While similar, each of these forms has a distinct use.
- Schedule F: For farmers who are operating farms An operating farm is one where crops, livestock, poultry, or dairy are produced, cultivated, or sold. on their own land or materially participate in crop-sharing arrangements A crop-sharing arrangement is one where the landowner and the tenant share in the revenue and expenses from tenant-operated farm activity. .
- Schedule E: For farmland owners who lease their farmland for fixed cash rent.
- Form 4835: For farmland owners who lease their farmland as part of a crop-sharing arrangement but do not materially participate in the farming.
Form 4835 | Schedule F | Schedule E | |
|---|---|---|---|
Taxpayer receives a share of crop in exchange for the use of their farmland but doesn’t materially participate in the farming activity | |||
Taxpayer receives a share of crop in exchange for the use of their farmland and materially participates in the farming activity | |||
Taxpayer operates a farm on their own land | |||
Taxpayer operates a farm and pays the landowner a share of crops harvested | |||
Taxpayer receives a fixed cash payment for the use of their farmland | |||
Net income subject to self-employment tax | |||
Losses subject to passive activity limitations | |||
Sample Scenarios for When to File Each Form
For further clarity, I’ve provided some examples of when each form should be used and why the other forms would not be appropriate.
Examples of Schedule F Usage
While the typical use of Schedule F is reporting standard farming operations, multiple situations may warrant its use.
Taxpayer Is Farming on Self-owned Land
Frank Farmington owns 6 acres of land on which he grows vegetables for sale and has no other source of income. His farming business is set up as a single-member LLC, and he has a business account in the LLC’s name with a local bank. He has a written five-year plan for profitability.
Since he cultivates and sells his own crops, he meets the definition of an operating farm and should report his income and expenses on Schedule F. Neither Schedule E nor Form 4835 would apply to Frank because he isn’t collecting farm-related rent; instead, he is operating a farming business.
Taxpayer Is Farming on Rented Land
Let’s now assume the same facts as above, except that instead of owning 6 acres of land, Frank pays Paula Plant $1,500 per month for the use of the 6 acres on which he operates his farm. Frank would again report his income and expenses on Schedule F. As with the previous example, Schedule E and Form 4835 would not apply to Frank because he is operating a farming business, and not collecting farm-related rent.
Landlord Materially Participates in Crop-Sharing Arrangement
A farm rental landlord who materially participates in the farm operations (as defined by IRS rules; the IRS specifically lists plant nurseries, ranches, ranges, orchards, and groves as being farm operations) will need to report income and expenses on Schedule F. If the landlord does not have a material and ongoing role as outlined by the IRS and crops are received in lieu of rent payments, crop-sharing rental income will be reported on IRS Form 4835.
In addition to the standard tests for material participation that generally apply to most businesses, farm operators have two additional ways to qualify as materially participating.
- A retired or disabled farmer who materially participates in a farming activity for five out of eight years prior to retirement or disability is considered to be materially participating.
- A farmer’s widow or widower who still manages the farm and related real estate may qualify as materially participating if certain estate tax valuation rules are met relating to farm property.
Let’s revise our fact pattern so that Frank and Paula have a crop-sharing agreement where Frank can grow his vegetables on Paula’s 6 acres in exchange for 20% of Frank’s annual vegetable production.
- If Paula materially participates in growing Frank’s vegetables, she’ll report the income and expenses from her material participation on Schedule F.
- If Paula does not materially participate in Frank’s farming operations, she’ll report the crop-sharing activity on Form 4835, as discussed in more detail in the next example. Frank will also report income on Schedule F since he is operating a farming business.
Summary of When to Use Schedule F
If you materially participate in a crop-sharing arrangement or operate a farm, you should use Schedule F. If you receive revenue from caring for another person’s livestock, that income is also reported on Schedule F.
The following entity types should use Schedule F to report farm income:
- Individuals
- Trusts
- Partnerships
- LLCs taxed as partnerships
- Single-member LLCs
Example of Form 4835 Usage
For our next example, Frank and Paula had the following crop-sharing arrangement:
- Frank farms on Paula’s 6 acres.
- Frank pays Paula for the use of her 6 acres through 20% of his vegetable production.
- Paula is not involved in the farming operations.
Because Paula collected a share of the crop on land she owns, the fair market value of Paula’s share of Frank’s vegetable production would be reported on Form 4835, along with any relevant expenses.
Summary of When to Use Form 4835
When a farmland owner does not materially participate in farm operations but receives crops as a substitute for rent payments, the fair market value of the crops received is reported on IRS Form 4835.
Example of Schedule E Usage
Let’s now assume the following facts for Frank and Paula’s lease arrangement.
- Frank is solely responsible for all of the costs associated with his farming operation.
- Paula does not participate in Frank’s farming operation.
- Frank no longer provides Paula with a share of the vegetables.
- Frank pays Paula cash rent of $250 per acre to farm her 6 acres of irrigated land.
At the end of the year, Paula will report her rental income on Schedule E in the same manner that a non-farm landlord would report income. Schedule 4835 would not apply to Paula’s situation because Paula is receiving a fixed amount of cash rent. Schedule F would not apply to Paula because she is not materially participating in Frank’s business.
Summary of When to Use Schedule E
Farmers who charge a fixed amount of cash rent for the land should report their income and expenses on Schedule E. These are relatively typical lease agreements that include the following factors:
- The tenant bears the cost of all farming operations, including supplies and labor.
- The landlord does not directly participate in farming operations.
- The landlord does not receive an allocated share of the tenant’s income or production.
- The tenant pays a pre-established amount of rent.
Income to the landlord in this context is generally not considered trade or business income.
Self-employment Tax Implications
Schedule F filers are subject to self-employment tax when income minus expenses result in $400 or more of income. Schedule F income flows to IRS Schedule SE for the calculation of the additional tax. Schedule E and Form 4835 filers are not subject to self-employment tax related to the farming activity reported on those forms.
Farm Hobby Losses
Casual farmers should be aware of the IRS hobby loss rules that limit losses to the extent of income earned. The IRS may deem a farm to be a hobby if it seems like the taxpayer is engaging in an activity recreationally without a primary profit motive.
While multiple factors are considered in the final determination, if the business turns a profit in three out of five consecutive years, the IRS usually won’t reclass a farm business as a hobby. Hobby loss rules may apply to Schedule F and Form 4835. They are less likely to apply to Schedule E since pure rental activity does not generally include the pleasure element that is present in most hobbies.
Passive Losses
While Schedule E filers may not need to be concerned about hobby losses, passive losses may come into play. The IRS rule for passive losses states that passive losses can only be used to offset passive income. Passive losses that exceed passive income are generally carried forward until there is new passive income to be offset.
Passive losses occur when income is less than expenses in a passive activity. Rental activity is generally considered by the IRS to be a passive activity. Passive loss limitations would apply to filers of Form 4835 and Schedule E filers. Schedule F filers may also be limited by passive loss rules if they don’t materially participate in the income-producing activity.
QBI Deduction
Even though Schedule F activity results in the assessment of self-employment tax, the activity reported on the form is considered trade or business activity. This means that Schedule F filers may be eligible for the QBI deduction, which lowers tax by up to 20% of QBI.
For taxpayers who earn in excess of the Social Security wage base, the QBI deduction is particularly beneficial since the self-employment tax is limited and the deduction is larger due to higher income.
Additional Schedule E Considerations
Schedule F may get a bad rap because of the additional self-employment tax that it comes with. While Schedule E arrangements may be simpler to follow for farmland rentals, that ease is tempered by a handful of less favorable characteristics, as listed below:
- Farmers have a special rule that allows them extra flexibility when it comes to estimated taxes, but farmland owners renting out their land under Schedule E arrangements don’t get that benefit.
- Since no self-employment tax is assessed on this rental income, no additional Social Security benefits are earned through the farming rental activity.
- Farmland owners reporting on Schedule E are ineligible to accelerate the deduction of asset costs through the Section 179 deduction.
It’s not all doom and gloom. Some farmers have used a combination of Schedule E and Schedule F to their advantage by owning land outside of the farming business and renting property to themselves. This has allowed them to deduct rent expense on Schedule F, thereby reducing their self-employment tax for their farming operations while recognizing rental income on Schedule E, where no self-employment tax is assessed.While that tax strategy is not codified in legal statute, it does have legal precedent. The United States Court of Appeals has upheld the practice with the following conditions in place:
- Formal rental agreement
- Record of rental payments
- No link between material participation and rent paid
- Rent paid is equal to or less than fair market value
Frequently Asked Questions (FAQs)
It depends on the needs of the farming business. Cash rent agreements require farm operators to operate independently but allow them to have control over the decisions and business trajectory. Meanwhile, farm operators needing to share costs may prefer a crop-sharing arrangement for financial support.
Yes. In situations where you meet all other criteria for Schedule E filing, you still use Schedule E to report your income and expenses if you receive your rent payments for your farmland via credit card, Venmo, PayPal, or other electronic means.
Form 1099-PATR reports patronage dividends you received related to money you spent at a cooperative. The 1099-PATR income should be reported in the same activity where cooperative payments were deducted—which could be Form 4835, Schedule F, or Schedule C, among others. If the cooperative payments were not deductible, then the 1099-PATR income is not taxable.
Bottom Line
Comparing Form 4835 vs Schedule F vs Schedule E is necessary to ensure that the right amount of tax is assessed. Individuals who participate in farming or farmland rental will need to report income and expenses on either Schedule F, Schedule E, or Form 4835.
Schedule F is for operating farms and materially participating farmland owners in crop-sharing arrangements. Schedule E is for rental of farmland for fixed cash payments. Form 4835 is for rental of farmland through crop-sharing arrangements where the farmer does not materially participate.
