Continuing our farm income averaging trend, we had a couple of readers ask if they could farm income average their cash rented ground. The short answer is no. In order to use farm income averaging, you must have “farm income” which is comprised primarily of the following items:
Cash rent income based upon a fixed rent are not allowed for farm income averaging. The use of a flex rental arrangement may or may not allow the farmer to use farm income averaging depending on the terms of the lease. Rents based on farm production (whether in cash or crop shares) qualify for farm income averaging, but many of the flexible rental arrangements that we have seen are usually a form of cash rent with an adjustment for market price changes, not production changes. Therefore, these types of rent arrangements would probably not qualify for farm income averaing.
As you can see, this can get fairly complicated, but if the Bush Tax Cuts do expire, making a change to your form of farm rented ground in 2013 may save you some money. As usual, review this with your tax advisor.
Paul Neiffer, CPA