Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

February 20, 2015

When the Long family emigrated from Switzerland in 1737, they settled in the colony of South Carolina.  At the time, the headright system was in place, and every person received 50 acres of land for making the journey across the Atlantic.  The Longs stayed in South Carolina, and the land remained in our family until my dad and his sister-in-law sold the last remaining four hundred acres about ten years ago.  (Somewhere in our files we still have that original grant paperwork.)  Four hundred acres may sound like a lot to native Californians, but the phrase “dirt cheap” actually means something in other parts of the country!

Anyway, my dad grew up on that farm raising animals, picking cotton, and then in high school, packing peaches for another farmer in the area.  As time rolled on, farming became tougher for small farms, and the government eventually started paying my grandfather to NOT farm, and plant trees instead!  What a deal!  That was fine for my grandfather as he also had an architectural practice already dividing his time.  I am sure the subsidies he received were part of some government plan aimed at decreasing supply and driving up prices for other farmers, and I am sure he had to report those on a Schedule F – Profit or Loss from Farming.

Schedule F is our topic today.  Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.

The header section of Schedule F is an information gathering area about the type of farming you do, your participation level in the business, and various other questions.  Similar questions can be found on Schedule C for businesses or Schedule E for rental or other supplemental income activities.

Schedule F is a two page form, and nearly half of that real estate is devoted to gathering income.  By comparison most other schedules in the tax return have a tiny section devoted to income gathering.  This is due to the wide variety of sources of farming income.

Section I covers income for cash basis farmers.  Cash basis simply means you declare income when you receive the money, and you deduct expenses when you pay out the money.  Section III on page two covers income gathering for accrual basis taxpayers.  This means income is declared when it is earned (not necessarily received), and expenses are deducted when incurred (not necessarily paid).

Farming has been at the root of American lives since the country was founded, and it is not always an easy or a consistent business to run.  As a result there are many special programs available to farmers (or non-farmers as in the case of my grandfather) as well as certain tax advantages.  Farmers may see income from all kinds of sources, many tied to government programs or insurance, such as direct payments, patronage dividends, counter-cyclical payments, price loss coverage payments, agriculture risk coverage payments, price support payments, market gain from the repayment of a secured Commodity Credit Corporation (CCC) loan gains, diversion payments, cost-share payments (sight drafts), crop insurance proceeds, federal disaster payments, etc.

Due to the unpredictability of nature, there are even special provisions available to farmers that allow them to average their income over a three-year period. This is done by completing Schedule J.

You can imagine being a little upset if instead of having your income spread evenly over two years and being in a top bracket of 15 percent in both years, that you make zero in one year due to a drought and double in year two due to wonderful rain and sunshine, and then wind up in a 25 percent top bracket!  Not only did you suffer the hardship of having no income one year, but then you ended up with a bigger overall tax bill on the same amount of income.

Another example of a favorable provision says that if you have to sell livestock due to weather-related conditions, such as a drought, you have the option of reporting the income in the year following the sale.  So you get to defer the income.  Your farm must be located in an area qualified for federal aid due to the weather-related condition.

Part II of Schedule F deals with gathering expenses.  Due to the length of time it takes to get many crops or animals into a productive state, there are a lot of very specific rules regarding deducting versus capitalizing farm expenditures.

For example, if a crop takes more than two years growing time before it comes to fruition, you generally must capitalize the costs during the period. In most cases you can make an election to expense the costs, however.  The instructions to Schedule F tell us, “you cannot make this election for the costs of planting or growing citrus or almond groves incurred before the end of the fourth tax year beginning with the tax year you planted them in their permanent grove.”  As you can tell, the rules can get very specific depending on what you are growing, and where!

Similar to a Schedule C business, if an unincorporated farm is owned and operated by a husband and wife in a community property state, such as California, they should split the income and expenses according to the work performed and file two Schedule Fs.  This assists with filing two Schedule SEs for self-employment income for each.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.