FARM INCOME AVERAGING AGRICULTURE TAX TIPS

If you are engaged in a farming business, you may be able to average all or some of your current year's farm income by shifting it to the 3 prior years.

Farming Business
 A farming business is the trade or business of cultivating land or raising or harvesting any agricultural or horticultural commodity. This includes:

• Operating a nursery or sod farm;
• Raising or harvesting of trees bearing fruits, nuts, or other crops;
• Raising ornamental trees (but not evergreen trees that are more than 6 years old when severed from the roots);
• Raising, shearing, feeding, caring for, training, and managing animals; and
• Leasing land to a tenant engaged in a farming business, but only if the lease payments are (a) based on a share of the tenant’s production (not a fixed amount) and (b) determined under a written agreement entered into before the tenant begins significant activities on the land.

A farming business does not include:

• Contract harvesting of an agricultural or horticultural commodity grown or raised by someone else or
• Merely buying or reselling plants or animals grown or raised by someone else.

Who Can Use Farm Income Averaging?
You can elect to use farm income averaging if, in the year of the election, you are engaged in a farming business as an individual, a partner in a partnership, or a shareholder in an S corporation. You do not need to have been engaged in a farming business in any base year.

Who Cannot Use Farm Income Averaging

Corporations, partnerships, S corporations, estates, and trusts cannot use farm income averaging.

Use Schedule J (Form 1040) to elect to figure your current year tax by averaging, over the previous 3 years (base years), all or part of your current year taxable income from your trade or business of farming. Making this election may give you a lower tax if your current year income from farming is high and your taxable income for one or more of the 3 prior years was low.

If you owe alternative minimum tax (AMT) (figured without regard to farm income averaging), filing Schedule J will not reduce your total tax. Filing Schedule J may, however, increase your credit for prior year minimum tax in a later tax year.

This election does not apply when figuring your tentative minimum tax on Form 6251 (that is, you cannot average your AMT farm income). Also, you do not have to re-compute, because of this election, the tax liability of any minor child who was required to use your tax rates in the prior years.

General Instructions

Prior Year Tax Returns

• You may need copies of your original or amended income tax returns for the previous 3 years to figure your tax on Schedule J. If you do not have copies of those returns, you can get them by filing Form 4506. (See your Form 1040 instruction booklet to find out how to get this form).

Specific Instructions

Line 2 Elected Farm Income

To figure elected farm income, first figure your taxable income from farming. Taxable income from farming includes all income, gains, losses, and deductions attributable to any farming business. However, it does not include gain from the sale or other disposition of land.

Your elected farm income is the amount of your taxable income from farming that you elect to include on line 2. You do not have to include all of your taxable income from farming on line 2. It may be to your advantage to include less than the full amount, depending on how the amount you include on line 2 affects your tax bracket for the current and prior 3 tax years.

Your elected farm income cannot exceed your taxable income. Also, the portion of your elected farm income treated as a net capital gain cannot exceed the smaller of your total net capital gain or your net capital gain attributable to your farming business. If your elected farm income includes net capital gain, you must allocate an equal portion of the net capital gain to each of the base years. If, for any base year, you had a capital loss that resulted in a capital loss carryover to the next tax year, do not reduce the elected farm income allocated to that base year by any part of the carryover.

Additional Resources

Publication 225, Farmer's Tax Guide (PDF)

Form 1040 (Schedule J) Farm Income Averaging (PDF)

Inst. 1040 (Schedule J), Instructions (PDF)