Form 1040 Schedule F: Profit or Loss From Farming – Tax Year 2015
Understanding Schedule F for 2015
Schedule F reports profit or loss from farming for the tax year 2015. Farmers must answer Question E regarding material participation. If answered “No,” passive activity loss limitations apply, and Form 8582 is required. Section 179 expensing has a maximum of $500,000 for 2015, and depreciation is reported on Form 4562. Schedule F attaches to Form 1040, Form 1040NR, Form 1041, Form 1065, or Form 1065-B.
Applicable Programs for 2015
Agricultural program payments received in 2015 must be reported in the year received. CCC loan reporting is available under the election option. Soil and water conservation expenses are generally deductible as ordinary business expenses. If such costs were capitalized, farmers may elect to deduct them currently, subject to a 25% limitation based on gross income from farming, with excess amounts carrying forward.
Step-by-Step Filing Instructions
Step 1: Verify Material Participation Status
Answer Question E regarding material participation in farming operations during 2015. You materially participate if you meet at least one of seven tests: over 500 hours of participation, substantially all participation, over 100 hours and at least as much as any other person, over 100 hours in significant activities totaling 500+ hours, material participation in five of the prior ten years, material participation in three previous years in personal service activity, or regular, continuous, and substantial involvement based on facts and circumstances.
If you answer “No,” passive activity loss rules apply. Losses may only offset passive income. Obtain Form 8582 to calculate allowable deductions. Material participation determines whether other income sources, such as wages or business income, offset losses.
Step 2: Collect Farm Income Documents
Gather livestock and crop sale receipts with dates and amounts. Obtain Forms 1099-PATR for cooperative distributions. Collect agricultural program payment notices, CCC loan documentation, crop insurance proceeds statements, federal crop disaster payment notices, and custom hire invoices. Record exact dates and amounts received in 2015.
Step 3: Organize Farm Expense Records
Compile receipts for car and truck expenses, chemicals, conservation expenses, custom hire, depreciation records, employee benefits, feed, fertilizers, freight, fuel, insurance premiums (excluding health), mortgage interest statements, hired labor payroll records, pension plan contributions, rent or lease agreements, repairs, seeds, storage bills, supplies, property taxes, utilities, and veterinary expenses.
Step 4: Prepare Form 4562 for Depreciation and Section 179
Compute depreciation for property placed in service during 2015 or prior years. The 2015 maximum Section 179 deduction is $500,000, with a phase-out beginning at $2,000,000 of qualifying property placed in service during the year. The qualified real property Section 179 limit is $250,000 (part of the $500,000 maximum), including qualified leasehold improvements, restaurants, and retail improvements.
Complete Form 4562 with all depreciation calculations and listed property information. Transfer the total from Form 4562, Line 12, to Schedule F, Line 14. Attach Form 4562 to Schedule F.
Step 5: Select Accounting Method
Select the appropriate box to indicate your accounting method. Cash method reports income when received and expenses when paid; complete Parts I and II. Accrual method reports income when earned and expenses when incurred; complete Parts II and III, then transfer to Part I, Line 9. Crop method requires prior IRS approval. Use the same method consistently, unless you obtain IRS approval to make a change.
Step 6: Complete Part I for Cash Method Income
Enter livestock and resale item sales on Line 1a, subtract the cost on Line 1b, and enter the difference on Line 1c. Report crop sales on Line 2. Enter cooperative distributions on Line 3a with taxable amounts on Line 3b. Report agricultural program payments on Line 4a with taxable amounts on Line 4b.
Enter CCC loans reported as income on Line 5a, amounts forfeited on Line 5b, and net on Line 5c. Report crop insurance and disaster payments on Line 6a. If deferring to 2016 under Section 451(d), enter the deferred amount on Line 6b and the net on Line 6d. Enter custom hire income on Line 7 and other income on Line 8—total gross income on Line 9.
Step 7: Complete Part III for Accrual Method Income
Enter sales of products on Line 37, cooperative distributions on Line 38a (taxable on 38b), agricultural payments on Line 39a (taxable on 39b), CCC loans on Lines 40a-40c, crop insurance on Line 41, custom hire on Line 42, and other income on Line 43—total income on Line 44.
Enter the beginning inventory on Line 45, the ending inventory on Line 46, and the cost of purchased items on Line 47. Calculate net income on Line 48 by subtracting Lines 45 and 47 from Line 44, then adding Line 46. Transfer to Part I, Line 9.
Step 8: Complete Part II for Farm Expenses
Report business expenses on Lines 10-32f, excluding personal expenses. Enter car and truck expenses on Line 10, chemicals on Line 11, and conservation expenses on Line 12. Conservation expenses are generally deductible as ordinary business expenses. If expenses are capitalized, elect to deduct them currently, subject to a 25% limitation of gross income from farming, with excess deductions carrying forward. No agency approval is required.
Enter custom hire on Line 13, depreciation and Section 179 on Line 14, employee benefits on Line 15, feed on Line 16, fertilizers on Line 17, freight on Line 18, and fuel on Line 19. Report insurance on Line 20, mortgage interest on Lines 21a-21b, labor on Line 22, and pension plans on Line 23.
Enter rent or lease on Lines 24a-24b, repairs on Line 25, seeds on Line 26, storage on Line 27, supplies on Line 28, taxes on Line 29, utilities on Line 30, and veterinary expenses on Line 31. Report other expenses on Line 32 with descriptions—total expenditures on Line 33.
Step 9: Calculate Net Farm Profit or Loss
Subtract Line 33 (total expenses) from Line 9 (gross income) for net profit or loss on Line 34. If positive, you have a net profit. If negative, you have a net loss. If reporting a loss, complete Lines 35 and 36 for at-risk status. If Question E is “No,” complete Form 8582 for passive activity loss limitations.
Step 10: Apply At-Risk Rules
If Line 34 shows a loss, examine Line 36a to determine if all investments are at risk or Line 36b to see if some investments are not at risk. Investment at risk includes cash contributed, property contributed, and amounts borrowed for which you are personally liable. Investments not at risk include nonrecourse loans (except qualified nonrecourse financing), amounts protected against loss, and amounts borrowed from related parties.
Please review Line 36b and complete Form 6198 to calculate the deductible loss. Losses exceeding your at-risk amount are suspended and carried forward.
Step 11: Apply Passive Activity Loss Rules
If you answered “No” to Question E and Line 34 shows a loss, complete Form 8582. Passive losses generally offset only passive income, not wages, salaries, or active business income. Excess passive losses are suspended and carried forward to offset future passive income or deducted when disposing of your entire interest in the activity.
Step 12: Assemble and File
Attach Form 4562 if claiming depreciation or Section 179, Form 6198 if some investment is not at risk, and Form 8582 if claiming passive activity losses. Sign and date Schedule F. If filing jointly and both participated, both spouses must sign.
Attach Schedule F (Attachment Sequence No. 14) to Form 1040, 1040NR, 1041, 1065, or 1065-B. Include all supporting forms. Mail to the appropriate IRS address. The 2015 filing deadline is April 18, 2016. File Form 4868 by April 18 if you need an extension. Extensions do not extend the time to pay taxes owed.
Key Considerations
Conservation Expenses
Soil and water conservation expenses are generally deductible as ordinary business expenses without requiring agency approval. If costs are capitalized, you may elect current deduction, subject to 25% of gross income from farming. Excess amounts carry forward to subsequent years, subject to the same limitation.
Material Participation
Material participation requires regular, continuous, and substantial involvement. Meet any one of seven tests to qualify. The most common include over 500 hours of participation, substantially all participation, over 100 hours, and at least as much as any other person, or material participation of the prior ten years. Document hours and activities to support your claim.
By following these steps and maintaining accurate records, you ensure proper Schedule F completion for tax year 2015 and compliance with farming income reporting requirements.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
