EA2 Study Unit 2.3 Income and Farms - Farming Income and Expense

Farming Income and Expense

• Gross income from farming includes gross farm income, gross farm rental income, and gains from the sale of livestock raised or purchased for resale.
• Gross farm income includes income from cultivating the soil or raising/harvesting agricultural commodities and gains from selling farm livestock. The basis of livestock is typically the cost of the animals. Income is reported on Schedule F.
• Rent from farmland is generally rental income unless the taxpayer materially participates in the lessee's operations. Otherwise use Form 4835 to report farm rental income.
• Gains from livestock used for draft, dairy, breeding, or sporting purposes are typically capital gains and are reported on Form 4797, not Schedule F.
• Farm products raised for sale and farm products bought for resale are reported on Schedule F. Assets not held for primary sale (e.g., livestock for draft, breeding, sport, or dairy), are also reported on Schedule F.
• Agricultural program payments (farm subsidies) are reported on Schedule F and are subject to self-employment taxes. Most government payments for conservation practices are included in income, but some cost-sharing programs are excluded.

Capitalization and Depreciation

• Certain expenses for producing real or tangible personal property, or for resale, must be included in inventory costs or capitalized. These include direct costs plus allocable indirect costs.
• Farmers can deduct depreciation on buildings, improvements, cars/trucks, machinery, and other permanent farm equipment.
• Depreciation is not allowed on homes, furniture, livestock bought for resale, or items in inventory. Specific recovery periods for different assets are shown in a table.

Section 1231 Gains

• Schedule F does not include gains/losses from sales of farm land (1231 property), depreciable farm equipment (1245 property), and buildings/structures (1250 property).

Farm Income Averaging

• Farmers may be able to average all or some of their current year's income by using income rates from the 3 prior years.
• Individuals, partners in partnerships, or shareholders in S corporations can sometimes elect farm income averaging, but not corporations, partnerships, S corporations, estates, or trusts.
• Filing a Schedule J with their income tax return is required if electing farm income averaging.

Weather-Related Gains on Sale of Livestock

• Gains from livestock sales due to weather-related conditions (like drought or flood) eligible for federal assistance, can be postponed up to 4 years.
• Farmers can choose to include the additional livestock sales gain from weather conditions in the next year's income instead of the current year to offset the added revenue.
• This election applies to all livestock, including breeding, dairy, sporting or draft animals.

Crop Insurance and Disaster Payments

• Crop insurance and disaster payments are typically included in income in the year they're received.
• It's permitted to include these income proceeds in a following tax year, if the crops were damaged during that year.

Estimated Taxes

• Taxpayers who earn at least two-thirds of their gross income from farming in the current or preceding tax year may have specific payment rules.
• These rules generally involve paying all estimated taxes by January 15th and filing the 1040 return by April 15th, or the smaller of 2/3 of current year's tax or 100% of previous year's tax and filing the 1040 return by March 1st.