Frequently, farmers use their equipment to help neighbors or perhaps local government entities with projects or tasks. The farmer has the equipment and special knowledge or skill that makes this work practical. Commonly this activity is referred to as custom hire or machine work. If the custom work is not substantial in relation to the farming business, it is generally not considered to be a separate trade or business. and the farmer may report this income on Line 7 of Schedule F. If the custom work is a separate business, the income derived from the activity is not farm income, and the operator must report the income on a Schedule C.
If the farmer or rancher is unincorporated (a sole proprietor, partner, or operator of a single-member LLC) and completes work and is paid $600 or more by another entity, he or she will receive an IRS Form 1099-NEC. The 1099-NEC generally will have the custom work amount reported in Box 1 of the form.
Example 1. As a favor, Ted bales hay for his elderly neighbor, Tom. Tom pays Ted for his work, machinery time, and fuel; this year the amount was $1,200. Tom issued Ted a Form 1099-NEC for amount of $1,200. Ted reports the income on Line 7 of Schedule F as illustrated below.
Example 2. Georgia contracts with the township in which she lives to mow road ditches with her tractor and shredder (bush hog). The township pays Georgia a flat fee of $2,000 per mowing and Georgia mowed 4 times this year. The township issues Georgia a Form 1099-NEC in the amount of $8,000 [4 x $2,000]. Georgia also farms vegetables which she sells at local farmer’s markets. Like Ted above, Georgia uses Line 7 on her Schedule F to report her custom hire income.
Example 3. Jose manages and operates a poultry farm. He has a pair of backhoes and trailers which he uses to custom dig foundations for local contractors. This year Jose generated $200,000 in income from custom work digging foundations in three nearby counties. He generated $50,000 of income from his poultry business.
Question: Can Jose report his custom hire income on his schedule F, Line 7?
Answer: Because Jose’s non-farm custom work generates significantly more income than the farm business, Jose should instead report his custom work on a separate Schedule C.
Note: There is no bright-line test for determining when a separate non-farm business must be reported on a Schedule C. If more than half of the income comes from the custom work, however, the farmer should report that income separately.
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.