- Which of the following correctly describes his eligibility to avoid the underpayment penalty?
Answer: He cannot avoid the penalty because less than two-thirds of his gross income for 2025 was from farming.
Under IRC § 6654(i), a taxpayer is treated as a farmer or fisherman for a tax year if at least two-thirds of the taxpayer's gross income for that year or the preceding year is derived from farming or fishing. A qualifying farmer or fisherman may avoid the underpayment penalty by filing and paying in full by March 1 (or by paying the single estimated installment by January 15). Here, only $80,000 of the $140,000 total gross income, or about 57%, came from farming, and the facts state 2024 also failed the two-thirds test, so the exception is unavailable. Choice A incorrectly states a general exemption for farm taxpayers. Choice B omits the two-thirds requirement. Choice D incorrectly bars the exception whenever nonfarm income exists.
- What amount may Renee deduct in 2025 for the soil and water conservation expenditures?
Answer: $18,000 in 2025; the remaining $8,000 is carried over and may be deducted in later years, subject to the same 25% limitation.
IRC §175(a) and (b) allow a current deduction for qualifying soil and water conservation expenditures, but only to the extent of 25% of gross income from farming. The excess is carried over to later years and remains subject to the same limitation. Choice B is correct: $72,000 × 25% = $18,000, and $26,000 − $18,000 = $8,000 carryover. Choice A ignores the 25% limitation. Choice C applies the limitation to net farm income ($72,000 − $31,000 = $41,000 × 25% = $10,250) and incorrectly treats the excess as a capitalized land improvement. Choice D uses the same wrong net-income base and also drops the limitation that applies to the carryover.
- Which amounts may the farmer elect to defer to 2026?
Answer: Only the $40,000 may be deferred to 2026, because the wheat income would have been reported in 2026 under the farmer's normal practice.
IRC § 451(f) and Treas. Reg. § 1.451-6(a). A cash-method farmer may elect to include crop insurance proceeds in income for the year after the year of damage if, under the farmer's normal business practice, income from the damaged crops would have been reported in that following year. One election covers all of the proceeds for crops of a single trade or business, and a separate election is made for each separate trade or business. Here the wheat farm and the soybean farm are separate businesses. Wheat income would normally have been reported in 2026, so the $40,000 may be deferred; soybean income would normally have been reported in 2025, so the $20,000 may not. Choice B is correct. Choice A ignores the normal-practice condition. Choice C applies the condition to the wrong crop. Choice D invents a pre-harvest timing requirement that the statute does not contain.
- Rosa, a calendar-year individual taxpayer, has 2025 taxable income of $240,000. Of that amount, $90,000 is taxable income from her farming business. She plans to make the farm income averaging election on Form 1040, Schedule J. Which of the following is correct regarding the election?
Answer: She may elect all or any portion of the $90,000 as elected farm income; Schedule J spreads the elected amount over the three prior tax years for the averaging computation.
IRC § 1301 and Schedule J (Form 1040) instructions. Farm income averaging is an elective tax computation, not an adjustment to income. A taxpayer may designate all or any portion of current-year taxable income attributable to a farming business as elected farm income, and the designated amount may not exceed the taxable income attributable to that business. Schedule J allocates the elected amount evenly over the three prior tax years for the averaging computation; the election does not reduce adjusted gross income or self-employment tax. Choice A is wrong because the election is not all-or-nothing. Choice C is wrong because nonfarm taxable income is not elected farm income. Choice B misstates the treatment: the elected amount is not an adjustment to income and is not deducted in computing adjusted gross income.
- Marco, a calendar-year cash-method farmer, had his 2025 soybean crop destroyed by a flood. His normal practice is to sell soybeans in the year after harvest. In December 2025, he received a $30,000 advance payment from his crop insurer for the loss; in March 2026, he received the remaining $90,000. Which of the following correctly describes the reporting of these payments for 2025 and 2026?
Answer: Marco may elect to defer the $30,000 advance to 2026 because the loss occurred in 2025 and he normally reports income from that crop in 2026; the $90,000 received in 2026 is taxable in 2026.
IRC §451(d) and Treas. Reg. §1.451-6. A cash-basis taxpayer may elect to defer crop insurance proceeds received in the tax year the crop was damaged or destroyed to the following tax year if the taxpayer's normal business practice would have reported income from that crop in the following year. Marco received the $30,000 advance in 2025, the year of the flood, and he normally reports soybean income in 2026, so he may elect to report that $30,000 in 2026. The $90,000 payment was not received until 2026, so it is includible in 2026 under the cash method and cannot be deferred to 2027 under §451(d). Choice A ignores the election and misstates the timing. Choice B overstates the scope of the deferral. Choice D misstates both the treatment of the advance and the treatment of the later payment.
- What are the amount and character of the gain on the sale?
Answer: $1,000 of ordinary income under §1245 and $2,200 of §1231 gain because the ewe was held for more than 12 months.
Under IRC § 1231(b)(3)(B), livestock held for draft, dairy, or breeding is §1231 property if held for 24 months in the case of cattle and horses, or 12 months in the case of other livestock such as sheep. The ewe was held from March 15, 2024, until September 15, 2025—more than 12 months—so the sale qualifies as a §1231 disposition. Under §1245, gain is ordinary income to the extent of depreciation allowed or allowable; here that is $1,000. The remaining $2,200 is §1231 gain; with no other §1231 transactions, the net §1231 gain will be treated as long-term capital gain after the §1231 netting rules. Choice A incorrectly treats the entire $3,200 as ordinary income, ignoring the cap on §1245 recapture at the depreciation allowed. Choice C incorrectly uses the 24-month holding period that applies only to cattle and horses, not sheep. Choice B ignores the §1245 ordinary-income recapture.
- Which of the following correctly reports the federal income tax treatment of these transactions?
Answer: The $100,000 loan proceeds are not income in 2025, and the $130,000 sales proceeds are income in 2026, subject to the farmer's basis in the corn.
Under IRC § 77, a taxpayer may elect to include Commodity Credit Corporation loan proceeds in gross income in the year received. Without the election, the proceeds are a loan and are not income at receipt. When the farmer sells the pledged corn in 2026, the full $130,000 sales price is included in income, reduced by the farmer's basis in the corn, and the repayment of the $100,000 loan is not a deduction or an offset to sales proceeds. Choices A and C apply the § 77 election although the facts state it was not made. Choice B incorrectly reduces the sales proceeds by the loan principal.
- A cash-basis farmer paid $48,000 in 2025 for qualified soil and water conservation expenditures on land used in her farming business. The practices comply with a conservation plan approved by the Natural Resources Conservation Service. Her gross income from farming for 2025 is $120,000, and her taxable income before deducting these expenditures is $60,000. What is the correct treatment of the expenditures for 2025?
Answer: Deduct $30,000 in 2025 and carry the remaining $18,000 to 2026 as a soil and water conservation expense.
IRC §175(b) and Schedule F instructions. Soil and water conservation expenditures that comply with an approved conservation plan are deductible by a farmer, but the deduction is limited to 25% of gross income derived from farming for the year. Here, 25% of $120,000 is $30,000, so $30,000 is deductible in 2025. The remaining $18,000 is treated as a soil and water conservation expenditure paid or incurred in 2026. Choice B ignores the §175(b) limitation. Choice C measures the limitation by taxable income rather than gross farm income. Choice D states the correct current deduction but incorrectly denies the carryover, which §175(b) expressly allows.
- Which of the following is correct regarding the election to defer gain under IRC § 1033?
Answer: He must purchase replacement breeding cattle within four years after the close of the first taxable year in which the gain is realized and use them for breeding to defer the gain.
Under IRC § 1033(e), livestock sold or exchanged because of drought, flood, or other weather-related conditions in an area eligible for federal assistance is treated as involuntarily converted property. For such livestock, the replacement period is four years after the close of the first taxable year in which any part of the gain is realized, rather than the usual two years, and the replacement property must be similar or related in service or use. Replacement breeding cattle purchased within the four-year period and used for breeding satisfy that requirement, so Choice B is correct. Choice A states the general two-year period, which does not apply to drought sales. Choice C incorrectly allows any farm asset, including farmland, to qualify; the similar-or-related-in-service-or-use test is not that broad. Choice D incorrectly treats the sale as exempt from the replacement requirement; deferral requires timely replacement.
- Which of the following correctly describes the treatment of these amounts for FICA and FUTA purposes?
Answer: The cash wages are subject to FICA and FUTA, and the value of the housing is excluded from both because noncash remuneration for agricultural labor is not treated as wages.
IRC § 3121(a)(8)(A) excludes noncash remuneration for agricultural labor from FICA wages, and IRC § 3306(b)(11) likewise excludes noncash remuneration for agricultural labor from FUTA wages. The $9,000 of cash wages is cash remuneration for agricultural labor; it exceeds the FICA cash-pay threshold for farmworkers, and the facts state that the employer meets the FUTA tests for agricultural employers, so the cash wages are subject to both FICA and FUTA. The $4,500 fair market value of the housing is noncash remuneration and is therefore excluded from both taxes. Choice B incorrectly applies the general rule that noncash remuneration is wages without recognizing the agricultural-labor exception. Choice C is wrong because the $9,000 of cash wages is also subject to FUTA. The housing is excluded from FUTA because it is noncash pay for agricultural labor (§ 3306(b)(11)), not because farm housing is not remuneration. Choice D incorrectly divides the wage treatment by tax and ignores the noncash exclusion for both.
- For 2025, a cash-basis farmer paid $60,000 to build terraces and drainage ditches on land he operates as a farm. The work is consistent with a conservation plan approved by the Natural Resources Conservation Service. The farmer's gross income from farming for 2025 is $120,000, and his other deductible farm expenses are $40,000. What amount of the soil and water conservation expenditures may be deducted on Schedule F for 2025?
Answer: $30,000
IRC § 175; Schedule F (Form 1040). A farmer may currently deduct eligible soil and water conservation expenditures, but the amount deductible for the year is limited to 25% of gross income from farming. The terraces and drainage ditches are eligible because the work is consistent with an approved conservation plan. Here, 25% of $120,000 is $30,000, so $30,000 is deductible and the remaining $30,000 carries over to later years (Choice C). Choice A ($15,000) applies the 25% limit to the conservation expenditures themselves rather than to gross farm income. Choice B ($20,000) applies the 25% limit to the net farm income after other expenses. Choice D ($60,000) ignores the 25% limit.
- Rosa wants to elect to defer the proceeds under section 451(d). Which of the following is correct regarding the election?
Answer: Rosa may elect to report the $84,000 in 2026 if, absent the drought, the wheat would have been sold in 2026, and the election is made on a timely filed 2025 return.
IRC §451(d) permits a cash-method farmer who receives crop insurance proceeds in the year the crops were damaged to elect to include the proceeds in income for the following year if income from the damaged crop would, absent the damage, have been reported in that following year. The election is made with a timely filed return for the year of damage. Choice A states the default cash-method rule but omits the section 451(d) election. Choice C adds a replacement-crop condition that is not part of section 451(d). Choice D describes a partial deferral; section 451(d) does not allow the same proceeds to be split between years on these facts.
- For 2025, a single taxpayer engaged in a farming business has taxable income of $300,000. Of that amount, $120,000 is farm taxable income determined under Schedule J (Form 1040), and the remaining $180,000 is from nonfarm sources. The taxpayer did not make a farm income averaging election in 2022, 2023, or 2024. If the taxpayer makes the farm income averaging election for 2025, what is the maximum amount of elected farm income for the year?
Answer: $120,000
IRC § 1301(a) and (b)(1); Instructions for Schedule J (Form 1040). Elected farm income is the portion of taxable income attributable to a farming business that the taxpayer specifies in the election. The taxpayer may elect any amount up to the smaller of farm taxable income or taxable income, and an election in prior years is not required. Here farm taxable income is $120,000 and taxable income is $300,000, so the maximum elected farm income is $120,000, which is Choice B. Choice A ($40,000) is the one-third of elected farm income that is allocated to each of the three base years, not the amount that may be elected. Choice C ($180,000) uses the nonfarm portion of taxable income, which is not attributable to a farming business. Choice D ($300,000) treats all taxable income, including the $180,000 of nonfarm income, as eligible for averaging.
- What is the amount of ordinary income recaptured under IRC §1252 on the sale?
Answer: $22,000
IRC §175(b) limits the deduction to 25% of gross income from farming for the year, so in 2025 the allowable deduction is $30,000 (25% × $120,000); the remaining $10,000 carries over. Under IRC §1252(a), when farmland held less than 10 years is disposed of, gain is recaptured as ordinary income up to the lesser of (1) the applicable percentage of the aggregate §175 deductions allowed for expenditures made with respect to the farmland, and (2) the gain realized. Because the taxpayer acquired the land in 2024 and sold it in 2027, the disposition was within five years after acquisition, so the applicable percentage is 100%. The aggregate relevant deductions, including the $30,000 allowed for 2025, exceed the $22,000 gain (even if the $10,000 carryover was allowed before the sale). Therefore, $22,000 is ordinary income. Choice B uses the full $40,000 of expenditures instead of the gain limitation. Choice C uses the $30,000 deduction amount rather than the gain limitation. Choice D ignores that §1252 recapture applies to this disposition.
- In 2025, a rancher sold 25 breeding cows he had held for breeding for four years. He sold them solely because of a severe drought, and the drought caused the region to be designated as eligible for assistance by the federal government. The 25 cows exceed the number he would have sold under his usual business practice. The sale resulted in a $50,000 gain, and the rancher plans to use the full amount realized to buy replacement breeding cows. Which of the following is correct regarding the tax treatment of the 2025 sale?
Answer: The sale can be treated as an involuntary conversion, and the gain may be deferred if replacement breeding cows are acquired by the end of 2029.
IRC § 1033(a)(2)(B) and (e). Under § 1033(e)(1), a sale of livestock (other than poultry) held for draft, breeding, or dairy purposes, made solely on account of drought, is treated as an involuntary conversion to the extent the number sold exceeds the number the taxpayer would sell under usual business practice; the 25 cows exceed that number. The general replacement period under § 1033(a)(2)(B) ends two years after the close of the first tax year in which any part of the gain is realized, but § 1033(e)(2) extends it to four years when the drought causes the area to be designated as eligible for assistance by the federal government. The region was so designated and the gain was realized in 2025, so the gain may be deferred if replacement breeding cows (property similar or related in service or use) are acquired by December 31, 2029, which is Choice B. Choice A misclassifies the cows: cattle held for breeding for 24 months or more are § 1231 property, not inventory, and a drought sale of them qualifies under § 1033(e). Choice C applies the general two-year replacement period (ending in 2027) and ignores the four-year extension for drought in a federally designated area. Choice D treats the drought sale as voluntary, but § 1033(e)(1) expressly treats it as an involuntary conversion.
