There are special tax considerations that those in the business of farming must take into account. This publication, the second in a series of articles on taxes for farmers, focuses on income. The first entry was on Recordkeeping and Accounting.
Farmers may receive income from a variety of sources. Regardless of the source, farmers must report all income for income tax purposes, unless the income is explicitly excluded from taxation by law.
Farming income is typically reported on Schedule F of Form 1040, Profit or Loss From Farming.
Income from farming includes monies you receive from cultivating, managing, and operating a farm for the purpose of earning a gain or profit. Income can be whether your work the farm as an owner or a tenant.
Farming can include the raising of dairy, fish, fruit, livestock, or poultry. Farming also includes the running of a grove, nursery, orchard, plantation, ranch, or range.
Farm income on Schedule F includes amounts received from the sale of products raised on the farm for the purpose of sale or purchased for the purpose of resale. These products include but may not be limited to grains, livestock, and produce. In the case of products bought for resale, the profit reported on Schedule F is the difference between the selling price and the basis in the product, which is usually the cost you paid for the product.
Farm income reported on Schedule F does not include gains or losses from the sale or disposal of certain farm assets not held primarily for sale, including buildings, depreciable farming equipment, land, or livestock held for breeding, dairy, draft, or sport purposes.
The sale of livestock held for breeding, dairy, draft, or sport purposes is considered a business asset of your farm. The gain or loss from livestock held for one of these purposes is reported on Form 4797 rather than on Schedule F.
Sale by Agent
It is not unusual for farmers to use an agent to sell the products of their farm. When an agent sells farming products on your behalf, the income or loss is recognized by the farmer when the agents receives payment for the products, as receipt of payment by the agent is considered constructive receipt of the money for the farmer. The farmer does not wait until the agent has paid the proceeds to him to recognize income.
If you sell additional livestock than you would normally have sold as the result of drought, flood, or other weather-related conditions, you may not have to report income from the sale of the additional livestock until the following tax year.
In order to postpone the recognition of income from a weather-related sale, you must meet all of the following conditions:
- You must be in the principle business of farming
- You must use the cash method of accounting, meaning you normally recognize income and loss at the time you receive payment
- You can demonstrate you would not normally have sold the additional livestock except as a result of the weather-related condition
- The federal government designated the area containing your farm as eligible for assistance because of a weather-related condition
When postponing the recognition of income, you must determine the number of livestock you would have sold normally. One method of determining the normal sale of livestock is to compare your sale in the current year against the amount of livestock you have sold in previous years when there was not a weather-related condition.
How can I get additional help with my tax questions related to farming?
If you are a farmer and have additional questions or need further help concerning your income tax return, you can contact a tax attorney. Tax attorneys can pursue through education and training a variety of specialties, including taxation related to farmers. They will be able to answer your questions and be sure you follow the tax laws correctly and to minimize your tax.
You can get started today by calling the phone number at the top of this web site or by completing the form below. We can help you get in touch with a tax attorney who can give you the help you need.
Connect with Mark on Google+
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.