Gross Farm Income Explained for Tax Reporting

The primary source of farm income is the sale of products. Reporting methods differ depending on if the items were raised on the farm or purchased for resale. For farmers using the cash method of accounting, these distinctions affect the final calculation of taxable income.

Sale of Livestock and Other Items Bought for Resale

When a farm sells livestock or other items it previously purchased, the reported income is the gross sales price minus the item’s original cost. This calculation is handled on Part I of Schedule F. The cost of the items is entered on line 1a, the total sales price on line 1b, and the resulting profit is calculated on line 1c.

Meticulous records of the purchase price for any items bought for resale must be maintained. This cost basis is necessary to reduce the taxable gain. Without proof of the original cost, the entire sales price could be considered profit. This category includes items like feeder cattle that are fattened for market or any other products purchased and then sold.

Sale of Livestock Raised for Sale

For cash-basis farmers, the entire sales price of raised livestock is included in gross income. This is because the costs associated with raising the animal, such as feed and veterinary care, are deducted as business expenses in the years they were paid. As a result, the animal has a tax basis of zero.

This income is reported on line 2 of Schedule F, “Sales of livestock, produce, grains, and other products you raised.” The gross sales amount is entered here without any subtraction for the cost of raising the animal, as those costs have already been accounted for as deductible expenses.

Sale of Produce, Grains, and Other Crops

Similar to raised livestock, the total income from the sale of produce, grains, and other crops is reported as gross farm income. The full amount received from these sales is entered on line 2 of Schedule F. For a cash-basis farmer, the expenses of growing these crops are deducted in the year they are incurred.

This treatment means the crops have a zero basis, and the entire sale price contributes to the farm’s gross income. No cost is subtracted from the sales price at the time of sale on Schedule F.

Sale of Livestock Held for Draft, Breeding, Sport, or Dairy Purposes

Livestock held for draft, breeding, sport, or dairy purposes are considered business assets rather than inventory. When these animals are sold, the transaction is reported on Form 4797, Sales of Business Property, not on Schedule F’s main income lines. This form is used to calculate the gain or loss and determine its character, which could be ordinary or capital.

Gains from these sales may be treated as capital gains, which can have favorable tax implications. To qualify for this treatment, cattle and horses must be held for 24 months or more. For other types of livestock, such as goats or hogs, the holding period is 12 months or more.

Government Payments and Insurance Proceeds

Farms often receive payments from government agricultural programs and insurance claims. These funds are a component of gross farm income and must be reported. The nature of the payment dictates how it is treated for tax purposes.

Agricultural Program Payments

Payments from agricultural programs, such as Price Loss Coverage (PLC) or Agriculture Risk Coverage (ARC), are taxable farm income. These payments are reported to the farmer on Form 1099-G, Certain Government Payments. The total amount from Form 1099-G should be entered on line 4a of Schedule F.

The full amount of these subsidies is included in gross income. You should reconcile the amounts reported on any Forms 1099-G received with the income reported on the tax return to ensure accuracy.

Conservation Program Payments

Farmers may receive payments for implementing conservation practices through programs like the Conservation Reserve Program (CRP). These payments are considered income and are reported on Schedule F.

Some cost-sharing payments from government conservation programs may be partly or fully excludable from income. This exclusion applies if the payment is for a capital expense and does not substantially increase the farmer’s annual income. If an exclusion is claimed, a statement must be attached to the tax return detailing the payment. The total payment is listed on line 4a of Schedule F, with the taxable portion entered on line 4b.

Crop Insurance Proceeds

Payments from crop insurance for damaged or destroyed crops are treated as income and reported on line 6a of Schedule F. A cash-basis farmer can elect to defer reporting the proceeds to the year following the damage. This is allowed if they can show that, under normal circumstances, the income from the damaged crops would have been reported in that following year.

To make this election, a farmer must attach a statement to their tax return for the year of the damage. This statement must include the farmer’s name and address, a declaration to defer the proceeds, the cause of the crop destruction, and the total payments received. The deferred income is then reported on line 6d of the subsequent year’s Schedule F.

Federal Disaster Payments

Federal disaster payments, received when a natural disaster prevents planting or causes crop losses, are also includible in gross farm income. These payments replace income that would have been earned from the crops and are reported on Schedule F.

Similar to crop insurance proceeds, a farmer may be able to postpone reporting income from disaster payments. The same rules apply: the farmer must use the cash method and establish that the income from the crops would have been reported in a year following the disaster.

Additional Farm Income Sources

Gross farm income includes other common activities that generate reportable income. These sources, including providing services, managing commodity loans, and receiving cooperative distributions, must be properly accounted for.

Custom Hire (Machine Work)

Income earned from custom hire, or machine work, is revenue from using farm equipment to perform services for others, such as planting or harvesting. This income is part of the farming business and is fully taxable.

All payments received for custom hire work are reported on line 7 of Schedule F. The expenses associated with this work, such as fuel and repairs, are deducted in the expense section of Schedule F.

Commodity Credit Corporation (CCC) Loans

Farmers may receive loans from the Commodity Credit Corporation (CCC) using a crop as collateral. Under Section 77 of the Internal Revenue Code, the farmer can choose how to treat the loan. The default treatment is as a loan, with no income recognized until the crop is sold or forfeited to the CCC.

Alternatively, a farmer can elect to treat the CCC loan as income in the year it is received. This choice is made by reporting the loan amount on Schedule F, line 5a. Once this election is made, it must be applied to all subsequent CCC loans.

Cooperative Distributions

Many farmers are members of agricultural cooperatives and receive distributions, which are reported on Form 1099-PATR, Taxable Distributions Received From Cooperatives. The most common distributions are patronage dividends, which are the member’s share of the cooperative’s net earnings.

The total distributions from Form 1099-PATR are reported on line 3a of Schedule F, and the taxable amount is entered on line 3b. Some distributions, such as for the purchase of personal items, may not be taxable. Review Form 1099-PATR to determine the correct taxable portion.

Rental Income

Income from renting farmland can be part of gross farm income, depending on the arrangement. If a landowner materially participates in the farming operation on the rented land, the rental income is reported on Schedule F. Material participation involves being active in the management and operational decisions of the farm.

If the landowner does not materially participate, cash rent is reported on Schedule E (Form 1040). Income from crop shares where there is no material participation is reported on Form 4835, Farm Rental Income and Expenses.

Calculating and Reporting Your Gross Farm Income

After identifying all sources of farm income, the final step is to aggregate and report them on the correct tax forms. The primary form for this is Schedule F (Form 1040), but certain sales require a different form.

Primary Reporting on Schedule F (Form 1040)

Schedule F is designed to capture a farm’s income and expenses. For cash-basis farmers, Part I is where most income is reported. Income from purchased livestock is calculated on line 1, while sales of raised products are on line 2. Cooperative distributions are on line 3, and agricultural program payments on line 4.

Other income sources have designated lines, such as CCC loans on line 5, crop insurance on line 6, and custom hire income on line 7. Any other farm-related income not fitting these categories is reported on line 8. The sum of these lines is calculated on line 9, which represents the gross income from farming.

Reporting on Form 4797

The sale of specific business assets is not reported on Schedule F’s primary income lines. As detailed earlier, income from selling livestock held for draft, breeding, sport, or dairy purposes must be reported on Form 4797. This form is also used for selling other business assets, such as farm machinery or land.

Final Calculation

For cash-basis filers, line 9 of Schedule F represents the total of all income sources reported in Part I. This figure is the starting point for determining the farm’s profitability.

From this gross income figure, all deductible farm expenses, detailed in Part II of Schedule F, are subtracted. The result is the net farm profit or loss, calculated on line 34. This net figure is carried to Form 1040 and contributes to the farmer’s overall taxable income.