Schedule F – Profit/Loss From Farming Continued

Farming Income and SE tax

Income reported on Schedule F

1)Sales of livestock and other items bought for resale

2)Sales of livestock, produce, grains, etc. that taxpayer raised

3)Distributions from cooperatives in the year made available to members

4)Agricultural program payments such as commodity credit loans or certificates, crop insurance proceeds and disaster payments, feed assistance and payments, fertilizer and lime program payments, government payments for improvements, etc.

5)Custom hire machine work

6)Federal and state fuel tax credits

7)Conservation Reserve Program (CRP) payments

Farming income not subject to SE tax

1)Gains from sales of farmland or depreciable farm equipment

2)Gains from sales of livestock held for draft, breeding, sport or dairy purposes (report on Form 4797). Animals not held primarily for sale are considered business assets of the farm.

3)Tobacco quota buyout payments received under the 2004 Tobacco Reform Act.

Computing SE tax – 3 ways

1)Regular method

2)Farm optional method – is a way for a farmer to continue to accrue Social Security benefits when net profit for the year is small or is a loss.  It is available if Gross Income (GI) from farming is $6,720 or less or Net farm profit is less than $4,851.  Net earnings are the lesser of $4,480 (4.851 x 92.35%) or 2/3 of Gross Farm Income (not less than zero).

3)Nonfarm optional method – is available only if (1) net nonfarm profits are less than $4,851 and less than 72.189% of gross non-farm income and (2) net earnings from self-employment are at least $400 in two of the prior three years.  It can only be used five times.

Farm Rental Income – Rent received for the use of farmland is rental income, not farm income.  Such rental income is not subject to SE tax.

Determining material participation for SE tax – A landlord materially participates in the farming activity (and is subject to SE tax) if the landlord has an arrangement with the tenant for participation and the landlord meets any of the following tests:

 1)The landlord does any three of the following: (a) pays at least half the direct costs of producing the crop or livestock. (b) furnishes at least half the tools, equipment and livestock used in the production activities. (c) advises or consults with the tenant. (d) inspects the production activities periodically.

 2)Regularly and frequently makes management decisions substantially contributing to the success of the enterprise.

3)Works 100 hours or more spread over a period of 5 weeks or more in activities connected with agricultural production.

4)Does things that, considered in their totality, show material and significant involvement in production of the farm commodities.

Pasture income and rental

1)Rental income – Fee paid to the taxpayer for renting out the taxpayer’s pasture for the use and care of the renter’s cattle (Schedule E).

2)Farm income – Fee paid to the taxpayer for taking someone else’s cattle to the taxpayer’s pasture and for assuming responsibility for furnishing water, salt, etc. (schedule F).

Where to report farm rental income

Form 4835 – Rent is a share of crops or livestock produced by the tenant, and the taxpayer did not materially participate in farm operation or management.

Schedule E – Cash rent is a flat charge for use of farm land.

Schedule F – Farm operations in which the landlord materially participates, whether received in cash or as a crop share.

Schedule C – Rental of farm equipment as a trade or business.

Form 1040, line 21 – Personal property rental, not conducted as a trade or business (for example, infrequent rental of a tractor). Related expenses are deducted on line 36 of Form 1040 with the notation “PPR.”

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