Line 2 of Schedule F, is used to report all sales of agricultural production during the tax year which were grown by the farmer on owned or leased land engaged in a farming business. Examples of raised production are wheat, navy beans, canola, corn, soybeans, market calves, market feeder pigs, turkeys, and rainbow trout. The operative word is “raised”; implicit is that the farmer/rancher owns the production of annual crops/livestock/fish/poultry which is grown or husbanded in the farming business. Thus, the person who performs custom farming operations alone, such as combining, is not a farmer.
Line 2, Schedule F, is illustrated below.
Example 1. Amal raises figs and dates on her farm in California. She sells her annual production under a contract to a cooperative. This year her total production generated $500,000. Amal includes this income on Line 2.
Example 2. Jerome is a diversified farmer in Kansas. He grows wheat and grain sorghum (milo), as well as having a 300-head commercial cow herd and selling light feeder cattle in the late autumn. This year Jerome sold $150,000 of wheat, $250,000 of grain sorghum, and $200,000 of market calves. Jerome uses Line 2 to report his total raised farm production sales of $600,000.
Example 3. Susan raises azaleas and rhododendrons at her nursery in South Carolina. Susan has a contract with “big box stores” in the Mid-Atlantic states. This year she sells her azaleas and rhododendrons in 1-, 3-, and 5-gallon containers. Susan’s sales generated $1.5 million this year. Susan’s business is organized as a single member LLC, Susan reports her sales on Line 2.
Example 4. Justin raises crawfish in ponds in South Louisiana. He markets these crawfish through restaurants and roadside stands. This year he generated $350,000 in sales. Justin uses Schedule F, Line 2 to report his raised crawfish income.
Example 5. Renaldo harvests and bales pine straw for landscaping companies. Renaldo rents several hundred acres of Long Leaf Pine forests from local landowners. Pine straw is an annual crop generated by the trees. This year Renaldo sold $600,000 of pine straw bales. He reports his income on Line 2 of Schedule F.
Caution – Raised Breeding, Dairy, or Draft
An all too common error on farm income tax returns is that raised breeding, dairy, or draft animals are reported on line 2 of Schedule F. While it may be true that these animals were born, raised, and used on the farm, these are not “market” animals. Instead, they are producers of an annual product: calves, milk or power. A dairy cow, for example, is treated as a business asset under I.R.C. § 1231. I.R.C. § 1231 assets receive special treatment when the taxpayer disposes of them in the ordinary course of business. Since these are raised animals, their respective tax basis is zero, meaning, upon sale there is 100 percent gain. If the asset has been held for the proper holding period (for cattle, this is more than 24 months), the gain is treated as if it were capital gain and taxed at the preferential tax rates afforded capital gains of 0 percent, 15 percent, or 20 percent, dependent upon the marginal tax bracket of the farmer or rancher. These animal sales are reported on IRS Form 4797, Sales of Business Assets, discussed in a separate fact sheet. These sales are not subject to self-employment tax.
Example 6. Jose operates a dairy as a single-member LLC reporting his income and expenses on Schedule F. His milking herd averages about 1,000 cows. He has on average 600 baby to springing heifers and replaces about 200 – 250 milk cows per year from his replacement herd. Thus, at a long-term average of $750 per cull dairy cow, Jose generates $150,000 to $187,500 in cull cow sales. These animals, though raised on Jose’s farm, are not reported on Schedule F, but rather on Part I of IRS Form 4797.
Caution - Contract Production
Sometimes, although the farmer “raises” an agricultural product, the income may not be reported on Line 2. In the case of raising pigs or poultry as part of an integrated production system, the income received may best be reported on Schedule F, Line 8, Other Income. This is because the farmer does not own the pigs or poultry. The integrator owns the animals.
Example 7. Al operates a farrow-to-wean operation for a national integrator. Al owns the farrowing barns, provides labor, utilities and repairs to his buildings and equipment. The integrator owns the sows and piglets which the sows bear and birth. The integrator also provides feed and veterinary supplies. Al is paid on a “piglet delivered” basis with possibilities for premiums based on feed conversion and number of live pigs per sow delivered above the contracted target. Al is paid every two weeks based on piglets. AL receives a 1099-NEC for $425,000. Schedule F, Line 8 is generally the best place to report this income.
The Center for Agricultural Law and Taxation is a partner of the National Agricultural Law Center (NALC) at the University of Arkansas System Division of Agriculture, which serves as the nation’s leading source of agricultural and food law research and information. This material is provided as part of that partnership and is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.