and instructions 

(including the Instructions for Form 1040) on 

mobile devices as eBooks at IRS.gov/eBooks.

Note. IRS eBooks have been tested using 

Apple's iBooks for iPad. Our eBooks haven’t 

been tested on other dedicated eBook readers, 

and eBook functionality may not operate as intended.

Access your online account (individual taxpayers only). Go to IRS.gov/Account to securely access information about your federal tax 

account.

• View the amount you owe and a breakdown by tax year.

• See payment plan details or apply for a 

new payment plan.

• Make a payment or view 5 years of payment history and any pending or scheduled payments.

• Access your tax records, including key 

data from your most recent tax return, and 

transcripts.

• View digital copies of select notices from 

the IRS.

• Approve or reject authorization requests 

from tax professionals.

• View your address on file or manage your 

communication preferences.

Tax Pro Account. This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online 

account. For more information, go to IRS.gov/

TaxProAccount.

Using direct deposit. The fastest way to receive a tax refund is to file electronically and 

choose direct deposit, which securely and electronically transfers your refund directly into your 

Page 90 Chapter 16 How To Get Tax Help
financial account. Direct deposit also avoids the 

possibility that your check could be lost, stolen, 

destroyed, or returned undeliverable to the IRS. 

Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit 

union that can open an account online.

Getting a transcript of your return. The 

quickest way to get a copy of your tax transcript 

is to go to IRS.gov/Transcripts. Click on either 

“Get Transcript Online” or “Get Transcript by 

Mail” to order a free copy of your transcript. If 

you prefer, you can order your transcript by calling 800-908-9946.

Reporting and resolving your tax-related 

identity theft issues. 

• Tax-related identity theft happens when 

someone steals your personal information 

to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

• The IRS doesn’t initiate contact with taxpayers by email, text messages (including 

shortened links), telephone calls, or social 

media channels to request or verify personal or financial information. This includes 

requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

• Go to IRS.gov/IdentityTheft, the IRS Identity Theft Central webpage, for information 

on identity theft and data security protection for taxpayers, tax professionals, and 

businesses. If your SSN has been lost or 

stolen or you suspect you’re a victim of 

tax-related identity theft, you can learn 

what steps you should take.

• Get an Identity Protection PIN (IP PIN). IP 

PINs are six-digit numbers assigned to taxpayers to help prevent the misuse of their 

SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return 

with your SSN. To learn more, go to 

IRS.gov/IPPIN.

Ways to check on the status of your refund. 

• Go to IRS.gov/Refunds.

• Download the official IRS2Go app to your 

mobile device to check your refund status.

• Call the automated refund hotline at 

800-829-1954.

Note. The IRS can’t issue refunds before 

mid-February for returns that claimed the EIC or 

the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Making a tax payment. Go to IRS.gov/

Payments for information on how to make a payment using any of the following options.

• IRS Direct Pay: Pay your individual tax bill 

or estimated tax payment directly from your 

checking or savings account at no cost to 

you.

• Debit or Credit Card: Choose an approved 

payment processor to pay online or by 

phone.

• Electronic Funds Withdrawal: Schedule a 

payment when filing your federal taxes using tax return preparation software or 

through a tax professional.

• Electronic Federal Tax Payment System: 

Best option for businesses. Enrollment is 

required.

• Check or Money Order: Mail your payment 

to the address listed on the notice or instructions.

• Cash: You may be able to pay your taxes 

with cash at a participating retail store.

• Same-Day Wire: You may be able to do 

same-day wire from your financial institution. Contact your financial institution for 

availability, cost, and time frames.

Note. The IRS uses the latest encryption 

technology to ensure that the electronic payments you make online, by phone, or from a 

mobile device using the IRS2Go app are safe 

and secure. Paying electronically is quick, easy, 

and faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/

Payments for more information about your options.

• Apply for an online payment agreement 

(IRS.gov/OPA) to meet your tax obligation 

in monthly installments if you can’t pay 

your taxes in full today. Once you complete 

the online process, you will receive immediate notification of whether your agreement has been approved.

• Use the Offer in Compromise Pre-Qualifier 

to see if you can settle your tax debt for 

less than the full amount you owe. For 

more information on the Offer in Compromise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/

Form1040X for information and updates.

Checking the status of your amended return. Go to IRS.gov/WMAR to track the status 

of Form 1040-X amended returns.

Note. It can take up to 3 weeks from the 

date you filed your amended return for it to 

show up in our system, and processing it can 

take up to 16 weeks.

Understanding an IRS notice or letter 

you’ve received. Go to IRS.gov/Notices to find 

additional information about responding to an 

IRS notice or letter.

Note. You can use Schedule LEP (Form 

1040), Request for Change in Language Preference, to state a preference to receive notices, 

letters, or other written communications from 

the IRS in an alternative language. You may not 

immediately receive written communications in 

the requested language. The IRS’s commitment 

to LEP taxpayers is part of a multi-year timeline 

that is scheduled to begin providing translations 

in 2023. You will continue to receive communications, including notices and letters, in English 

until they are translated to your preferred language.

Contacting your local IRS office. Keep in 

mind, many questions can be answered on 

IRS.gov without visiting an IRS TAC. Go to 

IRS.gov/LetUsHelp for the topics people ask 

about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled 

online or by phone. All TACs now provide service by appointment, so you’ll know in advance 

that you can get the service you need without 

long wait times. Before you visit, go to IRS.gov/

TACLocator to find the nearest TAC and to 

check hours, available services, and appointment options. Or, on the IRS2Go app, under the 

Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate 

Service (TAS) Is Here To 

Help You

What Is TAS?

TAS is an independent organization within the 

IRS that helps taxpayers and protects taxpayer 

rights. Their job is to ensure that every taxpayer 

is treated fairly and that you know and understand your rights under the Taxpayer Bill of 

Rights.

How Can You Learn About Your 

Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic 

rights that all taxpayers have when dealing with 

the IRS. Go to TaxpayerAdvocate.IRS.gov to 

help you understand what these rights mean to 

you and how they apply. These are your rights. 

Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you 

can’t resolve with the IRS. And their service is 

free. If you qualify for their assistance, you will 

be assigned to one advocate who will work with 

you throughout the process and will do everything possible to resolve your issue. TAS can 

help you if:

• Your problem is causing financial difficulty 

for you, your family, or your business;

• You face (or your business is facing) an immediate threat of adverse action; or

• You’ve tried repeatedly to contact the IRS 

but no one has responded, or the IRS 

hasn’t responded by the date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of 

Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at 

TaxpayerAdvocate.IRS.gov/Contact-Us. You 

can also call them at 877-777-4778.

How Else Does TAS Help 

Taxpayers?

TAS works to resolve large-scale problems that 

affect many taxpayers. If you know of one of 

these broad issues, report it to them at IRS.gov/

SAMS.

Chapter 16 How To Get Tax Help Page 91
TAS for Tax Professionals

TAS can provide a variety of information for tax 

professionals, including tax law updates and 

guidance, TAS programs, and ways to let TAS 

know about systemic problems you’ve seen in 

your practice.

Low Income Taxpayer Clinics 

(LITCs)

LITCs are independent from the IRS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with 

the IRS, such as audits, appeals, and tax collection disputes. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who 

speak English as a second language. Services 

are offered for free or a small fee for eligible taxpayers. To find an LITC near you, go to 

TaxpayerAdvocate.IRS.gov/about-us/LowIncome-Taxpayer-Clinics-LITC or see IRS Pub. 

4134, Low Income Taxpayer Clinic List.

Page 92 Chapter 16 How To Get Tax Help
To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us. Index

A

Abandonment 56

Accounting method:

Accrual 7

Cash 6

Change in 9

Crop 9

Farm inventory 8

Accounting periods 6

Accrual method of accounting 7

Additional Medicare Tax 

withholding 83

Adjusted basis of assets 33

Agricultural activity codes, 

Schedule F 3

Agricultural program 

payments 11

Agricultural structure, 

defined 40

Alternative Depreciation System 

(ADS) 43, 45

Amortization:

Going into business 48

Reforestation expenses 48

Section 197 intangibles 48

Assessments:

By conservation district 29

Depreciable property 29

Assistance (See Tax help)

Automobiles, depreciation 41

B

Bankruptcy 16

Barter income 18

Basis:

Involuntary conversion 34

Like-kind exchange 35

Partner's basis 36

Replacement property 71

Shareholder's basis 36

Basis of assets:

Adjusted basis 33

Allocating to several assets 32

Changed to business use 34

Constructing assets 32

Cost 31

Decreases 33

Depreciation 44

Exchanges:

Like-kind 34

Nontaxable 34

Partially nontaxable 35

Taxable 34

Gifts 35

Increases 33

Real property 31

Received for services 34

Uniform capitalization rules 32

Below-market loans 18

Books and records 4

Breeding fees 22

Business income limit, section 

179 expense deduction 41

Business use of home 23

C

Canceled debt 15

Capital assets 51

Capital expenses 25

Car expenses 24

Cash method of accounting 6

Casualties and thefts:

Adjustments to basis 69

Casualty, defined 66

Disaster area losses 72

Leased property 69

Livestock 67

Reimbursement 68

Reporting gains and losses 74

Theft, defined 67

Certification program for 

professional employer 

organizations (PEOs). 3, 80

Change in accounting method 9

Chickens, purchased 25

Christmas trees 26, 54

Club dues 27

Commodity:

Wages 83

Commodity Credit Corporation 

(CCC):

Loans 11

Market gain 12

Community property 76

Computer, software 38

Condemnation 66, 70

Conservation:

Cost-sharing exclusion 29

District assessments 29

Expenses 29

Plans 29

Conservation Reserve 

Program 77

Conservation Reserve Program 

(CRP) 12

Constructing assets 32

Constructive receipt of income 6

Contamination 71

Converted wetland 53

Cooperatives, income from 14

Cost-sharing exclusion 13

Credits:

Employment 21

Fuel tax 18, 87

Social security and Medicare 75

Social security coverage 75

State unemployment tax 84

Crew leaders 82

Crop:

Destroyed 71

Insurance proceeds 12

Method of accounting 9

Shares 11

Unharvested 26, 57, 77

Cropland, highly erodible 53

D

Damage:

Casualties and thefts 66

Crop insurance 12

Tree seedlings 70

Debt:

Canceled 15, 34, 56

Nonbusiness bad 51

Nonrecourse 56

Qualified farm 17

Recourse 56

Depletion 46

Depreciation 43

ADS election 45

Conservation assets 29

Deduction 37

Incorrect amount deducted 39

Limit for automobiles 41

Listed property 46

Raised livestock 38

Recapture 46, 58, 59

When to file 39

Depreciation allowable 39

Depreciation allowed 39

Disaster area losses 72

Disaster payments 12

Disaster relief grants 73

Disaster relief payments 73

Disposition of installment 

obligation 63

Dispositions 30, 31, 57

Drainage tile 29

Dyed diesel fuel 85

Dyed kerosene 85

E

Easement 18, 34

Election:

ADS depreciation 44, 45

Amortization:

Business start-up costs 48

Reforestation costs 48

Crop method 25

Cutting of timber 54

Deducting conservation 

expenses 31

Not excluding cost-sharing 

payments 14

Out of installment method 61

Postponing casualty gain 70

Postponing reporting crop 

insurance proceeds 12

Section 179 expense 

deduction 42

Embryo transplants 32

Employer identification 

number 3

Employer identification number 

(EIN) 81

Endangered species recovery 

expenses 29

Environmental contamination 71

Estimated tax:

Farm gross income 88

Gross income 88

Penalties 89

Exchanges:

Basis:

Like-kind 34

Nontaxable 34

Partially nontaxable 35

Taxable 34

Like-kind 49

Nontaxable 49

Excise taxes:

Credit 87

Diesel fuel 85

Farming purposes 85

Home use of fuels 87

Off-highway uses 86

Refund 87

F

Fair market value (FMV) 64

Family member:

Business expenses 7

Like-kind exchange 50

Loss on sale or exchange of 

property 26

Personal-use property 67

Social security coverage 82

Farm:

Business expenses 19

Business, defined 28

Defined 28, 85

Income averaging 19

Rental 28

Sale of 55

Farmer 76

Federal unemployment tax 

(FUTA) 84

Fertilizer 14, 22

Figuring installment sale income:

Adjusted basis 61

Adjusted basis and installment 

sale income (gain on 

sale) 61

Adjusted basis for installment 

sale purposes 61

Amount to report as installment 

sale income 61

Cancellation 61

Contract price 61

Depreciation recapture 61

Disposition of installment 

obligation 61

Figuring adjusted basis and 

gross profit percentage for 

installment sale purposes 61

Form 6252 61

Gross profit 61

Gross profit percentage 61

Interest income 61

Sale of depreciable property 61

Selling expenses 61

Selling price 61

Selling price reduced 61

Transfer due to death 61

Foreclosure 56

Forestation costs 26

Form:

1099-A 12, 56

1099-C 15, 56

1099-G 12, 14

1099-NEC 84

1099-PATR 14

1128 6

2210-F 89

3115 9

4136 87

4562 39

4797 10, 14, 49

4835 11

5213 28

8822 3

8824 49

8849 87

940 84

943 84

Publication 225 (2023) Page 93
982 17

I-9 81

SS-4 3, 81

SS-5 75

T (Timber) 47

W-4 82, 83

W-4V 11, 12

W-7 75

Fuel tax credit or refund 18, 87

G

Gains:

Section 1231 gains 65

Gains and losses:

Basis of assets 31

Capital assets, defined 51

Casualty 67, 70

Installment sales 60

Livestock 53

Long- or short-term 51

Ordinary or capital 51

Sale of farm 55

Section 1231 57

Theft 67, 70

Timber 54

General asset accounts 46

Gifts 11, 26, 35, 51

Going into business 48

Grants, disaster relief 73

H

Health insurance deduction 23

Highway use tax 22

Holding period 51, 53

Home 65

Horticultural structure 40

I

Illegal irrigation subsidy 18

Important dates 80

Improvements 13

Income:

Accounting for 6

Accrual method of accounting 7

Canceled debt excluded 15

From farming 9, 30, 88

Gross 88

Not-for-profit farming 27

Pasture 11

Schedule F 9

Withholding of tax 83

Income averaging (See Farm: 

Income averaging)

Incorrect amount of depreciation 

deducted 39

Individual taxpayer identification 

number (ITIN) 75

Inherited property 36

Insolvency 16

Installment method:

Electing out of the installment 

method 61

Inventory (See More information)

Revoking the election (See More 

information)

Sale at a loss 61

When to elect out 61

Installment sales:

Electing out 61

Example 64

Farm, sale of 60

Installment obligation 60

Related parties 60

Unstated interest 64

Insurance 22, 23

Intangible property 48

Interest:

Expense 21

Inventory:

Items included 8

Methods of valuation 8

Involuntary conversions 45, 66

Irrigation:

Illegal subsidy 18

Project 70

L

Labor hired 21

Landlord participation 77

Lease or purchase 23

Life tenant (See Term interests)

Like-kind exchanges 34, 49

Lime 22

Limits:

At-risk 27

Business use of home 23

Capital losses 51

Conservation expenses 30

Depreciation:

Business-use 46

Excluded farm debt 17

Farm losses 27

Loss of personal-use 

property 69

Not-for-profit farming 27

Passive activity 27

Percentage depletion 48

Prepaid farm supplies 20

Reforestation costs 48

Section 179 expense deduction:

Automobile 41

Business income 41

Dollar 41

Time to keep records 5

Listed property:

Defined 46

Passenger automobile 46

Rules 46

Livestock 57

Casualty and theft losses 67

Crop shares 11

Depreciation 38

Diseased 70

Feed assistance 13

Immature 38

Losses 26, 53

Purchased 53

Raised 53

Sale of 10, 53

Unit-livestock-price, inventory 

valuation 8

Used in a farm business 53

Weather-related sales 10, 70

Loans 11, 25

Losses:

At-risk limits 27

Casualty 66

Disaster areas 72

Farming 67

Growing crops 26

Hobby farming 27

Livestock 53, 70

Nondeductible 26

Theft 66

Lost income payments 76

Lost property 67

M

MACRS property:

Involuntary conversion 45

Like-kind exchange 45

Nontaxable transfer 46

Market gain, reporting 12

Marketing quota penalties 24

Material participation 77

Meals 24

Membership fees 27

Methods of accounting 6

Modified ACRS (MACRS):

ADS election 45

Conventions 45

Depreciation methods 45

Exchange 45

Figuring the deduction 45

Involuntary conversion 45

Nontaxable transfer 46

Property classes 44

Recovery periods 44

N

National Center for Missing & 

Exploited Children 4

Net operating losses:

Net operating loss (NOL) 69

New hire reporting 82

Noncapital asset 52

Nontaxable exchanges 49

Nontaxable transfer of MACRS 

property 46

Not-for-profit farming 27

O

Organizational costs 25

P

Partners, limited 76

Partners, retired 77

Partners, spouses 76

Partnership 76

Passenger automobile 46

Pasture income 11

Patronage dividends 14

Payments considered received:

Bond 63

Buyer assumes mortgage 63

Buyer assumes other debts 63

Buyer pays seller’s expenses 63

Buyer’s note 63

Debt not payable on demand 63

Mortgage less than basis 63

Mortgage more than basis 63

Property used as a payment 63

Sale to a related person 63

Third-party note 63

Trading property for like-kind 

property 63

Payments received 63

Penalties:

Estimated tax 89

Returns 89

Trust fund recovery 84

Per-unit retain certificates 15

Personal expenses 26

Placed in service 38, 44

Postponing casualty gain 70

Prepaid expense:

Advance premiums 22

Extends useful life 7

Farm supplies 20

Livestock feed 20

Prizes 18

Produce 10

Property:

Changed to business use 34

Received for services 34

Repairs and improvements 39

Section 1231 57

Section 1245 58

Section 1250 59

Section 1252 60

Section 1255 60

Tangible personal 40

Property used as a payment:

Examples 64

Exception 64

Publications (See Tax help)

Q

Qualified disaster relief 

payments 73

Qualified farm debt 17

Qualified joint venture 76

Qualified small business payroll 

tax credit for increasing 

research activities 2, 79

R

Recapture:

Amortization 59

Basis reductions 17

Certain depreciation 18

Cost-sharing payments 14

Depreciation 46, 58

Section 1245 property 58

Section 1250 property 59

Section 179 expense 

deduction 42

Section 179 GO Zone 

property 42

Special depreciation 

allowance 43

Recordkeeping 4, 24

Records on depreciable 

property 58

Reforestation costs 26, 48

Refund:

Deduction taken 18

Fuel tax 18, 87

Reimbursements:

Casualties and thefts 33, 66, 68

Deduction taken 18

Expenses 20

Feed assistance 13

Real estate taxes 31

Reforestation expenses 48

To employees 24

Related parties 61

Related persons 7, 26, 35, 50, 71

Rental income 11

Rented property, 

improvements 39

Repairs 21

Repairs and improvements 39

Repayment of income 7

Replacement:

Period 72

Property 71

Repossessions 56

Right-of-way income 18

S

Sale of home 55

Page 94 Publication 225 (2023)
Section 179 expense 

deduction 39

How to elect 42

Listed property 46

Qualifying property 40

Recapture 42

Self-employed health 

insurance 23

Self-employed health insurance 

deduction 77

Self-employment (SE) tax:

Community property 76

Deduction 79

How to pay 75

Landlord participation 77

Material participation 77

Maximum net earnings 2, 74

Methods for figuring net 

earnings 77

Optional method 78

Regular method 78

Rental income 77

Reporting 79

Self-employment tax rate 74

Share farming 75

Who must pay 75

Selling price reduced 62

Settlement costs (fees) 32

Social security and Medicare:

Credits of coverage 75

Withholding of tax 82

Social security number (SSN) 75

Software, computer 38

Soil:

Conservation 29

Contamination 71

Special depreciation allowance:

How to elect not to claim 43

Recapture 43

Standard mileage rate 24

Start-up costs for businesses 25

T

Tangible personal property 40

Tax help 89

Tax preparation fees 25

Tax shelter:

At-risk limits 27

Defined 7

Tax-free exchanges 49

Taxes:

Credits and Refunds 85

Federal use 22

General 22

Self-employment 74

State and federal 22

State and local general sales 22

Withholding 82, 83

Telephone expense 24

Tenant house expenses 24

Term interests 38

Theft losses 66

Third-party note 64

Timber 26, 47, 54

Trade-in 35

Travel expenses 24

Truck expenses 24

Trust fund recovery penalty 84

U

Uniform capitalization rules:

Basis of assets 32

Inventory 8

W

Wages and salaries 77

Water conservation 29

Water well 29, 44

Weather-related sales, 

livestock 10, 70

Withholding:

Income tax 83

Social security and Medicare 

tax 82

Publication 225 (2023) Page 95