in 1994 for $9,500. He has a gain on the sale 

 of $214 ($9,500 - $9,286). His depreciation 

 and Section 179 deduction is $714 (he actu- 

 ally took no Section 179 deduction on the 

 baler in 1993). The amount to be recaptured 

 on Form 4797 is the lesser ($214). Joe's 

 Section 179 carryover is reduced by $5,000. 



Purchase and Sale of Livestock 



You purchased, transported and vaccinated 

 some young cattle in 1993, intending to sell them in 

 1994. As a farmer using the cash basis method of 

 accounting, how do you report this? The purchase 

 and transportation are your basis in the cattle, 

 included in your 1994 Schedule F, line 2. Vaccination 

 is a current expense, line 33 of your 1993 Schedule F. 



Do you pay self-employment tax on gain or loss 

 from the sale of breeding livestock? Yes, if it is held 

 for sale in the ordinary course of business. Report on 

 Schedule F. No, otherwise. Report in the appropriate 

 part of Form 4797, as follows: 



Held less than 12 months (24 months for cattle 

 and horses). Also poultry (unless held for sale in 

 the ordinary course of business) 



Part II of Form 4797 

 Held more than 12 months (24 months for cattle 

 and horses) and (1) purchased and sold at a loss 

 or raised (gain or loss) 



Part I of Form 4797 

 or (2) purchased and sold for a gain (depreciation 

 recapture) 



Part III of Form 4797 



Example: Robert breeds replacement heif- 

 ers for his dairy herd. When they are two 

 years old, he selects the number required to 

 maintain his herd and sells the rest. Even if 

 some heifers are sold as breeding livestock, 

 all sales are reported on Schedule F. 



Example: Dana breeds replacement heif- 

 ers. All are added to the dairy herd unless 

 they fail to breed. Those that turn out to be 

 poor milkers are sold. Dana can report all 

 sales on Form 4797, since her intent was to 

 keep them all for breeding. 



Investment Interest 



Previously, individual taxpayers could deduct 

 investment interest (interest on indebtedness 

 allocable to property held for investment) only to the 

 extent of their net investmentincome for that year. 

 Net investment income generally excluded capital 



gains, and the disallowed interest expense had to be 

 carried forward. Now there is a faster way to use up 

 the interest carry-forward. Effective January 1, 

 1993, a taxpayer may elect to include any amount of 

 the net capital gain from Schedule D in investment 

 income. The capital gain transferred to Form 1040 

 must be reduced by the same amount. For a taxpayer 

 in the 28% marginal tax bracket, the only effect is to 

 use up the investment interest carryover, reducing 

 total taxes in the present year rather than some 

 future year. Higher income taxpayers should take 

 care to elect to include only as much gain as will 

 offset the interest carried forward. Any larger 

 amount would be subject to tax at rates of 31%, 36%, 

 or 39.6%. 



Example: Fred and Emily have $10,000 

 unused investment interest expense from 

 1992 and $15,000 net long-term capital 

 gains in 1993. On their 1993 return, they 

 elect to treat $ 10,000 of the gain as ordinary 

 income. They pay tax (maximum rate 28%) 

 on $5,000 long-term capital gain. They de- 

 duct the $10,000 investment interest ex- 

 pense on Schedule A. 



The following sections are taken from material 

 published by Larry C. Jenkins, Department of 

 Agricultural Economics and Rural Sociology, 

 Pennsylvania State University. 



Earned Income Tax Credit (EITC) 



The new rules for earned income credit involve 

 only a basic credit; the extra credits for a child under 

 one year of age and for health insurance coverage 

 were eliminated in the 1993 legislation. Comment: 

 The new law results in a decrease in benefits in 1994, 

 compared to benefits from the earned income credit 

 in 1992, for a family with one child under one year of 

 age, and qualifying for the supplemental health 

 insurance credit. For such a family, based on earned 

 income of $7,750, the EITC in 1992 would have been 

 $2,151. Under the new rules, the credit is $2,038. 



In a departure from previous earned income 

 credit rules, the new law extends the credit to 

 taxpayers with no qualifying children. The credit is 

 available to taxpayers over age 25 and below age 65. 

 For these taxpayers, the EITC is 7.65 percent of the 

 first $4,000 of earned income (for a maximum credit 

 of $306 in 1994). The maximum credit is reduced by 

 7.65 percent of earned income (or adjusted gross 

 income, if greater) above $5,000. In 1994, the credit 

 is completely phased out for taxpayers with earned 



18 



Fruit Notes, Winter, 1994 



