Farmers total all expenses reported on Part II of the Schedule F and report the total on Line 33, Schedule F.
Example 1. Georgia has $652,435 of total allowable farm expenses this year. She reports this total on Line 33, Schedule F.
Net farm profit or loss is reported on Line 34, Schedule F. This is calculated by subtracting Total Expenses (Line 33, Schedule F) from Gross Income (Line 9, Schedule F).
Example 2. Alfredo reports $895,345 of Gross Income from farming on Line 9, Schedule F and $767,562 of Total Expenses on Line 33, Schedule F. Alfredo’s net farm profit is $127,783, reported on Line 34, Schedule F.
Alfredo’s Net Farm Profit, $127,783, is the starting point for calculating his self-employment tax on IRS Schedule SE.
Farm Loss
If total expenses are more than gross farm income, the farmer generally has a net farm loss. However, farmers do not enter a loss on Line 34 until they have applied the at-risk rules and the passive activity loss rules and the at-risk rules. Passive activity loss (PAL) rules are explained in the Instructions to Form 8582 and Publication 925. Farmers are only subject to PAL rules if they do not materially participate in their farming activity. The at-risk rules limit the ability to claim a loss for activities in which the farmer is not at-risk.
Farmers check Line 36, Box b only if they have amounts invested in the farming activity for which they are not at risk. This would include, for example, nonrecourse loans. If the passive activity loss rules do not apply, and the farmer checks Line 36, Box a (all investment is at risk), the net loss is the difference between gross farm income and total expenses. The farmer enters this amount on Line 34.
Example 3. Susanna’s fruit orchard generated a farm loss this year due to a spring freeze which reduced her harvestable crops by 75 percent. All her loans are recourse loans with her farm assets being the collateral. Her loss is $135,891 as reported on Line 34, Schedule F, she checks Line 36, Box a indicating that all the investment in her orchard business is at risk.
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.