Schedule J 2012 Income Averaging for Farmers

2012 Instructions for Schedule J | Income Averaging

for Farmers and Fishermen Checklist

Schedule J permits eligible farmers and fishermen to average farm or fishing net income over three years, reducing tax liability in high-income years. This form applies only to individuals with qualifying farm or fishing income.

Corporations, partnerships, and estates cannot use Schedule J as entities, but they pass income to owners who may elect averaging on their individual income tax returns. No year-specific stimulus reconciliation, ACA penalties, or TCJA provisions applied to Schedule J in

2012.

Eligibility Requirements

You must be engaged in a farming business or fishing trade during the current taxable year to qualify for income averaging. No requirement exists that farming or fishing be your principal income source.

Income averaging may provide a tax benefit if your current-year farm or fishing income is high relative to prior taxable years’ taxable income. The election does not require that you operate a farming business during any of the three base years used in the calculation.

Individual partners and S corporation shareholders may elect income averaging on their individual federal income tax returns using their distributive share of farm or fishing income from

Schedule K-1. Even if there is no other direct farming or fishing activity reported on Schedule F or Schedule C, you may choose to implement averaging.

Most nonresident aliens may use Schedule J if they have farming or fishing income effectively connected with a U.S. trade or business. Consult the 2012 Form 1040-NR instructions for specific guidance on nonresident alien eligibility and filing requirements.

Step-by-Step Filing Process

1. Step 1: Gather Required Documentation

   Collect Schedule F, Schedule C, or applicable farm and fishing income documentation for the current taxable year and the two preceding tax years. Obtain copies of all Schedule K-1 forms,

   Forms 1099, and Forms W-2 related to farm or fishing operations for all three years being averaged.

2. Step 2: Complete Schedule J Part I

   Enter current-year farm or fishing net income from Schedule F, line 34, or the equivalent line on

   Schedule C. Line 34 on the 2012 Schedule F reports net farm profit or loss. Line 36 on

   Schedule F is used only to indicate at-risk investment status when line 34 shows a loss.

3. Step 3: Calculate Three-Year Average

   Complete Schedule J Part II by calculating the three-year average using net farm or fishing income for the two preceding years. Perform the required arithmetic per the 2012 instructions to determine your average income amount.

4. Step 4: Compute Tax on Averaged Income

   Complete Schedule J Part III to compute the tax imposed on the averaged income using the tax tables or rates applicable to your filing status. The tax rate structure applies to your current taxable year calculation regardless of filing status changes in prior taxable years.

5. Step 5: Attach and File

   Attach Schedule J to your Form 1040 immediately after Schedule F or Schedule C. Proper attachment is required to make the income averaging election and ensure Internal Revenue

   Service processing.

• Sole proprietorships reporting on Schedule F or Schedule C qualify for income averaging
• Partnerships with individual partners receiving K-1 business income qualify because the
• Single-member limited liability companies taxed as sole proprietorships qualify for
• Multi-member limited liability companies taxed as partnerships or S corporations qualify
• S corporations passing income through to individual shareholders qualify because

6. Step 6: Sign and Submit

   Sign and date Form 1040 and Schedule J before mailing your tax returns. Include your Social

   Security Number on all pages to ensure proper Internal Revenue Service identification and processing of your filing.

   Entity Structure and Ownership

   Schedule J is restricted to individuals only. Pass-through entities, including partnerships, S corporations, C corporations, and estates, cannot claim income averaging under this form as entities.

   These entities report net income to owners via Schedule K-1 forms. Individual partners and S corporation shareholders may elect income averaging on their individual Form 1040 tax returns using their distributive share of farm or fishing business income reported on Schedule K-1.

   You do not need direct Schedule F or Schedule C activity to elect income averaging if you receive farm or fishing business income through a partnership or S corporation. Section 1 of the

   Internal Revenue Code allows an individual engaged in a farming business to elect averaging, which includes partners receiving Schedule K-1 farm income.

   Income averaging is allowed for the following business structures: when the individual reports farm or fishing income directly on Schedule F or Schedule C as part of their personal Form 1040 return. partnership passes farm or fishing income through to individual partners, who may elect income averaging on their own tax returns using their distributive share reported on

   Schedule K-1. income averaging when the owner reports farm or fishing income on Schedule F or

   Schedule C and makes the election at the individual level. because farm or fishing income flows through to individual owners via Schedule K-1, allowing those individuals to elect income averaging on their personal returns. shareholders may use their Schedule K-1 farm or fishing income to elect income averaging on Schedule J filed with their individual Form 1040.

   Qualifying Income Types

   Elected farm income includes all income, gains, losses, and deductions attributable to your farming business or fishing business. You must figure your taxable income from farming or fishing by combining these items.

   Elected farm income also includes any gain or loss from the sale or other disposition of property regularly used in your farming business for a substantial period. Farm income may be reported on various tax forms, including Schedule F, Schedule C, Schedule E Part II, Schedule D, Form

   4797, and Form 4835.

   These various forms should contain information regarding your income, gains, losses, and deductions from farming or fishing. K-1 income from pass-through entities engaged in farming or fishing businesses also qualifies as elected farm income for averaging purposes under section 1 of the Internal Revenue Code.

   Gains realized from the sale of livestock or equipment used in a farming business may be included in the elected farm income. When these gains are directly attributable to farming or fishing operations and are reported properly, they qualify for income averaging treatment.

   By contrast, gains arising from assets not used in farming or fishing activities do not qualify as elected farm income for Schedule J purposes. Likewise, any gain generated from the sale of land is excluded from elected farm income under the 2012 instructions.

   Tax Calculation and Payment Requirements

   You do not have to include all of your taxable income from farming or fishing on Schedule J line

   2a. It may be to your advantage to include less than the entire amount, depending on how the amount affects your tax rate for the current and prior three tax years.

   The election may reduce the tax due if your 2012 income from farming or fishing is high and your taxable income for one or more of the three prior years was low. You may elect to average farming or fishing income even if your filing status was not the same in the election year and the base years.

   Estimated tax payments made during the year apply toward your final tax liability calculated using Schedule J. Tax payments withheld from wages or other income also reduce your total amount owed when you file your income tax return. Tax payments made with extension requests count toward your final liability after applying income averaging calculations.

   This election does not apply when figuring your alternative minimum tax on Form 6251. You do not have to recompute the tax liability of any minor child who was required to use your tax rate in the prior years because of this election.

   If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.