as a garden giving scenic enjoyment; report mortgage 

 interest and property taxes on Schedule A rather than 

 on Schedule F; retain the house and some land for 

 some period of time after the sale of the farm. 



Net Operating Losses on the Farming 

 Business Now Carried Back Five Years [IRC 



§172(b)(l)(G)] 



RRA98 added a five-year carryback for the net 

 operating loss that would result if only income and 

 deductions attributable to farming businesses were 

 taken into account (i.e., "farming losses", reduced by 

 the amount of profit, if any, from other businesses). 

 [IRC § 172(b)(1)(G)] "Farming business" means the 

 trade or business of farming, including operating a 

 nursery or sod farm and raising or harvesting fruit trees 

 and ornamental trees. [IRC §263A(e)(4)] 



If you want to make use of the net operating loss 

 provisions to lower your taxes, the five-year carryback 

 is now the default. If you want to use the regular net 

 operating loss provisions you must elect to do so. Such 

 election must be made by the due date (including 

 extensions) for filing the return for the year with the 

 loss. Once made, the election is irrevocable. [IRC 

 §172(b)(3)] 



Regular net operating loss provisions have also 

 changed. In 1 998 and future years losses can be carried 

 back two years (instead of three) and carried forward 

 20 years (instead of 1 5). [TRA97; IRC § 1 72(b)( 1 )( A)] . 

 Farmers in "Presidentially declared disaster areas" can 

 use a three year carryback for disasters but not for 

 "fanning losses" (i.e. not for losses incurred in the 

 ordinary business), so this is of little use to most 

 farmers. If you want to use these regular provisions 

 you can elect to use only the carryforward provision. 

 The same conditions apply to this election. You must 

 make the election before the due date to file your return 

 (including extensions) and once made the election is 

 irrevocable. 



Net operating loss carryback and carryforward is 

 most useful when set against income subject to high 

 marginal tax rates. If you have low incomes and low 

 marginal tax rates in prior years you may wish to use 

 carryforward only. This is a decision that requires 

 careful analysis of past years' incomes and formation 

 of expectation about future net incomes. 



Form 1045 and its associated Schedules are used 

 to make the complex adjustments to itemized 



deductions, to figure the allocation of losses and to 

 calculate the amount of the tax reduction. As before, 

 net operating losses are allocated chronologically, that 

 is, to the earliest eligible year first. 



Massachusetts State Taxes Get Up to Date - 

 Almost 



After being frozen at January 1, 1988, 

 Massachusetts personal income tax law now follows 

 the Internal Revenue Code in effect on January 1, 

 1998. Unless they are related to deductions for 

 business expenses or one of the special federal tax 

 provisions such as Roth and Education IRAs, any 

 federal tax law changes that become part of the IRC as 

 amended and in effect after January 1, 1998, will not 

 be adopted by Massachusetts. 



One place where farmers might be affected is with 

 depreciation. If you took different amounts of 

 depreciation on a property for federal and State 

 purposes, that difference will disappear on your 1998 

 returns. Example: The life for single purpose 

 agricultural or horticultural buildings placed in service 

 after 1989 is 10 years for federal purposes while it 

 would remain at the 1988 life of 7 years Massachusetts 

 purposes. Possibly amounts on purchased equipment 

 taken as expenses (§179 expensing) might have been 

 higher for federal than for State purposes. These 

 differences would cause the amount of depreciation 

 taken on federal returns to differ from that taken on 

 State returns. 



Septic Credit Carryover 

 Extended to Five Years 



The Massachusetts credit for the replacement or 

 repair of failed cesspools or septic systems had been 

 amended to extend the carryover for unused credit 

 from three to five years. The current annual $1,500 

 maximum credit and $6,000 total maximum credit 

 remains the same. If you claimed the credit in 1997 you 

 have until 2002 to carryover any unused credit. 



Conversion to Roth IRA: 

 What Did You Miss? 



If you convert from a traditional IRA to a Roth 

 IRA by December 31, 1998, you meet a special rule 

 that allows you (but does not require you) to spread the 



Fruit Notes, Volume 63 (Number 2), Spring, 1998 



11 



