Farm Income

Farmers must report their income from farming in a variety of different ways.

If you are involved in Renting a Farm or Farmland, you should report the income and expenses related to that activity on Form 4835, Farm Rental Income and Expense.

However, if you are in the trade or business of farming, you must complete and file Schedule F, Profit or Loss from Farming, along with your IRS Form 1040. This form is very similar to Schedule C and most of your expense deductions, tax credits, and gains and losses are computed using the same rules discussed in Part IV of the Guide for small business owners. For example, the treatments of car or truck expenses and sales of assets are the same for farmers and small businesses.

Note that sales of livestock held for breeding, dairy, draft, or sport purposes are treated as sales of business assets reported on Form 4797, Sales of Business Property, while sales of livestock raised or purchased for resale are reported on Schedule F.

Schedule F, Line E, asks whether you "materially participated" in the farming business. The standard for "material participation" for this question relates to the passive activity rules and is basically the same as the standard for materially participating in a small business.

As a farmer, you can be treated as materially participating under two additional situations:

• if you are a retired or disabled farmer, and you materially participated for five of the eight years preceding your retirement or disability
• if you are a surviving spouse of a farmer, you actively manage the farm, and the property used for farming meets the special use valuation of a farm property under the estate tax rules

Net farm income as computed on Schedule F is carried over to Line 18 of Form 1040, and self-employment tax is computed on the Schedule F net income using Schedule SE.

A special rule permits farmers to average their income over three years. This rule allows you to pay less in taxes in an unusually good year. If you elect to average farm income, you must complete Schedule J and file it with your Form 1040. You figure the current year's tax by following these steps:

1. Subtract the elected part of your current year's taxable farm income (elected farm income) from your total taxable income.
2. Figure the tax on the result in Step 1 using the current year's tax tables or tax rate schedules.
3. For each of the previous three years, make the following computation:
   1. Add one-third of the current year's elected farm income to your taxable income for that year.
   2. Figure the tax on the amount in (a) using the tax tables or rate schedules for that year.
   3. Subtract that year's actual tax from the tax in (b).
4. Add the amounts in step 3(c) to the amount in Step 2. The result is the tax for the current year.

More farming information. Farmers are subject to some special, generally more lenient accounting rules and some very specific rules about income recognition. We recommend that you get a copy of the IRS's free Publication 225, Farmer's Tax Guide, for help in completing Schedule F or Form 4835. See also our discussion of Schedule E.

Planning Tools You can download Schedule F, Form 1040, Schedule C, Form 4797, Schedule SE and Schedule E to aid in your financial planning efforts.

© 2024 Wolters Kluwer. All Rights Reserved.