Other Issues Farming & Fishing Income Averaging
AMT
The farm or fishing averaging cannot reduce the tax below the alternative minimum tax.
Farming Rental Income
The rental income of a landlord that is based on a share of a tenant's production is subject to fluctuations in the farm economy to the same extent as that of a farmer. Therefore, a landlord is engaged in a farming business if this arrangement is established in a written agreement before the tenant begins significant activities on the land.
Lessor of a Vessel
Regulations provide that a lessor of a vessel is engaged in a fishing business within the meaning of section 1301(b)(4) if the payment due to the lessor under the lease is based on a share of the lessee's catch (or a share of the proceeds from the sale of the catch) and the lease is a written agreement entered into before the lessee begins significant fishing activities resulting in the shared catch. A fixed lease payment is not eligible for income averaging.
Crewmembers
The income of crewmembers on vessels engaged in fishing also is subject to fluctuations in the fishing economy if the crewmembers' compensation is based on a share of the vessel's catch of fish or a share of the proceeds from the sale of the catch. Accordingly, the regulations provide that these crewmembers are engaged in a fishing business, whether they are treated as employees for employment tax purposes.
Taxable Income from Farming or Fishing
Includes all income, gains, losses, and deductions attributable to any farming or fishing business. However, it does not include gain from the sale or other disposition of land. A taxpayer engaged in both a farming business and a fishing business must combine income, gains, deductions, and losses from both the farming and the fishing businesses to determine the maximum amount of income that is eligible for averaging. Generally, farm or fishing income, gains, losses, and deductions are reported on: Form 1040, line 1 (2021), to the extent of wages and other compensation received as a shareholder in an S corporation engaged in a farming business; Schedule C; Schedule D; Schedule E, Part II; Schedule F; Form 4797; and Form 4835 – see Schedule J instructions for other potential income.
Not All Income Need Be Included
The elected farm or fishing income (EFI)is the amount of the taxable income from farming or fishing that the taxpayer elects to include. All of the taxable income from farming or fishing need not be included. It may be to the taxpayer’s advantage to include less than the full amount, depending on how the amount included affects the tax bracket for the current and prior 3 tax years.
Additional Limitations
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The elected farm or fishing income cannot exceed the taxable income.
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The portion of the elected farm or fishing income treated as a net capital gain cannot exceed the smaller of the total net capital gain or the net capital gain attributable to farming or fishing business.
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If the elected farm or fishing income includes net capital gain, the taxpayer must allocate an equal portion of the net capital gain to each of the base years.
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If, for any base year, the taxpayer had a capital loss that resulted in a capital loss carryover to the next tax year, do not reduce the elected farm or fishing income allocated to that base year by any part of the carryover.