Deductible Expenses The ordinary and necessary costs of operating a farm for profit aredeductible business expenses. Part II of Schedule F lists expensescommon to farming operations. This chapter discusses many of theseexpenses, as well as others not listed on Schedule F. Reimbursed expenses.If you are reimbursed, either reduce the expense or report theamount you receive as income, depending on when you receive it. SeeRefund or reimbursement under Income From OtherSources in chapter 4. Prepaid Farm Supplies There may be a limit on your deduction for prepaid farm supplies ifyou use the cash method of accounting to report your income andexpenses. This limit will not apply, however, if you meet one of theexceptions, described later. Defined.Prepaid farm supplies are amounts you paid during the tax year forthe following items. ERROR MSGFeed, seed, fertilizer, and similar farm supplies not usedor consumed during the year. Poultry (including egg-laying hens and baby chicks) boughtfor use (or for both use and resale) in your farm business that wouldbe deductible in the following year if you had capitalized the costand deducted it ratably (for example, monthly) over the lesser of 12months or the useful life of the poultry. Poultry bought for resale and not resold during theyear. Prepaid farm supplies do not include any amount paid for farmsupplies on hand at the end of the tax year that you would haveconsumed if not for a fire, storm, flood, other casualty, disease, ordrought. Deduction limit.You can deduct an expense for prepaid farm supplies that does notexceed 50% of your other deductible farm expenses in theyear of payment. You can deduct an expense for any excess prepaid farmsupplies only for the tax year you use or consume the supplies. The cost of poultry bought for use (or for both use and resale) inyour farm business and not allowed in the year of payment isdeductible in the following year. The cost of poultry bought forresale is deductible in the year you sell or otherwise dispose of thatpoultry. Other deductible farm expenses.Other deductible farm expenses are any amounts allowable asdeductions on Schedule F, including depreciation or amortization, butnot prepaid farm supplies. Example.During 2000, you bought fertilizer ($4,000), feed ($1,000), andseed ($500) for use on your farm in the following year. Your totalprepaid farm supplies expense for 2000 is $5,500. Your otherdeductible farm expenses totaled $10,000 for 2000. Therefore, yourdeduction for prepaid farm supplies may not exceed $5,000 (50% of$10,000) for 2000. The excess prepaid farm supplies expense of $500($5,500 - $5,000) is deductible in the later tax year you use orconsume the supplies. Exceptions.This limit on the deduction for prepaid farm supplies expense doesnot apply if you are a farm-related taxpayer and either of thefollowing apply. Your prepaid farm supplies expense is more than 50% of yourother deductible farm expenses because of a change in businessoperations caused by unusual circumstances. Your total prepaid farm supplies expense for the preceding 3tax years is less than 50% of your total other deductible farmexpenses for those 3 tax years. You are a farm-related taxpayer if any of the following testsapply. Your main home is on a farm. Your principal business is farming. A member of your family meets (1) or (2). For this purpose, your family includes your brothers andsisters, half-brothers and half-sisters, spouse, parents,grandparents, children, grandchildren, aunts, uncles, and theirchildren. Whether or not the deduction limit for prepaid farm suppliesapplies, your expenses for prepaid livestock feed may be subject tothe rules for advance payment of livestock feed, discussed next. Livestock Feed If you report your income and expenses under the cash method, youcan deduct in the year paid the cost of feed your livestock consumedin that year. However, the cost of feed not consumed in that year issubject to the advance payment for feed rules, discussed next, and thelimit on prepaid farm supplies, discussed earlier. Advance payments for feed.If you meet all three of the following tests, you candeduct in the year of payment (subject to the limit on prepaid farmsupplies) the cost of feed your livestock will consume in a later taxyear. This rule does not apply to the purchase of commodity futurescontracts. The expense is a payment for the purchase of feed, nota deposit. Whether an expense is a deposit or payment depends onthe facts and circumstances in each case. The expense is a payment ifyou can show you made it under a binding commitment to accept deliveryof a specific quantity of feed at a fixed price and you are notentitled, under contract provision or business custom, to a refund orrepurchase. The following are some factors that show an expense is a depositrather than a payment. The absence of specific quantity terms. The right to a refund of any unapplied payment credit at theend of the contract. The treatment of the expense as a deposit by theseller. The right to substitute other goods or products for thosespecified in the contract. A provision permitting substitution of ingredients to vary theparticular feed mix to meet current diet requirements of the livestockfor which you bought the feed will not suggest a deposit. Further,adjustment to the contract price to reflect market value at the dateof delivery is not, by itself, proof of a deposit. The prepayment has a business purpose and is not merelyfor tax avoidance. You should have a reasonable expectation ofreceiving some business benefit from the prepayment. The following aresome examples of business benefits. Fixing maximum prices and securing an assured feedsupply. Securing preferential treatment in anticipation of a feedshortage. Whether the prepayment was a condition imposed by the seller andwhether the condition was meaningful will also be considered indetermining the existence of a business purpose for the prepayment. The deduction of these costs does not result in amaterial distortion of your income. The following are somefactors to consider in determining whether the deduction results in amaterial distortion of income. Your customary business practice in conducting yourlivestock 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. If you fail any of these three tests, you cannot deduct in the yearpaid the cost of feed your livestock will consume in a later tax year.Deduct it in the tax years your livestock consume the feed. Labor Hired You can deduct reasonable wages paid for regular farm labor,piecework, contract labor, and other forms of labor hired to performyour farming operations. You can pay wages in cash or noncash itemssuch as inventory items, capital assets, or assets used in yourbusiness. The cost of boarding farm labor is a deductible labor cost.Other deductible costs you incur for farm labor include healthinsurance, workers' compensation insurance, and other benefits. If you must withhold social security, Medicare, and income taxesfrom your employees' cash wages, you can still deduct the full amountof wages before withholding. See chapter 16for more information onemployment taxes. Also, deduct the employer's share of the socialsecurity and Medicare taxes you must pay on your employees' wages as afarm business expense on the Taxes line of Schedule F (line31). See Taxes, later. Deductible Pay The kinds of pay you can deduct include the fair market value ofproperty you transfer to your employees and wages you pay to membersof your family, as discussed below. Property for services.If you transfer property to one of your employees in payment forservices, you can deduct as wages paid the fair market value of theproperty on the date of transfer. If the employee pays you anythingfor the property, deduct as wages the fair market value of theproperty minus the payment by the employee for the property. Treat thededuction on your return as an amount received for the property. Youmay have a gain or loss to report if the property's adjusted basis onthe date of transfer is different from its fair market value. Any gainor loss has the same character the exchanged property had in yourhands. For more information, see chapter 10. Child as an employee.You can deduct reasonable wages or other compensation you pay toyour child for doing farm work if a true employer-employeerelationship exists between you and your child. Include thesewages in the child's income. The child may have to file an income taxreturn. These wages may also be subject to social security andMedicare taxes if your child is age 18 or older. For more information,see Family Employees in chapter 16. The fact that your child spends the wages to buy clothes or othernecessities you normally furnish does not prevent you from deductingyour child's wages as a farm expense. Spouse as an employee.You can deduct reasonable wages or other compensation you pay toyour spouse if a true employer-employee relationship existsbetween you and your spouse. Wages you pay to your spouse are subjectto social security and Medicare taxes. For more information, seeFamily Employees in chapter 16. Nondeductible Pay You cannot deduct wages paid for certain household work,construction work, and maintenance of your home. However, those wagesmay be subject to the employment taxes discussed in chapter 16. Household workers.Do not deduct amounts paid to persons engaged in household work,except to the extent their services are used in boarding or otherwisecaring for farm laborers. Construction labor.Do not deduct wages paid to hired help for the construction of newbuildings or other improvements. These wages are part of the cost ofthe building or other improvement. You must capitalize them. Maintaining your home.If your farm employee spends time maintaining or repairing yourhome, the wages and employment taxes you pay for that work arenondeductible personal expenses. For example, assume you have a farmemployee for the entire tax year and the employee spends 5% of thetime maintaining your home. The employee devotes the remaining time towork on your farm. You cannot deduct 5% of the wages and employmenttaxes you pay for that employee. Employment Credits Reduce your deduction for wages by the amount of any employmentcredits you claim. The following are employment credits and theirrelated forms. Empowerment zone employment credit (Form 8844). Indian employment credit (Form 8845). Welfare-to-work credit (Form 8861). Work opportunity credit (Form 5884). For more information, see the forms and their instructions. Personal and Business Expenses Some expenses you pay during the tax year may be partly personaland partly business. These may include expenses for gasoline, oil,fuel, water, rent, electricity, telephone, automobile upkeep, repairs,insurance, interest, and taxes. Allocation.Allocate these mixed expenses between their business and personalparts because the personal expenses are not deductible. Example.You paid $1,500 for electricity during the tax year. You usedone-third of the electricity for personal purposes and two-thirds forfarming. Under these circumstances, you can deduct two-thirds of yourelectricity expense ($1,000) as a farm business expense. Reasonable allocation.It is not always easy to determine the business and nonbusinessparts of an expense. There is no method of allocation that applies toall mixed expenses. Any reasonable allocation is acceptable. What isreasonable depends on the circumstances in each case. Telephone expense.You cannot deduct the cost of basic local telephone service(including any taxes) for the first telephone line you have in yourhome, even though you have an office in your home. However, chargesfor business long-distance phone calls on that line, as well as thecost of a second line into your home used exclusively for your farmbusiness, are deductible business expenses. Tax preparation fees.You can deduct as a farm business expense on Schedule F the cost ofpreparing that part of your tax return relating to your farm business.You may be able to deduct the remaining cost on Schedule A (Form 1040)if you itemize your deductions. You can also deduct on Schedule F the amount you pay or incur inresolving tax issues relating to your farm business. Repairs and Maintenance You can deduct most expenses for the repair and maintenance of yourfarm property. Common items of repair and maintenance are repainting,replacing shingles and supports on farm buildings, and minor overhaulsof trucks, tractors, and other farm machinery. However, repairs to, oroverhauls of, depreciable property that substantially prolong the lifeof the property, increase its value, or adapt it to a different useare capital expenses. For example, if you repair the barn roof, thecost is deductible. But if you replace the roof, it is a capitalexpense. For more information, see Capital Expenses, later. Interest You can deduct as a farm business expense interest paid on farmmortgages and other obligations you incur in your farm business. Cash method.If you use the cash method of accounting, you can deduct interestpaid during the year. You cannot deduct interest paid with fundsreceived from the original lender through another loan, advance, orother arrangement similar to a loan. You can, however, deduct theinterest when you start making payments on the new loan. Prepaid interest.Under the cash method, you generally cannot deduct any interestpaid before the year it is due. Interest paid in advance may bededucted only in the tax year in which it is due. Accrual method.You can deduct only interest that has accrued during the tax year.However, you cannot deduct interest owed to a related person who usesthe cash method until payment is made and the interest is includiblein the gross income of that person. For more information, see chapter 5 in Publication 535. Allocation of interest.If you use the proceeds of a loan for more than one purpose (forexample, personal and business), allocate the interest on that loan toeach use. TaxTip: The easiest way to allocate interest is to keep the proceeds of aparticular loan separate from any other funds. You can treat a payment made from any account (or in cash) within30 days before or after the debt proceeds are deposited (or receivedin cash) as being made from those debt proceeds. You generally allocate interest on a loan the same way you allocatethe loan. This is true even if the funds are paid directly to a thirdparty. You allocate loans by tracing disbursements to specific uses.Use the following categories when allocating your interest expense. Trade or business interest. Passive activity interest. Investment interest. Personal interest. Portfolio interest. Secured loan.The allocation of loan proceeds and the related interest is notgenerally affected by the use of property that secures the loan. Example.You secure a loan with property used in your farming business. Youuse the loan proceeds to buy a car for personal use. You must allocateinterest expense on the loan to personal use (purchase of the car)even though the loan is secured by farm business property. TaxTip: If the property that secures the loan is your home, you generallydo not allocate the loan proceeds or the related interest. Theinterest is usually deductible as qualified home mortgage interest,regardless of how the loan proceeds are used. For more information,see Publication 936. Allocation period.The period for which a loan is allocated to a particular use beginson the date the proceeds are used and ends on the earlier of thefollowing dates. The date the loan repaid. The date the loan is reallocated to another use. More information.For more information on interest, see chapter 5 in Publication 535. Loan expenses.You prorate and deduct loan expenses, such as legal fees andcommissions, you pay to get a farm loan over the term of the loan. Breeding Fees You can deduct breeding fees as a farm business expense. However,if you must use an accrual method of accounting, you must capitalizebreeding fees and allocate them to the cost basis of the calf, foal,etc. For more information on who must use an accrual method ofaccounting, see Accrual Method in chapter 3. Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer,lime, and other materials applied to farm land to enrich, neutralize,or condition it. You can also deduct the cost of applying thesematerials in the year you pay or incur it. However, see PrepaidFarm Supplies, earlier, for a rule that may limit your deductionfor these materials. If the benefits of the fertilizer, lime, or other materials lastsubstantially more than one year, you generally must capitalize theircost and deduct a part each year the benefits last. However, you canchoose to deduct these expenses in the year paid or incurred. If youmake this choice, you can change the choice for that year only withIRS approval. Farm land for the choice described in the preceding paragraph island used for producing crops, fruits, or other agricultural productsor for sustaining livestock. It does not include land you have neverused previously for producing crops or sustaining livestock. Youcannot deduct initial land preparation costs. (See CapitalExpenses, later.) Include government payments you receive for lime or fertilizer inincome. See Fertilizer and Lime in chapter 4. Taxes You can deduct as a farm business expense the real estate andpersonal property taxes on farm business assets, such as farmequipment, animals, farm land, and farm buildings. You can also deductthe social security and Medicare taxes you pay to match the amountwithheld from the wages of farm employees and any federal unemploymenttax you pay. For information on employment taxes, see chapter 16. The taxes on the part of your farm you use as your home (includingthe furnishings and surrounding land not used for farming) arenonbusiness taxes. You may be able to deduct these nonbusiness taxesas itemized deductions on Schedule A (Form 1040). To determine thenonbusiness part, prorate the taxes between the farm assets andnonbusiness assets. The proration can be done from the assessedvaluations. If your tax statement does not show the assessedvaluations, you can usually get them from the tax assessor. State or local general sales taxes.State or local general sales taxes on nondepreciable farm businessexpense items are deductible as part of the cost of those items.Include state or local general sales taxes imposed on the purchase ofassets for use in your farm business as part of the cost youdepreciate. If the taxes are imposed on the seller and passed on toyou, treat them as part of your cost. State and federal income taxes.Individuals cannot deduct state and federal income taxes as farmbusiness expenses. Individuals can deduct state income tax only as anitemized deduction on Schedule A (Form 1040). You cannot deductfederal income tax. Highway use tax.You can deduct the federal use tax on highway motor vehicles paidon a truck or truck tractor used in your farm business. Forinformation on the tax itself, including information on vehiclessubject to the tax, see the instructions for Form 2290, HeavyHighway Vehicle Use Tax Return. Self-employment tax deduction.You can deduct one-half of your self-employment tax in figuringyour adjusted gross income on Form 1040. For more information, seechapter 15. Insurance You can generally deduct the ordinary and necessary cost ofinsurance for your farm business as a business expense. This includespremiums you pay for the following types of insurance. Fire, storm, crop, theft, liability, and other insurance onfarm business assets. Health and accident insurance on your farm employees. Workers' compensation insurance set by state law that coversany claims for bodily injuries or job-related diseases suffered byemployees 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 statelaw). Advance premiums.If you pay insurance premiums in advance, deduct each year only thepremium that applies to that tax year. Deduct the balance in eachlater year to which it applies. TaxTip: This treatment of advance premiums applies whether you use the cashor accrual method of accounting. Example.On June 28, 2000, you paid a premium of $3,000 for fire insuranceon your barn. The policy will cover a period of 3 years beginning onJuly 1, 2000. Only the cost for the 6 months in 2000 is deductible asan insurance expense on your 2000 calendar year tax return. Deduct$500, which is the premium for 6 months of the 36-month premiumperiod, or 6/36 of $3,000. In both 2001 and the year2002, deduct $1,000 ( 12/36 of $3,000). Deduct theremaining $500 in 2003. Had the policy been effective on January 1,2001, the deductible expense would have been $1,000 for each of theyears 2000, 2001, and 2002, based on one-third of the premium usedeach year. Business interruption insurance.Use and occupancy and business interruption insurance premiums aredeductible as a business expense. This insurance pays for lost profitsif your business is shut down due to a fire or other cause. Report anyproceeds in full on Schedule F. Self-employed health insurance deduction.If you are self-employed, you can deduct, in figuring your adjustedgross income on your 2000 Form 1040, 60% of your payments for healthinsurance coverage for yourself, your spouse, and your dependents.Generally, this deduction cannot be more than the net profit from thebusiness under which the plan was established. If you or your spouse is also an employee of another person, youcannot take the deduction for any month in which you are eligible toparticipate in a subsidized health plan maintained by your employer oryour spouse's employer. Use the Self-Employed Health Insurance Deduction Worksheetin the Form 1040 instructions to figure your deduction. Includethe remaining part of the insurance payment in your medical expenseson Schedule A (Form 1040) if you itemize your deductions. For more information, see Deductible Premiums Piraeus hotelsin chapter 7 of Publication 535. Rent and Leasing If you lease property for use in your business, you can generallydeduct the rent you pay. Rent You can deduct on Schedule F rent you pay in cash. However, youcannot deduct rent you pay in crop shares because you deduct the costof raising the crops as farm expenses. Advance payments.Deduct advance payments of rent only in the year to which theyapply, regardless of your accounting method. Farm home.If you rent a farm, do not deduct the part of the rental expensethat represents the fair rental value of the farm home in which youlive. Lease or Purchase If you lease a farm building or equipment rather than buy it, youmust determine whether or not the agreement can be treated as a leasefor tax purposes. Some leases must be treated as conditional salescontracts for tax purposes. If the agreement is treated as a lease fortax purposes, you can deduct rental payments for the use of theproperty in your trade or business. If the agreement is treated as aconditional sales contract, the payments under the agreement (so faras they do not represent interest or other charges) are payments forthe purchase of the property. Do not deduct these payments as rent,but capitalize the cost of the property and recover this cost throughdepreciation. Example.You lease new farm equipment from a dealer who both sells andleases. The lease payments and the specified option price equal thesales price plus interest. Under the lease, you are responsible formaintenance, repairs, and the risk of loss. For federal income taxpurposes, the lease is a sale of the equipment and you cannot deductany of the lease costs as rent. You can deduct interest, repairs,insurance, depreciation, and other business expenses. Conditional sales contract.Whether an agreement is a conditional sales contract depends on theintent of the parties. Determine intent based on theprovisions of the agreement and the facts and circumstances that existwhen you make the agreement. No single test, or special combination oftests, always applies. However, in general, an agreement may beconsidered a conditional sales contract rather than a lease if any ofthe following is true. The agreement applies part of each payment toward an equityinterest you will receive. You get title to the property after you make a stated amountof required payments. The amount you must pay to use the property for a short timeis a large part of the amount you would pay to get title to theproperty. You pay much more than the current fair rental value of theproperty. accommodation in UppsalaYou have an option to buy the property at a nominal pricecompared to the value of the property when you may exercise theoption. Determine this value when you make the agreement. You have an option to buy the property at a nominal pricecompared to the total amount you have to pay under theagreement. The agreement designates part of the payments as interest,or that part is easy to recognize as interest. Leveraged leases.Special rules apply to leveraged leases of equipment (propertyfinanced by a nonrecourse loan from a third party). For moreinformation, see chapter 4 of Publication 535 and the followingrevenue procedures. 75-21 in Cumulative Bulletin 1975-1. 75-28 in Cumulative Bulletin 1975-1. 76-30 in Cumulative Bulletin 1976-2. 79-48 in Cumulative Bulletin 1979-2. Motor vehicle leases.Special rules apply to lease agreements that have a terminal rentaladjustment clause. The clause will generally provide for a rentaladjustment based upon the amount the lessor is able to sell thevehicle for at the end of the lease. If your rental agreement containsa terminal rental adjustment clause, treat the agreement as a lease ifthe agreement otherwise qualifies as a lease. For more information,see section 7701(h) of the Internal Revenue Code. Depreciation If property you acquire to use in your farm business is expected tolast more than one year, you generally cannot deduct the entire costin the year you acquire it. You must spread the cost over more thanone year and deduct part of it each year on Schedule F. For mostproperty, this deduction is depreciation. However, you may be able todeduct part or all of the cost of this property as a business expensein the year you place it in service. This is the section 179deduction. Depreciation and the section 179 deduction are discussed in chapter 8. Business Useof Your Home You can deduct expenses for the business use of your home if youuse part of your home exclusively and regularly: As the principal place of business for any trade or businessin which you engage, As a place to meet or deal with patients, clients, orcustomers in the normal course of your trade or business, or In connection with your trade or business, if you are usinga separate structure that is not attached to your home. Your home office will qualify as your principal place of businessfor deducting expenses for its use if you meet the followingrequirements. You use it exclusively and regularly for the administrativeor management activities of your trade or business. You have no other fixed location where you conductsubstantial administrative or management activities of your trade orbusiness. If you use part of your home for business, you must divide theexpenses of operating your home between personal and business use. Formore information, see Publication 587. Deduction limit.If your gross income from farming equals or exceeds your total farmexpenses (including expenses for the business use of your home) youcan deduct all your farm expenses. But if your gross income fromfarming is less than your total farm expenses, your deduction forcertain expenses for the business use of your home is limited. Your deduction for otherwise nondeductible expenses, such asutilities, insurance, and depreciation (with depreciation taken last),cannot be more than the gross income from farming minus: The business part of expenses you could deduct even if youdid not use your home for business (such as deductible mortgageinterest, real estate taxes, and casualty and theft losses),and The business expenses that relate to the business activityin the home (for example, salaries or supplies), but not to the use ofthe home itself. If you are self-employed, do not include in (2) above yourdeduction for half of your self-employment tax. You can carry over to your next tax year deductions over thecurrent year's limit. They are subject to the deduction limit for thenext tax year. See Publication 587 for information on how to figure this limit andwhere to deduct the expenses on your return. Truck and Car Expenses You can deduct the actual cost of operating a truck or car in yourfarm business. Only the expenses for business use are deductible.These include such items as gasoline, oil, repairs, license tags,insurance, and depreciation (subject to certain limits). Instead of using actual costs, under certain conditions you can usethe standard mileage rate. For 2000, the rate is 32 1/2cents a mile for all business miles driven. You can use the standardmileage rate for a car or a light truck, such as a van, pickup, orpanel truck, you own or lease. You cannot use the standard mileagerate if you operate two or more cars or light trucks at the same time.You are not using two or more vehicles at the same time ifyou alternate using (use at different times) the vehicles forbusiness. Example.Maureen owns a car and a pickup truck that are both used in herfarm business. Her farm employees use the truck and she uses the carfor business. Maureen cannot use the standard mileage rate for the caror the truck. This is because both vehicles are used in Maureen's farmbusiness at the same time. She must use actual expenses for bothvehicles. Business use percentage.You can claim 75% of the use of a car or light truck as businessuse without any records if you used the vehicle during most of thenormal business day directly in connection with the business offarming. The following are uses directly connected with the businessof farming. Cultivating land. Raising or harvesting any agricultural or horticulturalcommodity. Raising, feeding, caring for, training, and managinganimals. Driving to the feed or supply store. If you keep records and they show that your business use was morethan 75%, you may be able to claim more. See Recordkeepingrequirements, later. More information.For more information, see chapter 4 of Publication 463. If you payyour employees for the use of their truck or car in your farmbusiness, see Reimbursements to employees under TravelExpenses, next. Travel Expenses You can deduct ordinary and necessary expenses you incur whiletraveling away from home for your farm business. You cannot deductlavish or extravagant expenses. Usually, the location of your farmbusiness is considered your home for tax purposes. You are travelingaway from home if: Your duties require you to be absent from your farmsubstantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of yourwork while away from home. If you meet these requirements and can prove the time, place, andbusiness purpose of your travel, you can deduct your ordinary andnecessary expenses for travel, meals, and lodging. You can ordinarilydeduct only 50% of your business-related meal expenses. The following are some types of deductible travel expenses. Belgium HotelsAir, rail, bus, and car transportation. Meals and lodging. Dry cleaning and laundry. Telephone and fax. Transportation between your hotel and your temporary work orbusiness meeting location. Tips for any of the above expenses. Meals.You can deduct 50% of the cost of meals only if your business tripis overnight or long enough to require you to stop for sleep or restto properly perform your duties. You cannot deduct any of the cost ofmeals if it is not necessary for you to rest, unless you meet therules for business entertainment. For information on entertainmentexpenses, see chapter 2 of Publication 463. The expense of a meal includes amounts you spend for your food,beverages, taxes, and tips relating to the meal. You can deduct eitherthe actual cost or a standard meal allowance that covers your dailymeal and incidental expenses. Files: Recordkeeping requirements. You must be able to prove yourdeductions for travel by adequate records or other evidence that willsupport your own statement. Estimates or approximations do not qualifyas proof of an expense. You should keep an account book or similar record, supported byadequate documentary evidence, such as receipts, that together supporteach element of an expense. Generally, it is best to record theexpense and get documentation of it at the time you pay it. If you choose to deduct a standard meal allowance rather than theactual expense, you do not have to keep records to prove amounts spentfor meals and incidental items. However, you must still keep recordsto 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 standardmeal allowance, see Publication 463. Reimbursements to employees.You can generally deduct reimbursements you pay to your employeesfor travel and transportation expenses they incur in the conduct ofyour business. If you reimburse these expenses under an accountableplan, deduct them as travel and transportation expenses. If youreimburse these expenses under a nonaccountable plan, you must reportthe reimbursements as wages on Form W-2 and deduct them aswages. For more information, see chapter 13 of Publication 535. Marketing Quota Penalties You can deduct as Other expenses on Schedule F penaltiesyou pay for marketing crops in excess of farm marketing quotas.However, if you do not pay the penalty, but instead the purchaser ofyour crop deducts it from the payment to you, include in gross incomeonly the amount you received. Do not take a separate deduction for thepenalty. Tenant House Expenses You can deduct the costs of maintaining houses and theirfurnishings for tenants or hired help as farm business expenses. Thesecosts include repairs, heat, light, insurance, and depreciation. The value of a dwelling you furnish to a tenant under the usualtenant-farmer arrangement is not taxable income to the tenant. Items Purchasedfor Resale If you use the cash method of accounting, you can deduct the costof livestock and other items purchased for resale in Part I ofSchedule F in the year of sale. This cost includes freight charges fortransporting the livestock to the farm. Ordinarily, this is the onlytime you can deduct the purchase price. However, see Cost ofchickens, seeds, and young plants-cash method, later. Example.You report on the cash method. In 2000, you buy 50 steers you willsell in 2001. You will report the sales price minus the purchase price(and any freight cost) as income in Part I of your 2001 Schedule F. Cost of chickens, seeds, and young plants-cash method.If you are a cash method farmer, you can deduct the cost of hensand baby chicks bought for commercial egg production, or for raisingand resale, as an expense in the year you pay the costs if you do itconsistently and it does not distort income. You can deduct thepurchase price of seeds and young plants bought for furtherdevelopment and cultivation before sale as an expense when paid if youdo this consistently and you do not figure your income on the cropmethod. However, see Prepaid Farm Supplies, earlier, for arule that may limit your deduction for these items. If you deduct the purchase price of chickens and young plants as anexpense, report their entire selling price as income. You cannot alsodeduct the purchase price from the selling price. You cannot deduct the purchase price of seeds and young plants forChristmas trees and timber as an expense. Deduct the cost of theseseeds and plants through depletion allowances. For more information,see Depletion in chapter 8. The purchase price of chickens and plants used as food for yourfamily is never deductible. Capitalize the cost of plants with a preproductive period of morethan 2 years, unless you can elect out of the uniform capitalizationrules. These rules are discussed in chapter 7. Example.You use the cash method of accounting. In 2000, you buy 500 babychicks to raise for resale in 2001. You also buy 50 bushels of winterseed wheat in 2000 that you sow in the fall. You can deduct the costof both the baby chicks and the seed wheat in 2000, unless youpreviously adopted the method of deducting these costs in the year yousell the chickens or the harvested crops. Delaying deduction-crop method.You can delay deducting the purchase price of seeds and youngplants until you sell them if you get IRS approval. If you follow thismethod, deduct the purchase price from the selling price to determineyour profit. Do this in Part I of Schedule F. For more information,see Crop method under Special Methods of Accountingin chapter 3. Choosing the method.You can adopt either of these methods for deducting the purchaseprice in the first year you buy egg-laying hens, pullets,chicks, or seeds and young plants. If you choose the crop method,however, you need IRS approval. 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 forthose items until you get IRS approval to change your method. For moreinformation, see Change in Accounting Method in chapter 3. Other Expenses The following list, while not all-inclusive, shows some expensesyou can deduct as other farm expenses in Part II of Schedule F. Theseexpenses must be for business purposes and (1) paid, if you use thecash method of accounting, or (2) incurred, if you use an accrualmethod of accounting. Accounting fees. Advertising. Chemicals. Custom hire (machine work). Educational expenses (to maintain and improve farmingskills). Farm-related attorney fees. Farm fuels and oil. Farm magazines. Freight and trucking. Ginning. Insect sprays and dusts. Litter and bedding. Livestock fees. Recordkeeping expenses. Service charges. Small tools expected to last one year or less. Stamps and stationery. Storage and warehousing. Subscriptions to professional, technical, and trade journalsthat deal with farming. Tying material and containers. Veterinary fees and medicine.