2020 Instructions for Schedule J | Income Average for
Farmers and Fishermen Checklist
Schedule J allows farmers and fishermen to elect income averaging under Section 1301 of the
Internal Revenue Code, which reduces tax volatility caused by highly variable annual earnings.
This form applies to self-employed individuals and those receiving farm or fishing income through pass-through entities such as partnerships or S corporations.
You must attach Schedule J to Form 1040, Form 1040-SR, or Form 1040-NR along with
Schedule F or Schedule C documenting your farm or fishing activity. The form operates under consistent Section 1301 income averaging rules and does not interact with year-specific programs for 2020.
Eligibility Requirements
You qualify to use Schedule J if you have farm or fishing income from self-employment reported on Schedule F or received through a partnership or S corporation reported on Schedule K-1 for the current tax year. The Internal Revenue Service does not require you to have been engaged in farming or fishing during any of the base years to qualify for this election.
Base years are the three tax years immediately preceding the current year: 2017, 2018, and
2019 for tax year 2020. Even if your filing status differed between the election year and the base years, you have the option to average your farming or fishing income.
Entity Restrictions and Pass-Through Income
Section 1301 applies only to individuals, which excludes estates and trusts from using Schedule
J for income averaging. C corporations cannot use income averaging at the entity level.
Individuals who receive farm or fishing income as pass-through income from S corporations or partnerships can use Schedule J to average that income on their individual income tax returns.
Nonresident aliens can use Schedule J if they file Form 1040-NR and report farm or fishing income.
Gathering Required Documents
You must obtain federal tax returns for the three immediately preceding tax years to complete
Schedule J accurately. For tax year 2020, you need to complete Form 1040 returns along with
Schedule F or Schedule C and any applicable Schedule K-1 forms for 2017, 2018, and 2019.
These documents provide the baseline taxable income and tax calculations needed to compute your three-year averaged farm or fishing income. The IRS does not explicitly require you to attach copies of prior-year returns to your filing, but you must have them available for reference.
Completing Schedule J: Step-by-Step Process
Schedule J contains three main parts that require careful attention to detail. Part I covers taxable income on lines 1 through 4, while Parts II and III address tax calculations using the three-year average.
Part I (Taxable Income, lines 1-4):
- Enter your elected farm income on line 2a from Schedule F line 34 showing net farm
profit or loss, or from applicable partnership or S corporation farm income reported on
Schedule K-1.
- You are not required to use all of your taxable farm and fishing income for averaging
purposes.
- Elected farm income includes all income, gains, losses, and deductions attributable to
your farming or fishing business.
- You may elect to include a smaller portion if doing so provides a more favorable tax
result based on your income levels in the current year and the three base years.
Parts II and III (lines 5-20)
- Calculate the tax for each of the three base years using portions of your elected farm
income.
- These sections involve detailed calculations that allocate one-third of your elected farm
income to each base year and refigure the tax liability for those years.
- The income averaging calculations compare three-year average amounts to determine
your tax benefit.
- The form compares your tax liability using income averaging against your tax liability
without averaging to determine the actual tax benefit you receive from the election.
Filing Procedures and Signature Requirements
Attach Schedule J to your Form 1040, Form 1040-SR, or Form 1040-NR for the current year and file as a single document. Schedule J cannot be filed separately and has no independent tax effect without the primary return.
Sign and date your Form 1040, Form 1040-SR, or Form 1040-NR according to standard filing procedures. There is no requirement for an additional signature in Schedule J, as it does not include a distinct signature block.
File your return with Schedule J attached using the standard Form 1040 mailing address for your state and filing status as specified in the Form 1040 instructions. The Department of the
Treasury processes returns with Schedule J using the same procedures as other individual income tax returns.
Elected Farm Income Definitions
Elected farm income includes income from cultivating land, raising or harvesting agricultural or horticultural commodities, and qualifying fishing activities. Income also encompasses any gain or loss resulting from the sale or other disposition of property that has been regularly utilized in your farming or fishing business for an extended period.
The income from your elected farm must not exceed your taxable income for the year. You should evaluate whether including less than your entire farm or fishing income on line 2a provides a more favorable tax result, depending on how the amount affects your tax bracket.
Strategic Considerations for Income Averaging
Consider the tax imposed under Section 1 when determining your elected farm income amount.
Review your income levels for the current tax year and the three prior taxable years to identify the optimal averaging strategy.
Income averaging may provide the greatest tax benefit when your current year farm or fishing income is substantially higher than income in the base years. Calculate your tax liability with and without income averaging to verify that the election reduces your overall tax due.
Record Retention and Future Use
Keep copies of the three prior years’ federal tax returns available for reference when completing
Schedule J, as you will need the income amounts and tax calculations from those years. Your records should include Schedule F or Schedule C forms, along with any Schedule K-1 forms showing pass-through farm or fishing income.
Retain a copy of your 2020 income tax return to use for income averaging in 2021, 2022, or
2023. Maintaining organized records ensures you can accurately complete Schedule J in future years and respond to any Internal Revenue Service inquiries regarding your income averaging elections.
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