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 accurately calculate your income, then subtract your expenses from your revenues. This ultimately produces your taxable income, which is transferred to Form 1040.
Who Uses Schedule F to File Taxes
Whether or not you should file Schedule F with your taxes depends on three different factors.
1. You must be a farmer
Schedule F is for farmers, but that doesn't just mean you need to grow crops. The definition of "farmer" used by the government includes ranchers and fish breeders, as well as homeowners who do things like keep chickens and earn income from selling eggs. 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.
According to the IRS:
"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.
2. Your farm is a business
For tax purposes, farming for a business is differentiated from farming as a hobby. Only farmers who operate as a business are required to file Schedule F.
To be considered a business, you must be engaged in farming for profit. This means that you've made money in at least three of the last five tax years, or two out of seven years for breeding or raising horses. However, even if you don't strictly meet this requirement, the IRS will consider other factors, such as whether:
- You operate your farm like a business.
- You make changes in an attempt to improve profitability.
- Farming is your main source of income.
- The time and effort you put into farming are substantial.
- Losses are either beyond your control or normal in the startup phase of farming.
- You made a profit from similar activities in the past.
- You expect to make a profit in the future from the appreciation of assets used in farming.
Hobby farms were subject to completely different tax treatment before the changes made in 2018 under the Tax Cuts and Jobs Act (TCJA). Under the TCJA, hobby expenses, are not deductible. Your tax burden will be lower if your farm or ranch qualifies as a business.
If your farm has not made a profit in several years, talk with a financial advisor before filing your taxes to ensure that you can successfully demonstrate that your farm is a business, rather than a hobby.
3. You are a sole proprietor
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.
If you and your spouse own and operate your farm together as an unincorporated business, and you share jointly in the profits, you must film Form 1065 instead.
You and your spouse would only file Schedule F if one of the two situations applies:
- You and your spouse wholly own your unincorporated farming business as community property. You can then be treated as a sole proprietorship instead of a partnership and file Schedule F.
- You and your spouse each materially participate as the only members of a jointly owned and operated farm, file a joint return for the tax year, and elect to be treated as a qualified joint venture. You would then each file a separate Schedule F.
How to Report Farming Income on Schedule F
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 use the crop method of accounting instead.
- Cash method of accounting: Income is reportable in the year you actually receive it.
- Accrual method of accounting: Income is reported in the year it was earned.
- Crop method of accounting: Revenues are included in your income when in the year you sell what you've grown.
To use the crop method of accounting, you must get special permission from the IRS.
If you use the cash method for calculating your income, you must also use the cash method for reporting your expenses. Likewise, if you use the accrual method for calculating your income, you must also use the accrual method for reporting your expenses.
You're permitted to use a combination of accounting methods as long as it is used consistently and clearly shows your income and expenses. If you do use a combination, work with a tax specialist to ensure that your income and expenses are reported according to IRS rules.
In addition to reporting farming income on your Schedule F, you will also need to report income from other sources such as federal disaster payments and money received from agricultural programs. Most agricultural programs will report income on Form 1099-G, a copy of which will be mailed to you.
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.
If you are reimbursed for any expenses in the year you claim them, reduce the expense by the amount of the reimbursement. If you are reimbursed in the following year, you will report the reimbursement as income.
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."
Livestock that you don't hold primarily for sale are considered business assets.
Special Rules for Estimated Tax Payments
Farmers need to 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.
If you are a calendar-year taxpayer and more than two-thirds of your income comes from farming in either the current or previous year, you qualify to make just one estimated payment by January 15 of the following year (for example, your estimated payment for 2020 would be due by January 15, 2021.
In 2019, 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, 2019 but prior to this date. Speak with a tax professional if you were.
If you are a calendar-year taxpayer and you file Form 1040 by March 2, you do not need to make estimated payments if you pay all the tax you owe at that time.
How to Complete and File Schedule F
Schedule F is 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, including insurance, utilities, employee benefit programs, 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, 1040-NR, 1040-SR, 1041, 1065, or 1065-B. Forms 1040-A and 1040-EZ are obsolete as of the 2018 tax year.
The key to preparing an accurate Schedule F is to keep excellent records of your income, assets, 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. 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 that is designed for business owners who are farmers.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.
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