2020 Publication 225 - Internal Revenue Service
Publication 225ContentsFarmer'sTax GuideIntroduction . . . . . . . . . . . . . . . . . . 1Cat. No. 11049LDepartmentof theTreasuryInternalRevenueServiceFor use in preparing2020 ReturnsAcknowledgment: The valuable advice and assistance given us eachyear by the National Farm Income Tax Extension Committee isgratefully acknowledged.What's New for 2020 . . . . . . . . . . . . . 2What's New for 2021 . . . . . . . . . . . . . 3Reminders . . . . . . . . . . . . . . . . . . . 3Chapter 1. Importance of Records . . . . 3Chapter 2. Accounting Methods . . . . . 5Chapter 3. Farm Income . . . . . . . . . . 8Chapter 4. FarmBusiness Expenses. . . . . . . . . 18Chapter 5. Soil and WaterConservation Expenses . . . . . . . 27Chapter 6. Basis of Assets. . . . . . . 30Chapter 7. Depreciation, Depletion,and Amortization . . . . . . . . . . . 36Chapter 8. Gains and Losses . . . . . . 48Chapter 9. Dispositions ofProperty Used in Farming. . . . . 56Chapter 10. Installment Sales. . . . . 59Chapter 11. Casualties, Thefts, andCondemnations . . . . . . . . . . . . 65Chapter 12. Self-Employment Tax . . . 73Chapter 13. Employment Taxes. . . . 78Chapter 14. Fuel Excise TaxCredits and Refunds . . . . . . . . . 84Chapter 15. Estimated Tax. . . . . . . 87Chapter 16. How To Get Tax Help . . . 89Index. . . . . . . . . . . . . . . . . . . . . 92IntroductionGet forms and other information faster and easier at: IRS.gov (English) IRS.gov/Spanish (Español) IRS.gov/Chinese (中文)Oct 15, 2020 IRS.gov/Korean (한국어) IRS.gov/Russian (Pусский) IRS.gov/Vietnamese (TiếngViệt)You are in the business of farming if you cultivate, operate, or manage a farm for profit, eitheras owner or tenant. A farm includes livestock,dairy, poultry, fish, fruit, and truck farms. It alsoincludes plantations, ranches, ranges, and orchards and groves.This publication explains how the federal taxlaws apply to farming. Use this publication as aguide to figure your taxes and complete yourfarm tax return. If you need more information ona subject, get the specific IRS tax publicationcovering that subject. We refer to many of thesefree publications throughout this publication.See chapter 16 for information on orderingthese publications.The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress,Treasury regulations, and court decisions. However, the information given does not cover every situation and is not intended to replace the
law or change its meaning. This publicationcovers subjects on which a court may have rendered a decision more favorable to taxpayersthan the interpretation by the IRS. Until thesediffering interpretations are resolved by highercourt 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 toall.Comments and suggestions. We welcomeyour comments about this publication and yoursuggestions for future editions.You can send us comments throughIRS.gov/FormComments. Or you can write to:Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526,Washington, DC 20224.Although we can’t respond individually toeach comment received, we do appreciate yourfeedback and will consider your comments aswe revise our tax forms, instructions, and publications. We can’t answer tax questions sent tothe above address.Tax questions. If you have a tax questionnot answered by this publication or the How ToGet Tax Help at the end of this publication, goto the IRS Interactive Tax Assistant page atIRS.gov/help/ITA where you can find topics using the search feature or by viewing the categories listed.Ordering forms and publications. VisitIRS.gov/FormsPubs to download forms andpublications. Otherwise, you can go to IRS.gov/OrderForms to order current and prior-yearforms and instructions. Your order should arrivewithin 10 business days.Comments on IRS enforcement actions.The Small Business and Agricultural RegulatoryEnforcement Ombudsman and 10 RegionalFairness Boards were established to receivecomments from small business about federalagency enforcement actions. The Ombudsmanwill annually evaluate the enforcement activitiesof each agency and rate its responsiveness tosmall business. If you wish to comment on theenforcement actions of the IRS, you can: Call 888-734-3247, Fax your comments to 202-481-5719, Write to:Office of the National OmbudsmanU.S. Small Business Administration409 3rd Street SWWashington, DC 20416, Send an email to ombudsman@sba.gov,or Complete and submit a Federal AgencyComment Form online atwww.sba.gov/ombudsman/comment.Treasury Inspector General for Tax Administration (TIGTA). If you want to confidentiallyreport misconduct, waste, fraud, or abuse by anIRS employee, you can call 800-366-4484(800-877-8339 for TTY/TDD users). You can remain anonymous.Page 2Farm tax classes. Many state CooperativeExtension Services conduct farm tax workshops in conjunction with the IRS. Contact yourcounty or regional extension office for more information.Rural Tax Education website. The Rural TaxEducation website is a source for informationconcerning agriculturally related income anddeductions and self-employment tax. The website is available for farmers and ranchers, otheragricultural producers, Extension educators,and anyone interested in learning about the taxside of the agricultural community. Members ofthe National Farm Income Tax Extension Committee are contributors for the website and thewebsite is hosted by Utah State University Cooperative Extension. You can visit the websiteat www.ruraltax.org.Future DevelopmentsThe IRS has created a page on IRS.gov forinformation about Pub. 225 atIRS.gov/Pub225. Information about recentdevelopments affecting Pub. 225 will be postedon that page.What's New for 2020The following items highlight a number ofadministrative and tax law changes for 2020.They are discussed in more detail throughoutthe publication.Coronavirus Food Assistance Program(CFAP). The CFAP provides direct paymentsto producers of eligible agricultural commoditiesadversely affected by the conronavirus(COVID-19) pandemic to help offset sales losses and increased marketing costs associatedwith the COVID-19 pandemic.CFAP payments are agricultural programpayments that you must include in gross income. Report the full amount of your CFAP payments on Schedule F (Form 1040), lines 4a and4b. See the Instructions for Schedule F (Form1040).Standard mileage rate. For 2020, the standard mileage rate for the cost of operating yourcar, van, pickup, or panel truck for each mile ofbusiness use is 57.5 cents. See chapter 4.Increase business interest expense. TheCoronavirus Aid, Relief, and Economic SecurityAct (CARES Act) retroactively increases theamount of business interest expense that maybe deducted for tax years beginning in 2019and 2020 by computing the section 163(j) limitation using 50% (instead of 30%) of your adjustable taxable income. The limitation doesn’tapply to most farms. See chapter 4.Payroll Protection Program (PPP) Loan andForgiven Debt. Generally, you can’t deductexpenses that are allocable to a PPP loan youreceive that’s later forgiven. For more information, see Notice 2020-32 available atIRS.gov/irb/2020-21 IRB#NOT-2020-32.Increased section 179 expense deductiondollar limits. The maximum amount you canelect to deduct for most section 179 propertyyou placed in service in 2020 is 1,040,000.This limit is reduced by the amount by which thecost of the property placed in service during thetax year exceeds 2,590,000. Also, the maximum section 179 expense deduction for sportutility vehicles placed in service in tax years beginning in 2020 is 25,900. See chapter 7.Expiration of the treatment for certain racehorses. The 3-year recovery period for racehorses 2 years old or younger will not apply tohorses placed in service after December 31,2020. See chapter 7.Qualifiedimprovementproperty. TheCARES Act revised the provision in the TaxCuts and Jobs Act (TCJA) to change the treatment of qualified improvement property (as defined in section 168(e)(6) of the Internal Revenue Code) placed in service after December 31,2017, to 15-year property under MACRS. Seechapter 7.New rules for net operating loss (NOL) carrybacks. The CARES Act revised the provisions of the TCJA related to NOL carrybacks toallow taxpayers to carryback NOLs includingnon-farm NOLs arising from tax years 2018,2019, and 2020 for 5 years. See chapter 11.Maximum net earnings. The maximum netself-employment earnings subject to the socialsecurity part (12.4%) of the self-employment taxis 137,700 for 2020, up from 132,900 for2019. There is no maximum limit on earningssubject to the Medicare part (2.9%) or, if applicable, the Additional Medicare Tax (0.9%). Seechapter 12.Changes to Schedule SE (Form 1040).Schedule SE (Form 1040) has a new Part II toallow self-employed persons to figure a maximum amount of self-employment tax paymentswhich may be deferred. Schedule SE (Form1040) has also been revised into a single formformat and each person with net earnings fromself-employment will use a separate Schedule SE (Form 1040). See the Instructions forSchedule SE (Form 1040) for more information.Credits for self-employed persons. New refundable credits are available to certainself-employed persons impacted by the coronavirus. See the Instructions for Form 7202 formore information.COVID-19 related employment tax creditsand other tax relief. The Families First Coronavirus ResponseAct (the “FFCRA”), enacted on March 18,2020, provides small and midsize employers refundable tax credits that reimbursethem for the cost of providing paid sick andfamily leave wages to their employees forleave related to COVID-19. The CARES Act, enacted on March 27,2020, provides eligible employers with anemployee retention tax credit if they keepemployees on their payroll, despite experiencing economic hardship related toCOVID-19. The CARES Act also allows employers todefer the deposit and payment of the employer share of social security taxes. The Presidential Memorandum on Deferring Payroll Tax Obligations in Light of theOngoing COVID-19 Disaster, issued onAugust 8, 2020, directs the Secretary ofthe Treasury to defer the whholding, deposit, and payment of the employee sharePublication 225 (2020)
of social security tax on wages paid duringthe period of September 1, 2020, throughDecember 31, 2020. The deferral is available to employees whose social securitywages paid for a bi-weekly pay period areless than 4,000, or the equivalent threshold amount for other pay periods.See chapter 13.Social security and Medicare tax for 2020.The social security tax rate is 6.2% each for theemployee and employer, unchanged from2019. The social security wage base limit is 137,700.The Medicare tax rate is 1.45% each for theemployee and employer, unchanged from2019. There is no wage base limit for Medicaretax. See chapter 13.2020 withholding tables. The federal incometax withholding tables are now included in Pub.15T, Federal Income Tax Withholding Methods.Redesigned Form W-4 for 2020. The IRShas redesigned Form W-4 for 2020. See chapter 13.New Form 1099-NEC. There is a new Form1099-NEC to report nonemployee compensation paid in 2020. The 2020 Form 1099-NECwill be due February 1, 2021. See chapter 13.What's New for 2021Social security and Medicare tax for 2021.The employee and employer tax rates for socialsecurity and the maximum amount of wagessubject to social security tax for 2021 will bediscussed in Pub. 51 (for use in 2021).The Medicare tax rate for 2021 will also bediscussed in Pub. 51 (for use in 2021). There isno limit on the amount of wages subject to Medicare tax. See chapter 13.RemindersThe following reminders and other items mayhelp you file your tax return.Principal agricultural activity codes. Youmust enter on line B of Schedule F (Form 1040)a code that identifies your principal agriculturalactivity. It is important to use the correct codebecause this information will identify marketsegments of the public for IRS Taxpayer Education programs. The U.S. Census Bureau alsouses 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 YourEmployer Identification Number, provides general information on EINs. Topics include how toapply for an EIN and how to complete FormSS-4.Change of address. If you change your homeaddress, you should use Form 8822, Change ofAddress, to notify the IRS. If you change yourbusiness address, you should use Form8822-B, Change of Address or ResponsibleParty—Business, to notify the IRS. Be sure toinclude your suite, room, or other unit number.Reportable transactions. You must file Form8886, Reportable Transaction Disclosure Statement, to report certain transactions. You mayhave to pay a penalty if you are required to fileForm 8886 but do not do so. Reportable transactions include (1) transactions the same as, orsubstantially similar to, tax avoidance transactions identified by the IRS; (2) transactions offered to you under conditions of confidentialityand for which you paid an advisor a minimumfee; (3) transactions for which you have, or a related party has, a right to a full or partial refundof fees if all or part of the intended tax consequences from the transaction are not sustained;(4) transactions that result in losses of at least 2 million in any single year or 4 million in anycombination of years; and (5) transactions withasset holding periods of 45 days or less andthat result in a tax credit of more than 250,000.For more information, see the Instructions forForm 8886.Form W-4 for 2020. You should make newForms W-4 available to your employees and encourage them to check their income tax withholding for 2020. Those employees who oweda large amount of tax or received a large refundfor 2019 may need to submit a new Form W-4.Form 1099-MISC. Generally, file Form1099-MISC if you pay at least 600 in rents,services, and other miscellaneous payments inyour farming business to an individual (for example, an accountant, an attorney, or a veterinarian) who is not your employee. Paymentsmade to corporations for medical and healthcare payments, including payments made toveterinarians, must generally be reported onForm 1099.Limited liability company (LLC). For purposes of this publication, a limited liability company (LLC) is a business entity organized in theUnited States under state law. Unlike a partnership, all of the members of an LLC have limitedpersonal liability for its debts. An LLC may beclassified for federal income tax purposes as apartnership, corporation, or an entity disregarded as separate from its owner by applying therules in Regulations section 301.7701-3. SeePub. 3402 for more details.Photographs of missing children. The IRS isa proud partner with the National Center forMissing & Exploited Children (NCMEC). Photographs of missing children selected by theCenter may appear in this publication on pagesthat would otherwise be blank. You can helpbring these children home by looking at thephotographs and calling 1-800-THE-LOST(1-800-843-5678) (24 hours a day, 7 days aweek) if you recognize a child.1.Importance ofRecordsIntroductionA farmer, like other taxpayers, must keep records to prepare an accurate income tax returnand determine the correct amount of tax. Thischapter explains the benefits of keeping records, what kinds of records you must keep,and how long you must keep them for federaltax purposes.While this publication only discusses tax records, the records you keep as a farm businessowner should allow you to accurately measureyour farm’s financial performance, create financial statements, and help you make management decisions in addition to calculating taxablefarm income.Records that provide information beyondyour tax return require additional informationand effort on the part of the record keeper. Toassist you in developing or improving your recordkeeping system, the Farm Financial Standards Council produces publications that providerecommendations for financial reporting andanalysis. You can download the ImplementationGuidelines at https://ffsc.org. For more information, contact the Farm Financial StandardsCouncil in the following manner. Call 262-253-6902. Send a fax to 262-253-6903. Write to:Farm Financial Standards CouncilN78 W14573 Appleton Ave., #287Menomonee Falls, WI 53051.TopicsThis chapter discusses: Benefits of recordkeeping Kinds of records to keep How long to keep recordsUseful ItemsYou may want to see:Publication51(Circular A), Agricultural Employer'sTax Guide51463 Travel, Gift, and Car Expenses463535 Business Expenses535544 Sales and Other Dispositions ofAssets544946 How To Depreciate Property946See chapter 16 for information about gettingpublications.Chapter 1Importance of RecordsPage 3
Benefits ofRecordkeepingEveryone in business, including farmers, mustkeep appropriate records. Recordkeeping willhelp you do the following.Monitor the progress of your farming business. You need records to monitor the progress of your business. In addition to measuringoverall profitability, detailed records can helpyou identify which crop or livestock enterprisesare 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 ofbusiness success.Prepare your financial statements. You willneed records to prepare accurate financialstatements. These include income (profit andloss) statements, cash flow statements, balance sheets, and statements of owner’s equity.These statements will be required and helpfulwhen working with your bank or creditors andmay also help you manage your farm business.Identify source of receipts. You will receivemoney, property, and/or services from manysources. Your records can identify the source ofyour receipts. You need this information to separate farm from nonfarm receipts and taxablefrom nontaxable income.Keep track of deductible expenses. Youmay forget expenses when you prepare yourtax return unless you record them when theyoccur.Prepare your tax returns. You need recordsto prepare your tax return. These records mustaccurately support the income, expenses, andcredits you report. Generally, these are thesame records you use to monitor your farmingbusiness and prepare your financial statements.You will also need records to prepare information returns such as a Form 1099-MISC provided to a vendor or a Form W-2 provided to anemployee.Support items reported on tax returns. Youmust keep your business records available at alltimes for inspection by the IRS. If the IRS examines any of your tax returns, you may be askedto explain the items reported. A complete set ofrecords will assist in the examination.Kinds of RecordsTo KeepExcept in a few cases, the law does not requireany specific kind of records. You can chooseany 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 clearlyshows your income for your tax year. If you arein more than one business, you should keep aPage 4Chapter 1Importance of Recordscomplete and separate set of records for eachbusiness. A corporation’s recordkeeping system should include board of directors meetingminutes. See chapter 2 for more information.Your recordkeeping system should include asummary of your business transactions, whichshows your gross income, as well as any expenses, deductions, and credits you are reporting. In addition, you must keep supportingdocuments, such as invoices and receipts, forpurchases, sales, payroll, and o
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 web-site is available for farmers and ranchers, other agricultural producers, Extension e
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