2020 Schedule F (Form 1040) Tax Filing Checklist
Overview
Schedule F (Form 1040) reports profit or loss from farming activities for the tax year 2020. This form must be attached to Form 1040, Form 1040-SR, Form 1040-NR (nonresident aliens), Form 1041 (estates and trusts), or Form 1065 (partnerships). Understanding the distinction between cash and accrual accounting methods, properly categorizing income and expenses, and applying material participation standards are essential for accurate farm tax reporting.
Defining Farming Activities
You are engaged in farming if you cultivate, operate, or manage a farm for gain or profit as an owner or tenant. Qualifying farming activities include livestock operations, dairy farms, poultry production, fish farms, fruit and vegetable production, truck farms, plantations, ranches, ranges, orchards, groves, mushroom farming, and aquaculture.
Do not use Schedule F for agricultural services provided on a fee or contract basis, such as soil preparation, veterinary services, farm labor, horticultural services, or farm management services. Report these activities on Schedule C (Form 1040) instead. Similarly, do not use Schedule F for breeding, raising, or caring for dogs, cats, or other pet animals. Report pet-related activities on Schedule C.
Step-by-Step Filing Process
Step 1: Select Accounting Method
Line C requires you to select either the cash method or the accrual method of accounting. This choice determines the timing of income recognition and expense deduction throughout the tax year.
If you use the cash method, check the “Cash” box and complete Parts I and II of Schedule F. The cash method recognizes income when actually or constructively received and deducts expenses when paid, subject to certain prepayment limitations.
If you use the accrual method, check the “Accrual” box and complete Parts II and III. Then, enter the amount from Part III, line 50, on Part I, line 9. The accrual method recognizes income when it is earned and deducts expenses when they are incurred, regardless of when payment is made.
For tax years beginning after 2017, more small business taxpayers became eligible to use the cash method of accounting. However, farming syndicates—partnerships, LLCs, S corporations, or other entities offering interests for sale in a manner that requires registration—cannot use the cash method and must adopt the accrual method, regardless of their size.
You cannot switch accounting methods without IRS consent. Your initial election generally remains binding for subsequent tax years unless you obtain approval using Form 3115.
Step 2: Enter Principal Agricultural Activity Code
Line B requires entry of the appropriate six-digit North American Industry Classification System code from Part IV of Schedule F that best identifies your primary farming activity.
The 2020 Schedule F, Part IV, includes codes for various crop production activities, such as oilseed and grain farming, vegetable and melon farming, fruit and tree nut farming, greenhouse nursery and floriculture production, and other crop farming. Animal production codes encompass beef cattle ranching and agriculture, cattle feedlots, dairy cattle and milk production, hog and pig farming, poultry and egg production, sheep and goat farming, aquaculture, and other forms of animal production. Additional codes are available for forestry and logging operations.
Step 3: Report Farm Income Under Cash Method
Part I of Schedule F captures all farm income for cash method taxpayers. Report income on the following lines:
Line 1a reports sales of livestock and other items purchased for resale. Line 1b reports the cost or other basis of these items. Line 1c calculates the net result.
Line 2 reports sales of livestock, produce, grains, and other products you raised rather than purchased for resale.
Lines 3a and 3b report cooperative distributions. Enter total distributions from cooperatives on line 3a, including patronage dividends, nonpatronage distributions, and per-unit retain allocations. Enter only the taxable portion on line 3b. Cooperatives typically report these amounts on Form 1099-PATR.
Lines 4a and 4b report agricultural program payments, including disaster assistance, Conservation Reserve Program payments, market facilitation program payments, diversion payments, and cost-share payments. These payments are typically reported on Form 1099-G. Enter the total on line 4a and only the taxable portion on line 4b.
Lines 5a through 5c report Commodity Credit Corporation loans if you elected to treat loan proceeds as income under Internal Revenue Code Section 77. If you made this election, report loan proceeds on line 5a. Report forfeited loans on line 5b and only the taxable amount on line 5c. If you did not make the Section 77 election, CCC loan proceeds remain as loans until repayment or disposition.
Lines 6a through 6d report crop insurance proceeds and federal crop disaster payments. These lines involve special deferral provisions discussed in Step 4.
Line 7 reports custom hire income from providing services such as planting, cultivation, and harvesting to other farmers, but only if such services are incidental to your own farming operation.
Line 8 reports other miscellaneous farm income, including breeding fees, rental income from pasture or land used for livestock care, and other income not captured on previous lines.
Line 9 totals all income sources from lines 1c, 2, 3b, 4b, 5a, 5c, 6b, 6d, 7, and 8.
Step 4: Apply Crop Insurance Deferral Election
Internal Revenue Code Section 451(f) permits farmers to elect to postpone income recognition for crop insurance proceeds and federal disaster payments in certain circumstances. This deferral allows qualifying payments to be included in income for the taxable year following the year in which crops are destroyed or damaged.
The deferral is available only for payments resulting from physical damage to insured crops that you would typically have sold more than fifty percent of in the following year. Revenue-only crop insurance payments based on price movements rather than physical damage usually do not qualify for deferral.
To make the election, file a statement with your tax return identifying the destroyed or damaged crop, declaring that under your standard business practice, the income would have been recognized in the following year, stating the cause and dates of destruction or damage, itemizing total payments received from each insurance carrier with payment dates, and identifying insurance carrier names.
If properly documented, report insurance proceeds on lines 6a and 6c (indicating deferral) but do not include them in gross income on line 6b for the year of receipt. Report the deferred proceeds on line 6d of the following year’s Schedule F.
Step 5: Complete Accrual Method Reporting
Farmers using the accrual method must complete Part III of Schedule F to compute inventory values at the beginning and end of the tax year. The net change in inventory value is reflected in line 9 of gross income.
The 2020 instructions recognize two inventory valuation methods: the unit-livestock-price method and the farm-price method. Under the unit-livestock-price method, each animal is valued at a standard price based on type and age, established by you and consistently applied. Under the farm-price method, inventory is valued at its reasonable farm value reflecting local market prices adjusted for specific conditions.
Calculate inventory changes by adding beginning inventory values for different categories, adding purchases and qualifying expenses, determining ending inventory, and computing the net change. An inventory increase represents accrual-basis income, even though no cash was received. An inventory decrease is treated as a deduction from gross income.
Step 6: Report Farm Business Expenses
Part II of Schedule F addresses farm expenses. An expense is deductible if it is ordinary and necessary for your type of farming operation and was paid or incurred during 2020.
Line 10 reports car and truck expenses. You may use either actual expenses allocated to business use or the standard mileage rate. For 2020, the standard mileage rate for business use was 57.5 cents per mile. If you claim vehicle depreciation, you must attach Form 4562. Proper records of business use are required for substantiation.
Line 11 reports chemicals used in farming. Line 12 reports conservation expenses, which are limited to 25% of the gross farm income on line 9. Line 13 reports custom hire and machine work services.
Line 14 reports depreciation and Section 179 expense deductions. Complete Form 4562 and attach it to Schedule F for any depreciation claimed.
Line 15 reports employee benefit programs, excluding pension and profit-sharing plans. Line 16 reports the purchase of feed for livestock. Line 17 reports fertilizers and lime. Line 18 reports freight and trucking costs. Line 19 reports gasoline, fuel, and oil. Line 20 reports farm business insurance.
Lines 21a and 21b report interest expenses. Report mortgage interest paid to banks on line 21a. Attach Form 1098 if you received one. Report all other interest on line 21b.
Line 22 reports labor hired as wages and salaries less any employment credits claimed. Line 23 reports pension and profit-sharing plan contributions for employees. Lines 24a and 24b report rent or lease expenses for vehicles, machinery, equipment, land, and animals.
Line 25 reports repairs and maintenance. Line 26 reports seeds and plants. Line 27 reports storage and warehousing costs. Line 28 reports supplies including twine, nails, bags, and similar items.
Line 29 reports taxes, including Social Security and Medicare taxes, which match employee withholdings, federal unemployment tax, federal highway use tax, state unemployment contributions, property tax on farmland and equipment, and state and local sales taxes on farm purchases.
Line 30 reports utilities. Line 31 reports veterinary, breeding, and medicine expenses. Lines 32a through 32f report miscellaneous expenses that do not fit into other categories.
Step 7: Apply Conservation Expense Limitation
Conservation expenses are subject to a unique limitation. You may deduct conservation expenses under a program certified by a conservation district, including soil and water conservation expenses, provided you maintain appropriate records.
The total deduction for conservation expenses is limited to 25% of the gross farm income on line 9. This limitation operates as a hard cap regardless of actual conservation expenditures. For example, if gross farm income is $100,000, the maximum allowable conservation expense deduction is $25,000.
Step 8: Calculate Net Farm Profit or Loss
Line 33 totals all deductible farm expenses by adding lines 10 through 32f. If line 32f displays a negative amount, refer to the full instructions for proper treatment.
Line 34 calculates net farm profit or loss by subtracting line 33 (total expenses) from line 9 (gross income).
If line 34 shows a profit, you are finished with Schedule F. Report the profit on Schedule 1 (Form 1040) as instructed if your net farm earnings are $400 or more, complete Schedule SE to calculate self-employment tax.
If line 34 shows a loss, complete lines 35 and 36 to assess material participation and passive activity loss limitations.
Step 9: Determine Material Participation Status
Line 35a asks whether you materially participated in the farming operation during 2020. Material participation is critical because it determines whether passive activity loss limitations apply.
You meet the material participation standard if you satisfy any one of these tests: you participated for more than 500 hours during the year; your participation constituted substantially all participation by all individuals; you participated more than 100 hours and not less than any other individual; you materially participated through multiple significant participation activities totaling more than 500 hours combined; or you materially participated for any 5 years (whether consecutive or not) during the 10 tax years immediately before 2020.
Special rules apply to retired and disabled farmers. A retired or disabled farmer is treated as materially participating if they materially attended for five or more of the 8 years immediately preceding retirement or disability. A surviving spouse is treated as materially participating if they actively manage the farm and the property meets estate tax rules for special valuation of farm property passed from a qualifying decedent.
If you answer “Yes” to material participation and have a profit, report the income on Schedule 1. If you have a loss and materially participated, the loss is generally deductible subject to at-risk limitations.
If you answer “No” to material participation and have a loss, you must complete Form 8582 to determine how much loss is allowable against non-passive income.
Step 10: Apply At-Risk Limitations
Line 36 asks you to check the box describing your investment in the farming activity. The at-risk concept comes from Internal Revenue Code Section 465, which restricts loss deductions to the amount you have at risk in the activity.
Investment not at risk includes amounts financed through nonrecourse debt not personally guaranteed, amounts protected by guarantees or stop-loss agreements, and amounts borrowed from persons with an interest in the activity.
If some investment is not at risk, complete Form 6198 to calculate your allowable loss. Your deductible loss is limited to your at-risk basis. Losses exceeding your at-risk amount are suspended and carried forward to future years.
Step 11: Complete Passive Activity Loss Analysis
If you did not materially participate and have a net farm loss, complete Form 8582 to determine the amount of loss allowed in the current year versus the amount carried forward.
Form 8582 separates passive rental activities with active participation, other passive rental activities, and passive trade or business activities. The form determines how much passive loss can offset passive income and how much must be suspended.
A special allowance permits the deduction of up to $25,000 of passive rental real estate losses if you actively participated in the rental activity and meet income limitations. This allowance generally does not extend to farming activities unless the operation qualifies as a rental activity.
Step 12: Complete Depreciation Calculations
If you claim depreciation on property placed in service during 2020, make a section 179 expense election, or claim depreciation on vehicles or listed property, complete and attach Form 4562.
For 2020, the maximum section 179 expense deduction was $1,040,000, reduced dollar-for-dollar by the amount by which total section 179 property placed in service during 2020 exceeded $2,590,000. The maximum section 179 expense for sport utility vehicles placed in service in 2020 was $25,900.
Bonus depreciation for 2020 permitted 100% of the depreciable basis for most qualified property placed in service during the year. This allowed for immediate write-off, regardless of the property’s depreciable life.
Property for which a section 179 election is made cannot also be depreciated and is fully deducted in the year of election. However, the section 179 expense deduction cannot exceed the taxable income of the farming business for the year. Any excess carries forward to the next tax year.
Step 13: Calculate Self-Employment Tax
Net farm profit or loss from line 34 transfers to Schedule SE (Form 1040), line 1a, to calculate self-employment tax obligations. Self-employment tax funds Social Security and Medicare benefits for self-employed individuals.
For 2020, the self-employment tax consists of 12.4% for Social Security and 2.9% for Medicare, applied to 92.35% of net farm earnings. The Social Security portion applies only to the first $137,700 of combined wages and self-employment income for 2020. The Medicare portion applies to all net earnings without limitation.
High-income taxpayers may owe the Additional Medicare Tax of 0.9% on self-employment income exceeding $200,000 for single filers or $250,000 for married filing jointly. Calculate Additional Medicare Tax on Form 8959 if your income exceeds these thresholds.
Step 14: Consider Income Averaging
Schedule J (Income Averaging for Farmers and Fishermen) allows you to average current year farm income over the preceding three years if such averaging produces a lower tax liability. This election can prevent higher marginal tax rates in years of unusually high farm income.
To use income averaging, complete Schedule J with your Form 1040. The calculation divides the elected farm income by three and adds that amount to the income for each of the three base years. It then calculates the tax liability for each modified base year using the applicable rates for those years.
Step 15: Assemble Required Attachments and File
Attach Form 4562 if you claimed any depreciation or section 179 deductions. Attach Form 6198 if some investment is not at risk. Attach Form 8582 if you did not materially participate and have a farm loss. If you elected to defer crop insurance proceeds, attach a statement documenting the damaged crops, amounts deferred, and demonstrating that damage occurred in 2020.
Complete Schedule SE for self-employment tax. Consider Schedule J for income averaging if your current-year income is substantially higher than that of prior years. Attach Schedule F to Form 1040, Form 1040-SR, Form 1040-NR, Form 1041, or Form 1065 as appropriate. Verify that all schedules are in the correct sequence and that identification numbers match across forms.
Farmers with at least two-thirds of gross income from farming may file their annual return and pay all taxes by March 1, 2021, rather than using quarterly estimated payment schedules. This acknowledges the seasonal nature of farming and the challenge of determining annual income until after the harvest.
Record Retention Requirements
Maintain all farm business records supporting income and expenses reported on Schedule F. Keep receipts, invoices, canceled checks, bank statements, Forms 1099, Forms 1098, mileage logs, depreciation schedules, and all other source documents.
The general statute of limitations requires retaining records for at least three years from the filing date or due date, whichever is later. If you have carry-forward items such as suspended passive losses or net operating losses, retain records for as long as those items may affect your tax liability.
Contemporary records provide the best support in the event of an IRS examination and facilitate accurate tax preparation in future years.
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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.
