At the very end of a secluded rural road was Tanglewood Tracts, a small and old farm operated by an elderly couple named Walter and Martha.
Walter had a reputation for keeping careful track of every dollar that came into the farm. Martha, meanwhile, was in charge of keeping the records and managing the accounts. She was now 65 years old and had started to show more interest in the meaning behind the tax forms.
The farm was a small one. They had some livestock, cultivated some crops, and kept a roadside stall that sold eggs and tomatoes. And of course, there was a little dog that ran around the house - unfortunately for him, he was neither an employee nor even a dependent.
As the tax season was approaching, Martha looked through their books and asked Walter: “Do we need to submit the tax return this year?”
This straightforward question started a series of tax-related conversations based on the Form 1040.
Does a Small Farm Still Require a Tax Return?
It was not the size of Tanglewood Tracts that led to the need to file by Walter and Martha.
For the taxation period 2025, the requirement to file depends on factors like gross income, status of tax filing, and age. Taxpayers over the age of 65 are entitled to higher income thresholds since they have an extra standard deduction.
Further, there is another rule that is worth knowing for Martha.
As farming labor may generate self-employment income, there is another reason for filing. If a farmer earns $400 and more in net self-employment income, he has to file a tax return in a federal way and may have to pay self-employment tax as well.
In other words, Walter and Martha face the necessity to file a tax return with the best farming profits.
Where Does Farm Income Go on Form 1040?
Walter had another question:
"If we are to report everything on Form 1040, where will we log farm income?"
The answer is Schedule F (Profit or Loss from Farming).
Farm income, instead of getting recorded straight in Form 1040, is to be calculated by using the Schedule F.
For Tanglewood Tracts, farm income might include:
- Livestock sales
- Production and sale of grains and other agricultural products
- Custom farming or machine rental
- Payments from agricultural programs
- Crop insurance payouts
- Certain distributions from cooperative
However, the IRS does not care just about the revenues; eligible expenses of farming operations should also be recorded.
Walter produced his records for expenses incurred for feed, seeds, fertilizers, repairs, fuel, vet costs, and depreciation of the farm's machinery and facilities.
These costs of doing business will provide the farmer with an opportunity to reduce the income from the farm and to calculate the net profit or loss reflected in Schedule F.
This amount will go to Schedule 1 (Form 1040), Line 6, and become part of the taxpayer's income that he reports on Form 1040 afterwards.
Farm Profit Can Also Mean Self-Employment Tax
Martha continued to discuss this issue.
“Does receiving a profit on Schedule F tell us that we only need to look at the regular income tax?”
Not quite.
For example, a farmer could be liable for paying self-employment taxes on any net farm income earned through a sole proprietorship. This is where the Schedule SE comes in.
Self-employment tax can be defined as the taxation for Social Security and Medicare obligations owed by a person in case there is no employer from whom taxes were withheld.
Therefore, the net farm income generated by Tanglewood Tracts will require consideration of income tax as well as self-employment tax liabilities for Walter and Martha.
However, an important adjustment to the tax system needs to be acknowledged: a farmer can subtract half of the self-employment tax amount. In this way, the same amount will not be taxed twice.
If farmers experience lower revenues or losses during their business year, there might also be a chance to figure out their self-employment taxes using an optional method.
Are Selling Eggs and Tomatoes Really a Farm Business?
Martha continued to discuss this issue.
“Does receiving a profit on Schedule F tell us that we only need to look at the regular income tax?”
Not quite.
For example, a farmer could be liable for paying self-employment taxes on any net farm income earned through a sole proprietorship. This is where the Schedule SE comes in.
Self-employment tax can be defined as the taxation for Social Security and Medicare obligations owed by a person in case there is no employer from whom taxes were withheld.
Therefore, the net farm income generated by Tanglewood Tracts will require consideration of income tax as well as self-employment tax liabilities for Walter and Martha.
However, an important adjustment to the tax system needs to be acknowledged: a farmer can subtract half of the self-employment tax amount. In this way, the same amount will not be taxed twice.
If farmers experience lower revenues or losses during their business year, there might also be a chance to figure out their self-employment taxes using an optional method.
Turning 65 Can Change the Tax Picture
Walter chuckled.
“I thought we were just selling eggs and tomatoes by the side of the road. Does the IRS treat it like a business?”
Accordingly, it means that it must show the intention to earn profits and provide regular activities relating to income generation.
The IRS looks at a few factors, including, whether the business has been operated like a business, whether appropriate accounting records have been kept for the business, and whether the activity generates profits in a few years’ time.
This distinction is important because being treated as a hobby instead of a business can mean different tax consequences, such as restrictions on hobby losses.
For a CPA or tax expert dealing with farmers, this is an important matter that needs to be addressed early on.
What About Social Security Benefits?
Walter and Martha were also part of the Social Security benefits system.
Walter said, “Our Social Security payments can’t be affected by the farm.”
As unfortunate as it may seem, it actually can.
The Social Security payments that some receive are subject to tax, particularly per the level of their income.
The relevant calculation would be:
Adjusted Gross Income + Nontaxable Interest + Half of the Social Security payments made.
This amount ensures the correct assessment of the combined income with regard to the taxation of Social Security payments.
The level of taxability of Social Security payments may reach the amount of 85% in accordance with the level of income the taxpaying individual has.
This opens great opportunities for the farms in terms of taxation. If a farm business gets a big profit because of an increase in sales, that can lead to the increase of taxable amount of Social Security payments.
Because of that, farming businesses can use income modeling techniques and provide major sales beforehand if required. Planning for the Future
Can Their Dog Be Claimed as a Dependent?
Martha gazed at the pooch lying by the farmhouse door.
“What is he doing? He’s here everyday.”
Walter instantly disagreed with her opinion.
As per the IRS guidelines, generally, a dependent must satisfy the definition of either a qualifying child or a qualifying relative. Pets aren’t defined as dependents.
Nonetheless, it is possible, however, to differentiate between agricultural businesses.
In particular, if an animal is being used primarily for business purposes, for example, if it’s a real working or livestock guardian dog, relevant expenses might qualify as business costs.
However, a pet remains a pet for personal use, which eliminates any tax deduction for its owner.
Do Farmers Have to Make Quarterly Estimated Tax Payments?
At this point, Martha was turned toward her last concern.
"What if income from farming comes only in a particular season(s) in a year? Does the farmer have to make estimated tax payments every three months?"
There are some exceptions allowed for farmers to alleviate the overall unpredictability of farm revenue resulting from the seasonality of the agricultural industry.
Eligible farmers that earn two-thirds of their entire annual income from the agriculture sector might have the opportunity to skip the usual quarterly taxation.
This means that instead of making quarterly tax payments the farmer can choose to:
- File a tax return as well as pay taxes in full by March 1 of the following calendar year, OR
- Make estimated tax payments by the given date of March 1.
This enables a farmer household of Walter and Martha to have a significant cash flow advantage compared to a small business owner.
The Tanglewood Tracts Tax Return: Putting It All Together
At the end of the talk, Nancy made a very unclear array of forms regarding taxation more understandable.
A usual tax return in the case of a productive couple engaged in agriculture allows the couple to boast of:
- Form 1040/ Form 1040-SR: the document used as a regular income tax declaration for the federal government which serves to describe the taxpayer’s general situation.
- Schedule F: used to report the income from agricultural activities and show the expenses in case of farming activities.
- Schedule SE: used to find out the amount of self-employment tax owed.
- Schedule 1: used to show additional incomes and compensations, among which there is an income from farming activities presented in Schedule F.
- Schedule 1A: for deduction purposes for those who qualify.
- Schedule B: applicable when there is an interest source and qualified income.
The important lesson from Tanglewood Tracts is that farm taxation isn't simply about adding up the money earned from selling crops or livestock.
It involves understanding how farm income, deductible expenses, net profit, self-employment tax, Social Security benefits, senior deductions, estimated tax payments, and multiple IRS schedules connect to one another.
For Walter and Martha, the tax return was no longer just a form to complete. It was a story of how their farm operated throughout the year.
And for tax professionals working with senior farmers, understanding that story is often the key to preparing an accurate and complete Form 1040.
Disclaimer: This content is for general educational purposes only and is not personalized tax advice. Individual farming and tax situations can vary, so taxpayers should consult a qualified tax professional regarding their specific filing requirements, deductions, and estimated tax strategy.
