Schedule F for Farmers: Reporting Farm Income and Expenses

If you operate a farm as a sole proprietor and you’re farming for profit, you report your income and expenses on Schedule F (Form 1040). It’s the farming equivalent of Schedule C for other self-employed businesses, and it feeds into your 1040 the same way: net farm profit is income, subject to both income tax and self-employment tax. Partnerships and S-corporations that farm don’t file Schedule F directly (they use Form 1065 or Form 1120-S), but the income categories, expense categories, and accounting-method rules all mirror Schedule F. Understanding what goes on this form and how the accounting method affects timing is the foundation of farm tax planning.

Who files Schedule F?

Schedule F is for individuals (including single-member LLCs treated as disregarded entities) who operate a farm for profit. The IRS defines “farm” broadly: it includes crop production, livestock raising and feeding, dairy, poultry, fish farming, fur-bearing animals, orchards, vineyards, nurseries, and ranching operations. Hobby farms don’t qualify. If you’re not farming with the intent to make a profit, your farm income is reported as other income on Schedule 1 and your deductions are limited to the income amount (with no loss allowed). The IRS uses the same factors it applies to any activity under IRC 183 to distinguish a trade or business from a hobby: whether you operate in a businesslike manner, whether you depend on the income, your track record of profits and losses, and the time and effort you put in.

Partnerships that farm file Form 1065 and pass through income and deductions to partners on Schedule K-1. S-corporations file Form 1120-S with a similar K-1 pass-through. The income and expense categories on those returns closely track Schedule F, so the substantive rules discussed here apply to those entities too, even though the form is different. C-corporations that farm file Form 1120 and have additional accounting-method rules discussed below.

What types of income belong on Schedule F?

Schedule F captures several distinct categories of farm income, and the classification matters because each category has its own timing and reporting rules.

Crop sales are the most straightforward. Revenue from selling grain, hay, cotton, produce, or any other crop you raised goes on Part I, line 2. If you sell through a cooperative, the gross amount goes here and you deduct expenses on the deduction side. Livestock sales depend on whether the animal was raised or purchased. Animals you raised and held for sale (feeder cattle, market hogs, broilers) are reported on Schedule F. Animals you purchased for resale are also reported on Schedule F with the purchase cost deducted as an expense, but breeding livestock held for draft, dairy, breeding, or sporting purposes that you sell at a gain may qualify for capital gain treatment under IRC 1231 and get reported on Form 4797 instead.

Cooperative distributions, including patronage dividends and per-unit retain allocations, are farm income. Agricultural program payments from the USDA (such as ARC, PLC, or conservation program payments) are taxable and reported on Schedule F. Custom hire income, which is what you earn when you use your equipment to do field work for other farmers, is farm income if your primary business is farming. If custom work is a separate trade or business, it might belong on Schedule C instead, but for most farmers who do occasional custom work alongside their own operation, Schedule F is the right place.

CCC loans present a timing choice. Under IRC 77, farmers who receive Commodity Credit Corporation loans can elect to report the loan proceeds as income in the year received, rather than waiting until the commodity is sold or the loan is redeemed. This election is irrevocable for that crop and can be a powerful planning tool: if you have a low-income year, electing to treat a CCC loan as income accelerates the income into that year, smoothing income across years and potentially keeping you in a lower bracket.

Crop insurance proceeds and federal disaster payments get their own timing rule. Under IRC 451(f), if you receive crop insurance proceeds or disaster payments in the year after the year the crops were damaged or destroyed, and you can show that under your normal business practice you would have reported the income from those crops in the following year, you can defer the insurance proceeds to the next year. This prevents a double-income year where you collect insurance on a destroyed crop and also sell your normal crop from the same season. The crop insurance and disaster payments guide covers the deferral mechanics in detail.

How does the cash vs accrual method choice work for farmers?

The accounting method you elect on Schedule F determines when income and expenses are recognized, and for most farmers, the cash method is the default and the better choice.

Under the cash method, you report income when you actually or constructively receive it (a check in the mail, a deposit to your account, a credit to your co-op account) and deduct expenses when you pay them. This gives you significant control over the timing of income and deductions. You can delay selling grain until January to push income into the next year. You can prepay feed, seed, or fertilizer in December to pull deductions into the current year (subject to the prepaid supply limits discussed below). Cash-method farming is one of the few businesses where the taxpayer has real, legal control over when income and expenses hit the return, and that flexibility is worth protecting.

Under the accrual method, you report income when you earn it (when the sale occurs, regardless of when you’re paid) and deduct expenses when they’re incurred (when the liability arises, regardless of when you pay). Accrual removes most of the timing flexibility and adds complexity, because you need to track accounts receivable, accounts payable, and inventory. Most sole-proprietor farmers gain nothing from accrual and lose the timing flexibility that makes cash-method farming so tax-efficient.

The tax code generally lets farmers choose. IRC 447 requires the accrual method only for certain farming corporations and partnerships with a corporate partner. But a farming corporation that meets the section 448(c) gross receipts test ($31 million of average annual gross receipts for 2025, $32 million for 2026, indexed annually) is exempt from this requirement and can continue using the cash method, and so is any S corporation. In practice, this means nearly every family farm operation in the country can use cash-method accounting. Tax-shelter farming activities face a separate mandatory accrual requirement under IRC 448, but that applies to syndicated arrangements, not working farms.

The cash method also interacts with the farm inventory rules. Cash-basis farmers are not required to maintain inventories for tax purposes (the TCJA expanded the small-business exemption), which eliminates one of the main administrative headaches of accrual accounting. You don’t need to value unsold grain in the bin at year-end. You simply don’t report it as income until you sell it and receive payment.

What expenses can I deduct on Schedule F?

Schedule F lists the expense categories on the form itself, and they’re broad enough to capture nearly everything a farm operation spends money on. The standard is the same as any business deduction under IRC 162: the expense must be ordinary (common in the farming industry) and necessary (helpful and appropriate for the operation). It does not need to be indispensable, just reasonable.

Feed is often the largest single expense for livestock operations. Seed, plants, and fertilizer are the crop-operation equivalents. These are fully deductible in the year paid (for cash-basis farmers) or incurred (for accrual-basis farmers), subject to the prepaid supply limitation discussed below. Veterinary, breeding, and medicine costs for livestock are deductible. So are chemicals and pesticides, conservation expenses (covered in the land improvement guide), custom hire (paying another farmer or contractor to do field work on your land), freight and trucking costs to move crops or livestock to market, rent paid for farmland or equipment, insurance premiums on crops, livestock, buildings, and equipment, and utilities including electricity, water, and irrigation costs.

Labor costs are deductible, including wages paid to hired hands, payroll taxes (the employer’s share of FICA and FUTA), and benefits. Fuel and oil for tractors, combines, trucks, and other farm equipment are deductible as supplies. Repairs and maintenance on equipment and buildings are deductible as current expenses, provided they maintain the asset’s existing condition rather than improving it beyond its original state. Taxes paid (real estate taxes on farmland, personal property taxes on equipment) are deductible on Schedule F rather than Schedule A, which is better because they reduce both income tax and self-employment tax.

Interest on farm operating loans and equipment loans is deductible. Mortgage interest on farmland used in the operation is deductible on Schedule F. Depreciation on equipment, buildings, and land improvements is one of the largest deduction categories and has its own set of rules covered in the equipment depreciation guide.

What’s the prepaid farm supplies rule?

The cash method’s flexibility has a guardrail. IRC 464 limits how much a cash-basis farmer can deduct for prepaid feed, seed, fertilizer, and other farm supplies. The rule exists to prevent year-end deduction stuffing, where a farmer buys a huge quantity of feed or fertilizer in December that won’t be used until the following year, solely to accelerate the deduction.

The mechanics work through a “50% test.” If your prepaid farm supplies for the year exceed 50% of your other deductible farm expenses (everything except the prepaid supplies and depreciation), the excess is not deductible in the current year. It gets pushed to the year when the supplies are actually used or consumed. For example, if your total non-prepaid, non-depreciation farm expenses are $200,000 and you prepay $120,000 in feed for next year, the 50% threshold is $100,000. The $20,000 excess ($120,000 minus $100,000) is deferred to the following year.

There are exceptions. If you have consistently deducted prepaid supplies in prior years (a pattern of pre-buying, not a one-time year-end maneuver) and the payment is for supplies to be used within 12 months after the payment, the limitation generally doesn’t apply. The IRS looks at your history: a farmer who routinely pre-buys spring fertilizer in December has a stronger position than one who suddenly prepays a year’s worth of feed on December 31 for the first time.

The prepaid supply rule applies to cash-method farming operations where the farmer is an individual, partnership, S-corporation, or C-corporation. It applies to farming tax shelters without the exceptions. For most working farmers, staying within the 50% threshold is the key, and that means balancing your prepayment strategy against your other deductible expenses rather than loading everything into one year.

How does self-employment tax apply to farm income?

Net farm profit from Schedule F is subject to self-employment tax under IRC 1402. The SE tax rate is 15.3% on the first $176,100 of net self-employment earnings for 2025 (12.4% Social Security plus 2.9% Medicare), and 2.9% on earnings above that threshold (only the Medicare portion continues). The Additional Medicare Tax of 0.9% applies above $200,000 for single filers ($250,000 for married filing jointly), bringing the Medicare rate to 3.8% on high-income farms.

Before computing SE tax, net farm profit is multiplied by 92.35% (the equivalent of subtracting the employer-equivalent share of FICA that employees don’t pay). Half of the resulting SE tax is deductible on Schedule 1 as an above-the-line deduction, which reduces your income tax but doesn’t reduce the SE tax itself.

CRP (Conservation Reserve Program) payments are also subject to self-employment tax for farmers who are otherwise actively farming. The IRS and courts have consistently held that CRP payments to active farmers are farm income subject to SE tax, even though the land enrolled in CRP is by definition not being actively farmed during the contract period. Retired farmers who are no longer actively farming can sometimes avoid SE tax on CRP payments, but the distinction is fact-specific and the IRS audits it.

Where does depreciation fit?

Depreciation on farm equipment (tractors, combines, planters, tillage equipment, grain handling systems), farm buildings, and land improvements is reported on Form 4562 and flows to Schedule F. For many farms, depreciation is the single largest deduction, especially in years when major equipment is purchased and Section 179 or bonus depreciation is elected.

The current rules are generous. Section 179 expensing under IRC 179 allows up to $2,500,000 of qualifying property to be expensed immediately for 2025, and 100% bonus depreciation under IRC 168(k) is now permanent for property acquired after January 19, 2025 (under the One Big Beautiful Bill Act). These rules are detailed in the farm equipment depreciation guide.

The depreciation deduction reduces both income tax and self-employment tax when it’s reported on Schedule F. That’s a meaningful advantage over deductions taken elsewhere on the return (like the Schedule 1 deduction for half of SE tax, which only reduces income tax). Every dollar of depreciation on Schedule F saves at the combined income tax plus SE tax rate, which for many farmers is in the 30% to 40% range.

Can income averaging reduce my tax bill?

Farmers have access to a special income-averaging provision under IRC 1301 that no other industry gets. Schedule J lets you spread the current year’s farm income over the three prior years, effectively taxing it at the average of your marginal rates across those years. This is enormously valuable in farming, where income swings wildly from year to year due to weather, commodity prices, and the timing of equipment purchases.

Income averaging works best when the current year is a high-income year and the prior three years were lower. The tax savings come from pulling income out of the current year’s high bracket and taxing it in the prior years’ lower brackets. The income averaging guide covers the mechanics, limitations, and planning strategies.

What records do I need to keep?

The IRS requires that you keep records sufficient to substantiate every item of income and every deduction on your return. For farmers, the practical minimum includes:

• Sales receipts, settlement statements, and co-op statements for all crop and livestock sales
• 1099-PATR forms from cooperatives and 1099-G forms for agricultural program payments
• Receipts or invoices for every expense: feed, seed, fertilizer, chemicals, fuel, repairs, labor, rent, insurance, and supplies
• Equipment purchase documents (including the date placed in service, which determines the depreciation start)
• A farm vehicle log if any farm vehicle is also used for personal purposes (the IRS requires mileage records to substantiate the business-use percentage)
• Bank statements and cancelled checks as backup documentation

Cash-basis farmers should also keep records of any year-end prepayments to demonstrate compliance with the prepaid supply rule under IRC 464. If you routinely pre-buy supplies, having a multi-year history of the practice documented in your records strengthens your position if the IRS questions the deduction.

What should I do next?

Schedule F is the central reporting mechanism for sole-proprietor farm operations, but the real planning opportunities lie in the interaction between the accounting method, depreciation elections, income averaging, and entity structure. Getting the basics right on Schedule F is the starting point. Optimizing across all of these levers is where the tax savings compound.

These guides cover the related topics in detail:

• Farm equipment depreciation: Section 179, bonus depreciation, and MACRS, the full breakdown of accelerated depreciation for tractors, combines, and farm buildings
• Farm income averaging and Schedule J, how to spread high-income years across prior years for a lower effective rate
• Crop insurance and disaster payments, the deferral rules for insurance proceeds and federal disaster payments
• Land improvements, drainage, and irrigation, how to depreciate or expense conservation and land improvement costs
• Livestock tax treatment: raised vs. purchased, how the cost basis, depreciation, and sale reporting differ for animals you raised from birth versus those you bought

Related guides:

• Farm Commodity Hedging Futures Tax Treatment
• Farm Conservation Easement Tax Deduction
• Farm Crop Insurance Disaster Payments Tax
• Farm Equipment Depreciation Section 179 Bonus
• Farm Estate Planning Succession Irc 2032A

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.