Schedule J 2014 Income Averaging Guide

Filing status differences between the election year and base years do not disqualify you from using income averaging. Only individuals may file Schedule J; estates and trusts cannot use this form under IRC Section 1301.

Pass-through entities such as partnerships and S corporations cannot file Schedule J directly, but individual partners and shareholders may use Form 1040 Schedule J to average their distributive share of farm income or fishing income. Nonresident aliens may use income averaging if they meet the individual taxpayer requirement and report qualifying farm or business income on their return.

Defining Farming and Fishing Businesses

A farming business includes cultivating land, raising or harvesting agricultural commodities or horticultural commodities, operating nurseries or sod farms, and raising or managing animals.

Lease payments from land rented to tenant farmers qualify as farming income only when the payments are based on a share of the tenant’s production (not a fixed amount) and are determined under a written agreement entered into before the tenant begins significant activities on the land.

Contract harvesting of crops grown by others does not qualify as a farming business. Reselling plants or animals raised by others also fails to meet the farming business definition under

Schedule J requirements.

A fishing business encompasses the catching, taking, or harvesting of fish intended to enter commerce through sale, barter, or trade. Fishing income includes lease payments from fishing vessels when the payments are based on a share of the catch from the lessee’s fishing activities

(not a fixed payment) and are determined under a written lease entered into before significant fishing activities begin.

Compensation received as a crew member on a fishing vessel qualifies as fishing income when the compensation is based on a share of the catch or proceeds from the sale of the catch.

Scientific research activities conducted by research vessels do not qualify as fishing businesses for Schedule J purposes.

Calculating Elected Farm Income

Determine your taxable income from farming or fishing, which includes all income, gains, losses, and deductions attributable to your farming or fishing business. Schedule J calculations allow you to elect all or part of your taxable income from farming or fishing as elected farm income on line 2a.

You do not need to include your entire taxable income from farming or fishing in the averaging calculation. Including less than the full amount may provide a greater tax benefit depending on how the elected amount affects your tax liability for the current year and the three prior tax years.

Your elected farm income cannot exceed your total taxable income for 2014. Elected farm income does not include income, gain, or loss from the sale or disposition of land, development rights, grazing rights, or similar rights.

Business income from farming or fishing may include capital gains from the sale of property regularly used in your operations. Capital gains attributable to your farming or fishing business qualify for income averaging if the property was used for a substantial period and sold within a reasonable time after cessation of operations.

Income Classification and Tax Forms

Schedule J requires proper classification of income types to calculate your tax liability accurately. Capital gains from Schedule D must be separately identified on lines 2b and 2c when your elected farm income includes net capital gain.

Income sources that qualify for averaging include

• Business income reported on Schedule C qualifies for averaging when it relates to

fishing operations with the correct principal business activity code.

• Farm income qualifies for averaging when it is reported on Schedule F and reflects profit

or loss from farming activities.

• Capital gains qualify for averaging when they arise from the sale of livestock, equipment,

or other property regularly used in farming or fishing operations.

• A distributive share of business income qualifies for averaging when it comes from

pass-through entities engaged in farming or fishing.

• Income reported on Schedule E, Part II, qualifies for averaging when rental activities

meet production-share lease requirements.

Capital gains treatment on Schedule D may reduce your overall tax liability when combined with income averaging. Rental income reported on Schedule E qualifies for averaging only when lease payments are based on production shares rather than fixed amounts under written agreements.

Tax credits available on your return apply after you calculate the alternative tax using Schedule

J. Capital gains rates continue to apply to qualifying capital gains even when you use income averaging to compute your tax liability.

Required Forms and Documentation

You must attach Schedule J as a rider to Form 1040 when you elect income averaging. The IRS does not require audited profit-and-loss statements or independently verified financial documentation to support your Schedule J election.

Tax Forms required for your complete return package

• Form 1040 (U.S. Individual Income Tax Return) serves as the primary filing document for

your individual income tax return.

• Schedule J (Income Averaging for Farmers and Fishermen) is required to compute the

alternative tax using income averaging.

• Schedule F (Profit or Loss From Farming) reports all income and expenses from farming

operations.

• Schedule C (Profit or Loss From Business) reports income and expenses from fishing

businesses using the appropriate principal business activity code.

• Schedule D (Capital Gains and Losses) reports capital gains from the sale of farm or

fishing property.

• Schedule A (Itemized Deductions) is required when you claim itemized deductions

instead of the standard deduction.

• Form 8949 (Sales and Other Dispositions of Capital Assets) supports capital gains

reported on Schedule D.

You need copies of your original or amended income tax returns for 2011, 2012, and 2013 to complete the income averaging calculation on Schedule J. Tax forms from prior years provide the base year taxable income amounts required for lines 5, 9, and 13 of Schedule J.

If you claimed itemized deductions on Schedule A for 2014, you must attach Schedule A to your return; Schedule J does not override Schedule A requirements, and both schedules must reflect consistent information. Tax credits claimed on your return do not require recalculation when you elect income averaging for farm or fishing income.

Filing Procedures and Deadlines

Sign and date Form 1040 with the same signature used throughout your return. Write your name, address, and Social Security number on the Schedule J header section per standard

Form 1040 assembly rules.

Submit the complete return package by April 15, 2015, or the applicable extension deadline if you filed Form 4868 or Form 2350. Schedule J attaches to Form 1040 and is mailed to the same address designated for Form 1040 returns based on your state of residence and whether you are including a payment.

The Internal Revenue Service does not maintain a separate mailing address specifically for

Schedule J. You use the standard Form 1040 where-to-file instructions to determine the correct processing center address based on your state and filing circumstances.

Extension requests filed by April 15, 2015, grant an automatic six-month extension to file your return until October 15, 2015. Any tax payment remains due by the original April 15 deadline, regardless of extension approval.

Important Limitations and Exclusions

The income averaging election does not apply when computing alternative minimum tax on

Form 6251. You do not need to recompute the tax liability of any minor child who used your tax rates in prior years when you elect income averaging for 2014.

Farm income that includes rental payments from leasing land or vessels qualifies for averaging only when the lease payments meet the production-share and written-agreement requirements.

Keep copies of all supporting records for the current year and three prior years for at least three years after April 15, 2015, or the date you file your 2014 tax return if later.

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

• Full IRS transcript retrieval (Wage & Income + Account)
• Professional tax form review
• Preparation & filing support
• Tax relief options if you owe the IRS