Whether you make your living off of a farm, or just work your farm for fun, you are required to file a schedule F to report any income that farm produces. The good news is you can also use some of the expenses to run the farm in order to help offset some of the income. The schedule F can be a bit tricky at first glance, however if you follow these simple steps, you will get through it just fine.
Items you will need
- Farm Income Records
- Farm Receipts
- Schedule F
- Form 4797
- Form 1040
Determine what method of accounting you will use for your farm. You can choose between cash and accrual however you should make this decision wisely. Accrual means that your income and expenses are recorded when they are earned or when the expense is incurred, not when you actually receive or spend the cash. If you are a cash basis reporter you record the transaction when the cash changes hands. The method you choose dictates when a farm bill can be written off.
Determine how you are going to keep track of your records. Are you going to throw them in a shoebox, or track them in your computer using an accounting program? The IRS states “a farmer, like other tax payers, must keep records to prepare an accurate income tax return and determine the correct amount of tax” (www.IRS.Gov ret. August 15, 2009). They really don’t give you a set of rules to follow; they just instruct you to keep accurate records. Organize them for this schedule and keep them that way for future returns.
Now that you have your records together it is time for the schedule F and recording of income. Before starting however, you must first determine what you are selling. If you own a cow for instance and sell the milk it produces, that cow is an asset and goes on a different form called a 4797. The proceeds from the sale of the milk itself however get recorded as income on our schedule F. If on the other hand you are raising the cow to sell, then the income from that sale would be recorded on the schedule F.
Determine your expenses and get them categorized. The IRS allows for a wide array of expenses to be used to offset the income earned from your farm. According to the IRS, any and all expenses that are “ordinary and necessary” to operate a farm for profit can be deducted. So you must determine what you are making the income from in order to determine what expenses can be written off. In other words, as in step three we are selling milk. If I also raised chickens on my farm for my own eggs and I am not selling them, then I cannot deduct my expenses for these chickens as a farm expense.
Fill out part two on schedule F. This is where your expenses are listed; it is also where you must determine a proper allocation for personal and farm expenses. The IRS realizes most farmers live on their farm and many of the expenses, such as electricity, get intermingled with personal expenses. A reasonable method of allocation is what they require so it is up to you to determine this.
Review your work and go over the numbers twice. The net profit for this return flows through to your 1040 tax return and you will be taxed on these profits. It is important to verify your numbers to insure that you are deducting everything allowable for the farm.
• A farm has many complex rules they must follow in order to properly file a schedule F. Publication 225 should be reviewed thoroughly prior to attempting to fill out this schedule.
• Review all the data you enter into this return and verify your math calculations prior to sending it to the IRS.
• Talk with a tax professional or give the IRS a call, they will gladly answer any questions you have regarding this schedule. Their number is 1-800-829-1040 and their hours of operation is Monday –Friday 7am to 10pm your local time.
Only deduct what is reasonable to the operation of your farm. It is always better to be conservative than to have a deduction denied later and have to pay penalties and interest.