T AXPAYERS engaged in farming
are taxed at the same rates as
other persons. A person operating a
farm as a business is taxed the same
as any other person. A corporation
that operates a farm is taxed as any
other corporation, and a partnership
operating a farm reports the partner
ship income and expenses on a part
nership return (information return),
provided for all partnerships.
However, there are a few special
rules applicable to income and de
ductions peculiar to farming. Farm
ers may report on either the cash
basis or on the accrual or inventory
basis. Whatever basis is adopted in
filing a first return must be followed
in subsequent years unless permis
sion is granted by the commissioner
to adopt a different method,
A farmer producing crops which
take more than a year from time of
planting to mature and be harvested,
may report his income therefrom on
the crop basis, provided he has first
received the consent of the commis
sioner. In this method the entire
cost of producing the crop must be
taken as a deduction in the year the
crop is sold and the income received.
Cash. Accrual Methods
The basic distinction between the
cash and accrual methods of ac
counting is that the latter requires
books to be kept and inventories
used. Gross income on the cash basis
is comprised of:
"(1) The amount of cash or the
value of merchandise or other
property received during the tax
able year from the sale of live
stock and produce which were
raised during the taxable year or
prior years, (2) the profits from
the sale of any livestock or other
items which were purchased and
(8) gross income from all other
sources." Reg. Sec. 29.22 (a) -7.
On the accrual basis, gross in
come is computed, viz.:
• • . by adding to the inven
tory value of livestock and prod
ucts on hand at the end of the
year, the amount received from the
sale of livestock and products, and
miscellaneous receipts for hire of
teams, machinery, and the like,
during the year, and deducting
from this sum the inventory value
of livestock and products on hand
at the beginning of the year and
the cost of livestock and products
purchased during the year."
Under either method, the regula
tions state:
"If farm produce is exchanged
for merchandise, groceries, or the
like, the market value of the
article received in exchange is to
be included in gross income."
If rents are received in crop shares,
income is reported when they are
reduced to money or "the equivalent
of money." Proceeds of hail, fire, or
similar insurance are reportable as
income. Reg. Sec. 29.22 (a) -7.
Benefit payments under the soil
conservation act are taxable income,
not gifts.
The value of farm products con
sumed by a farmer and his family
are not taxable income, neither may
these be deducted as expense.
Capital Outlay
Expenditures for buildings, fenc
ing, machinery and equipment are
in the nature of capital outlay and
are not deductible as an expense in
the year purchased but may be
written off over the useful life of
such assets by way of an annual
charge for depreciation.
Animals used for draft, breeding
and dairy purposes are ordinarily
treated as capital assets subject to
depreciation in the same manner as
buildings and equipment. Thus they
are subject to the same rules as
other depreciable assets and are en
titled to the capital gain or ordinary
loss provisions of section 117 J L
R. C.
Income Taxes Will Be Less
How the New haw Affects Farmers and Ranchers
By DOUGLAS N. WILSON, C. P. A.
The general rule is that gain or
loss on the sale of involuntary con
version of land used in business and
buildings, machinery and equipment,
etc., is includible in gross income as
ordinary income or deductible as or
dinary loss.
The relief provision of section 117
J applies to taxpayers who realize
gains or losses from the sale of prop
erty held for six months or longer,
or from involuntary conversion (in
cluding condemnation, seizure, de
struction) of the above kind of prop
erty or of capital assets held for six
months or longer.
If the recognized gains from such
transactions exceed the losses they
are to be treated as capital gains, of
which only 50 percent is subject to
tax. On the other hand, if the ag
gregate losses in such transactions
exceed the aggregate gains the loss
is to be treated as an ordinary loss
deductible 100 percent.
Accordingly, "Livestock used for
draft, breeding, or dairy purposes,
irrespective of whether such live
stock was raised or purchased, is
property used in the trade or busi
ness of a farmer for the purpose
of Sec. 117 (j), provided it is held
for more than 6 months. Whether
taxpayer is on the cash or accrual
basis is immaterial. (I. T. 3666, Par.
5008.) With respect to the inclusion
of such livestock in an inventory
(on the accrual basis), the commis
sioner has ruled that such inclu
sion is primarily for the conveni
ence of accounting and does not
deprive a farmer from, the benefits
of Sec. 117 (j). However, the sale
of animals culled from the breed
ing herd as feeder or slaughter
animals in the regular course of
Tax Saving Changes
/CHANGES under the new law that effect tax savings are the same
fox farmers and ranchers as for all other taxpayers.
The most important change, of course, is the new provision that
the income and property can be treated as though half belonged to
the husband and half to the wife. Thus the total income can be split
in two and the lax paid at the lower rate applicable to the divided
amounts. Here's the way it works:
It will be assumed that John Doe, living with
his wife, has an income of $12,000. They are both
under 65. They elect to file a joint return and
lake the standard deduction of $1,000. Their
exemptions are $600 each.
Salary .
Standard deductions
$ 12 , 000.00
1,000.00
$ 11 , 000.00
. . 1 , 200.00
Two exemptions
$ 9,800.00
50 percent, or adjusted gross
income for each.
$ 4,900.00
$ 925.00
times 2
Tax on $4,900
Total tax payable for both husband
and wife under new law
$ 1,850.24
Tax on $12,000 under 1947 law .. $ 2,688.50
$ 838.26
Tax savings under new law.
Additional changes that affect lax savings:
The flat 5 percent reduction on the tentative normal and surtax
is replaced by a series of percentage reductions. If the tentative
normal and surtax is not over $400, the reduction is 17 percent or
$68. If over $400, but not over $100,000 the reduction is $68 plus 12
percent of the amount in excess of $400.
Individual exemptions are increased from $500 to $600.
Individuals over 65 are allowed a further $600 exemption or $1,200
in alL
The maximum medical deduction allowable on the basis of the
excess of 5 percent of the gross income is raised from $2,500 to
$5,000 in joint returns and from $1,250 to $2,500 in separate returns.
the business of the farmer is not
treated as the sale of a capital
asset. (L T. 3712, Par. 5009.)"
4 Years to Absorb Losses
Farmers as well as other taxpay
ers are entitled to the benefits of
code section 112b I. R. C. This sec
tion provides that net operating
losses from a trade or business sus
tained in any one year may be car
ried back and applied against the
gains of the two preceding taxable
years. The unabsorbed loss, if any,
may then be applied against the two
succeeding years. Thus there is a
period of four years against which
a net operating loss may be obsorbed
providing there are profits in those
years sufficient to absorb such loss.
It is a kind of equalizer. It works
like this: Suppose a farmer sustains
a loss in 1948 of $10,000. In 1946 he
had a profit of $2,000, in 1947 he had
a profit of $5,000, in 1949 his profit
will be $6,000. He may carry back
$2,000 of his loss against the $2,000
gain for 1946 and $5,000 of the loss
against the $5,000 gain for 1947. Thus
it will be seen that $7,000 of his loss
has been carried back and absorbed
by the gains of the two preceding
years. There is still $3,000 of the
$10,000 loss to be carried forward
and applied against the 1949 profit
of $6,000, leaving only $3,000 to be
taxed in 1949.
Farmers and other taxpayers may
adopt a fiscal or calendar year and
may elect to do so upon filing a first
return. Permission of the commis
sioner must be obtained if the tax
payer wishes to change from a cal
endar to a fiscal year or vice versa
or from one fiscal year to another.
A fiscal year basis for reporting may
not be used by a taxpayer who keep*
no books of account.
Declaration of Estimates
Every individual must make an
annual declaration of his estimated
income (a) if he is subject to with
holding on salary in excess of $4,500
plus $600 for each exemption, (b)
Income from all other sources in ex
cess of $100 provided his total in
come is expected to amount to $600
or more.
The declaration must be filed on
or before March 15 of the income
year and may be amended quarterly
such as June 15, Sept. 15 and Jan.
15 following. However, there is an
exception to this general rule in the
case of farmers. If two-thirds of a
taxpayer's gross income is derived
from farming, he may file this dec
laration and pay the tax on or be
fore Jan. 15 instead of the preceding
March 15. If a farmer wishes to do
so he can make a final return in lieu
of an estimate on Jan. 15. Final in
come tax returns for a calendar year
taxpayer are due not later than
March 15 of each year.
Farmers filing on a fiscal year
must make their declarations and
pay the estimated tax due on the
15th day of the month following the
close of their fiscal year and a final
return if not filed in lieu of the es
timate must be filed on the 15th day
of the third month following the
close of the fiscal year.
Major Changes
The more important changes
brought about by the Revenue Act
of 1948 pertain to the rules of re
porting income of married couples,
and also there is a radical departure
from previous laws in the rules af
fecting estate and gift taxes.
Briefly the new provisions, al
though highly technical as they af
fect estate and gift taxes, allow hus
bands and wives, at their option, to
treat their income and property as
though one-half belonged to the hus
band and one-half to the wife. As a
practical proposition, this situation
may not actually be true in number
less cases, nevertheless, for federal
tax purposes, it will be assumed to
be true if the option is elected.
Since the personal income tax has
always been on a graduated rate, in
creasing with the increase in income,
it can readily be seen that an income
of say $12,000 would be taxed at a
considerably higher rate than an in
come of $6,000. Accordingly, if a hus
band has a salary of $12,000 and his
wife has no income they may elect
to make a joint return. After allow
ing for the legal deductions and the
exemption allowed by law, the re
sult is split in half and the tax com
puted thereon. This is then mul
tiplied by two, giving the amount of
tax to be paid.
The new act retains the same ten
tative normal and surtax rates that
applied to 1946 and 1947. The 5 per
cent reduction has been eliminated
and in lieu thereof a series of per
centage reductions is applied de
pending upon the aggregate amount
of the tentative tax.
For instance, if the tentative nor
mal and surtax is not over $400 the
reduction is 17 percent or $68. If
over $400 but not over $100,000, the
reduction is $68 plus 12 percent of
the amount in excess of $400 or $12,
020, plus 9.75 percent of the amount
in excess of $100,000.
(Please Turn to Page 16)