2016 Instructions for Schedule J | Income Average for
Farmers and Fishermen Checklist
Schedule J allows eligible farmers and fishermen to average farm or fishing income over three years to reduce tax liability from volatile annual earnings. Nonresident aliens may use income averaging if they have eligible farming or fishing income, and Schedule J requires attachment of
Form 1040 or Form 1040-NR with complete documentation.
Understanding Schedule J Eligibility Requirements
You can elect Schedule J income averaging if you have taxable income from your trade or business of farming or fishing for the 2016 tax year. The Internal Revenue Code Section 1301 does not require you to have been in a farming business or fishing business during any of the base years.
Base years consist of the three preceding tax years: 2013, 2014, and 2015. Income averaging applies to taxable income attributable to farming or fishing activities reported on various IRS forms for the current year and three prior years.
Eligible Forms and Income Sources
Farming or fishing income may appear on multiple schedules and forms beyond traditional self-employment documentation. The Internal Revenue Service recognizes income reported on
Schedule F, Schedule C, Schedule E (Part II), Schedule D, Form 4797, Form 4835, and Form
8949 as eligible for averaging.
Qualified income sources include
- Wages from an S corporation engaged in farming or fishing qualify as eligible income
when the wages are paid to shareholders for services performed in farming or fishing operations.
- Crew member compensation based on catch share qualifies as fishing income when
compensation is calculated as a percentage or share of the catch rather than as a fixed wage.
- Capital gains from the sale of farm or fishing property qualify for income averaging when
the property was used in farming or fishing operations, and the gain is reported on the appropriate tax forms.
- Income from partnerships engaged in farming or fishing operations qualifies for income
averaging when the income is passed through to individual partners and reported as part of their distributive share.
- Lease arrangements based on production shares qualify as farming income when rental
payments are determined by a share of crops or production rather than a fixed cash amount.
The fishing industry recognizes income from catching, taking, or harvesting fish, as well as operations at sea supporting these activities. Farming income includes amounts from cultivating land, raising or harvesting agricultural or horticultural commodities, and qualified lease arrangements.
Required Documentation for All Four Years
Collect complete documentation of your farm or fishing income for the current tax year (2016)
and the three preceding tax years (2013, 2014, 2015). Schedule F (Profit or Loss from Farming)
serves as the primary form for farmers reporting agricultural income and expenses.
Additional required schedules depend on your specific income sources and may include
Schedule C, Schedule C-EZ, Schedule E (Part II), Schedule D, Form 4797, Form 4835, and
Form 8949. Form 4562 documenting depreciation schedules must accompany your current year return if you used depreciable assets.
Supporting documents must cover all four years and include farm or fishing gross receipts, sales records, operating expense records, and capital gains documentation. Wage statements from S corporations engaged in farming or fishing and crew member compensation records provide additional verification of eligible income.
Calculating Elected Farm Income
Complete Part II of Schedule J to average taxable income from farming or fishing for the current year and the three immediately preceding years. Enter your elected farm income on line 2a, which represents the amount of taxable income from farming or fishing that you choose to include for averaging.
You do not need to include all of your farming or fishing income on line 2a. Dividing the elected amount equally among the three base years may lower your overall tax burden by utilizing unused tax brackets from prior years.
Computing Tax Using Base Year Rates
Follow Part III instructions to calculate tax on the averaged income using the applicable tax rates for each base year. You must figure the tax on amounts allocated to each base year using the 2013, 2014, and 2015 tax rates, respectively.
The instructions require comparison of the tax computed on the averaged income versus the tax on actual current-year income to determine the benefit. Add the calculated amounts from each base year to the tax on your non-farm income for 2016, then compare this total to your regular tax liability.
Transfer the final tax from Schedule J line 23 to Form 1040 line 44 or Form 1040-NR line 42 in place of the standard tax calculation. This line shows the tax computed using income averaging rather than standard methods.
Filing Procedures and Attachment Requirements
Staple Schedule J to the back of your completed Form 1040 or Form 1040-NR, since Schedule
J cannot be filed separately. Include all four years of completed schedules documenting farm or fishing income as applicable to your situation.
Attach Form 4562 for the current year if you used depreciable assets in your farming or fishing business. Sign and date Form 1040 or Form 1040-NR in the spaces provided and include your
Social Security number.
Write “Schedule J attached” in the margin next to the tax line on your income tax return. File the complete return, including all attachments, according to the filing deadlines and location instructions for your filing status.
Eligibility for Nonresident Aliens
U.S. residents, citizens, and nonresident aliens are all eligible to use Schedule J for income averaging purposes. Nonresident aliens filing Form 1040-NR can elect income averaging using the same procedures as residents and citizens.
The election does not apply when figuring the alternative minimum tax on Form 6251. You may elect to average farming or fishing income even if your filing status differs between the election year and the base years.
Important Tax Considerations
Keep copies of your 2016 income tax return and all supporting schedules to use for income averaging in 2017, 2018, or 2019. The 2016 Schedule J instructions specify detailed line-by-line tax computation comparing income-averaged tax to standard tax methods.
This comparison identifies the actual tax benefit and clarifies that only the lower calculated tax applies to your federal income tax obligation. You can verify whether Schedule J reduces your tax payments by completing the form and comparing results before making your final election.
Your tax liability calculated through income averaging must result in a lower amount than the standard calculation methods to provide a benefit. The election allows you to utilize lower tax brackets from previous years when your farming or fishing income was reduced or nonexistent.
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