Section 1.182-5 - Limitation(a)Limitation - (1)General rule. The amount of land clearing expenditures which the taxpayer may deduct under section 182 in any one taxable year is limited to the lesser of $5,000 or 25 percent of his "taxable income derived from farming". Expenditures in excess of the applicable limitation are to be charged to the capital account and constitute additions to the taxpayer's basis in the land.(2)Definition of "taxable income derived from farming". For purposes of section 182, the term taxable income derived from farming means the gross income derived from the business of farming reduced by the deductions attributable to such gross income. Gross income derived from the business of farming is the gross income of the taxpayer derived from the production of crops, fruits, or other agricultural products, including fish, or from livestock (including livestock held for draft, breeding or dairy purposes). It does not include gains from sales of assets such as farm machinery or gains from the disposition of land. The deductions attributable to the business of farming are all the deductions allowed by Chapter 1 of the Code (other than the deduction allowed by section 182) for expenditures or charges (including depreciation and amortization) paid or incurred in connection with the production or raising of crops, fruits, or other agricultural products, including fish, or livestock. However, the deduction under section 1202 (relating to the capital gains deduction) attributable to gain on the sale or other disposition of assets (other than draft, breeding, or dairy stock), and the net operating loss deduction (computed under section 172) shall not be taken into account in computing "taxable income derived from farming." Similarly, deductible losses on the sale, disposition, destruction, condemnation, or abandonment of assets (other than draft, breeding, or dairy stock) shall not be considered as deductions attributable to the business of farming. A taxpayer shall compute his gross income from farming in accordance with his accounting method used in determining gross income. (See the regulations under section 61 relating to accounting methods used by farmers in determining gross income.)(b)Examples. The provisions of paragraph (a) of this section may be illustrated by the following examples: Example 1. For the taxable year 1963, A, who uses the cash receipts and disbursements method of accounting, incurs expenditures to which section 182 applies in the amount of $2,000 and makes the election under section 182. A has the following items of income and deductions (without regard to section 182 expenditures). | Income: | | |
| Proceeds from sale of his 1963 yield of corn | $10,000 | |
| Proceeds from sales of milk | 8,000 | |
| Gain from disposition of old breeding cows | 500 | |
| Gain from sale of tractor | 100 | |
| Gain from sale of farmland | 5,000 | |
| Interest on loan to brother | 100 | |
| 23,700 | |
| Deductions: | | |
| Cost of labor | 4,000 | |
| Cost of feed | 3,000 | |
| Depreciation on farm equipment and buildings | 2,500 | |
| Cost of maintenance, fuel, etc | 2,000 | |
| Interest paid, mortgage on farm buildings | 1,000 | |
| Interest paid, personal loan | 500 | |
| Loss on destruction of barn | 2,000 | |
| Loss on sale of truck | 300 | |
| Section 1202 deduction-gain on sale of cows (500 * 1/2) | 250 | |
| Section 1202 deduction-net gain on disposition of section 1231 property, other than cows [$2,800 ($5,100-$2,300) * 1/2 ] | 1,400 | |
| --- | $16,950 |
| Net income before section 182 deduction | | 6,750 |
For purposes of computing taxable income derived from farming under section 182, the following items of income and deductions are not taken into account:
| Income: | | |
| Gain from the sale of tractor | $100 | |
| Gain from the sale of farmland | 5,000 | |
| Interest on loan to brother | 100 | |
| --- | $5,200 |
| Deductions: | | |
| Interest paid, personal loan | $500 | |
| Loss on destruction of barn | 2,000 | |
| Loss on sale of truck | 300 | |
| Section 1202 deduction-Net gain from disposition of 1231 assets other than cows | 1,400 | |
| --- | $4,200 |
A's "taxable income derived from farming" for purposes of section 182 is $5,750; income of $18,500 ($23,700-$5,200), less deductions of $12,750 ($16,950-$4,200). A may deduct $1,437.50 (25% of $5,750) under section 182. The excess expenditures in the amount of $562.50 are to be charged to capital account and serve to increase the taxpayer's basis of the land.
Example 2. Assume the same facts as in Example 1 and in addition, assume that A is allowed a deduction for a net operating loss carryback from the taxable year 1966 in the amount of $3,000. The net operating loss deduction will not be taken into account in computing A's "taxable income derived from farming" for 1963 Accordingly, A will not be required to recompute such taxable income for purposes of applying the limitation on the deduction provided in section 182 and the deduction of $1,437.50 will not be reduced.T.D. 6794, 30 FR 791, Jan. 26, 1965