Internal Revenue Service (IRS), Treasury.
Final and temporary regulations.
This document contains final and temporary regulations under section 1301 of the Internal Revenue Code (Code) relating to the averaging of farm and fishing income in computing income tax liability. The regulations reflect changes to the law made by the American Jobs Creation Act of 2004. The regulations provide guidance to individuals engaged in a farming or fishing business who elect to reduce their tax liability by treating all or a portion of the current taxable year's farm or fishing income as if one-third of it had been earned in each of the prior three taxable years. The text of the temporary regulations in this document also serves as the text of proposed regulations set forth in a notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the
Amy Pfalzgraf, (202) 622–4950 (not a toll-free number).
This document contains final and temporary amendments to the Income Tax Regulations (26 CFR part 1) under section 1301. For taxable years beginning after December 31, 1997, section 1301 provides that individual taxpayers engaged in a farming business may elect to compute their income tax liability under section 1 by treating all or a portion of their taxable income from the trade or business of farming as if one-third of it had been earned in each of the prior three taxable years.
Section 314(b) of the American Jobs Creation Act of 2004 (AJCA), Public Law 108–357 (118 Stat. 1468), amended section 1301 to permit fishermen to make a farm income averaging election. Section 1301(b)(1)(A) now provides that the income eligible for averaging includes income attributable to a fishing business.
The Magnuson-Stevens Act defines
Section 314(a) of the AJCA amended section 55(c) to provide that the farm income averaging election is disregarded in computing the regular tax liability for purposes of calculating the alternative minimum tax (AMT). As a result, the reduction in regular tax liability resulting from a farm income averaging election will not be offset by a corresponding increase in the AMT.
Section 1.1301–1 of the Income Tax Regulations provides guidance on income averaging for farmers under the rules in effect before the AJCA amendments.
These temporary regulations provide guidance on the AJCA changes to the income averaging rules. In addition, conforming changes are made to the final regulations in § 1.1301–1.
Section 1301(b)(4) defines
Section 1301(b)(1)(A) provides that income attributable to any farming business or fishing business is eligible for income averaging. These temporary regulations clarify that the maximum amount of income that an individual may elect to average is the total of the individual's farm and fishing income and gains, reduced by any farm and fishing deductions or losses allowed as a deduction in computing taxable income. Therefore, a taxpayer engaged in both a farming business and a fishing business must combine income, gains, deductions, and losses from both the farming business and the fishing business to determine the maximum amount of income that is eligible for averaging.
The rental income of a landlord that is based on a share of a tenant's production is subject to fluctuations in the farm economy to the same extent as that of a farmer. Therefore, § 1.1301–1(b)(2) provides that a landlord is engaged in a farming business if this arrangement is established in a written agreement before the tenant begins significant activities on the land.
These temporary regulations similarly provide that a lessor of a vessel is engaged in a fishing business within the meaning of section 1301(b)(4) if the payment due to the lessor under the lease is based on a share of the lessee's catch (or a share of the proceeds from
The income of crewmembers on vessels engaged in fishing also is subject to fluctuations in the fishing economy if the crewmembers' compensation is based on a share of the vessel's catch of fish or a share of the proceeds from the sale of the catch. Accordingly, these temporary regulations provide that these crewmembers are engaged in a fishing business, whether or not they are treated as employees for employment tax purposes.
Section 7518(c)(1)(A) provides that certain deposits into a Merchant Marine Capital Construction Fund (CCF) reduce taxable income for purposes of the Code (the CCF reduction). These temporary regulations provide that, for purposes of income averaging computations, the CCF reduction also reduces taxable income. In addition, except to the extent that the amount of the CCF deposit is determined by reference to income from maritime operations other than fishing, the CCF reduction also reduces the amount of income that is eligible for income averaging.
These temporary regulations apply for taxable years beginning after July 22, 2008. However, taxpayers may apply the temporary regulations in taxable years beginning after December 31, 2003, but before July 23, 2008, if all provisions are consistently applied in each taxable year.
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) please refer to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the
The principal author of these regulations is Amy Pfalzgraf of the Office of the Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development.
Income taxes, Reporting and recordkeeping requirements.
26 U.S.C. 7805 * * *
Section 1.1301–1T also issued under 26 U.S.C. 1301(c). * * *
The additions and revision read as follows:
(b) * * *
(3) [Reserved]. For further guidance, see § 1.1301–1T(b)(3).
(d) * * *
(4) [Reserved]. For further guidance, see § 1.1301–1T(d)(4).
(g)
(2) Paragraphs (a), (b)(1), (c)(1), (d)(3)(ii), (e), (f)(2), and (f)(4) of this section apply only for taxable years beginning before July 23, 2008. For taxable years beginning after July 22, 2008, see § 1.1301–1T.
(3) Paragraphs (b)(3) and (d)(4) of this section apply for taxable years beginning after July 22, 2008.
(a)
(1) Designates all or a portion of the individual's electible farm income for the election year as elected farm income; and
(2) Determines the election year section 1 tax by determining the sum of—
(i) The section 1 tax that would be imposed for the election year if taxable income for the year were reduced by elected farm income; plus
(ii) For each base year, the amount by which the section 1 tax would be increased if taxable income for the year were increased by one-third of elected farm income.
(b)
(ii)
(iii)
(2) [Reserved]. For further guidance, see § 1.1301–1(b)(2).
(3)
(c)
(2) [Reserved]. For further guidance, see § 1.1301–1(c)(2).
(d)(1) through (3)(i) [Reserved]. For further guidance, see § 1.1301–1(d)(1) through (3)(i).
(ii)
(i) T is a fisherman who uses the calendar taxable year. In each of the years 2001, 2002, and 2003, T's taxable income is $20,000. In 2004, T has taxable income of $30,000 (prior to any farm income averaging election) and electible farm income of $10,000. T makes a farm income averaging election with respect to $9,000 of the electible farm income for 2004. Under paragraph (a)(2)(ii) of this section, $3,000 of elected farm income is allocated to each of the base years 2001, 2002, and 2003. Under paragraph (a)(2) of this section, T's 2004 tax liability is the sum of the following amounts:
(A) The section 1 tax on $21,000, which is T's taxable income of $30,000, minus elected farm income of $9,000.
(B) For each of the base years 2001, 2002, and 2003, the amount by which section 1 tax would be increased if one-third of elected farm income were allocated to each year. The amount for each year is the section 1 tax on $23,000 (T's taxable income of $20,000, plus $3,000, which is one-third of elected farm income for the 2004 election year), minus the section 1 tax on $20,000.
(ii) In 2005, T has taxable income of $50,000 and electible farm income of $12,000. T makes a farm income averaging election with respect to all $12,000 of the electible farm income for 2005. Under paragraph (a)(2)(ii) of this section, $4,000 of elected farm income is allocated to each of the base years 2002, 2003, and 2004. Under paragraph (a)(2) of this section, T's 2005 tax liability is the sum of the following amounts:
(A) The section 1 tax on $38,000, which is T's taxable income of $50,000, minus elected farm income of $12,000.
(B) For each of base years 2002 and 2003, the amount by which section 1 tax would be increased if, after adjustments for previous farm income averaging elections pursuant to paragraph (d)(3)(i) of this section, one-third of elected farm income were allocated to each year. The amount for each year is the section 1 tax on $27,000 (T's taxable income of $20,000 increased by $3,000 for T's 2004 farm income averaging election and further increased by $4,000, which is one-third of elected farm income for the 2005 election year), minus the section 1 tax on $23,000 (T's taxable income of $20,000 increased by $3,000 for T's 2004 farm income averaging election).
(C) For base year 2004, the amount by which section 1 tax would be increased if, after adjustments for previous farm income averaging elections pursuant to paragraph (d)(3)(i) of this section, one-third of elected farm income were allocated to that year. This amount is the section 1 tax on $25,000 (T's taxable income of $30,000 reduced by $9,000 for T's 2004 farm income averaging election and increased by $4,000, which is one-third of elected farm income for the 2005 election year), minus the section 1 tax on $21,000 (T's taxable income of $30,000 reduced by $9,000 for T's 2004 farm income averaging election).
(4)
(ii)
(i) T is a fisherman who uses the calendar taxable year. In each of the years 2001, 2002, and 2003, T's taxable income (before taking any CCF reduction into account) is $20,000. For taxable year 2002, all of T's income is described in section 7518(a)(1)(A) and is attributable to T's fishing business. T makes a $5,000 deposit into a CCF for taxable year 2002. In 2004, T has taxable income of $30,000 (before taking any CCF reduction into account). In addition, T's electible farm income for 2004 (before taking the CCF reduction into account) is $10,000, all of which is described in section 7518(a)(1)(A) and is attributable to T's fishing business. For taxable year 2004, T makes a $4,000 deposit into a CCF.
(ii) The amount of the 2004 CCF deposit reduces taxable income. Accordingly, T's taxable income for 2004 is $26,000 ($30,000−$4,000). In addition, the entire amount of the CCF reduction is treated as an item of deduction attributable to T's fishing business. Accordingly, T's electible farm income for 2004 is $6,000 ($10,000−$4,000). Similarly, the amount of the 2002 CCF deposit reduces T's taxable income for 2002. Accordingly, T's taxable income for 2002 is $15,000 ($20,000−$5,000).
(iii) T makes an income averaging election with respect to all $6,000 of the electible farm income for 2004. Under paragraph (a)(2)(ii) of this section, $2,000 of elected farm income is allocated to each of the base years 2001, 2002, and 2003. Under paragraph (a)(2) of this section, T's 2004 tax liability is the sum of the following amounts:
(A) The section 1 tax on $20,000, which is T's taxable income of $26,000 ($30,000 reduced by the $4,000 CCF deposit), minus elected farm income of $6,000.
(B) For each of the base years 2001, 2002, and 2003, the amount by which section 1 tax would be increased if one-third of elected farm income were allocated to each year. The amount for base years 2001 and 2003 is the section 1 tax on $22,000 (T's taxable income of $20,000, plus $2,000, which is one-third of elected farm income for the election year), minus the section 1 tax on $20,000. The amount for base year 2002 is the section 1 tax on $17,000 (T's taxable income of $15,000 ($20,000 reduced by the $5,000 CCF deposit), plus $2,000 (one-third of elected farm income for the election year)), minus the section 1 tax on $15,000.
(e)
(ii)
(B)
(2)
(B) Individuals conducting both a farming business and a fishing business must calculate electible farm income by combining income, gains, deductions, and losses derived from the farming business and the fishing business.
(C) Except as otherwise provided in paragraph (d)(4) of this section, the amount of any CCF reduction is treated as a deduction from income attributable to a fishing business in calculating electible farm income.
(D) Electible farm income may not exceed taxable income, and electible farm income from net capital gain attributable to a farming or fishing business may not exceed total net capital gain. Subject to these limitations, an individual who has both ordinary income and net capital gain from a farming or fishing business may elect to average any combination of the ordinary income and net capital gain.
(ii)
A has ordinary income from a farming business of $200,000 and deductible expenses from a farming business of $50,000. A's taxable income is $150,000 ($200,000−$50,000). Under paragraph (e)(2)(i) of this section, A's electible farm income is $150,000, all of which is ordinary income.
B has capital gain of $20,000 that is not from a farming or fishing business, capital loss from a farming business of $30,000, and ordinary income from a farming business of $100,000. Under section 1211(b), B's allowable capital loss is limited to $23,000. B's taxable income is $97,000 (($20,000−$23,000) + $100,000). B has a capital loss carryover from a farming business of $7,000 ($30,000 total loss−$23,000 allowable loss). Under paragraph (e)(2)(i) of this section, B's electible farm income is $77,000 ($100,000 ordinary income from a farming business, minus $23,000 capital loss from a farming business), all of which is ordinary income.
C has ordinary income from a fishing business of $200,000 and ordinary loss from a farming business of $60,000. C's taxable income is $140,000 ($200,000−$60,000). Under paragraph (e)(2)(i)(B) of this section, C must deduct the farm loss from the fishing income in determining C's electible farm income. Therefore, C's electible farm income is $140,000 ($200,000−$60,000), all of which is ordinary income.
D has ordinary income from a farming business of $200,000 and ordinary loss of $50,000 that is not from a farming or fishing business. D's taxable income is $150,000 ($200,000−$50,000). Under paragraph (e)(2)(i)(D) of this section, electible farm income may not exceed taxable income. Therefore, D's electible farm income is $150,000, all of which is ordinary income.
E has capital gain from a farming business of $50,000, capital loss of $40,000 that is not from a farming or fishing business, and ordinary income from a farming business of $60,000. E's taxable income is $70,000 (($50,000−$40,000) + $60,000). Under paragraph (e)(2)(i)(D) of this section, electible farm income may not exceed taxable income, and electible farm income from net capital gain attributable to a farming or fishing business may not exceed total net capital gain. Therefore, E's electible farm income is $70,000 of which $10,000 is capital gain and $60,000 is ordinary income.
(f)(1) [Reserved]. For further guidance, see § 1.1301–1(f)(1).
(2)
(f)(3) [Reserved]. For further guidance, see § 1.1301–1(f)(3).
(4)
(f)(5) [Reserved]. For further guidance, see § 1.1301–1(f)(5).
(g)
(2) Taxpayers may apply the provisions of this section rather than the corresponding provisions of § 1.1301–1 in taxable years beginning after December 31, 2003, but before July 23, 2008, if all provisions are consistently applied in each taxable year.
(3) This section expires on July 21, 2011.