If you earn a living as a self-employed farmer, you may need to include a Schedule F attachment with your tax return to report your profit or loss for the year. The Internal Revenue Service defines “farmer” in a very broad sense—whether you grow crops, raise livestock, breed fish or operate a ranch.
Are you a cash or accrual farmer?
There are a few ways to report income and expenses from your farming activities.
- Cash method
You report harvest revenue in the year cash is received from buyers and deduct all farming expenses in the year you pay them.
- Accrual method
Essentially the opposite of the cash method, in that you record farming income in the year you finalize a sale—even if you don't get paid until the following year—and deduct costs in the year you become liable for payment, regardless of when you actually pay them.
- Crop method
You wait until the year you sell your crops to report the related income and expenses on Schedule F, if you obtain IRS approval first.
Farming profits to report on Schedule F
In addition to the money you earn from selling crops and livestock, Schedule F also reports other types of farming income, such as any crop insurance payouts, including:
- Federal disaster payments
- Money you earn through a farming cooperative
- Payments you get from an agricultural program
And if your profits aren't consistent from year to year, the IRS may allow you to spread your current year's farming profits over the last three years so that you don't end up paying high rates of tax in your successful years.
Deductible farming expenses
You can deduct any cost you incur that's an ordinary and necessary expense of farming on Schedule F to reduce the profit—or increase the loss—on which you'll owe taxes. Some of the expenses that farmers commonly deduct cover the cost of livestock and feed, seeds, fertilizer, wages paid to employees, interest paid during the year on farm-related loans, depreciation to recover a portion of equipment costs, utilities and insurance premiums.
Wrapping up your Schedule F
Schedule F ultimately computes the net farming profit or loss that gets reported on the designated line of your 1040. If you have a profit or a loss, it gets combined with the other non-farming income reported on your return and increases or reduces your taxable income. When you suffer a net operating loss—meaning you paid more in expenses than you earned for all of your income sources including non-farm income—you can use it to offset future farming profit.