Federal Form 4835 - Farm Rental Income and Expenses Instructions

General Instructions for Form 4835

What’s New

Increased section 179 deduction. The dollar limit to expense certain business assets under section 179 has increased to $250,000 for 2008. This limit will be reduced if property placed in service for the year exceeds $800,000. Also, the higher section 179 deduction for certain Gulf Opportunity Zone property has been extended.

Special depreciation allowance. If you purchase qualifying property in 2008, you can depreciate up to 50% of the adjusted basis. See Pub. 946 for more information.

Kansas disaster area. See Pub. 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes.

Midwestern disaster areas. See Pub. 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.

Other federally declared disaster areas. See Pub. 535 and Pub. 946 for tax relief available for other federally declared disasters occurring after December 31, 2007. Also, go to www.fema.gov/news/disasters.fema for a list of designated counties in federally declared disaster areas.

Purpose of Form

If you were the landowner (or sub-lessor) and did not materially participate (for self-employment tax purposes) in the operation or management of the farm, use Form 4835 to report farm rental income based on crops or livestock produced by the tenant. See chapter 12 in Pub. 225, Farmer’s Tax Guide, for the definition of material participation for landlords.

Use this form only if the activity was a rental activity for purposes of the passive activity loss limitations. See the Instructions for Form 8582, Passive Activity Loss Limitations, for the definition of “rental activity.”

If you have net income on line 32, your tax may be less if you figure it using Schedule J (Form 1040).

Do not use Form 4835 if you were a/an:

  • Tenant—instead use Schedule F (Form 1040) to report farm income and expenses;
  • Landowner (or sub-lessor) and materially participated in the operation or management of the farm—instead use Schedule F (Form 1040) to report farm income and expenses;
  • Landowner (or sub-lessor) and received cash rent for pasture or farmland based on a flat charge—instead report as income on Schedule E (Form 1040), Part I;
  • Estate or trust with rental income and expenses from crop and livestock shares—instead report on Schedule E (Form 1040), Part I; or
  • Partnership or S corporation with rental income and expenses from crop and livestock shares—instead report on Form 8825.


Additional information. See the instructions for Schedule F and Pub. 225 for more information.

Specific Instructions

Employer ID number. You need an employer identification number (EIN) only if you had a qualified retirement plan or were required to file an employment, excise, estate, trust, partnership, or alcohol, tobacco, and firearms tax return. If you need an EIN, see the
Instructions for Form SS-4.

Line A. Generally, you are considered to actively participate if you participated in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that are relevant in this context include approving new tenants, deciding on rental terms, approving capital or repair expenditures, and other similar decisions. You do not, however, actively participate if at any time during the year your interest (including your spouse’s interest) in the activity was less than 10% (by value) of all interests in the activity.

Part I. Gross Farm Rental

Income—Based on Production

Line 1. Report income you received from livestock, produce, grains, and other crops based on production. Under both the cash and the accrual methods of reporting, you must report livestock or crop share rentals received in the year you convert them into money or its equivalent.

Lines 2a and 2b. Enter on line 2a your total distributions from cooperatives as shown on Form 1099-PATR, Taxable Distributions Received From Cooperatives. On line 2b report the taxable amount. See the instructions for Schedule F, lines 5a and 5b, on page F-3.

Lines 3a and 3b. Enter on line 3a the total agricultural program payments you received. On line 3b report the taxable amount. See the instructions for Schedule F, lines 6a and 6b, on page F-3.

Lines 4a through 4c. Report the full amount of CCC loans forfeited, even if you reported the loan proceeds as income. See the instructions for Schedule F, lines 7a through 7c, on page F-3.

Lines 5a through 5d. In general, you must report crop insurance proceeds in the year you receive them. Federal crop disaster payments are treated as crop insurance proceeds. However, if you use the cash method of accounting and 2008 was the year of damage, you can elect to include certain proceeds in income for 2009. To do this, check the box on line 5c and attach a statement to your return. See chapter 3 of Pub. 225.

Generally, if you elect to defer any eligible crop insurance proceeds, you must defer all such crop insurance proceeds (including federal crop disaster payments).

For details on how to complete lines 5a through 5d, see the instructions for Schedule F, lines 8a through 8d, on page F-3.

Line 6. Use this line to report income not shown on lines 1 through 5d. See the instructions for Schedule F, line 10, that begin on page F-3.

Part II. Expenses—Farm Rental

Property

Capitalizing costs of property. If you produced real or tangible personal property or acquired property for resale, certain expenses may have to be included in inventory costs or capitalized. These expenses include the direct costs of the property and the share of any indirect costs allocable to that property. For details and
exceptions, see Capitalizing costs of property in the instructions for Schedule F, on page F-4.

How to report. Do not reduce your expenses on lines 8 through 30f by the expenses you must capitalize. Instead, enter the total amount capitalized in parentheses on line 30g. On the line to the left of the line 30g entry space, enter“263A.”

Line 10. Expenses you paid or incurred for soil and water conservation can be deducted only if they are consistent with a conservation plan approved by the Natural Resources Conservation Service of the Department of Agriculture for the area in which your land is located. If no plan exists, your expenses must be consistent with a soil conservation plan of a comparable state agency. See the instructions for Schedule F, line 14, on page F-5.

Line 12. Enter your depreciation and section 179 expense deduction. For details, including whether you must file Form 4562, Depreciation and Amortization, see Pub. 225, chapter 7, and the Instructions for Form 4562.

Lines 19a and 19b. The tax treatment of interest expense differs depending on its type. For example, home mortgage interest and investment interest are treated differently. You must allocate (classify) your interest expense so it is deducted on the correct line of your tax return and it gets the right tax treatment. These rules could affect how much interest you are allowed to deduct on Form 4835. See the instructions for Schedule F, lines 23a and 23b, that begin on page F-5.

Line 22a. If you rented or leased vehicles, machinery, or equipment, enter on line 22a the business portion of your rental cost. But if you leased a vehicle for a term of 30 days or more, you may have to reduce your deduction by an inclusion amount. See Leasing a Car in Pub. 463.

Lines 30a through 30g. Enter expenses not listed on another line. See the instructions for Schedule F, lines 34a through 34f, that begin on page F-6. If you are required to capitalize expenses, see How to report under Capitalizing costs of property in the previous column.

Line 31. If you entered capitalized expenses on line 30g, your total expenses on line 31 will equal the total of lines 8 through 30f reduced by the amount on line 30g.

Line 33. To determine your deductible loss, you may need to complete Form 8582. However, if you checked box 33b, you must complete Form 6198, At-Risk Limitations, before you complete Form 8582. See the instructions for Schedule F, line 37, on page F-7.

Do not complete Form 8582 if either of the following applies.

  • You meet all of the conditions listed under Exception for Certain Rental Real Estate Activities in the instructions for Schedule E on page E-2. Instead, enter your deductible loss on line 33c and on Schedule E, line 40.
  • You were a real estate professional (as defined in the instructions for Schedule E on page E-2) and you materially participated in the operation of this activity (under the passive loss rules). See the Instructions for Form 8582 for the definition of material participation. Your loss is not subject to the passive activity loss
    limitations. Instead, enter your deductible loss on line 33c and on Schedule E, line 40. Also, include the loss in the total for Schedule E, line 43.

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The average time and expenses required to complete and file this form will vary depending on individual circumstances. For the estimated averages, see the instructions for your income tax return.

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