Federal Income tax form 1040 is comprised of many sub-forms called schedules which make figuring taxable income easier by allowing only those who need to file special forms do so. Those who have no need to file schedules can concentrate on the main 1040 tax form.
Schedule J is used by farmers and fishermen to average their current tax year’s taxable income with previous years’ taxable income. The filing of Schedule J is an elected filing which means farmers and fishermen may do so if they can lower their taxable income thereby lowering their tax liability. For example, if a farmer has a higher taxable income in the current year then in previous (base) years, averaging the current taxable income with the base years will result in lower taxable income.
The definition of farming and fishing activities is finely defined on Schedule J. To qualify as a farmer, the tax payer must be engaged in one of the following activities:
(1) Operation of a nursery or sod farm
(2) Raising or harvesting of fruit- and nut-bearing trees
(3) Raising ornamental trees
(4) Raising, feeding, and caring for animals
(5) Leasing land to a tenant engaged in farming if lease payments are based on a share of the tenant’s production and determined under a contract before the tenant begins significant work on the land
A fisherman must be engaged in:
(1) Catching fish
(2) Attempted catching of fish
(3) Any activity in which the catching of fish was reasonable
(4) Any operation at sea in support of 1 through 3
(5) Leasing a fishing vessel if lease payments are based on a share of the lessee’s production and determined under a contract before the lessee begins significant work on the land
(6) Compensation as a crew member on a vessel engaged in fishing if compensation is based on a share of the catch or a share of the proceeds from the catch
Schedule J offers farmers and fisherman, as defined above, to average their current taxable income with previous base years’ taxable income. This can lower the tax payer’s tax liability if the current year’s taxable is higher than in the base years. The purpose of this schedule is to recognize that events far outside the farmer’s or fisherman’s control can affect his/her production for the year. By allowing averaging, these tax payers can smooth out the cyclical or erratic nature of taxable income from variations of poor and high harvest yields.
Always consult with a tax professional for questions about your tax liability.