OVERVIEW
As with all businesses, the IRS requires you to report the income and expenses involved with running that business, including a farm rental. If you're the owner of a farm but not the one actively farming the land, generally you'll report your income and expenses using IRS Form 4835. If you're a farmer who actually farms the land, however, you fall under a different tax classification even if you also own the land. The IRS provides instructions for Form 4835 as to whether you should be categorized as a farmer or a landowner.
Qualification for Form 4835
The IRS considers "material participation" to be the determining factor as to which farm income tax form you should file. If you're a traditional farmer who raises crops or livestock, you're considered a self-employed business person and you would file using Schedule F, Profit or Loss From Farming.
However, if you merely rent out your land to farmers and do not materially participate in the labor or management of the farming process yourself, you are considered a landowner, not a farmer, according to the IRS. Form 4835 is the way for non-participating farmland owners to report their farm income and expenses.
Income categories
Most landowners contract with farmers under a crop-share arrangement, in which "rent" is paid in crops or livestock produced by the farmer. Form 4835 only recognizes income to a landowner in the year that these crop or livestock shares are converted to cash.
Line 1 of Form 4835 is where you'd report any such income you receive from the production of grains, livestock, produce or other crops. Other types of income you'd report on Form 4835 include:
- Crop insurance proceeds
- Federal disaster proceeds
- Certain Commodity Credit Corporation (CCC) loans
- Cooperative distributions
- Agricultural program payments
- Other income, such as federal and state fuel tax credits or refunds
Once you calculate your gross farm rental income, you'll transfer that amount to Schedule E.
Expense categories
You can reduce you farm rental income with expenses that you pay in the year that you pay them including:
- Car and truck expenses
- Depreciation
- Employee benefit programs
- Freight and trucking
- Gasoline, fuel and oil
- Feed
- Fertilizers and lime
- Interest
- Seeds and plants
- Storage and warehousing
- Supplies
- Utilities
- Repairs and maintenance
As with most businesses, any expenses that can be reasonably attributed to your farm rental business are allowable expenses. You'll deduct your total expenses from your total farm rental income to determine your net taxable income, or loss, from the business. This amount appears on your Schedule E.
Schedule E and Form 1040
Ultimately, reporting your net farm rental income is essentially the same as reporting any type of rental real estate income on Schedule E, "Supplemental Income and Loss." Before you can transfer the amount from Schedule E to Form 1040, you'll have to add any additional "supplemental" income you may have, including income from:
- Royalties
- Partnerships
- S-corporations
- Estates
- Trusts
- Real estate mortgage investment conduits (REMICs)
Your combined supplemental income gets transferred to Form 1040. From there, your net income gets treated as ordinary income for tax purposes.
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