2023 Instructions for Schedule J | Income Averaging
for Farmers and Fishermen
Understanding Schedule J and Income Averaging
Schedule J allows individuals engaged in agricultural or commercial fishing activities to reduce tax liability by averaging current-year income over three prior base years. This election under
Internal Revenue Code Section 1301 addresses income fluctuations common in agriculture and commercial fishing.
The averaging method can lower your tax burden when your current-year income is high and your taxable income for one or more of the three prior years was low. For 2023, the Tax Cuts and Jobs Act provisions remain active through 2025, and no stimulus reconciliation or ACA shared responsibility provisions affect this schedule.
Income averaging applies only to individuals who file Form 1040, Form 1040-SR, or Form
1040-NR. You may elect this method regardless of whether you used it in prior years.
You make the election annually and independently for each tax year. To qualify for income averaging in the current year, the Internal Revenue Service does not mandate that you have been involved in farming or fishing during any of the base years.
Eligibility Requirements for Schedule J
You qualify to file Schedule J if you are engaged in a qualifying farming or fishing operation during the election year. Sole proprietors of farming or fishing operations meet this requirement automatically without additional documentation.
Individual partners in partnerships engaged in these activities may use Schedule J on their personal tax returns to average their distributive share of qualifying income. Schedule J may also be employed by individual shareholders in S corporations that are involved in farming or fishing businesses to average their share of business income from these activities.
Nonresident aliens filing Form 1040-NR may use Schedule J to average U.S.-source farm or fishing income. IRS Publication 225 provides detailed definitions of farming business activities for 2023.
A farming business includes cultivating land, raising or harvesting agricultural or horticultural commodities, operating nurseries or sod farms, and managing animals. A fishing business includes commercial fishing, where harvested marine life enters commerce through sale, barter, or trade.
Entity and Filing Status Restrictions
Partnerships, S corporations, C corporations, estates, and trusts cannot file Schedule J as entities. These business structures do not qualify for income averaging under IRC Section 1301.
Individual partners and individual shareholders in S corporations engaged in farming or fishing may use Schedule J on their personal income tax returns. The election applies only to individuals who compute tax liability under section 1 of the Internal Revenue Code.
It is possible for your filing status to vary between the election year and the base years, but this will not affect your eligibility. When calculating the alternative minimum tax on Form 6251, the averaging calculation is not applicable.
Calculating Elected Farm Income
Elected farm income represents the portion of your taxable income from farming or fishing that you choose to average over three years. This amount includes all income, gains, losses, and deductions attributable to your farming or fishing business.
If you conduct both farming and fishing businesses, you must combine income, gains, losses, and deductions from both activities when calculating the elected farm income. Your elected farm income cannot exceed your taxable income for the year.
You must gather specific documentation to support your calculation
- You must have your current-year Schedule F (Profit or Loss From Farming) or Schedule
C (Profit or Loss From Business) available to document farming or fishing income for the election year.
- Form 4835 (Farm Rental Income and Expenses) is required if your income averaging
calculation involves farm rental arrangements that meet IRS reporting criteria.
- Federal income tax returns for 2020, 2021, 2022, and 2023 must be gathered to show all
farming or fishing income reported for purposes of the income averaging calculation.
- Prior-year Schedule F or Schedule C forms are necessary to document net farm or
fishing income for each base year included in the averaging period.
The elected farm income may include net capital gain attributable to your farming or fishing business. Gain or loss from the sale of property regularly used in your business for a substantial period qualifies for averaging.
Sales within one year of business cessation are presumed to occur within a reasonable time for income averaging purposes. Elected farm income does not include income from selling land, development rights, grazing rights, or similar rights.
Completing and Filing Schedule J
You must complete Schedule J by calculating your tax liability using both the standard method and the average method. Compare these calculations to determine whether income averaging reduces your tax burden for the year.
The averaging calculation requires you to designate all or a portion of your electable farm income as elected farm income. Following the IRS instructions, you calculate the sum of the two components to ascertain your Section 1 tax.
Follow these steps to file Schedule J correctly
1. Calculate the tax that would be imposed if the elected farm income for the current year reduced taxable income.
2. Calculate the tax increase that would result if taxable income for each base year were increased by one-third of the elected farm income.
3. Attach Schedule J directly behind Form 1040, Form 1040-SR, or Form 1040-NR in the order specified by IRS instructions.
4. Include photocopied pages from your 2020, 2021, and 2022 returns showing net farm or fishing income for those years.
Attach your current-year Schedule F or Schedule C to support your farming or fishing income calculations. Sign and date your return in the space provided before submitting your tax forms.
Verify that Schedule J is placed immediately after all other schedules and attachments before mailing your return to the address specified in the IRS Where to File instructions. Different mailing addresses apply depending on whether you include a payment with your return.
Record Retention and Documentation
Retain copies of all prior-year returns, Schedule J working papers, and Schedule F or Schedule
C documentation for the three base years. These records provide audit protection as required under general recordkeeping rules referenced in Form 1040 instructions.
Keep copies of your 2023 income tax return to use for income averaging in 2024, 2025, or 2026 if needed. If you did not file a tax return for any base year, use the amount you would have reported as taxable income had you been required to file.
Maintain all records for at least three years after April 15, 2024, or the date you file your 2023 tax return, whichever is later. This retention period protects you in case the Internal Revenue
Service requests verification of your income averaging calculation.
Notable Features for Tax Year 2023
No line-by-line redesign or removal occurred for Schedule J in 2023. The three-year averaging methodology and supporting line structure remain consistent with prior-year instructions.
Any clarifications appear in existing line instructions without renumbering or structural changes to the form. For tax years commencing after 2017 and before 2029, the limitation on excess farm losses is not applicable.
Excess business loss limitation rules replaced these provisions for tax years beginning after
2020 and before 2029. At-risk limits and passive activity limits are applied before calculating the amount of any excess business loss for farming or fishing businesses.
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