Example 1:
A self-employed farmer sold their farm and retired at the end of November 1988. They
filed for and became entitled to benefits in November 1988. During the period of April
1988 through November 1988 they raised, harvested and stored a grain crop. The crop
was sold in 1989 making the net profit from the sale of the grain reportable as NESE
for 1989. If the beneficiary requests the income be excluded, their request can be
approved since the income was received in a taxable year following the year of entitlement
and the income is not attributable to services performed after the initial month of
entitlement. Any activities performed after the month of entitlement solely in connection
with the sale of the stored crop; e.g., arranging the sale of the crop or delivering
the crop to market, are not considered services attributable to the income received.
Note that the income from self-employment which is excluded from 1989 total yearly
earnings is not counted as earnings for 1988 for deductions. Also, the full amount
of NESE subject to SE tax for the year is used for computation purposes.
Example 2:
A self-employed farmer became entitled to benefits in May 1987. They cultivated, harvested
and stored a grain crop in the period July through November 1987. They did not work
after November 1987. In March 1988 they sold the 1987 holdover crop for $30,000.
In this case, if the beneficiary requests the $30,000 be excluded from their gross
income, they will be advised the self-employment income exclusion does not apply because,
while the income was received in a year following the initial year of entitlement,
it is attributable to their services performed after the month of entitlement.
Example 3:
In 1987, a farmer signed a FAPP agreement to limit production of wheat by placing
one-half of the farm's acreage in the Conservation Reserve Program for 10 years on
condition that a cover crop be planted to prevent erosion. Periodic payments were
to be made by check and in the form of agricultural lime. The farmer then became entitled
to Social Security benefits in June 1988 but continued to farm the remaining acreage
full time. The farmer's Annual Report for 1988 listed $15,000 in SEI for that year
and estimated the same amount for 1989. They requested that $10,000 be excluded each
year for ET purposes as FAPP payments. The farmer submitted a copy of a 1988 Form
1099G (statement for recipients of certain Government Payments) from the Dept. of
Agriculture, showing $10,000 in FAPP payments. A copy of schedule F (Form 1040) -
Farm Income and Expenses, for 1988 also, was submitted. It listed $10,000 in item
7a (total agricultural program payments) in Part I; also, $40,000 of gross income
in item 12. In Part II, Farm Deductions, under item 15 (Conservation expenses) it
listed $10,000. Items 20 (Fertilizers and lime) and 22 (Gasoline, fuel, oil), each
listed $2,000.
Under the instructions in RS 02505.115D.2., the $10,000 in FAPP payments is counted for ET purposes in 1988 (the initial year
of entitlement) but not for 1989, pursuant to the SEI exclusion rule. Also, as provided
in RS 02505.115D.2.b., no development regarding offsetting expenses, such as those listed above, is ordinarily
required, since the only SEI to be excluded is the FAPP payments.
Example 4:
By the time Farmer Jakes attained age 65 in October 1980, they had already raised,
harvested, and stored their grain crop for 1980. They filed for Social Security benefits
and became entitled beginning October 1980. They advised the DO they would not work
from October 1980 through April 1981 but would return to work in May 1981. 1980 becomes
their initial grace year. Since Farmer Jakes had indicated they would not exceed the
exempt amount for 1981, their benefits continue. When they filed their 1981 annual
report, they indicated all months are service months and that they had NESE of $10,000.
They advised this income was for the partial sale of their 1980 crop, raised and stored
before their initial month of entitlement. Since the $10,000 can be excluded, for
deduction purposes Farmer Jakes had no income for 1981. (Their crop for 1981 was raised
and stored but not sold.) In each of the years from 1982 through 1984, they again
raised and stored crops. To meet their needs each year they sold off $10,000 in grain
from the crop raised and stored in 1980, before their initial month of entitlement.
Therefore, each year they can exclude $10,000 from their gross income from self-employment.
Although they have performed services each year after their month of entitlement,
they received no income attributable to these services. The income they do receive
is the result of their 1980 carryover crop, which was raised, harvested, and stored
before their initial month of entitlement. In January 1986, Farmer Jakes sells all
of their stored grain (raised in 1981-1984) for $240,000. However, since they attained
age 70 in October 1985, the earnings test no longer applies and no deductions will
be imposed based on their earnings in 1986.
If Farmer Jakes had sold their stored grain in 1985, the year they attained age 70,
and requested the $240,000 be excluded from their 1985 income, their request would
be denied. Since all this income is attributable to a source for which significant
services were performed after the month of entitlement, even though the services (other
than the sale of the crop) were not performed in the year in which the income was
received, it may not be excluded from income from self-employment for deduction purposes.
Their total earnings for deductions for 1985 are $180,000. This is arrived at by dividing
the $240,000 by 12 and multiplying the result by 9 (the number of months they were
under age 70). Deductions could be imposed for January 1985 through September 1985.