Farm Business Income vs. Rental Income

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 A farmer may arrange farming operations in several different ways. The farmer may enter into a custom-work arrangement where he hires an operator who performs farm work in exchange for a flat custom-work fee. The farmer may also operate on a cash rent or crop-share basis. In this situation, the farmer effectively rents the land to another party. The rent is then paid either at a set cash price-per-acre or as a share of the crop harvested by the person carrying on the farming activities (this is often net of some of the expenses).
Each of these arrangements may have different income tax implications.

Farmers who rent out their farms on either a cash or crop-share basis may be seen as not carrying on the business of farming. If this is the case, the farmer may be required to file on an accrual basis for this rental income. In addition, there may be problems if the farmer or certain related parties are not using the property in the farming business themselves, but are rather renting the properties out under either of these alternatives. These situations may jeopardize the farmer’s ability to roll the property over to a child during lifetime or on death. (See section on Rollovers)

If, however, a custom operator is hired to carry out many of the farming activities, but the farmer maintains all key cropping decisions and risks, then it is likely the farmer would still be considered to be carrying on the business of farming. This arrangement would avoid some of the concerns outlined in the previous paragraph.

In many situations, it may be appropriate to enter into a “joint venture” where both parties incur expenses, are involved in management decisions and are subject to risk. With this approach, both parties to the agreement should be considered in the business of farming.

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For more information about the content of this document, contact Joel Bokenfohr.
This document is maintained by Brenda McLellan.
This information published to the web on July 22, 2014.