Elected Farm Income (EFI) is a provision under the farm income averaging rules (IRC §1301) that allows an individual engaged in a farming business to elect to treat a portion of current-year farm income as if it had been earned evenly over the prior three “base years.” This can reduce overall tax liability in a high-income farm year. EFI is calculated and reported on Schedule J (Form 1040), Income Averaging for Farmers and Fishermen.
EFI may include certain types of farm income, but it is strictly limited to amounts attributable to a farming business and is subject to specific exclusions and computation rules under the Internal Revenue Code.
Eligible Income for EFI
EFI generally includes income attributable to the taxpayer’s farming business, such as:
- Ordinary income from farming activities: Includes income from cultivating soil, operating a farm, ranch, nursery, orchard, or similar agricultural operations, including sales of livestock, crops, and other farm products.
- Capital gain from farm property used in the farming business: Includes net capital gain from the sale or exchange of property used in the farming business. This may include certain depreciable or business-use property (other than land), if it is used in the farming trade or business.
- Gain from the disposition of farm property used in the farming business: Includes gains from the sale of qualifying farm assets used in the farming trade or business, subject to capital gain rules.
Exclusions from EFI
The following are not eligible for EFI:
- Gain from the sale or exchange of land (farmland)
Land itself is excluded from EFI eligibility, even if used in farming.
- Income not attributable to a farming business
Non-farm business income and investment income cannot be included in EFI.
- Certain special gains not connected to farming operations
For example, gains not arising from property used in the farming business are excluded.
- CCC loans (Commodity Credit Corporation loans)
Loan proceeds are generally not included in income unless the taxpayer makes an election to treat the loan as income in the year received. If the election is not made, income is reported when the commodity is sold or the loan is forfeited.
Tax Calculation for EFI
- EFI is divided into:
- Ordinary income portion
- Net capital gain portion
- Each portion is subject to separate computation under Schedule J rules.
- The tax benefit is determined by applying base year tax rates (the three preceding taxable years) to the elected amount of EFI.
- EFI cannot exceed:
- The taxpayer’s taxable income for the current year, and
- The net capital gain limitation for the capital gain portion of EFI.
Reporting and Election Requirements
- EFI is reported and calculated on Schedule J (Form 1040).
- The election is made annually by the individual taxpayer.
- For partnerships, S corporations, or other pass-through entities:
- EFI is determined at the entity level for allocation purposes,
- But the election to use income averaging is made by the individual partner, shareholder, or member on their own return.
Source:
Publication 225 - Farmer's Tax Guide (2025)
Schedule F Instructions (2025)
Disclaimer: Always verify details with current IRS forms, instructions, and guidance from your state Department of Revenue. For complex situations, consult a CPA or tax attorney.