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Publication 225
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Farm Income AveragingIf you are engaged in a farming business, you may be able to average all or some of your farm income by allocating it to the 3 prior years (base years). This may give you a lower tax if your income from farming is high and your taxable income from one or more of the 3 prior years was low. The term farming business is defined in the instructions for Schedule J (Form 1040). Who can use farm income averaging? You can use farm income averaging to figure your tax for any year in which you were engaged in a farming business as an individual, a partner in a partnership, or a shareholder in an S corporation. Services performed as an employee are disregarded in determining whether an individual is engaged in a farming business. However, a shareholder of an S corporation engaged in a farming business may treat compensation received from the corporation that is attributable to the farming business as farm income. You do not need to have been engaged in a farming business in any base year. Corporations, partnerships, S corporations, estates, and trusts cannot use farm income averaging. Elected Farm Income (EFI)EFI is the amount of income from your farming business that you choose to have taxed at base year rates. You can designate as EFI any type of income attributable to your farming business. However, your EFI cannot be more than your taxable income, and any EFI from a net capital gain attributable to your farming business cannot be more than your total net capital gain. Income from your farming business is the sum of any farm income or gain minus any farm deductions or losses allowed as deductions in figuring your taxable income. However, it does not include gain from the sale or other disposition of land. Gains from the sale or other disposition of farm property. Gains from the sale or other disposition of farm property other than land can be designated as EFI if you (or your partnership or S corporation) used the property regularly for a substantial period in a farming business. Whether the property has been regularly used for a substantial period depends on all the facts and circumstances. Liquidation of a farming business. If you (or your partnership or S corporation) liquidate your farming business, gains on property sold within a reasonable time after operations stop can be designated as EFI. A period of 1 year after stopping operations is a reasonable time. After that, what is a reasonable time depends on the facts and circumstances. EFI and base year rates. If your EFI includes both ordinary income and capital gains, you must allocate an equal portion of each type of income to each base year to figure the tax on EFI. For example, you cannot allocate all of the capital gains to a single base year. How To Figure the TaxIf you average your farm income, you will figure your tax on Schedule J (Form 1040). Negative taxable income for base year. If your taxable income for any base year was zero because your deductions were more than your income, you may have negative taxable income for that year to combine with your EFI on Schedule J. Schedule J for 1999. Although the Schedule J for 1999 did not allow you to use negative taxable income for a base year, you can file an amended return on Form 1040X to do so. If you did not use Schedule J for 1999 and this change would make using it beneficial, you can amend your return to use it. If you used Schedule J for 1999 and your taxable income for that base year was zero, you can amend your return to refigure your tax. If you file an amended return to make the changes discussed above, you must generally do so within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. More information. For more information, see the Schedule J instructions. Filing status. You are not prohibited from using farm income averaging solely because your filing status is not the same as your filing status in the base years. For example, if you are married and file jointly, but filed as single in all of the base years, you may still average farm income. Effect on Other Tax DeterminationsYou subtract your EFI from your taxable income and add one-third of it to the taxable income of each of the base years to determine the tax rate to use for income averaging. The allocation of your EFI to the base years does not affect other tax determinations. For example, you make the following determinations before subtracting your EFI (or adding it to income in the base years).
Tax on Investment Income of Child Under 14If your child's investment income is more than $1,500, part of that income may be taxed at your tax rate instead of your child's tax rate. If you use farm income averaging, figure your child's tax on investment income using your rate after allocating EFI. You cannot use any of your child's investment income as your EFI, even if it is attributable to a farming business. For information on figuring the tax on your child's investment income, see Publication 929, Tax Rules for Children and Dependents. Alternative Minimum TaxYou cannot use income averaging to determine your alternative minimum tax (AMT). When figuring your AMT, the regular tax you subtract from your tentative minimum tax is the tax you computed using farm income averaging. This may cause you to owe AMT or increase your AMT but, generally, it will not increase your total tax. Credit for prior year minimum tax. You may be able to claim a tax credit if you owed AMT in a prior year. See chapter 14. Schedule JYou can use farm income averaging by filing Schedule J (Form 1040) with your timely filed (including extensions) return for the year. You can also use farm income averaging on a late return, or use, change, or cancel it on an amended return, if the time for filing a claim for refund has not expired for that election year. You generally must file the claim for refund within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. - Continue - |