Elected Farm Income (EFI) is a tax provision that allows farmers to elect to have a portion of their farm income taxed at the average of the tax rates from the three prior base years, potentially reducing their tax liability in years of high farm income. This is part of the income averaging rules for farmers under IRS regulations. EFI can include various types of income attributable to a farming business, such as ordinary income and capital gains, but it cannot exceed the taxpayer’s total taxable income. Additionally, any EFI attributable to net capital gains cannot exceed the total net capital gain for the year.
Eligible Income for EFI
- Ordinary farm income: This includes income from cultivating soil, raising agricultural commodities, livestock, or operating farms, ranches, nurseries, orchards, etc.
- Capital gains from farm property: Gains or losses from the sale or disposition of farm property (other than land) can be designated as EFI if the property was regularly used in a farming business for a substantial period. The determination of "substantial period" depends on facts and circumstances.
- Liquidation of farming business: If a farming business is liquidated, gains or losses from property sold within one year after operations cease (or a reasonable time thereafter, depending on circumstances) may be designated as EFI.
Exclusions from EFI
- Gain or loss from the sale or disposition of farmland is not eligible for EFI.
- Gain or loss from the sale of development rights, grazing rights, or similar rights is also excluded.
- Income from CCC loans is generally not reported as income unless an election is made to report it in the year received.
Tax Calculation for EFI
- If EFI includes both ordinary income and capital gains, tax must be computed using base year rates for each type of income separately. You cannot apply a single base year rate to all income types.
- The tax on EFI is calculated using the average of the tax rates from the three prior base years (the three years before the current tax year).
Reporting and Election Requirements
- EFI must be reported on Schedule J (Form 1040), which is used for income averaging for farmers.
- For partnerships or S corporations, the election must be made by individual partners, shareholders, or members.
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.