Income Averaging for Farmers and Fishermen 2015
Checklist
Schedule J permits eligible farmers and fishermen to average farm or fishing income over three base years, which reduces tax liability when current-year income spikes above prior-year levels.
The 2015 form operates under longstanding income-averaging provisions specific to agricultural and fishing trade classifications.
Eligibility Requirements
You may elect Schedule J income averaging if you have taxable income from farming or fishing in the current year that you wish to average. The Internal Revenue Service does not require that more than half of your gross income come from farming or fishing operations.
There is no requirement that you have been engaged in the farming or fishing industry during any of the three base years to be eligible for this election. Your filing status does not need to remain the same across the election year and base years.
Nonresident aliens engaged in farming or fishing businesses may use Schedule J for income averaging. Throughout all calculations and worksheets, the 2015 form and instructions explicitly accommodate Form 1040-NR filers.
Understanding Base Years and Election Years
Schedule J uses three base years for averaging calculations, which are the three taxable years immediately preceding the election year. For the 2015 election, the three base years are 2012,
2013, and 2014.
The current year, 2015, serves as the election year, not as one of the three years used for averaging calculations. You need tax return information from all three base years to complete
Part II of Schedule J.
Required Documentation and Records
You need copies of your original or amended income tax returns for 2012, 2013, and 2014 to figure your tax on Schedule J. These documents remain in your possession for your own use during calculations.
The instructions do not require you to attach copies of prior-year returns or certified transcripts when filing your 2015 return with Schedule J. If you need copies of your tax returns, you may use Form 4506 for a fee or Form 4506-T for a free transcript.
Keep all records for base years for at least three years after April 15, 2016, or the date you file your 2015 tax return, whichever comes later. Additionally, it is recommended that you retain a copy of your 2015 income tax return for income averaging in 2016, 2017, or 2018.
Calculating Elected Farm Income
You must first figure your taxable income from farming or fishing, which includes all income, gains, losses, and deductions attributable to your farming or fishing business. Your elected farm income represents the amount of your taxable income from farming or fishing that you elect to include on line 2a of Schedule J.
It is not necessary to include all of your taxable income from farming or fishing on line 2a.
Depending on how the amount affects your tax bracket for the current year and the prior three tax years, including less than the entire amount may prove advantageous.
Elected farm income does not include income, gain, or loss from the sale or other disposition of land or from the sale of development rights, grazing rights, and other similar rights. Your elected farm income cannot exceed your taxable income for the year.
The amount may include net capital gain from the sale or other disposition of property regularly used in your farming or fishing business for a substantial period of time. Gains or losses realized after cessation of the farming or fishing business qualify only if the property sells within a reasonable time after cessation.
Prior-Year Income Adjustments
The instructions provide detailed worksheets for adjusting prior-year taxable income when amounts were zero or less. You must make modifications for net operating losses and capital loss carryovers when calculating base-year income.
Lines 5, 9, and 13 reference taxable income from prior-year tax returns or amounts as previously adjusted by the IRS or corrected on an amended return. When your taxable income for a base year was zero or less, you must complete specific worksheets to determine the proper amount to enter on Schedule J.
Filing Procedures
Follow these steps to file Schedule J with your return properly
1. When filing your return, you must attach Schedule J securely behind Form 1040 or Form
1040-NR to ensure it is processed with the main return.
2. You are required to sign the return in the designated signature area on Form 1040 or
Form 1040-NR before submission.
3. The date entered on Schedule J must match the date used on the main tax return to maintain consistency across all filing documents.
4. You must file the completed return at the IRS mailing location specified for your filing status and state, as listed on the IRS website.
This election does not apply when figuring your alternative minimum tax on Form 6251.
Schedule J should not be filed separately or as an amendment without reviewing the current guidance on proper assembly.
Business Structure Restrictions
Certain farm corporations and partnerships, as well as all tax shelters, must use an accrual method of accounting, which may affect their ability to use Schedule J effectively. In general, a family corporation is considered to be eligible if at least 50% of the total combined voting power and at least 50% of the total shares of all other classes of stock are owned by members of the same family.
A tax shelter includes any partnership, noncorporate enterprise, or S corporation whose principal purpose involves the avoidance or evasion of federal income tax or that qualifies as a farming syndicate. S corporations and businesses operating nurseries or sod farms or raising or harvesting trees (other than fruit and nut trees) receive exemptions from certain accrual method requirements.
Income Sources and Form References
You should find your income, gains, losses, and deductions from farming or fishing reported on
different tax forms
- Schedule C or C-EZ for business profit or loss
- Schedule D for capital gains and losses
- Schedule E Part II for partnerships and S corporations
- Schedule F for farm profit or loss
- Form 4797 for sales of business property
- Form 4835 for farm rental income and expenses
- Form 8903 for domestic production activities deduction
Wages and other compensation you received as a shareholder in an S corporation engaged in a farming or fishing business or as a crew member on a vessel engaged in a fishing business appear on line 7 of Form 1040 or line 8 of Form 1040-NR. Income from Exxon Valdez litigation appears on line 21 of Form 1040 or Form 1040-NR.
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