Schedule F is a tax form used by individuals to report profit or loss from farming. It accompanies Form 1040, the individual income tax return. Farmers use this schedule to calculate their net farming income, which is subject to both income tax and self-employment tax.
Who Needs to File Schedule F?
Your client must file Schedule F if they are:
- Sole proprietors engaged in farming.
- Tenants or sharecroppers earning income from cultivating land.
- Operators of livestock, dairy, poultry, fish, fruit, or truck farms.
- Engaged in agricultural or horticultural activities for profit.
This excludes hobby farms, which are reported differently (on Schedule A if itemized).
Key Parts of Schedule F
Part I: Farm Income – Cash Method Includes:
- Sale of livestock, produce, grains, and other products.
- Cooperative distributions.
- Agricultural program payments (e.g., USDA subsidies).
- Custom hire (machine work) income.
- Other income (e.g., breeding fees).
Part II: Farm Expenses Deductible expenses include:
- Feed, fertilizer, and seeds.
- Labor (excluding the farmer’s own labor).
- Depreciation on farm equipment and property (often calculated using Form 4562).
- Repairs and maintenance.
- Gasoline, fuel, and oil.
- Insurance and mortgage interest.
- Utilities and rent or lease payments.
- Conservation expenses.
Note: Personal expenses and the value of unpaid family labor are not deductible. Part III: Farm Income – Accrual Method Used by farmers who account for income when earned (not received). Includes inventory accounting.
Special Considerations
Self-Employment Tax Net income from Schedule F is typically subject to self-employment tax using Schedule SE. Depreciation and Capital Improvements Use Form 4562 for depreciation. Improvements with useful life over 1 year (like barns or irrigation systems) must be capitalized and depreciated. Government Payments Payments like Conservation Reserve Program (CRP) income may have specific tax treatments, especially for retired farmers. Disaster and Insurance Payments These may qualify for deferral under certain conditions. See IRS Publication 225 for details.
3 Keys to Farm Losses
Losses may be subject to passive activity loss rules, hobby loss rules, or at-risk rules. Large losses may trigger scrutiny or limitations. A net loss on Schedule F can reduce a taxpayer’s overall income and tax liability, but the IRS applies various rules to limit or disallow these losses if the farming activity doesn’t meet specific thresholds or qualifications. These rules are meant to prevent abuse and ensure the taxpayer is genuinely running a business rather than engaging in a personal or hobby activity. 1. Passive Activity Loss (PAL) Rules Under IRC §469, a passive activity is any business in which the taxpayer does not materially participate. For example, a taxpayer who owns a farm but hires a manager and only visits occasionally. The IRS may consider this a passive activity, and losses would be suspended until passive income is generated or the activity is disposed of.
- Rental farming or absentee ownership may be considered passive.
- If the activity is passive and generates a loss, that loss can generally only offset passive income, not active (e.g., W-2) or portfolio (e.g., interest/dividends) income.
Additionally, a farmer must meet one of the seven IRS tests (see Publication 925) to qualify as materially participating — most commonly:
- Working more than 500 hours per year on the farm.
- Being the only person who substantially participates in the activity.
- Participating at least 100 hours and more than anyone else.
2. Hobby Loss Rules (IRC §183) If the farming operation is not engaged with a profit motive, it may be deemed a hobby, and losses are not deductible beyond the income earned. If the activity shows a profit in at least 3 of the last 5 tax years, it is presumed to be for profit. The IRS uses a facts and circumstances test with 9 factors, including:
- History of income or losses.
- Effort to make the activity profitable.
- Dependence on income for livelihood.
- Expertise or advice sought.
- Businesslike operation (records, marketing, etc.).
3. At-Risk Rules (IRC §465) Even if a farmer materially participates, they can only deduct losses up to the amount they have “at risk” in the business.
- Cash or property personally invested.
- Loans personally liable for.
- Certain amounts borrowed for which the taxpayer is personally at risk.
- Disallowed losses can be carried forward and used in future years when additional at-risk amounts are added or income is generated.
- Loans that are nonrecourse (e.g., where the lender’s only recourse is the property securing the loan) usually don’t count unless the loan is qualified nonrecourse financing secured by real property.
