Seminar 103 - Taxation of Farmers

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You will need IRS Publication 225 and Publication FTB 1001 to complete this seminar.

Please answer the following as accurately as possible.

1. You are in the business of farming if you

a. Cultivate a farm for profit.
b. Operate a farm for profit.
c. Manage a farm for profit.
d. Any of the above.

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

a. Monitor the progress of your business.
b. Prepare your financial statements and tax returns.
c. Identify the source of receipts and keep track of deductible expenses.
d. All of the above.

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

True False

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

a. Schedule C (Form 1040).
b. Schedule F (Form 1040).
c. Schedule E (Form 1040).
d. None of the above.

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

a. An individual.
b. A partner in a partnership.
c. A shareholder in an S corporation.
d. Any of the above.

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

a. Farmer income averaging (FIA).
b. Elected Farming Income (EFI).
c. Other Source Income (OSI).
d. None of the above.

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

True False

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

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

9. You are a farm-related taxpayer if

a. Your main home is on a farm.
b. Your principal business is farming.
c. A member of your family's main house is on a farm or their principal business is farming.
d. Any of the above.

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

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

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

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

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

a. Schedule C line 2.
b. Schedule F line 31.
c. Form 1040 line 12.
d. None of the above.

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

True False

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

a. Schedule C, line 2.
b. Schedule F line 31.
c. Form 1040 line 12.
d. None of the above.

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

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

16. If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. You can deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses.

True False

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

True False

18. You can deduct the actual cost of operating a truck or car in your farm business. Only expenses for business use are deductible. These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation. Instead of using actual costs, under certain conditions you can use the standard mileage rate. For 2007, the rate is 

a. 31.5 cents a mile for all business miles driven.
b. 44.5 cents a mile for all business miles driven.
c. 48.5 cents a mile for all business miles driven.
d. None of the above.

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

a. Cultivating land.
b. Raising or harvesting any agricultural or horticultural commodity.
c. Driving to the feed or supply store.
d. All of the above.

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

True False

21. The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant.

True False

22. A payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year is

a. Uniform capitalization.
b. An expense.
c. A capital expense.
d. Depreciable expense.

23. You can deduct as a loss the value of raised livestock that died if you deducted the cost of raising them as an expense.

True False

24. If you do not carry on your farming activity to make a profit, you report the income from the activity on

a. Schedule F.
b. Form 1040 line 21.
c. Schedule C.
d. None of the above.

25. You own a farm in Iowa and live in California. You rent the farm for 125 in cash per acre and do not materially participate in production of the crops grown on the farm. You

a. Cannot deduct your soil conservation expenses for this farm.
b. Can deduct your soil conservation expenses for this farm.
c. Don't capitalize the expenses or add them to the basis of the land.
d. None of the above.

26. 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. A conservation plan includes the farming conservation practices approved for the area where your farm land is located. Approved plans include

a. NRCS individual site plans.
b. NRCS county plans.
c. Comparable state agency plans.
d. All of the above.

27. You may want to use the optional methods when you have a loss or a small net profit and if

a. You want to receive credit for social security benefit coverage.
b. You incurred child and dependent care expenses for which you could claim a credit.
c. You are entitled to the earned income or the additional child tax credits.
d. Any of the above.

28. Use the farm optional method only for self-employment earnings from a farming business. You use this method if

a. Your gross farm income is $2,400 or less.
b. Your net farm profits are less than $1,733.
c. Your earnings are less than $400.  
d. Both A and B above. 

29. If you use both the farm optional method and the non-farm optional methods, the amount you can report as your combined net earnings from self-employment cannot be more than

a. $1,600.
b. $2,400.
c. $1,733.
d. $400.

30. Special estimated tax rules apply if you are a qualified farmer for 2007, such as the following.

a. You do not have to pay estimated tax if you file your 2007 tax return and pay all the tax due by March 3, 2008.
b. You do not have to pay estimated tax if you expect your 2007 income tax withholding (including any amount applied to your 2007 estimated tax from your 2006 return) to be at least 66 2/3% (.6667) of the total tax to be shown on you 2007 tax return or 100% of the total tax shown on your 2006 return.
c. If you must pay estimated tax, you are required to make only one estimated tax payment (your required annual payment) by January 15, 2008, using special rules to figure the amount of the payment.
d. All of the above.

31. Federal law does not have a Donated Agricultural products transportation credit.

True False

32. Under California law, deductions are allowed for the portion of the expenses equal to the Donated Agricultural products transportation credit.

True False

33.  Like California, federal law has the following credit (s).

a. Donated agricultural products transportation credit.
b. Farm worker housing credit.
c. Rice straw credit. 
d. None of the above.

34. Depreciation methods and useful lives of trade or business property must be acceptable to California.

True False

35. Federal law allows a deduction for all ordinary and necessary trade or business expenses. Under California law, employers may claim a credit of _______ of the costs for establishing a child care program or contributing to a child care referral service.

a. 10%.
b. 20%.
c. 30%.
d. None of the above.

36.  Federal law allows a credit of 50% for the cost of making a business accessible to disabled individuals. California conforms to this provision,

a. And you can also take a credit of 50% for the cost of making a business accessible to disabled individuals for California.
b. California conforms to this provision, but the maximum credit is $125.
c. California does not allow this type of credit.
d. None of the above.

37. Federal law allows a work opportunity credit and a Welfare-to-work credit for employers that hire individuals from certain target groups and recipients of long-term family assistance. California has a similar credit.

True False

38. Compensation paid from the Paid Family Leave (PFL) Program is not taxable by California but it is taxable for federal purposes.

True False

39. Federal law generally requires a 10-year recovery period for fruit bearing vines for purposes of accelerated cost recovery and a 20-year recovery period for those vines under an alternative depreciation system. California law allows 5 and 10-year recovery periods, respectively.

True False