Accurately Handling Farm Income

Farmers, such as you, may have multiple types and sources of income within a single tax year. Some items of income that arise in connection with the business of farming are subject to special tax rules. These include:

• sale of farm products;
• rent and crop shares;
• agricultural program payments;
• easements and rights of way;
• crop insurance proceeds;
• income from farm cooperatives;
• government payments;
• cost-sharing conservation program payments;
• loans from the Commodity Credit Corporation;
• breeding fees;
• discharge of indebtedness; and
• bartering.

This diversity of income may be challenging to identify, and substantiate. In addition, the accuracy for reporting income requires an understanding of the special tax rules that determine the year and amount to report. For example, if you use the cash method of accounting, you may elect a one-year deferral of income from the sale of livestock due to drought under certain circumstances. You must make an election to tax advantage of this favorable tax treatment. Also, if you receive loans from the Commodity Credit Corporation, you may report the loan proceeds as income when received or wait until the commodity is exchanged. The decision to report or defer income depends on the overall tax liability for the years involved.

The appropriate treatment of taxable income is also a consideration that may have a significant impact on your tax liability. The rent you receive for the use of farmland is generally rental income. However, if you materially participate in the farming operations on the rented land, then the income from rent is deemed to be farm income. Rental income is passive income, which means it is not subject to self-employment tax. However, farm income is subject to it. Whether or not you materially participate is determined based on a number of factors.

The farm income rules are very complicated. Thus it is important that we thoroughly review and discuss your reporting requirements and available options. Please contact our offices to arrange an appointment at your earliest convenience.