Farm Income Averaging: Eligibility, Math, and Filing

Farm income averaging is an election that lets an individual farmer or commercial fisher spread part of a high-income year back across the three prior tax years for federal income tax purposes. You make the election on Schedule J (Form 1040): you pick an amount of current-year farm or fishing income, one-third gets added to the taxable income of each of the three base years, and Schedule J recalculates what the tax on that income would have been at those years’ brackets. If the base years had lower income, more of your current earnings is taxed at lower rates and your bill drops. The provision sits in Section 1301 of the tax code and is available every year you qualify.¹

Who Can Make the Election

Only individuals qualify. That covers sole proprietors filing Schedule F, partners receiving farming income through a partnership, and shareholders in an S corporation engaged in a farming or fishing business.² C corporations cannot use it. Estates and trusts are explicitly excluded from the statute’s definition of “individual.”¹

You don’t need to have been farming during the three base years. If 2025 is your election year, you can average across 2022, 2023, and 2024 even if you only started farming in 2025.³ A filing-status change between then and now is fine too. Married filing jointly this year but single in 2023? Still works.

A farming business covers cultivating land and raising or harvesting agricultural or horticultural commodities. Nurseries, livestock operations, and orchards all count. The same averaging benefit reaches commercial fishing operations, which is a detail many producers miss.

Commercial Fishing

Section 1301 covers fishing businesses on the same terms as farming. A fishing business means commercial fishing where the catch enters commerce through sale, barter, or trade, including at-sea support of harvesting and attempted catches that don’t produce fish.⁴ Crew members qualify only if their pay is a share of the catch or its proceeds rather than a flat wage. Leasing a fishing vessel qualifies only when lease payments are tied to catch shares under a written agreement signed before significant fishing activity begins.³ Scientific research vessels are out.

What Income You Can Average

Your elected farm income is the portion of current-year taxable income from farming or fishing that you choose to average. It includes net profit from Schedule F, gains from selling livestock or equipment used in the business, and for S corporation shareholders, wages from the farming S corporation.⁵ Gains from selling fishing equipment or a vessel you used regularly and for a substantial period qualify too. A sale after you stop farming or fishing still counts if it happens within a reasonable time; a sale within one year of stopping is presumed reasonable.³

Two hard limits. Your elected farm income cannot exceed your total taxable income for the election year.⁶ If your taxable income is $80,000, you cannot elect to average $100,000. And gains from selling land are always excluded, even farmland you used for decades. The same exclusion applies to sales of development rights and grazing rights.⁵

Some other categories fall outside the definition. Wages you earn as an employee on someone else’s farm don’t qualify because you don’t bear the entrepreneurial risk of the operation. Fixed cash rent for renting out your land isn’t farming income, though crop-share rental can qualify if there’s a written agreement signed before the tenant begins significant work on the land.⁵ Dividends and interest from farm-related investments don’t count either.

How the Math Produces Savings

The concept is simple even though the form has many lines. Pick the amount of farm income to average, divide by three, and add each third to the taxable income you actually reported in each of the three base years. Schedule J recalculates the tax those base years would have owed with the added income, and the difference between that recalculated tax and the tax you originally owed becomes the tax on that third of your elected income.¹

Your total tax for the election year is the regular tax on your non-elected income plus the sum of those three increases. When a base year had low income, the added third gets taxed starting in that year’s lower brackets rather than stacking on top of a high current-year income. That bracket arbitrage is where the savings come from.

You aren’t locked into averaging all your farm income. You can elect any amount up to your total taxable income, and it’s worth running the numbers at several figures. If one base year already had moderate income, allocating a full third to it can push that year into a higher bracket and eat into your savings. The optimal figure depends on the pattern across all three base years.

If a base year had negative taxable income, the calculation is more involved. All deductions for that year are counted, including any net operating loss carryovers, even if total deductions exceed gross income. Amounts that could provide a tax benefit in another year, such as the NOL itself or a capital loss carryover, get added back when determining the base year’s starting taxable income for Schedule J.⁶ The rule prevents using the same loss twice.

What the Election Does Not Reduce

Averaging only reduces your regular income tax. Several other pieces of your bill are untouched, and knowing this upfront prevents disappointment.

Self-employment tax is unchanged. Your SECA obligation is calculated on your full current-year net earnings from self-employment, with no averaging.⁶ Producers with a heavy SE tax bill sometimes expect averaging to cut their total tax and are underwhelmed by the actual result.

The alternative minimum tax calculation strips the benefit back out. On Form 6251, you must refigure your regular tax without using Schedule J, which can reduce or eliminate your savings if you’re subject to AMT.⁷

Averaging also doesn’t change your adjusted gross income. It changes how tax is computed, not what your AGI is, so income-based phaseouts for credits and deductions like the Child Tax Credit, education credits, and the Earned Income Tax Credit are still calculated on your full current-year AGI.³

Filing, Amending, and Revoking

You make the election by attaching a completed Schedule J to Form 1040. Filing electronically links the schedule automatically. On paper, place Schedule J directly behind Form 1040 and any other required schedules.

You’ll need copies of your filed returns (or amended returns) for all three base years to pull the correct taxable income figures.³ If you used Schedule J in any of those base years, you need those prior Schedule J forms too, because the base-year figures chain forward through repeat use. Mismatched line-number entries are the most common source of processing delays.

If you filed without Schedule J and later realize you’d have benefited, you can submit Form 1040-X with a new Schedule J. The deadline for claiming a refund on an amended return is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.⁸ Inside that same window you can also change the amount of elected farm income or revoke a prior election entirely.⁶ That flexibility matters when an amended base-year return changes the math.

Records to Keep

Averaging creates a longer-than-usual record retention need. Because the election pulls data from three prior years, keep the base-year returns and supporting documents at least until the statute of limitations expires for the election year, not the base year itself. In most cases, that’s three years after you file the return that includes Schedule J.⁹ If you underreported income by more than 25% of gross income, the IRS has six years to assess. And if you plan to use averaging again, this year’s return may become a base year in a future election. Seven years of accessible records is a safe default.

1
Office of the Law Revision Counsel. 26 USC 1301 – Averaging of Farm Income
2
eCFR. 26 CFR 1.1301-1 – Averaging of Farm and Fishing Income
3
Internal Revenue Service. Instructions for Schedule J (Form 1040) (2025)
4
Office of the Law Revision Counsel. 26 USC 1301 – Averaging of Farm Income
5
Farmers.gov. Farm Income Averaging: Eligibility and Schedule J Filing
6
eCFR. 26 CFR 1.1301-1 – Averaging of Farm and Fishing Income
7
Internal Revenue Service. Instructions for Form 6251 (2025)
8
Office of the Law Revision Counsel. 26 USC 6511 – Limitations on Credit or Refund
9
Internal Revenue Service. How Long Should I Keep Records