If you earn income from your farming or fishing business, you can avoid making estimated tax payments by completing the return and paying all taxes due on or before March 1st of the year in which the tax return is due. This rule generally applies if the farming or fishing income represents at least two-thirds of the total gross income of the current or previous financial year. If March 1st falls on a statutory holiday or weekend, you have until the next business day to file your return and pay your tax.
If you choose not to file your taxes by March 1st, you can make an estimated one-time tax payment by January 15th or the next business day if January 15th falls on a weekend or public holiday to avoid the estimated tax penalty. If these special rules do not apply, it may be necessary to make quarterly estimates of tax payments.
Let’s take a look at the individual Forms and filing procedures for Farming and Fishing Income.
Schedule J: Income Averaging for farmers and fishermen
The average income of farmers and fishermen is a way of balancing the weight of income tax over several years, reducing the effects of weak and good years. Schedule J is the IRS form used when you want to average your fishing or farming income.
When the income averaging is beneficial
You may want to consider the income averaging if your income from fishing and farming in the current fiscal year is significantly more than your income from any source in the past three years. Choosing to use the Schedule J form for your income averaging allows you to balance the current tax category with the categories from the previous year so that you don't have to pay taxes at a much higher rate this year. The income of the last three years, called base years, does not have to come from farming or fishing.
Farming business that is eligible for income averaging.
The IRS defines a farming business as a business engaged in marketing farmland produce or creating or harvesting any agricultural or horticultural product. This excludes the purchase and resale of plants or animals grown by another person or the contract harvesting of agricultural or horticultural products grown by another person. Renting land to a firm tenant is allowed for income averaging, as long as the rent payments are based on a portion of the tenant's output rather than a lump sum. This agreement must also be in effect before the tenant begins to cultivate.
Fishing and Income Averaging
Crew members of commercial fishing vessels are only eligible if their income is based on a portion of the catch.
Fishing involves the taking, catching, or harvest of finfish, crustaceans, mollusks, marine animals, and plants other than birds and marine mammals.
If you are involved in a dispute with Exxon Valdez as a plaintiff or beneficiary, you may be entitled to an income averaging from fishing.
If you own and rent a fishing vessel, you are only entitled to an average income if charter arrangements are made in connection with the catch.
Use of elected farm income with Schedule J
It is not necessary to use all of the taxable income from farming and fishing for the current year to calculate the average income, and it may be preferable to use only part of it. Whichever part of your income you include, it is called Selected Farm Income on Schedule J and may include gains or losses from the sale of property and assets used in your business. You cannot exceed the taxable income shown on Form 1040. Schedule J provides a guide in calculating selected farm income tax for the current year and the three base years for calculating average income.
Schedule F: Profit and Loss from Farming
If you make a living as a self-employed farmer, you may need to attach Schedule F to your income tax return to report your profits or losses for the year. The IRS defines "farmer" very broadly if he breeds, raises animals, raises fish, or runs a farm.
Are you an accrual or cash farmer?
There are several ways to report your farming income and expenses.
Accrual Method: This is the opposite of the cash payment method, as you record farm income in the year the sale ends, even though you won't get paid until the following year, and deduct costs in the year you become liable for the payment, irrespective of when you actually pay them.
Cash method: Report harvest income in the year the buyers' money is received and deduct all farming expenses in the year you pay it off.
Crop Method: You wait until the tax year you sell your crops to report the income and expenses listed in Schedule F if you obtain IRS approval first.
Farming profits to report on Schedule F
In addition to money made from the sale of crops and animals, Schedule F also lists other types of farm income, such as crop insurance payments, including:
Federal Disaster Payments
Money earned thanks to an agricultural cooperative
Payments received from an agricultural program
And if your income isn't constant from year to year, the IRS may allow you to spread the current year's farm income over the past three years, so you don't pay high tax rates during your years of success.
Deductible Farming Expenses
You can deduct any costs incurred that are a common farm expense and necessary on Schedule F in order to reduce the gain or increase the loss for which you are required to pay taxes. Some of the expenses that farmers usually deduct cover the cost of livestock and feed, seeds, fertilizers, wages paid to employees, interest paid during the year on farm loans, depreciation to recover part of the cost of equipment, utilities, and insurance premiums.
Wrapping up your Schedule F
Finally, Schedule F calculates the net farm gain or loss that is reported on the designated line of 1040. If you have a gain or loss, it is combined with other non-farm income reported on your return and increases or decreases your taxable income. When you experience a net operating loss, which means you paid more than what you earned for all sources of income, including off-farm income, you can use it to offset future business gains.
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