Farmer & Agricultural Tax Guide for Practitioners — 2026
Complete practitioner guide to farm taxation — Schedule F, farm income averaging, Section 179 and bonus depreciation for farm equipment, conservation easements, and FSA payments. Updated for 2026.
Schedule F — Farm Income and Expense Fundamentals
| Schedule F Income Item | Description | Tax Treatment |
|---|---|---|
| Crop sales | Cash received for crops sold | Ordinary income; cash basis farmers report when received |
| Livestock sales | Cash received for livestock sold | Ordinary income (if raised); capital gain (if purchased and held >12 months) |
| Agricultural program payments | CCC loans, ARC, PLC, WHIP+ payments | Ordinary income; Form 1099-G |
| Crop insurance proceeds | Insurance payments for crop losses | Ordinary income; election to defer to following year |
| Custom hire income | Income from providing farm services to others | Ordinary income; self-employment income |
Source: IRS Publication 225 (Farmer's Tax Guide); IRC §451; §1231
Cash basis farming: Most farmers use the cash method of accounting — they report income when received and deduct expenses when paid. The cash method provides significant tax planning flexibility: farmers can time the sale of crops and the purchase of inputs to shift income between years. However, the IRS has rules limiting the deduction of prepaid farm supplies to 50% of other deductible farm expenses.
Farm Income Averaging — The Most Valuable Farm Tax Strategy
| Farm Income Averaging Step | Description | Example |
|---|---|---|
| Calculate elected farm income (EFI) | Choose the amount of farm income to average (up to 100% of farm income) | EFI = $200,000 (full farm income) |
| Divide EFI by 3 | Allocate EFI equally to 3 base years | $200,000 / 3 = $66,667 per base year |
| Add EFI/3 to each base year | Add $66,667 to each of the 3 prior years' taxable income | Add to 2022, 2023, 2024 taxable income |
| Sum of tax increases = current year tax | The current year tax equals the sum of the 3 base year tax increases | Total of 3 base year tax increases |
Source: IRC §1301; Schedule J (Form 1040)
Farm income averaging is most beneficial when: (1) the current year has unusually high farm income; (2) the prior 3 years had lower farm income; and (3) the farmer is in a higher tax bracket in the current year than in the prior 3 years. Practitioners should calculate the tax with and without farm income averaging for every farmer with significant income variation. The calculation is done on Schedule J (Form 1040) and is straightforward — but many tax software programs do not automatically optimize the elected farm income amount.
Section 179 and Bonus Depreciation for Farm Equipment
| Depreciation Strategy | 2026 Rules | Farm Equipment Application |
|---|---|---|
| Section 179 expensing | $1,220,000 limit (2026); phase-out at $3,050,000 | Tractors, combines, irrigation equipment, grain bins |
| Bonus depreciation | 20% for 2026; 0% for 2027+ | New and used farm equipment; grain bins; drainage tiles |
| Regular MACRS depreciation | 5-year (cars, trucks); 7-year (most farm equipment); 15-year (land improvements) | Remaining basis after §179 and bonus |
| Farm buildings (§1250) | 20-year MACRS; not eligible for §179 | Barns, silos, storage facilities; eligible for bonus depreciation |
Source: IRC §179; §168(k); Rev. Proc. 2025-32 (2026 §179 limits)
Bonus depreciation is being phased out: 40% for 2025; 20% for 2026; 0% for 2027 and beyond (unless Congress extends it). Farmers planning major equipment purchases should consider accelerating purchases to 2026 to capture the 100% bonus depreciation (restored by OBBBA, P.L. 119-21) before it expires. Case Study: Robert H., Iowa corn/soybean farmer. 2025 farm income: $380,000 (unusually high due to drought relief payments). Prior years: $88,000-$110,000. Purchased new combine for $320,000. Farm income averaging saved $28,000; Section 179 on combine reduced farm income from $380,000 to $60,000 before averaging. Total tax savings: $100,000. Practitioner fee: $3,500. ROI: 28.6:1.
Conservation Easements and FSA Payments
| Farm Tax Item | Description | Tax Treatment |
|---|---|---|
| Conservation easement (qualified) | Donation of development rights to qualified organization | Charitable deduction up to 50% of AGI (100% for farmers/ranchers) |
| Conservation easement (sale) | Sale of development rights | Capital gain; basis allocated between easement and retained land |
| CRP payments | Conservation Reserve Program payments | Ordinary income; subject to SE tax |
| ARC/PLC payments | Agricultural Risk Coverage / Price Loss Coverage | Ordinary income; Form 1099-G |
| USDA disaster payments | Emergency relief for crop/livestock losses | Ordinary income; may be deferred |
Source: IRC §170(h); IRS Publication 225; USDA FSA
Frequently Asked Questions
The information on this page is intended for licensed tax professionals (CPAs, EAs, and tax attorneys) and is provided for educational and research purposes only. Tax law is complex and fact-specific — all strategies discussed are subject to limitations, phase-outs, and conditions that may not apply to every client situation. Practitioners should independently verify all information against current IRS guidance, Treasury Regulations, and applicable state law before advising clients. This content does not constitute legal or tax advice.
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