Farm Schedule F: Income, Deductions, and Self-Employment Tax

Schedule F (Form 1040) is the IRS form sole proprietors use to report profit or loss from a farming business, and the net figure flows onto Form 1040 where it drives your income tax, self-employment tax, and adjusted gross income.¹ Farming carries its own tax rules on income timing, depreciation, losses, and rate smoothing, and getting the form right can shift your bill by thousands of dollars in either direction.

Who Files Schedule F

You file Schedule F if you run a farming business as a sole proprietor. The IRS defines farming broadly: cultivating land, raising livestock, growing crops, operating orchards or nurseries, running ranches, and raising poultry, dairy, or fish all qualify.² Whether you own or lease the land makes no difference. A single-member LLC that hasn’t elected corporate treatment files Schedule F too, because the IRS treats it as a sole proprietorship.

Partners in a farming partnership do not file Schedule F personally. The partnership files Form 1065 and issues each partner a Schedule K-1. S corporation shareholders likewise receive a K-1. If you run a separate farm on the side as a sole proprietor, that operation still goes on Schedule F regardless of your other entities.

One boundary catches landowners off guard. If you rent farmland to a tenant and don’t materially participate in the farming, you report the rent on Form 4835, not Schedule F.³ The difference is not cosmetic: Form 4835 income avoids self-employment tax, while Schedule F income does not.

Business or Hobby

Schedule F is for farms operated with a genuine profit motive. A weekend homestead with no realistic path to profitability is a hobby, and the IRS can reclassify it, disallowing losses against your other income.

There’s a safe harbor. If your farm turns a net profit in at least three of five consecutive tax years, the IRS presumes you are farming for profit.⁴ For horse breeding, training, showing, or racing, the standard is two profitable years out of seven. Missing the safe harbor doesn’t automatically make you a hobbyist, but the burden shifts to you to show businesslike records, time invested, expertise, and a plausible plan.

If the activity gets reclassified as a hobby, you still report the income, but you can no longer use farm losses to offset wages, investments, or other earnings.

Cash, Accrual, or Crop Method

You pick an accounting method before you fill out the form. Most small farms use the cash method, counting income when payment arrives and expenses when they are paid. It’s simple, and it gives you some timing flexibility: hold grain until January and the income lands in the next tax year.⁵

The accrual method records income when earned and expenses when incurred, regardless of cash flow. Larger operations with significant inventory sometimes prefer accrual because it reflects economic reality more accurately, but the recordkeeping is heavier.

A third option, the crop method, lets you defer all expenses tied to a crop until you sell it. That helps for crops that take longer than a year to harvest. The crop method requires IRS approval before use.⁵

Changing method later means filing Form 3115. Some changes get automatic consent; others need review by the IRS National Office.⁶

What Counts as Farm Income

Cash-method farmers report income in Part I. Accrual-method farmers use Part III, which builds income from inventory changes and sales.⁷ Categories include:

Sales of livestock and produce, including cattle, hogs, poultry, grain, vegetables, and fruit.
Cooperative distributions based on your patronage.
Agricultural program payments and government subsidies.
Commodity Credit Corporation loans, which you can either treat as income in the year received or defer until repayment or forfeiture.⁷
Crop insurance proceeds and federal disaster payments.
Custom hire income from renting equipment or doing work on other farms.

Line 34 produces the net farm profit or loss that goes to Form 1040 and, from there, to Schedule SE for self-employment tax.⁷ Everything downstream depends on getting this number right.

Deductible Farm Expenses

Part II is where operating costs come off. Deductible items include feed, seed, fertilizer, chemicals, fuel, farm labor, veterinary fees, rent on land or equipment, interest on farm loans, property taxes, insurance premiums, and repairs to buildings and machinery.⁷ Keep receipts, invoices, and bank statements. If the IRS audits, you’ll need documentation for each line.

Vehicle and Mileage

For a truck or car used in the farm, you can either track actual expenses (gas, repairs, insurance, depreciation) and deduct the business-use percentage, or use the IRS standard mileage rate, which is 72.5 cents per mile for 2026.⁸ Either way, keep a contemporaneous log with date, destination, business purpose, and miles. Trips between home and the farm are commuting unless the farm is your principal place of business.

Fuel Tax Credit

Federal excise tax is baked into every gallon of gasoline (18.3 cents) and diesel (24.3 cents). When you burn that fuel off-highway in tractors, combines, irrigation pumps, or other field equipment, you can recover nearly all of it by filing Form 4136 with your return.⁹ A 0.1 cent per gallon portion for the Leaking Underground Storage Tank Trust Fund is not refundable. Fuel used in a farm truck on public roads doesn’t qualify.

Soil and Water Conservation

Terracing, contour farming, drainage ditches, earthen dams, and similar conservation work can be deducted as current expenses rather than capitalized. The annual deduction is capped at 25% of your gross farm income, and any excess carries forward under the same 25% cap in future years.¹⁰ Gross farm income covers all your farming activity, not just the parcel being improved.

Depreciation, Section 179, and Bonus Depreciation

Equipment, buildings, fencing, drainage tile, and breeding livestock lose value over time and are depreciated. Two accelerated options let you claim most or all of a purchase in year one.

Section 179 expensing lets you deduct the full purchase price of qualifying equipment in the year you place it in service. For 2026, the maximum deduction is $2,560,000, phasing out dollar-for-dollar once total qualifying purchases exceed $4,090,000. Most farms sit well below the phaseout, so in practice a tractor, combine, or grain bin can often be written off entirely in the year of purchase.

Bonus depreciation is back at 100% on a permanent basis under the One Big Beautiful Bill Act for qualifying property acquired after January 19, 2025.¹¹ It applies to new and used equipment and to certain plants planted or grafted after that date. The prior schedule had dropped to 40% for 2025; the current 100% rate has no sunset. You get bonus depreciation automatically unless you elect out.

Section 179 can be applied selectively, asset by asset. Bonus depreciation is an all-or-nothing election by asset class. Working through the choice with a tax preparer before a large year-end purchase is worth the time.

Self-Employment Tax

Schedule F profit is subject to self-employment tax on top of income tax. The combined rate is 15.3%: 12.4% Social Security and 2.9% Medicare.¹² The Social Security portion applies to net earnings up to $184,500 in 2026; the Medicare portion has no cap.

On Schedule SE, net farm profit is multiplied by 92.35% to reach the base the tax applies to. You can deduct half of the resulting self-employment tax on Form 1040 as an adjustment to income.

Farmers with low or uneven income can use a farm optional method. If gross farm income was $10,860 or less, or net farm profit was less than $7,240, you can report the smaller of two-thirds of gross farm income or $7,240 as your net earnings.¹³ This keeps Social Security credits accruing in lean years. Unlike the non-farm version, there is no cap on how many years you can use it.

Farm Losses and the Two-Year Carryback

When Part II expenses exceed Part I income, Schedule F shows a loss, which can offset wages, investment income, or a spouse’s earnings on the same return. Farming has a carryback rule most other businesses lost after 2020: farm net operating losses can be carried back two years, letting you amend prior returns and potentially recover taxes already paid.¹⁴ Claim the carryback with Form 172.

Losses carried forward to future years can offset only 80% of taxable income in the carryforward year, not 100%.¹⁴ That 80% cap applies to losses arising in tax years beginning after December 31, 2017; older losses, if any remain, can still offset 100%. You can elect to waive the carryback and only carry forward if that produces a better result.

Income Averaging on Schedule J

Farm income swings hard. A bumper crop or a large livestock sale can spike one year’s bracket even when the surrounding years were thin. Schedule J lets you compute your tax as if a chunk of this year’s farm income had been spread across the three prior tax years.¹⁵ You don’t need to have farmed during those base years to use the election, and it’s still available if your filing status changed.

Income averaging doesn’t reduce the income you report. It only changes the effective rate applied to your farm earnings, and it does not apply to the alternative minimum tax calculation. For a farmer coming off one unusually profitable year, it’s one of the more valuable and underused provisions in farm taxation.

Filing Deadlines for Farmers

If at least two-thirds of your gross income comes from farming in either the current or prior year, you qualify as a farmer for estimated tax purposes and get a special deadline.¹⁶ You can skip quarterly estimates entirely by filing your return and paying all tax owed by March 1 of the following year.¹⁷ If you’d rather take more time, you can make one estimated payment by January 15 and file by the standard April 15 deadline without an estimated tax penalty.

Missing a deadline costs real money. The failure-to-file penalty is 5% of unpaid tax per month, capped at 25%.¹⁸ A separate failure-to-pay penalty runs 0.5% per month on unpaid balance, also capped at 25%.¹⁹ In months when both apply, the failure-to-file penalty is reduced by the failure-to-pay amount, so the combined hit is 5% per month, not 5.5%. Interest runs on top. If cash is short, file on time and pay what you can; that is always better than not filing.

Schedule F can be e-filed with your Form 1040 or mailed on paper. Electronic filing confirms receipt faster and speeds any refund.

1
Internal Revenue Service. About Schedule F (Form 1040), Profit or Loss From Farming
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Internal Revenue Service. About Publication 225, Farmer’s Tax Guide
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Internal Revenue Service. About Form 4835, Farm Rental Income and Expenses
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Office of the Law Revision Counsel. 26 USC 183 – Activities Not Engaged in for Profit
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Internal Revenue Service. Publication 225 Farmer’s Tax Guide
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Internal Revenue Service. Instructions for Form 3115 – Application for Change in Accounting Method
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Internal Revenue Service. Instructions for Schedule F (Form 1040)
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Internal Revenue Service. The Standard Mileage Rates and Maximum Automobile Fair Market Values Have Been Updated for 2026
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Internal Revenue Service. About Form 4136, Credit For Federal Tax Paid On Fuels
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Office of the Law Revision Counsel. 26 USC 175 – Soil and Water Conservation Expenditures
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Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
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Social Security Administration. Contribution and Benefit Base
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Social Security Administration. If You Are Self-Employed
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Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
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Internal Revenue Service. Instructions for Schedule J (Form 1040)
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Internal Revenue Service. Topic No. 416, Farming and Fishing Income
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Internal Revenue Service. Farming and Fishing Income
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Internal Revenue Service. Failure to File Penalty
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Internal Revenue Service. Failure to Pay Penalty