How Schedule F Loss Limitations Work for Farmers

Schedule F loss limitations work as three sequential filters: the at-risk rules, the passive activity rules, and the excess business loss cap. A farm loss has to survive all three before it can offset wages, interest, or other non-farm income. For 2026, the excess business loss threshold is $256,000 for single filers and $512,000 for joint filers, down from $313,000 and $626,000 in 2025 because the One Big Beautiful Bill Act reset the inflation-adjustment base year.¹² Anything a filter disallows is suspended and carries forward, not lost outright.

Before the Filters: Is the Farm a Business?

None of the loss rules matter if the IRS treats your operation as a hobby. Under Section 183, hobby deductions are capped at hobby income, so you cannot generate a deductible loss at all.³

A safe harbor presumes profit motive if the farm shows a profit in three of the last five years. Horse breeding, training, showing, and racing get two profitable years out of seven. Missing the safe harbor doesn’t automatically make you a hobbyist, but it shifts the burden of proof. The IRS then weighs nine factors, including your recordkeeping, expertise, time devoted to the operation, and history of income and losses. No factor decides the question alone.

A new operation without a five-year track record can elect to postpone the determination until the end of its fourth year (sixth for horse activities). The election extends the statute of limitations on those early returns, which is the tradeoff for the breathing room.

First Filter: At-Risk Rules

Farming is listed by statute as subject to the at-risk rules.⁴ You can deduct a loss only up to what you actually stand to lose. Contribute $200,000 of your own money and take out a $100,000 loan you’re personally liable for, and your at-risk amount is $300,000.

What counts: cash and the adjusted basis of property you’ve put into the activity, plus borrowed amounts for which you’re personally liable or that you’ve secured with non-farm property. Non-recourse debt generally does not count, because the lender can only reach the farm asset itself. Farmland gets a specific exception. Qualified non-recourse financing secured by real property used in the activity does increase your at-risk amount if it comes from a qualified lender rather than someone with an ownership stake. That exception is what makes bank and USDA land loans work under this rule.

You report the calculation on Form 6198.⁵ A loss that exceeds your at-risk amount is suspended indefinitely and becomes deductible whenever your at-risk amount rises, through additional capital, personally guaranteed debt, or farm income that rebuilds your position.

Second Filter: Passive Activity Rules

Whatever loss survives the at-risk test hits the passive activity rules next.⁶ A passive activity is one in which you don’t materially participate. A passive farm loss can only offset passive income; it cannot reduce wages, interest, dividends, or other non-passive income.

A boundary worth flagging: landowners who lease to tenants on a crop-share basis without materially participating in management or operations report on Form 4835, not Schedule F, and the IRS treats that as a rental activity automatically subject to the passive rules.⁷ Schedule F is for owners who actually run or actively help run the farm.

The Seven Material Participation Tests

Treasury regulations list seven ways to prove material participation. Meeting any one is enough:

More than 500 hours of participation in the activity during the tax year.
Your participation constitutes substantially all of the participation by anyone, including hired workers.
More than 100 hours of participation, and no other person participates more than you do.
The activity is a significant participation activity (over 100 hours), and your combined hours across all such activities exceed 500.
You materially participated in the activity for any five of the ten preceding tax years.
The activity is a personal service activity and you materially participated in any three preceding years.
Facts and circumstances show regular, continuous, and substantial participation.

For most active farmers the 500-hour test is the cleanest to meet and the easiest to document.⁸ A contemporaneous log carries far more weight in an audit than estimates reconstructed after the fact.

Retired and Disabled Farmers

If you’ve stepped back from day-to-day farming because of retirement or disability, your prior years of active involvement can still qualify you as materially participating. The statute reaches this result by cross-referencing the estate tax rules for special-use valuation of farm real property.⁹ A surviving spouse who actively manages a farm inherited from a qualifying decedent can be treated the same way.⁸

Passive limitations are reported on Form 8582. A suspended passive loss carries forward until you either generate enough passive income to absorb it or dispose of your entire interest in the activity in a fully taxable sale to an unrelated party. That disposition releases all accumulated suspended losses at once. Selling to a family member doesn’t trigger the release; it waits until the family member sells to someone unrelated.

Third Filter: Excess Business Loss Cap

A loss that clears the first two filters faces one more restriction. The excess business loss rule caps the net business loss a non-corporate taxpayer can deduct against non-business income in a single year, and it applies to your combined result from every business activity you have. Schedule F, Schedule C, and any partnership or S corporation losses all fold into one calculation.

For 2026, the cap is $256,000 for single filers and $512,000 for joint filers. That’s down sharply from the 2025 figures of $313,000 and $626,000, because the One Big Beautiful Bill Act reset the inflation-adjustment base year to a lower starting point. The threshold will still adjust for inflation going forward, but from that lower baseline. The same legislation made the EBL rule permanent; it had been scheduled to sunset after 2028.¹⁰

The math: total your business income, subtract your allowable business deductions, and if the resulting net loss exceeds the threshold, only the threshold amount is currently deductible. The excess is disallowed for the year. You run the calculation on Form 461. Capital losses from selling business assets are excluded from the calculation, and capital gains are included only to a limited extent.

What Happens to Suspended Losses

Each filter has its own carryforward, and they don’t behave the same way.

At-risk suspensions carry forward indefinitely and free up whenever your at-risk amount increases, whether through new capital, guaranteed debt, or farm income.

Passive suspensions carry forward indefinitely too, but they can only come out in two situations: you generate passive income to absorb them, or you dispose of your entire interest in the activity in a fully taxable sale to an unrelated buyer. The disposition path is the stronger one because it releases every dollar at once, regardless of how much passive income you have that year.

Excess business losses convert to a net operating loss carryforward the following year.² Once inside the NOL system, the deduction in any carryforward year is capped at 80% of that year’s taxable income calculated before the NOL itself.¹¹ Unused amounts keep carrying forward under the same 80% cap. A very large excess business loss can take several years to fully absorb even against strong income.

How the Filters Stack

The ordering is fixed. At-risk applies first. Passive rules apply to whatever survives at-risk. The excess business loss cap applies last, to whatever survives both.⁶ A loss suspended at an earlier stage never reaches the later stages. If the at-risk rules suspend $50,000 of a $200,000 farm loss, only $150,000 flows to the passive test. If you materially participate and that $150,000 passes through, it then joins your other business results at the EBL calculation.

Each layer has its own form and its own carryforward tracking: Form 6198 for at-risk, Form 8582 for passive, and Form 461 with the NOL rules for excess business losses. The IRS won’t remind you what you have banked from prior years, and a suspended carryover that gets dropped from one year’s return to the next is one of the more common and expensive mistakes on a farm return.

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Office of the Law Revision Counsel. 26 USC 461 – Limitation on Excess Business Losses of Noncorporate Taxpayers
3
Office of the Law Revision Counsel. 26 USC 183 – Activities Not Engaged in for Profit
4
Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
5
Internal Revenue Service. Instructions for Form 6198 – At-Risk Limitations
6
Internal Revenue Service. Instructions for Form 8582 – Passive Activity Loss Limitations
7
Internal Revenue Service. Form 4835 – Farm Rental Income and Expenses
8
eCFR. 26 CFR 1.469-5T – Material Participation (Temporary)
9
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
10
Internal Revenue Service. Instructions for Form 461 – Limitation on Business Losses
11
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction