Farm income averaging and rental income: what tax pros need to know

Farm income averaging is a powerful tax strategy that allows eligible farmers to redistribute income across the three prior tax years, which often results in significant tax savings when income spikes. Yet many tax pros overlook or misapply this opportunity, leaving money on the table.

When you know how to apply it correctly, you position yourself as a trusted advisor who really understands the unique patterns of agricultural income.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Does farm income averaging (FIA) exclude income from the rental of pasture or fields, including non-participating farmers filing Form 4835, Farm Rental Income and Expenses?

A: It depends on how active the taxpayer is in the farming activity. If they are not actively involved in management or operations, they do not qualify for FIA. If the taxpayer actively participates in management or operations, rental arrangements may count. Passive rental income, such as that reported on Form 4835 by non-participating landlords, does not qualify. However, landlords who materially participate (reporting income on Schedule F) or, in certain cases, on Form 4835 with self-employment tax implications, may be eligible to include that income in FIA.

Q: What if the farmer has separate businesses generating farm income? Can a farmer add them together from each prior year?

A: Yes. All businesses can be aggregated as long as each business produces qualified farming income.

Q: Does crop or livestock share-rent income qualify as farm income for income averaging?

A: For FIA, qualifying farm income generally means income from your farming business, which includes sales of crops or livestock, as well as other farming-related receipts. If a taxpayer rents land for a share of the crop or livestock, the share-rent income is typically considered qualified farm income as long as the taxpayer materially participates in the farming activity.

Q: For the qualified business income deduction (QBID) adjustment, what is the interplay with carryforwards of losses from prior years, or is it only based on the current year calculations?

A: For the QBID, the loss rules are not just “current year only.” Prior year qualified business losses do carry forward and reduce the deduction in later years.