Schedule J 2018 Income Averaging Guide for Farmers

• Cultivating land or raising and harvesting agricultural or horticultural commodities as part

of regular business operations qualifies as a farming business.

• Operating nurseries or sod farms qualifies as a farming business for purposes of income

averaging under Schedule J.

• The definition of a farming business also covers raising ornamental trees, fruit-bearing

trees, or nut-bearing trees for sale or production.

• Leasing land to tenant farmers qualifies as a farming activity when lease payments are

based on a share of production and are determined under written agreements entered into before the tenant begins significant activities.

A fishing business means commercial fishing where harvested fish enter commerce through sale, barter, or trade. Crew members on fishing vessels can qualify when their compensation is based on a share of the catch or sale proceeds.

Required Documentation and Prior Year Returns

You need federal income tax returns for 2016 and 2017 to complete Schedule J for 2018. These returns provide the taxable income figures you will enter on lines 1 through 3 of the schedule.

If you used Schedule J to figure your tax in 2017, 2016, or 2015, you must reference specific line amounts from those prior Schedule J forms. Standard Form 1040 taxable income does not apply when you previously elected income averaging.

Obtain copies of prior returns using Form 4506 if needed. A fee applies unless your main home or business is located in a federally declared disaster area.

Gather your 2018 Schedule F for farm income and expenses or Schedule C for business profit or loss. Collect any Form 1099-NEC or partnership K-1 that documents income from farming or fishing activities.

Income That Cannot Be Averaged

You must exclude income not derived from farming or fishing from Schedule J calculations. Only elected farm income from your trade or business of farming or fishing qualifies for three-year averaging.

The following types of income cannot be averaged using Schedule J

• Wages, salaries, and other employee compensation do not qualify for income averaging

when the pay is not based on a share of the catch or production.

• Rental income from real estate leases cannot be averaged when the lease provides for

fixed payments rather than a share of agricultural or fishing production.

• Capital gains from the sale of stocks, bonds, or investment property are excluded from

Schedule J income averaging calculations.

• Income received from estates, trusts, or partnerships that are not engaged in farming or

fishing businesses cannot be averaged under Schedule J.

How to Complete Schedule J for the 2018 Tax Year

1. Step 1: Enter Prior Year Taxable Income

   Enter your taxable income for 2016, 2017, and 2018 on lines 1 through 3 of Schedule J. Do not include farm loss carryovers or adjustments not reflected in your original returns for those years.

   If any of these years had zero or negative taxable income, you may need to complete special worksheets provided in the Schedule J instructions. Net operating loss carryovers and carrybacks affect these calculations and must be accounted for properly.

2. Step 2: Calculate Average Taxable Income

   Calculate your average taxable income on line 4 by adding the three years of taxable income and dividing by three. You will then figure the tax on this average amount using 2018 tax rates and brackets.

   The schedule walks you through allocating one-third of your elected farm income to each base year. This methodology effectively spreads your 2018 farm or fishing income across prior years when you may have been in lower tax brackets.

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3. Step 3: Attach Schedule J to Your Tax Return

   Attach your completed Schedule J to Form 1040 or Form 1040-NR for 2018. Schedule J is filed by attaching it to your income tax return.

   The election can also be made on a late return or amended return if the period of limitations for filing a claim for credit or refund has not expired. Sign and date your Form 1040 or Form

   1040-NR and confirm Schedule J is properly attached and labeled.

   Mailing Instructions

   Mail your complete return package to the address specified in the Form 1040 or Form 1040-NR instructions for your state and filing status. There is no separate mailing address specific to

   Schedule J.

   The schedule follows the same filing location requirements as your main tax return. Consider using certified mail with a return receipt requested to document the date you mailed your tax return and when the Internal Revenue Service received it.

   Short Tax Years and Special Circumstances

   The 2018 instructions for Schedule J do not explicitly address whether short tax years disqualify you from using income averaging. A short tax year is a tax period of less than twelve months.

   If you have a short tax year for 2018, 2017, or 2016, consult a tax professional or contact the

   Internal Revenue Service for clarification on eligibility. Short tax years can occur when you change your accounting period or when a business starts or ends partway through a calendar year.

   Revoking or Changing Your Election

   You may revoke a previous Schedule J election or change the amount of elected farm income by filing an amended return. This option remains available as long as the period of limitations for filing a claim for credit or refund has not expired for the election year.

   The standard period of limitations is three years from the original due date of the return or two years from the date you paid the tax. Your election is not irrevocable or final once filed.

   To change or revoke an election, follow these steps:

   1. File Form 1040-X for the applicable tax year and attach a revised Schedule J reflecting the updated election.

   2. Enter the new amount of elected farm income on the revised Schedule J, or remove the schedule entirely if you are fully revoking the election.

   3. Explain the reason for the change in the explanation section of Form 1040-X to support the amendment.

   Record Retention Requirements

   Retain copies of all three prior year returns and your 2018 documentation for audit substantiation. Keep Schedule F, Schedule C, partnership K-1 forms, and profit and loss records for at least three years after the due date of your 2018 return.

   If you plan to use income averaging in future years, maintain these records for reference when completing subsequent Schedule J forms. Prior year taxable income amounts flow forward into future calculations, making accurate recordkeeping essential for multi-year tax planning.

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