Farmers may lower taxes by averaging income

This article was provided by the IRS and printed to assist the agency in publicizing a filing option available to farmers. The printing of this article should not be taken as an endorsement of this filing option. Farmers are encouraged to consult with their accountant or a tax professional to see if this option works for their business.

Farmers may want to consider Farm Income Averaging when farm income for the current year is high and taxable income from one or more of the three prior years was low. The provision, included in the Taxpayer Relief Act of 1997, was designed to smooth out economic disparities that farmers experience from year to year.

Farm Income Averaging is not automatic. In order to reap the savings, qualifying farmers must elect to file Schedule J, Farm Income Averaging, along with their 1040 U.S. Individual Income Tax Return Form.

To qualify, a person must engage in the trade or business of cultivating land or raising or harvesting any agricultural or horticultural commodity. This includes leasing land to a tenant if the lease payments are based on a share of the tenant’s production and determined under a written agreement before the tenant begins significant activities on the land.

It is not necessary to be engaged in a farming business in any of the three base years to qualify for Farm Income Averaging. Qualified farmers can average all or part of their current year farm income over the previous three years. The amount of income chosen for taxation at base year rates is called the Elected Farm Income (EFI). Any type of income attributable to a farming business can be designated as EFI including operations and capital gains from the sale, liquidation or other disposition of a farming business.

Those who elect Farm Income Averaging subtract their EFI from their taxable income for the current year and add one-third of it to the taxable income for each of the three base years.

Originally following the enactment of Farm Income Averaging, a negative amount could not be entered as a base year income. In 2000, changes were made to the method to allow the entry of a negative taxable income for a base year. This change was retroactive to 1998 and 1999.

Anyone who may have benefitted from Farm Income Averaging for a previous year but who failed to make the election should consider filing an amended return. The deadline for filing a refund claim is three years from the date the original return was filed or two years from the date the tax was paid, whichever is later.

The IRS offers several resources to assist individuals and tax professionals in making informed decisions about the Farm Income Averaging election such as Publication 225, Farmers Tax Guide. For more information visit www.irs.gov or call 1-800-829-1040 for general tax assistance; 1-800 829-4933 for business and specialty tax assistance.

Georgia Farm Bureau Farm Records Management offers fee based services to GFB members including bookkeeping, payroll, and tax preparation. If you would like to discuss your farm income tax or record keeping needs with a member of this staff call 1-800-342-1192.