The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Farm Income Not Cash Rents
Dec 27, 2012
Continuing our farm income averaging trend, we had a couple of readers ask if they could farm income average their cash rented ground. The short answer is no. In order to use farm income averaging, you must have "farm income" which is comprised primarily of the following items:
- Direct farm income from Schedule F,
- Flow-through farm income from partnerships and S corporations,
- Crop share income, regardless of whether the taxpayer materially participates, as long as there is a written agreement in place before the tenant begins significant activity on the land,
- Gains from the sale of farm personal property (sale of farmland is not included), and
- Wages a shareholder earns from an S corporation that is active in farming.
Cash rent income based upon a fixed rent are not allowed for farm income averaging. The use of a flex rental arrangement may or may not allow the farmer to use farm income averaging depending on the terms of the lease. Rents based on farm production (whether in cash or crop shares) qualify for farm income averaging, but many of the flexible rental arrangements that we have seen are usually a form of cash rent with an adjustment for market price changes, not production changes. Therefore, these types of rent arrangements would probably not qualify for farm income averaing.
As you can see, this can get fairly complicated, but if the Bush Tax Cuts do expire, making a change to your form of farm rented ground in 2013 may save you some money. As usual, review this with your tax advisor.