Farm income is the amount earned from a farming business that typically gets reported separately from other types of income for tax purposes. Many different types of farming businesses exist, such as those that raise livestock, cultivate vegetables, or grow Christmas trees.
Learn more about farm income and how it works.
Definition and Examples of Farm Income
Farm income equates to the revenue earned from a farming business, which often gets reported on Schedule F as part of a personal tax return. A C corporation that owns a farm, however, would generally file a corporate income tax return that doesn’t go into all the detail on farm income that Schedule F does.
Farm income can include any amount earned by “cultivating, operating, or managing a farm for gain or profit, either as owner or tenant.” The definition of a farm for the purposes of reporting farm income can include a wide range of businesses.
Many businesses that grow crops or raise animals for food, textiles, or similar purposes can qualify as farms and generate farm income. A nursery that grows decorative plants for gardening can also count as a farm and have farm income.
How Does Farm Income Work?
Farm income works by calculating the amount that a farm business earns from several types of farming activities. Some examples can include selling:
- Livestock such as cows and pigs
- Fruits and vegetables
- Crops such as cotton
All of these types of farming activities can generate farm income, such as for individuals operating sole proprietorships, S corporations, single-member LLCs, and a few other types of entities that might run these businesses.
Note
There are exceptions to what is considered farm income. Income from activities such as landscaping, veterinary services, or dog breeding doesn’t count as farm income. Raising and selling livestock for breeding purposes is also an exception.
Farm income can also include several other sources of revenue, such as crop insurance proceeds or dividends from a farming cooperative.
Keep in mind that farm income is generally not the same as the net profit a farm generates. Instead, farm income equals the revenue from a farming business. Many types of farm expenses can be reported to offset some farm income to lower tax bills. These expenses often differ from what other types of businesses tend to have, which is partly what makes the profit or loss generated from farming unique. For example, farm expenses can include costs for feed, fertilizers, and seeds.
Farm Income Accounting
Farm income is often accounted for on either a cash or accrual basis. Under the cash accounting method, farm income counts as any farm revenue received within a calendar year. Under the accrual accounting method, farm income counts as any farm revenue that was earned within a calendar year but not necessarily paid that same year.
Note
Farmers may also account for farm income using what’s known as the crop method if they receive approval from the IRS. The crop method enables farmers who do not sell crops in the same year that they were planted to deduct the whole cost of crop production in the year that the crop then gets sold, rather than at the time of the initial expenditure.
Keep in mind that not everything related to a farm counts as farm income. A farm income might earn money that does not count as farm income, such as by selling land, buildings or depreciable farm equipment. Renting farmland also typically doesn’t count as farm income.
Just because something doesn’t count as farm income doesn’t mean that it doesn’t count as another type of income and needs to be reported as such. Renting farmland, for example, often counts as rental income.
A farmer might not do all the calculations for farm income and farm expenses themselves, as tax laws related to farm income can be a bit complex. However, understanding farm income can help farm businesses understand what records to keep.
Those who dive into more detail might be able to determine ways to operate their farming businesses with lower tax implications.
Key Takeaways
- Farm income is the amount a farm business—ranging from a fruit orchard to a poultry farm—earns in revenue.
- In addition to direct revenue such as selling crops, farm income can include earnings from other sources, such as crop insurance.
- Farm income generally gets reported separately to the IRS from other types of income.
