1235.Optional Method of Figuring Net Farm Earnings
1235.1When is the optional method of computing net earnings from farm self-employment available?
The optional method of computing net earnings from farm self-employment is available for any taxable year for which you qualify.
1235.2How is the optional method of calculating net earnings used?
The farm option operates in either two ways:
If you have gross income from farming of $2,400 or less during a taxable year beginning after 1965, you may count as net earnings from farming either the actual net farm earnings or two-thirds of the gross farm income; or
If your gross income from farming is over $2,400 and the net farm earnings are less than $1,600 during a taxable year beginning after 1965, you may count as net earnings from farming either the actual net farm earnings or $1,600.
Effective with tax years after 12/31/07, the maximum amount of income reportable using the optional method of reporting will be equal to the amount of earnings needed to acquire four quarters of coverage (QC) for a given tax year. To determine the amount of earnings needed to acquire a QC or the amount of earnings needed to acquire four QC's for a given tax year or years effective with tax year 1977 and after, see Sections 212-212.7 and 1301-1301.2 of the Social Security Handbook. For example, for tax year 2009, the maximum amount of farm income reportable using the optional method of reporting is $4,360. Further, the maximum gross farm profit is increased to $6,540 and the maximum net farm profit is increased to $4,721. See 2009 IRS Schedule SE Instructions and IRS Form Schedule SE at http://www.irs.gov/.
1235.3Is the optional method always available?
No. If your gross farm income is more than $2,400 and his or her actual net farm earnings are over $1,600, you must report the actual net farm earnings. In this situation, the optional method of reporting farm income is not applicable.
Your gross income was $2,700 and the net farm profit was $800. You may report either $800 or $1,600 as the net farm earnings. Even if the farm had operated at a loss, you still could have reported $1,600. If the net farm profit had exceeded $1,600; however, you would have had to report actual net farm profits as net earnings from farm self-employment. (For a table illustrating application of the option, see §1241.)
1235.4If the optional method is used for one year, must it be used in years afterward?
No. If the optional method is used for one year, it does not have to be used for the next. However, if it is used, it must be applied to all farm earnings from self-employment for that year. It may be used to increase or decrease reported net farm earnings, and it may be used even if the farming operation resulted in a loss.
Last Revised: Apr. 19, 2010