Treasury Regulations, Subchapter A, Sec. 1.182-5

From TaxAlmanac

(a) Limitation—(1) General rule. The amount of land clearing expenditures which the taxpayer may deduct under section 182 in any one taxable year is limited to the lesser of $5,000 or 25 percent of his “taxable income derived from farming”. Expenditures in excess of the applicable limitation are to be charged to the capital account and constitute additions to the taxpayer's basis in the land.

(2) Definition of “taxable income derived from farming”. For purposes of section 182, the term taxable income derived from farming means the gross income derived from the business of farming reduced by the deductions attributable to such gross income. Gross income derived from the business of farming is the gross income of the taxpayer derived from the production of crops, fruits, or other agricultural products, including fish, or from livestock (including livestock held for draft, breeding or dairy purposes). It does not include gains from sales of assets such as farm machinery or gains from the disposition of land. The deductions attributable to the business of farming are all the deductions allowed by Chapter 1 of the Code (other than the deduction allowed by section 182) for expenditures or charges (including depreciation and amortization) paid or incurred in connection with the production or raising of crops, fruits, or other agricultural products, including fish, or livestock. However, the deduction under section 1202 (relating to the capital gains deduction) attributable to gain on the sale or other disposition of assets (other than draft, breeding, or dairy stock), and the net operating loss deduction (computed under section 172) shall not be taken into account in computing “taxable income derived from farming.” Similarly, deductible losses on the sale, disposition, destruction, condemnation, or abandonment of assets (other than draft, breeding, or dairy stock) shall not be considered as deductions attributable to the business of farming. A taxpayer shall compute his gross income from farming in accordance with his accounting method used in determining gross income. (See the regulations under section 61 relating to accounting methods used by farmers in determining gross income.)

(b) Examples. The provisions of paragraph (a) of this section may be illustrated by the following examples:

Example 1.   For the taxable year 1963, A, who uses the cash receipts and disbursements method of accounting, incurs expenditures to which section 182 applies in the amount of $2,000 and makes the election under section 182. A has the following items of income and deductions (without regard to section 182 expenditures).

 
 
 
Income:
  Proceeds from  $10,000..............................
   sale of his
   1963 yield
   of corn.....
  Proceeds from  8,000................................
   sales of
   milk........
  Gain from      500..................................
   disposition
   of old
   breeding
   cows........
  Gain from      100..................................
   sale of
   tractor.....
  Gain from      5,000................................
   sale of
   farmland....
  Interest on    100..................................
   loan to
   brother.....
                ---------------------------------------
                 23,700...............................
                =======================================
Deductions:
  Cost of labor  4,000................................
  Cost of feed.  3,000................................
  Depreciation   2,500................................
   on farm
   equipment
   and
   buildings...
  Cost of        2,000................................
   maintenance,
   fuel, etc...
  Interest       1,000................................
   paid,
   mortgage on
   farm
   buildings...
  Interest       500..................................
   paid,
   personal
   loan........
  Loss on        2,000................................
   destruction
   of barn.....
  Loss on sale   300..................................
   of truck....
  Section 1202   250..................................
   deduction_ga
   in on sale
   of cows
   (500x 1/2 ).
  Section 1202   1,400................................
   deduction_ne
   t gain on
   disposition
   of section
   1231
   property,
   other than
   cows [$2,800
   ($5,100-
   $2,300) x 1/
   2 ].........
                 ___..................................   $16,950
                                                       -----------
  Net income     .....................................     6,750
   before
   section 182
   deduction...
 

 
 
 
Income:
  Gain from the  $100...................................
   sale of
   tractor.....
  Gain from the  5,000..................................
   sale of
   farmland....
  Interest on    100....................................
   loan to
   brother.....
                 ___....................................   $5,200
Deductions:
  Interest       $500...................................
   paid,
   personal
   loan........
  Loss on        2,000..................................
   destruction
   of barn.....
  Loss on sale   300....................................
   of truck....
  Section 1202   1,400..................................
   deduction_Ne
   t gain from
   disposition
   of 1231
   assets other
   than cows...
                 ___....................................   $4,200
 

Example 2.   Assume the same facts as in Example 1 and in addition, assume that A is allowed a deduction for a net operating loss carryback from the taxable year 1966 in the amount of $3,000. The net operating loss deduction will not be taken into account in computing A's “taxable income derived from farming” for 1963 Accordingly, A will not be required to recompute such taxable income for purposes of applying the limitation on the deduction provided in section 182 and the deduction of $1,437.50 will not be reduced.

[T.D. 6794, 30 FR 791, Jan. 26, 1965]