The
Berry DisPatch
Newsletter of the Wisconsin
Berry Growers Association
OCTOBER, 2004
A provision in the
Taxpayer Relief Act of 1997 allowed farmers to elect to compute their tax
liabilities by averaging, over the prior three years, all or a portion of their
taxable income from farming. This provision
was designed to smooth out the economic disparities that farmers experience from
year to year.
Farm Income Averaging may
not apply to all farmers and is not automatic for those who do qualify. Farmers who do
qualify need to make this election when they file their Form 1040 in order to
reap the tax savings offered by this provision.
Who can qualify for
income averaging?
You can qualify for
income averaging if you engage in the trade or business of cultivating land or
raising or harvesting any agricultural or horticultural commodity including:
Operating a nursery or
sod farm Raising or harvesting trees bearing fruits, nuts, or other crops
Raising ornamental trees (but not evergreen trees more than 6 years old when severed from the roots,
Raising, shearing,
feeding, caring for, training and managing animals and
Leasing land to a tenant
providing the lease payments are:
Based on a share of the
tenants production. Determined under a written agreement before the tenant
begins significant activities on the land
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
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.
Note: You do not
need to have been engaged in a farming business in any base year.
How income averaging
works
If you are engaged in a
farming business, you may be able to average some or all of your income by
allocating it to the 3 prior years (base years). The farm income averaging
method was changed in 2000 to a method more favorable for farmers. This may lower
your tax amount if your income from farming is high and your taxable income from
one or more of the 3 prior years was low.
Note: The method was changed to allow the inclusion of
negative income (where deductions were more than your income) when identifying
base years. Income
that you chose to have taxed at the lower (base year) rates is called Elected
Farm Income (EFI). You
can designate as EFI any type of income attributable to your farming business
including operations, and capital gains from the sale, liquidation, or other
disposition of your farming business. See Publication 225, Farmers Tax Guide, for more information and
limitations
Why should I income average?
Income averaging could
save you substantial tax dollars by having your EFI taxed at
a lower tax rate. The
net effect of income averaging is that you subtract your EFI from your taxable
income in the current year (which is being taxed at a higher rate) 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
to the base years does not affect other tax determinations.
When do I have to make
the decision to income average?
Making the election to
income average is very convenient. You can use farm
income averaging by filing Schedule J (Form 1040) with a timely filed return for
the current year. You
can also use farm income averaging on a previously filed return. If you didn’t
use income averaging in past year, there is still time to go back and see if you
can benefit from this election by filing an amended return. The deadline for
filing a claim for refund is three years from the date the original return was
filed or two years from the date the tax was paid, whichever is later. Resources
IRS has several resources
to assist you and your tax professional in making an informed decision as to
whether income averaging will lower your tax. Additional
information on making the election to income is readily available from the on
the Internet 24 hours a day and 7 days a week. http://www.irs.gov/businesses/small/industries/article/0,,id=99020,00.html link to farm income averaging page on irs.gov
If you still need
assistance, you can call our help lines at: Non-Corporate or Partnership
taxpayers: 1-800-829-1040.
Corporate or Partnership
taxpayers
1-800-829-4933
Tax practitioners:
1-866-860-4259