Despite having a largely uniform tax code system that assesses income tax on fixed brackets, the Internal Revenue Service doesn’t treat all income equally. Reporting income becomes particularly intricate for sole proprietors and self-employed workers. Somewhere between the two lie farmers responsible for filing IRS Schedule F.
What is Schedule F?
IRS Schedule F is used to report taxable income earned and expenses paid on farming or other agricultural enterprises. If you are a farmer and your farming or agricultural business is legally classified as a sole proprietorship, you are required to file Schedule F to report your business’s net profits or losses for the year.
Who is required to file Schedule F?
According to the IRS’ official definition, a farmer is any taxpayer who receives income from the harvesting and cultivation of crops and/or livestock. Those in the business of operating or managing a farm either as owner or tenant are also considered farmers and will be required to file Schedule F.
To elaborate, the IRS Publication 225 considers the following agriculturalists as legal farmers:
- Livestock, poultry, dairy, and fish farmers
- Fruit and nut farmers
- Owners or operators of ranches, nurseries, ranges, orchards, and groves
It is important to note that Schedule F is used only by farmers who are considered to be sole proprietors. The sole proprietorship title applies to farmers who own the business and are personally responsible for its debts and expenses. However, farmers who operate their businesses through a corporation or other type of business entity are required to report taxable income and expenses on IRS Form 1120.
Schedule F Instructions
Schedule F is comprised of four key parts:
- Part I. Farm Income – Cash Method
- Part II. Farm Expenses – Cash and Accrual Method
- Part III. Farm Income – Accrual Method
- Part IV. Principal Agricultural Activity Codes
Depending on how you complete your accounting—either cash method or accrual method—you may or may not have to complete Part I and Part II. Those who use the accrual accounting method can skip ahead to Part III.
Be sure to carefully assess each line you are required to provide information for as there are many intricate details the IRS needs in order to accurately determine your total liability.
Pro-tip: In order to properly prepare for a perfectly accurate Schedule F, you must keep your records in exceptional order throughout the year. You’ll want to keep all records of your income, livestock, crops, and other assets and expenses in a safe, organized space to best ensure you’re able to source the information you need come tax season.
Farm Tax Deductions on Schedule F
The same tax deduction rule applies to ordinary businesses as it does for farming businesses: deductible costs and expenses must be considered “ordinary and necessary” to claim them on Schedule F. This universal rule is designed to ensure that virtually all farmers claim the same expenses across the board.
There are, in fact, a number of deductions available to farmers which can be found listed in Part II of Schedule F. Some of these tax-deductible expenses include:
- Veterinary costs for livestock
- Insurance (health insurance exempt)
- Employee wages
Reporting Profits and Losses on Schedule F
Because the business of farming is particular in its methods of determining income and expenses, the IRS requires that a Schedule F be filed with the standard Form 1040 tax return for every year in which farming profit or losses occur.
It is important to note that profits and losses from farming are only required to be reported on the IRS Schedule F if the farming activity is a for-profit endeavor. Farming is considered a for-profit endeavor if the farming activity has produced a profit for three of the prior five years. If there is an insufficient history of income produced by the farming activity, the IRS will consider the particular facts and circumstances of the individual case to determine whether it will be treated as a for-profit endeavor.
If the farming activity is not considered for-profit, it will be considered as a hobby and the losses claimed from farming will only be allowed to the extent that they offset any profits gained. Losses incurred that are associated with hobby income are reported on the Schedule A with income reported on the Form 1040 and should not be reported on the IRS Schedule F.
Once the IRS Schedule F is completed, all losses are deducted from the income received to determine the net income of the farming activity. This income is then reported on the first page of the Form 1040 and included in the total income earned for the tax year.
Profits and losses that are reported on the IRS Schedule F can be determined through multiple accounting methods which have different advantages for different situations. In addition to the IRS Schedule F, other filings may be required for activities that are related to farming, but are accounted for independently of the actual farm (e.g. Form 2290 for Heavy Vehicles).
Wrapping up IRS Schedule F
For further assistance, please contact our team of tax professionals at Community Tax to assist you in determining whether filing the Schedule F is appropriate and in preparing Schedule F to fully minimize the tax liability of your farming business. Call us today at (844) 352-4896.