Farm income

Introduction

If you are a farmer and your farming business is a sole proprietorship, you must file Schedule F (entitled “Profit or Loss from Farming”) to report your agricultural business’s net profit or loss for the tax year.
Use Schedule F (Form 1040) to report farm income and expenses. File it with Form 1040, 1040-SR, 1040-NR, 1041, or 1065.

Examples: Livestock, dairy, poultry, fish, and fruit farmers as well as owner/operators of plantations, ranches, ranges, nurseries, or orchards are considered farmers for the purposes of Schedule F.

Meaning

Schedule F is used to report taxable income earned from farming or agricultural activities. This schedule must be included on Form 1040 tax return regardless of the type of farm income and whether it’s a primary business activity or not. Schedule F also allows for various farm-related credits and deductions.

Schedule F to file taxes

You should file Schedule F with your tax return depends on three factors.
⦁ You must be a farmer
⦁ Your farm is a business
⦁ You’re a sole proprietor

You must be a farmer:
⦁ Qualifying as a farmer doesn’t just mean that you grow crops. The government’s definition of “farmer” includes ranchers, fish breeders, and homeowners who do things like keep chickens and earn income from selling their eggs.
⦁ A farmer is anyone who pursues or receives income from cultivating crops and/or livestock, whether it’s on a farm, ranch, or range, or in an orchard.
Farmers don’t include veterinarians, pet kennels, wineries, or landscaping businesses, but nurseries that grow ornamental plants are considered to be farmers for tax purposes.

Your farm is a business:
⦁ Only farmers who operate as businesses are required to file Schedule F.
⦁ You must be engaged in farming for profit to be considered a business.
⦁ Farming is your main source of income.
⦁ The time and effort you put into farming are substantial.
⦁ You’ve made a profit from similar activities in the past

You’re a sole proprietor:
⦁ Schedule F is only used by farmers who are considered to be sole proprietors. Those who operate their farming businesses through a corporation or other business entity would report their incomes and expenses on Form 1120 instead.
You must file Form 1065 instead if you’re married, you and your spouse own and operate your farm together as an unincorporated business, and you share jointly in the profits. You and your spouse would only file Schedule F if one of 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 decide whether they want to operate and report their incomes on a cash or accrual basis, but farmers have a third option: They can use the crop method of accounting instead.
⦁ Income is reportable in the year you actually receive it with the cash method of accounting.
⦁ Income is reported in the year it was earned with the accrual method of accounting.
⦁ The crop method of accounting allows you to include revenues in your income in the year you sell what you’ve grown.

Farming profits to report on Schedule F

Schedule F also reports other types of farming income, such as any crop insurance payouts, including:
⦁ Federal disaster payments
⦁ Money you earn through a farming cooperative
⦁ Payments you get from an agricultural program

Deductible Expenses on Schedule F
You can deduct any cost you incur that’s an ordinary and necessary expense of farming on Schedule F to reduce the profit—or increase the loss—on which you’ll owe taxes. Some of the expenses that farmers commonly deduct cover the cost of livestock and feed, seeds, fertilizer, wages paid to employees, interest paid during the year on farm-related loans, depreciation to recover a portion of equipment costs, utilities and insurance premiums.

How to Complete and File Schedule F
Schedule F ultimately computes the net farming profit or loss that gets reported on the designated line of your 1040. If you have a profit or a loss, it gets combined with the other non-farming income reported on your return and increases or reduces your taxable income. When you suffer a net operating loss—meaning you paid more in expenses than you earned for all of your income sources including non-farm income—you can use it to offset future farming profit.

Payments Made to Third Parties

Schedule F also asks if you made any payments during the tax year that required you to file Form 1099 and if you have filed it. An example of a case where you would need to file Form 1099 is if you hired an independent contractor to perform more than $600 worth of work, such as transporting your produce to a weekly farmer’s market, for your farm business.

Conclusion

As noted above, farming is not an easy business. Although they are encouraged to work with accountants and attorneys, farmers must have some expertise in tax and business planning to make good decisions. 

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