Farm Income: Report Farming Income on Schedule F
Farmers who are sole proprietors must file Schedule F
The Internal Revenue Service doesn't treat all income equally, particularly when it comes to reporting it. Sole proprietors must file Schedule C, and self-employed farmers report their income and expenses from their farming businesses on Schedule F.
Completing Schedule F involves some calculations. You must subtract your expenses from your revenues. This ultimately produces your taxable income, which is then transferred to Form 1040.
Schedule F is subject to a few unique rules.
Who's a Farmer?
Don't assume that you must grow crops before the IRS will consider you a farmer. The government's definition includes ranchers and fish breeders, too. A farmer is anyone who pursues or receives income from cultivating crops and/or livestock, whether it's on a farm, ranch, range, or in an orchard.
Here's what the IRS has to say about it in Publication 225:
"You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges and orchards."
This leaves out veterinarians, pet kennels, wineries, and landscaping businesses, but nurseries that grow ornamental plants are considered to be farmers for tax purposes.
Is Your Farm a Business or a Hobby?
The key words in Publication 225 are "in the business." This differentiates farming from a hobby. Hobbies were subject to completely different tax treatment before the changes made in 2018 under the Tax Cuts and Jobs Act (TCJA). You can no longer deduct hobby expenses, thanks to the TCJA, so it's likely in your best interest if your farm or ranch qualifies as a business.
The IRS says that you must be engaged in farming for profit, which means that you've made money in at least three of the last five tax years. It's two out of seven years if you're breeding or raising horses. This rule isn't absolutely ironclad, however, and it doesn't exist in a vacuum. The IRS will also consider other factors even if you don't meet this requirement.
Schedule F Is for Sole Proprietors
Schedule F is used only by farmers who are considered to be sole proprietors. Those who operate their farming businesses through a corporation or other business entity would report income and expenses on Form 1120 instead.
Reporting a Farm's Income
Most businesses must simply decide whether they want to operate and report their incomes on a cash or accrual basis, but farmers have an additional option—they can account for the crop method instead.
Income is reportable in the year you actually receive it if you use the cash method of accounting. It's reported in the year it was earned if you use the accrual method. With the crop method, revenues would not be included in your income until you've actually sold what you've grown, but you must get special permission from the IRS before you can use this basis.
You're even permitted to use a combination of these methods for two or more farming businesses if you do so regularly. You can use one for Farm A and another for Farm B if that works for you.
Schedule F reports not only farming income but federal disaster payments and money received from agricultural programs as well. Most agricultural programs will report income on Form 1099-G, so you should receive a copy of this form if you've received any of these types of payments.
Deductible Expenses on Schedule F
As with most businesses, the deductible costs and expenses of doing business must be "ordinary and necessary" to claim them on Schedule F. This means that virtually all farmers claim the same costs and expenses and, in fact, you would find it difficult or impossible to make a living without paying them.
Expenses are deductible in the year you pay them if you choose the cash basis or in the year you incur them if you use the accrual method.
Reporting Capital Gains and Losses
Schedule F cannot be used to report gains or losses associated with the sale or disposition of certain farm assets. These include your buildings or structures, most livestock, land, and farm equipment. You would instead report these gains or losses on Form 4797, "Sale of Business Property."
Special Rules for Estimated Tax Payments
Farmers need make only one estimated tax payment per year under some circumstances rather than the four that other sole proprietors must make. IRS penalties will not kick in if you make just one payment, but there are rules.
The IRS extended the deadline for farmers' estimated payments to April 15, 2019 for 2018 tax returns due to all the tax changes that took place under the TCJA in 2018. You should not have been hit with a penalty if you filed Form 2210-F after March 1 but prior to this date. Speak with a tax professional if you were.
More than two thirds of your income must come from farming in either the current or previous year to qualify for this special perk. The payment is typically due by March 1.
How to Complete and File Schedule F
Schedule F is actually comprised of several parts. You should complete Part I if you use the cash method of accounting. If you use the accrual method reserved specifically for farmers, you can skip ahead to Part III.
Part II is for deductible expenses and it includes more than 30 of them from insurance and utilities to fertilizers, seeds, and plants. The costs of things you've purchased for resale are included here as well.
Schedule F can be filed with Form 1040, 1040NR, 1041, 1065, or 1065-B. You don't have the option of using the easier Forms 1040A and 1040EZ if you must file Schedule F and, as a practical matter, the 1040Z and 1040EZ are obsolete as of the 2018 tax year. No one has the option of using them anymore.
The key to preparing an accurate Schedule F is to keep excellent records of your income, crops, livestock, other assets, and various expenses all throughout the year. Farmers should ideally use some type of accounting software to take the labor and drudgery out of this ongoing task and to streamline the process at tax time.
Farm Income Tax Software
Using top-of-the-line tax preparation software such as TurboTax Premier or TaxAct Deluxe can help considerably. You'll need the many advanced features offered by these programs, such as entering assets, tracking depreciation, accurately calculating your net profit or loss, and averaging your farming income using Schedule J.
These advanced calculations can't be handled by lower-end tax software so you'll want to pick a robust program.
NOTE: Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.