J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Income from Farming

When a business earns its income from sales of livestock and produce, payments from agricultural programs and farm rents and other similar sources, it is considered a farming business. Since most small farms use the cash method of accounting to report income and expenses, the following discussion is limited to this method of accounting. However, if items regularly produced in the farming business or used in the farming business are sold on an installment basis, the sale can be reported on the installment method, deferring income until payment is received.

While many income items of farms are similar to nonfarm businesses, there are a number of income items unique to farming. These include:

• Sales of livestock (including poultry) and produce. The sale of livestock classified as Section 1231 property may result in Section 1231 gain or loss (explained in Chapter 6). If crops are sold on a deferred payment contract, you report the income when payment is received.
• Sales of livestock caused by drought, flood, or other weather conditions. While such sales are generally reported in the current year, you can opt to report them in the following year if you can show that you would not have sold the livestock this year but for the weather conditions and you are eligible for federal assistance because of the weather conditions. You must file a separate election with your tax return for the year of the weather conditions for each class of animals (e.g., cattle, sheep). Alternatively, ...