[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.162-12]

[Page 784-785]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.162-12  Expenses of farmers.

    (a) Farms engaged in for profit. A farmer who operates a farm for 
profit is entitled to deduct from gross income as necessary expenses all 
amounts actually expended in the carrying on of the business of farming. 
The cost of ordinary tools of short life or small cost, such as hand 
tools, including shovels, rakes, etc., may be deducted. The purchase of 
feed and other costs connected with raising livestock may be treated as 
expense deductions insofar as such costs represent actual outlay, but 
not including the value of farm produce grown upon the farm or the labor 
of the taxpayer. For rules regarding the capitalization of expenses of 
producing property in the trade or business of farming, see section 263A 
and the regulations thereunder. For taxable years beginning after July 
12, 1972, where a farmer is engaged in producing crops and the process 
of gathering and disposal of such crops is not completed within the 
taxable year in which such crops were planted, expenses deducted may, 
with the consent of the Commissioner (see section 446 and the 
regulations thereunder), be determined upon the crop method, and such 
deductions must be taken in the taxable year in which the gross income 
from the crop has been realized. For taxable years beginning on or 
before July 12, 1972, where a farmer is engaged in producing crops which 
take more than a year from the time of planting to the process of 
gathering and disposal, expenses deducted may, with the consent of the 
Commissioner (see section 446 and the regulations thereunder), be 
determined upon the crop method, and such deductions must be taken in 
the taxable year in which the gross income from the crop has been 
realized. If a farmer does not compute income upon the crop method, the 
cost of seeds and young plants which are purchased for further 
development and cultivation prior to sale in later years may be deducted 
as an expense for the year of purchase, provided the farmer follows a 
consistent practice of deducting such costs as an expense from year to 
year. The preceding sentence does not apply to the cost of seeds and 
young plants connected with the planting of timber (see section 611 and 
the regulations thereunder). For rules regarding the capitalization of 
expenses of producing property in the trade or business of farming, see 
section 263A of the Internal Revenue Code and Sec. 1.263A-4. The cost 
of farm machinery, equipment, and farm buildings represents a capital 
investment and is not an allowable deduction as an item of expense. 
Amounts expended in the development of farms, orchards, and ranches 
prior to the time when the productive state is reached may, at the 
election of the taxpayer, be regarded as investments of capital. For the 
treatment of soil and

[[Page 785]]

water conservation expenditures as expenses which are not chargeable to 
capital account, see section 175 and the regulations thereunder. For 
taxable years beginning after December 31, 1959, in the case of 
expenditures paid or incurred by farmers for fertilizer, lime, etc., see 
section 180 and the regulations thereunder. Amounts expended in 
purchasing work, breeding, dairy, or sporting animals are regarded as 
investments of capital, and shall be depreciated unless such animals are 
included in an inventory in accordance with Sec. 1.61-4. The purchase 
price of an automobile, even when wholly used in carrying on farming 
operations, is not deductible, but is regarded as an investment of 
capital. The cost of gasoline, repairs, and upkeep of an automobile if 
used wholly in the business of farming is deductible as an expense; if 
used partly for business purposes and partly for the pleasure or 
convenience of the taxpayer or his family, such cost may be apportioned 
according to the extent of the use for purposes of business and pleasure 
or convenience, and only the proportion of such cost justly attributable 
to business purposes is deductible as a necessary expense.
    (b) Farms not engaged in for profit; taxable years beginning before 
January 1, 1970--(1) In general. If a farm is operated for recreation or 
pleasure and not on a commercial basis, and if the expenses incurred in 
connection with the farm are in excess of the receipts therefrom, the 
entire receipts from the sale of farm products may be ignored in 
rendering a return of income, and the expenses incurred, being regarded 
as personal expenses, will not constitute allowable deductions.
    (2) Effective date. The provisions of this paragraph shall apply 
with respect to taxable years beginning before January 1, 1970.
    (3) Cross reference. For provisions relating to activities not 
engaged in for profit, applicable to taxable years beginning after 
December 31, 1969, see section 183 and the regulations thereunder.

[T.D. 7198, 37 FR 13679, July 13, 1972, as amended by T.D. 8729, 62 FR 
44546, Aug. 22, 1997; T.D. 8897, 65 FR 50643, Aug. 21, 2000]