Farm Income Not Cash Rent!
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.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
I just wanted to thank you for your site. I enjoy your posts. I am a new CPA in Iowa and am the proud daughter of a farmer. I have worked on the family farm and kept my father’s books for five years.