Schedule F (Tax Form 1040) Instructions – Farming Profit/Loss

Farming isn’t just about managing crops and livestock. Like any other business, it also involves paying federal income tax. Farms that operate as sole proprietors, trusts, partnerships, limited liability companies (LLCs), and S corporations use Schedule F to report their farming income and expenses.

What Is Schedule F?

Schedule F is the Internal Revenue Service form used to report money earned from:

• Selling crops and livestock
• Breeding fish
• Operating a ranch, nursery, or sod farm
• Crop insurance payouts
• Federal disaster payouts
• Money earned from a farming cooperative (Form 1099-PATR)
• Payments received from an agricultural program
• Pasture income received from taking care of someone else’s livestock

If you receive rental income from farmland that isn’t based on the production of the tenant, you should report income on Schedule E instead.

Only farms structured as sole proprietorships, trusts, partnerships, LLCs, or S corporations should use Schedule F. Farming businesses structured as C corporations file and pay taxes with Form 1120.

Pro tip: By using tax preparation software from a company like H&R Block, you’ll have confidence you’re getting every available tax deduction and minimizing your tax liability.

How to Complete the Schedule F Tax Form

The IRS Schedule F instructions provide a line-by-line explanation for how to complete the form. However, these user-friendly instructions can help you get started.

The first section of Schedule F asks for some basic information about the farming operation:

• Owner name and Social Security number (SSN)
• Principal crop or activity and code. You can find these on Page 2 of Schedule F.
• Accounting method. Small farms earning less than $1 million per year may use the cash method of accounting. Larger farming operations must use the accrual method. You can find more information on the cash versus accrual methods of accounting in IRS Publication 538.
• Employer identification number for the business (if different from the owner’s SSN)
• Whether you materially participated in the business. Generally, you materially participate in a business if you spend more than 500 hours working in the business during the year. If you’re an investor in the business but don’t work in it, the IRS considers the farm a passive activity, and you may not be able to use losses from the farm to offset other income. You can learn more about passive activity limits in IRS Publication 925.
• Whether the business must file any 1099 forms and if so, whether it will issue them

Schedule F, Part I

Part I of Schedule F is where you report farming income earned during the tax year.

If you use the cash method of accounting, Lines 1 through 7 provide space for entering different types of income farms typically receive, such as income from sales of livestock and produce, cooperative distributions, agricultural program payments, and crop insurance proceeds. If you receive farming income from other sources that don’t fit within the predefined categories, enter it on Line 8. Then enter your total income on Line 9.

If you use the accrual method, don’t enter income details on lines 1 through 8. Instead, calculate farming income in Part III and enter the result on line 9 of Part I.

Schedule F, Part II

Part II of Schedule F is for entering deductible farm expenses. As with the income section, there are several lines for entering common types of farming expenses, such as:

• Car and truck expenses
• Chemicals
• Depreciation
• Employee benefits
• Feed
• Fertilizer
• Gas, fuel, and oil
• Insurance
• Mortgage interest and other interest expense
• Labor
• Rent or lease
• Repairs and maintenance
• Seeds and plants
• Storage
• Supplies
• Real estate and other taxes
• Utilities
• Veterinary, breeding, and medicine

You can enter any business expenses that don’t fit into the lines provided on Lines 32a through 32f. Enter your total costs on Line 33, then deduct total expenses from total income and enter your net farm profit or loss on Line 34.

Schedule F, Part III

Only farms that use the accrual basis of accounting need to complete Part III, which is the section used to calculate farming income using the accrual method. Lines 37 through 42 provide space for entering some common sources of farming income. If you have any income that doesn’t fit into one of the predefined categories, enter it on Line 43, then enter the total income on line 44.

Complete lines 45 through 48 to report inventory of products like livestock, produce, and grains at the beginning of the year, inventory purchased during the year, and inventory at the end of the year. These inventory amounts help taxpayers calculate their cost of goods sold, which goes on Line 49.

On Line 50, calculate your gross income. Subtract Line 49 from Line 44, then carry the result to Line 9 in Part I.

Other IRS Tax Forms for Farmers

Schedule F isn’t the only form you may need to file your farming operation’s taxes.

Schedule J

Farming businesses can have good years and bad years. Rather than pay high tax rates in the good years and low tax rates in the bad years, the IRS allows farmers to average their income over the previous three years. To take advantage of averaging, complete IRS Schedule J.

The IRS Schedule J instructions guide you through the process of averaging your income.

Form 4835

If you receive rental income from a farm that is based on production, you need to file Form 4835. This form looks very similar to Part I and II of Schedule F, and instructions for completing it are included with the form. Attach Form 4835 to your Form 1040 or Form 1040NR.

Form 8995 or 8995A

The Tax Cuts and Jobs Act of 2017 created a new Qualified Business Income (QBI) deduction for business owners, including farmers. This deduction gives business owners a deduction worth up to 20% of their business income.

You use either Form 8995 or Form 8995-A to calculate the QBI deduction. Form 8995 is the simplest version, and you can use it if all of the following are true:

• You have qualified business income
• Your taxable income before the QBI deduction is less than or equal to $163,300 if your filing status is single, head of household, or qualifying widow or widower; $316,600 if your filing status is married filing jointly
• You are not a patron in a specified agricultural or horticultural cooperative

Schedule SE

In the eyes of the IRS, farmers are self-employed, so you must pay self-employment taxes on your farming profits. Self-employment tax is a self-employed person’s version of Social Security and Medicare taxes.

Calculate the amount of self-employment taxes you owe using Schedule SE.

Final Word

Farming is a complicated business, and navigating tax laws only makes it more complex. Fortunately, IRS Publication 225 has a lot of information about keeping tax records, accounting for farm income and expenses, and how the tax laws apply to farm operations.

Remember, if you use online tax preparation software like H&R Block to prepare and file your income tax return, the software walks you through a series of questions and fills out the appropriate forms.