Farm Income: Report Farming Income on Schedule F
Farmers who are sole proprietors must file Schedule F
Your tax situation becomes exponentially more complicated when you're self-employed. Sole proprietors and independent contractors must file Schedule C with their federal tax returns—unless they happen to be farmers. Self-employed farmers report income and expenses from their farming business on Schedule F.
Don't assume that you must grow crops to fit into this category. The Internal Revenue Service includes ranchers and fish breeders, too.
Schedule F is to be used only by farmers who are considered to be sole proprietors. Farmers who operate their farming businesses through a corporation or another business entity would report income and expenses on the appropriate business tax return. Schedule F not only reports income and expenses but federal disaster payments and money received from agricultural programs as well.
As with most businesses, the deductible costs and expenses of doing business must be "ordinary and necessary" to claim them on Schedule F. That 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. Completing Schedule F involves some calculations, effectively subtracting your expenses from your revenues, which ultimately produces your taxable income which you then enter on your tax return.
Schedule F is 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.
Preparing an Accurate Schedule F
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.
They should also use top-of-the-line tax preparation software such as TurboTax Premier or TaxAct Deluxe. 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 tax program.
Most other businesses must simply decide whether they want to operate and report their incomes on a cash or accrual basis. Farmers have an additional option—they can account for the crop method instead. Revenues would not be included in your income until you've actually sold what you've grown, but you must get an OK from the IRS first before you can use this method.
Essential Resources for Farmers
An excellent summary of tax information for farmers can be found in TheTaxBook Deluxe, Chapter 5, pages 26 through 30. TheTaxBook is a quick reference guide that's designed for tax professionals, but farmers might find the information easier to follow.
Purdue University professor George Patrick has also published an excellent overview of tax planning strategies for farmers.
Farmers might also need to rely on the following IRS Publications and Schedules:
- Tax Information for Farmers
- Instructions for Schedule F
- IRS Forms and Publications to Assist Farmers
- Farmer's Tax Guide (Publication 225)
- Schedule F, Profit or Loss from Farming
- Schedule J, Farm Income Averaging
- Instructions for Schedule J